Inflation Another Millstone Around Housing Market's Neck (SPY)

Inflation doesn’t just mean higher bills at the gas station and supermarket. PIMCO economist Mark Kiesel notes that it is now weighing down the housing market as well.

Long-term interest rates track inflation expectations, and the higher they go, the more mortgage rates rise.  Higher mortgage reduce housing affordability–reversing one of the trends that fuelled the housing bubble–and reduced affordability means fewer sales. 

In addition to tighter credit and rising inventory, the U.S. housing market faces another challenge: Longer-maturity interest rates are now rising due to increased concerns over inflation. Mortgage rates for 30-year fixed conforming are up roughly 60 basis points so far this year with current conventional and jumbo 30-year mortgage rates now at an average of 6.27% and 7.41% respectively. Higher mortgage rates reduce housing affordability.

Oh, and by the way, housing prices are still overvalued by 28%:

Unfortunately for consumers, housing was already significantly over-valued. Higher mortgage rates will only increase housing’s unattractiveness, particularly versus rental property. A recent study done by Lehman Brothers concluded that at 6% mortgage rates, housing prices are 28% over-valued versus rental property nationwide.



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