Source: Knowledge at Wharton —
The U.S. housing market last year bore the brunt of higher mortgage rates that rode spiraling inflation in the broader economy, but that will change this year, according to Susan Wachter, Wharton professor of real estate and finance.
“The Fed is using the housing market as a fulcrum to slow overall activity and get the inflation rate down,” she said in a recent interview on the Wharton Business Daily radio show that airs on SiriusXM. (Listen to the full podcast above.) “When they succeed in doing that, housing and rents are likely to come down most and fastest, and that may get us out of the inflation bubble sooner than we think in 2023.”
Until that happens, “the housing market for sure is doomed; it’s a sinking ship,” said Wachter, as she surveyed the landscape: Pending home sales are at historic lows and home prices are down, too, as mortgage rates reach record levels. Housing supply is also running low because new housing construction is declining in response to tepid demand, and existing homeowners are unwilling to sell their homes financed at attractive low mortgage rates of 3% to 4% and move into newer homes at double the mortgage rate.
Demand is running low not just because new financing is costlier or because people are wary of an imminent economic recession, Wachter noted. More and more younger Americans are staying put with their parents and new household formation is declining — both dampeners for housing demand. The gainer from those downers is the multifamily rental housing market, which has seen a construction boom and sharp rises in rental rates, although those rates are beginning to slow down, she added.
The outlook for 2023 and beyond, however, is not hopeless. “The housing market across the board is in a doom situation for a bit, but we are not about to see a recurrence of the systemic crisis that we had in 2012,” said Wachter. She also did not expect home prices to crash like in the 2012 recession, or banks to face financial disasters and the “doom loop” of foreclosures and prices declining.
“The Fed is using the housing market as a fulcrum to slow overall activity and get the inflation rate down.”— Susan Wachter
For 2023, Wachter advised both homebuyers and homeowners to wait and watch. Prospective homebuyers could benefit from further price declines, and homeowners could continue enjoying the fruits of their relatively lower financing of earlier years for a while longer.
An edited transcript of the interview follows.
Wharton Business Daily: How has the real estate sector reacted to the impacts of rising interest rates and inflation over the past year?
Susan Wachter: The real estate sector, and specifically housing, has taken the brunt of the Federal Reserve’s aggressive stance on monetary policy. It is the housing sector that is in recession and is pulling down the rest of the economy.
Wharton Business Daily: Data on weekly mortgage applications shows a sharp pullback in the past two years from a surge in early 2020. What do you read in those trends?
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