Rising mortgage rates are taking a toll on the US housing market. But those hoping for prices to drop probably won't catch a break anytime soon.
What's happening: Home prices were up 18% in June compared to a year ago, with Tampa, Miami and Dallas reporting the highest annual gains, according to the S&P CoreLogic Case-Shiller Indices.
That was a slower pace than in May, when they rose 19.9% annually. But the bottom line is that prices are still going up a lot, even as home sales have declined from their peaks.
So are we in a housing bubble?
Economists at the Federal Reserve Bank of Dallas examined this very question earlier this year, noting in a blog post that home prices were rising faster than market forces would indicate they should, and were becoming "unhinged from fundamentals."
That isn't just a big deal for buyers and sellers. The housing market is an important economic indicator and a reflection of how interest rate hikes by the Federal Reserve are playing out.
Watch this space: The market is changing as the Fed's efforts to cap inflation take effect. Climbing mortgage rates are making it more expensive to buy a home. In theory, that should cool demand and prices over time.
And to the extent we are in a bubble, economists think it will slowly deflate rather than suddenly pop. The team at Goldman Sachs predicts that home price growth will slow sharply in the next couple of quarters and eventually flatten out.
"We expect home price growth to stall completely, averaging 0% in 2023," Jan Hatzius, Goldman's chief economist, wrote in a recent research note. "While outright declines in national home prices are possible and appear quite likely for some regions, large declines seem unlikely."
That said: There's a reason prices have shown more resilience. Supply is still constrained.
Pandemic-era shortages have limited the pace of new home building. In the past, downturns in housing have been accompanied by economy-wide recessions, leading to a flood of existing home inventory. Recession leads to unemployment, and cash-strapped homeowners are forced to sell.
Today's labor market is robust, and that influx of housing seems unlikely to happen in this cycle — further prolonging the lack of inventory.
On the radar: Unfortunately, Goldman reports that the slowdown in home price appreciation isn't likely to impact shelter costs, which are a crucial component of the Consumer Price Index tracking inflation.
That's because as higher mortgage rates increase the cost of buying a new home, more people will be inclined to rent, boosting prices in that market.
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