The squeeze on homebuyers appears to be getting tighter by the month—which could spell trouble for multiple sectors of the economy in the future.
Today, homebuyers’ budgets are getting clobbered in three key ways: rising inflation is keeping home prices elevated while increasing interest rates aimed at combating that inflation are pushing mortgage costs higher.
- The average interest rate for the benchmark 30-year fixed mortgage has soared from 2.87% since the end of 2020 to around 7.22% today.1
- The average monthly mortgage payment for the median-priced new single-family home has soared by approximately 110% since the end of 2020.2
- In dollars and cents terms, that average monthly payment currently stands at $3,200—up from just $1,514 in late 2020. (see the chart)
The result: Buyers of newly built homes today can expect to spend a whopping $20,234 extra per year in mortgage costs than they would have just a few years ago. What’s more, we expect the Fed to raise interest rates again next month—likely boosting mortgage rates even more.
Despite that rising cost of ownership, home prices have stayed high: the median sale price of new U.S. homes has soared 14% over the past year and is up nearly 8% over the past month to $470,600.3
The fallout is being seen in several ways:
- The Dow Jones US Select Home Construction Index (which measures the performance of U.S. companies in the home construction sector) has plummeted 33% year-to-date (versus a 20% decline for the S&P 500 as a whole).2
- Residential investment dropped sharply in the third quarter, acting as a drag of nearly 1.4% on GDP growth for the quarter.2
- Housing affordability recently hit its worst level in 37 years4.
While housing is often seen as a leading indicator for the rest of the economy, much about the current economic cycle is different. We are closely monitoring how higher mortgage costs feed through consumer behavior, and we stand ready to adjust portfolios accordingly to mitigate emerging risks and pursue opportunities.
1 Bank Rate
3 U.S. Census Bureau and the U.S. Department of Housing and Urban Development, Sept. 2022
This commentary is written by Horizon Investments’ asset management team.
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