Why concerns about the housing bubble are overdone and how to approach the purchase

  • Concerns about a housing market bubble are growing as mortgage rates rise rapidly.
  • However, UBS strategists Solita Marcelli and Jonathan Woloshin suspect these fears may be misguided.
  • The two strategists share why today’s market is very different than it was over a decade ago.

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federal reserve

While the pace of interest rate hikes continues to accelerate – with expectations that rates could rise by 250 basis points this year – home mortgage rates are following the same path. For example, average 30-year fixed-rate mortgage rates have already risen by around 1.5% this year and have already crossed the 5% mark.

With the dip that rising mortgage rates are putting in budgets and the roughly 27% rise in prices to roughly $408,000 that average home sales have seen since the pandemic began, fears of a downturn in the housing market are high could sign off. With the memory of the 2008 housing crisis still fresh in the minds of many homeowners, concerns are particularly exacerbated.

But according to top strategists at UBS Wealth Management – which manages $2.6 trillion in assets – those fears could be viewed as overdone as the US housing market remains on broadly solid ground. While price increases are likely to slow, overall values ​​are unlikely to plummet like they did over a decade ago, said Solita Marcelli, UBS Global Wealth Management chief investment officer Americas, and Jonathan Woloshin, top equity strategist for the real estate and accommodation sector for UBS Financial Services. in a customer note on Tuesday.

“We believe there are a number of factors that differentiate today’s housing market from the mid-2000s,” Marcelli and Woloshin said. “It’s not 2008.”

One reason they’re overwhelmingly optimistic about the market is that supply is much lower than it was during the housing crisis. Supply has increased in response to strong demand over the past two years, but it’s still lagging behind. Part of this trend is due to the same supply chain disruptions that have fueled inflation and caused construction delays.

“One of the key differences between the current real estate cycle and the pre-global financial crisis era is the absolute lack of inventory available for sale,” they said. “Existing Home Supply Months – the number of months it would take for the current inventory of homes on the market to sell given the current pace of sales – is near an all-time low in the US. In the case of new homes, supply chain and labor disruptions have lengthened the home completion cycle.

Below is a chart of the total monthly housing supply in the US according to the Federal Reserve Bank of St. Louis. It is currently a little over 6 months or about half as much supply as during the real estate crisis.

apartment months supply

Federal Reserve Bank of St Louis

In addition to the overwhelming imbalance between housing supply and demand, the market is also generally healthier than it was during the housing crisis because of things like tighter credit standards and better buying habits, they said.

Only 1% of current mortgages are variable rate, while the rest are fixed. That number was 40% in 2005, they said. Adjustable rate mortgages have fluctuating interest rates that rise as mortgage interest rates rise. Fixed-rate mortgages, on the other hand, remain the same throughout their lifetime.

However, Marcelli and Woloshin expect the rise in house prices to slow due to the rising cost of living, especially given the increasing expenses for food and energy that average families pay.

Other industry insiders have offered similar sentiments, suggesting that rising housing, energy and transportation costs coupled with the dollar’s continued inflation will have an impact on the broader market. And with many Americans still struggling to find a stable footing, we could see an even greater imbalance in the country’s wealth gap.

Speaking to Insider on April 1, Melissa Cohn, the regional vice president of William Raveis Mortgage, said inflation will have a “huge” impact on the housing market competitiveness of America’s middle and lower classes, and that the housing market is evolving become a “two-town story” between wealthier and middle- and lower-class Americans.

“If you think about it, two-thirds of our economy is based on oil, and when energy prices go up, it acts like a tax on the economy,” Cohn said. “If it costs us 8% more to do everything, then we have 8% less purchasing power to buy a house.”

Rising mortgage rates are another factor in this widening gap between wealthier Americans and working families. Ian Shepherdson, the founder and chief economist at Pantheon Macroeconomics, said in a March note that he sees house prices cooling in the coming months due to rising mortgage rates, but a correction is not necessarily likely.

“The average 30-year mortgage rate has risen about 125 basis points since last September, causing the monthly rate on a home mortgage to rise by $412, or 27% per month, at the average price,” Shepherdson said. “That’s a huge increase, even for households sitting on savings accumulated during the pandemic – a one-off increase in savings can’t fund an increase in mortgage payments for the next 30 years – and demand will fall quite a bit further.” “

mortgage payments

Pantheon Macroeconomics

Still, Cohn and others in the mortgage industry, like David Greene, who is also the host of the BiggerPockets podcast, say they’re unlikely to slow the broader housing market in the coming months as demand still far outstrips supply.

Referring to how Marcelli and Woloshin recommend buyers approach the current market, they discouraged potential buyers from timing a correction and said they should focus on affordability instead.

“It’s best not to try to plan your purchase, but to base your decision on whether you could afford the monthly payment
payment, including insurance, taxes and maintenance,” they said


in the housing market versus stocks.”

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