The housing market is about to get more dysfunctional

The U.S. housing market this spring selling season is looking like a multicar collision, a result of powerful forces crashing into each other.

The big picture: Interest rates on home mortgages have spiked more rapidly than they have in decades, reducing affordability. Builders can’t get adequate supplies to construct houses more quickly. Yet strong income growth and unstoppable demographic forces are propelling high demand.

Why it matters: It’s likely there will continue to be a gap between supply and demand — making for a frustrating market for all involved.

State of play: The rise in mortgage rates in recent weeks is jaw-dropping, and outside the range of any recent experience.

  • The average rate on a 30-year fixed-rate mortgage was 4.42% last week, Freddie Mac said, up from 3.76% three weeks earlier. That’s the biggest three-week rise since 1987. The rate was 3.05% just three months ago.
  • But those numbers are already outdated, based on mortgages locked in last Monday through Wednesday. By the end of last week, Mortgage News Daily’s average came in at 4.95%.

The impact: The speed and the scale of the adjustment mean that a family that can afford a $2,000 per month mortgage could have borrowed $424,000 at the beginning of March — but only $375,000 at Friday’s 4.95% rate.

  • Higher rates reflect a shift in messaging from the Federal Reserve.
  • While the central bank has raised its short-term interest rate by a mere quarter-point, long-term rates like mortgages are shaped by investors’ expectations of the future path of the economy and Fed policy. That has turned markedly toward higher rates since December.

The supply side of the market has its own troubles, as homebuilders have not been able to deliver enough houses to address demand, holding back sales volumes.

  • “Our biggest challenge today is completing homes, not selling them,” KB Home chief executive Jeffrey T. Mezger said in an earnings call last week.
  • Among the materials in short supply, said COO Robert McGibney: steel ducts needed for HVAC systems, ovens, garage doors, windows, cabinets and siding. He added that “we expect shortages of materials will stay with us throughout this year.”

It may be a bumpy path as the housing market finds a new equilibrium. Rising mortgage rates will limit what buyers can bid, yet it is high prices that incentivize suppliers to ramp up production.

  • Meanwhile, homeowners with a low mortgage rate may be more reluctant to sell and give up the benefit of a sub-3% rate, further limiting supply.

The bottom line: We may end up with less supply and transaction volume, worsening America’s housing affordability crisis.

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