Home prices still continue to rise at last official measure, with prices increasing over 1% between May and June, according to the National Association of Realtors. In some areas, the rise is even greater, such as the northeast, where prices rose over that period by 15.4%.
However some analysts are warning, a correction could be “dead ahead.” One such analysis is by chief economist for Moody’s Analytics Mark Zandi. However even as he warns of a correction, he notes there will not be crash.
Zandi begins his analysis by noting that mortgage rates are continuing to rise as the Fed increases interest rates. Some are forecasting a short term rise of 3.25%. Presently, mortgage rates are around 6% on a 30-year, fixed rate loan.
However as rates rise, payments can end up thousands of dollars higher year over year, Zandi notes. It is this increased cost which he believes will trigger a correction, probably fairly soon.
Zandi says, “If we stay around six I think that the market will adjust and we’ll eventually get that correction. If it goes much higher than that we’ll get a more significant pullback in the housing market.”
Zandi notes, on June 14th, Fed Chair Jerome Powell had told young potential home buyers that it was not the time to invest in housing, as prices had gone too high. He noted prices would continue to climb for a while due to tightness in the market.
Powell had said, “If you are a homebuyer, or a young person looking to buy a home, you need a bit of a reset. We need to get back to a place where supply and demand are back together and where inflation is down low again, and mortgage rates are low again.”
As the Fed raises rates, housing prices will begin to cool off. However Zandi makes the case they will not collapse, mainly due to institutional investing in housing.
A more recent phenomenon, institutional giants like Blackstone and Brookfield have begun purchasing houses in order to take part in their price appreciation, while making profits by renting them out. Zandi believes this phenomenon is here to stay, even with higher mortgage rates. He notes the issue these institutions have is they have raised enormous amounts of capital, and need ways to invest it prudently, with minimal risk, and decent returns. Real estate investment is perfect for that.
Zandi notes, these purchases by institutional investors are not short term positions they can exit the moment the market changes. These are long term investments which will tighten the market, even as mortgage rates rising are trying to loosen it. That will tend to stabilize the market and protect it from any crashes.
Zandi notes, “I think this is a business model that works. I don’t think they’re going to sell. They may not buy in this environment, they may wait and see how things shake out.”
