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SALT LAKE CITY — Warning that the housing market is contracting again as today's mortgage rates hover near 8%, Wells Fargo economists wrote in a new analysis that rising borrowing costs "stand to tip the housing sector back into a recession."
The "ominous" special commentary posted Thursday, according to a Wells Fargo news release, states prospects for a housing rebound are dimming as mortgage rates tighten their grip on the already sharp U.S. housing affordability issues.
Even though the economy has shown "a remarkable degree of resilience" this year — and a strong labor market along with moderating inflation has "raised hopes that the U.S. economy can avoid a recession — the same can't be said for the real estate market. Unfortunately, not every sector of the economy has been as sturdy in the face of rising debt costs," the Wells Fargo economic group wrote.
"After generally improving in the first half of 2023, the residential sector now appears to be contracting alongside the recent move higher in mortgage rates," they continued. "Although mortgage rates may gradually descend once the Federal Reserve begins to ease monetary policy, financing costs are likely to remain elevated relative to recent norms."
The commentary comes days after Goldman Sachs analysts also issued a downgraded housing forecast, predicting "higher for longer" mortgage rates will continue to squeeze home inventory and yet home prices will stay in the green, though growth will be slight as sales slow even more.
It also comes a day after the Federal Reserve Bank of Atlanta posted an update to its Home Ownership Affordability Monitor, showing housing affordability sank to a "new record low" in August due to still stubbornly high prices and rising interest rates.
In yet another month of declines, the monitor index score sank to 67.3 in August with a national median home price of $377,500, a median income of $76,621, a total median monthly payment of $2,848 and an interest rate of 7.1%. The Atlanta Fed estimated the annual total payment share of median income to be 44.6%, well over the recommended 30% of income for housing costs.
Compare that score to a score of 112.3 in November 2012, when the median home price was $197,333, median income was $52,161, and the interest rate was 3.4%.
This latest affordability reading was back in August, before interest rates inched closer to 8%, hitting that threshold last week before tipping down only slightly, according to Mortgage News Daily.
This "higher for longer" interest rate climate is likely to "not only weigh on demand, but could also constrain supply by reducing new construction and discouraging prospective sellers carrying low mortgage rates from listing their homes for sale," Wells Fargo economists wrote.
The bank's analysts also downgraded their home price forecast, though now they expect a "slightly softer pace of home price appreciation in the years ahead." Because high interest rates are expected to continue to both dampen demand and constrain supply, they predict those dynamics will continue to buoy home prices slightly.
"Higher financing costs are likely to both weigh on demand and constrain supply, which will allow home prices to maintain a positive trajectory," Wells Fargo economists wrote, predicting the S&P Case-Shiller National Home Price Index to increase 1.8% in 2023 and 2.5% in 2024.
The economic group also predicts a "downshift" in new residential construction starts, with multifamily permits already declining sharply in recent months.
"The recent drop in home builder confidence is evidence that single-family construction may begin to moderate as higher mortgage rates test builders' ability to offer rate buy-downs to attract new buyers," they wrote. "That noted, a structural shortfall of single-family supply will likely continue to boost new development."
