Ralph DeFranco is global chief economist of the mortgage group at Arch Capital Services Inc., White Plains,
N. Y. He leads the company’s efforts to forecast regional home prices and develop predictive economic models.
He also is the author of The Housing and Mortgage Market Review, a quarterly report on the state of the
nation’s housing sector, which includes probabilities of home-price declines from the Arch MI Risk Index.
Reach him at firstname.lastname@example.org or (925) 658-6111.
The recent rise in mortgage rates will result in continued cooling over the next several months, but sustained price declines are unlikely in America’s largest markets unless
mortgage rates spike to 6 percent or higher.
Before looking more closely at where affordability has deteriorated the fastest, why a crash is unlikely, and why mortgage rates and home prices are still likely headed higher, let’s
examine a few examples that highlight the softening market:
■ n New home sales and permits are down and sales of
previously owned homes were down 7 percent as of this
■ n Nationally, the supply of existing homes ticked up
slightly to 4.1 months as of this past Novenber, up from
3. 6 months a year earlier, while the supply of new homes
popped up to 7. 4 months.
■ n California, to name just one example, has 28 percent
more listings than a year earlier, and sales were down
8 percent as of this past October, according to the
California Realtors Association.
The underlying root cause of the slowdown is a lack of affordable homes for sale. Higher home prices and rising mortgage rates
have increased the size of the monthly mortgage payment needed to buy a median-priced home by anywhere from 7 to 26 percent over the past year, depending on which state you live in.
Housing affordability varies greatly by location. It remains
favorable to homeownership in most locations but is deteriorating quickly as rates rise. The National Association of
Realtors’ Affordability Index is still 15 percent better than its
historic average for the U.S. overall, which may explain why
government-sponsored enterprise (GSE) data indicates an increasing first-time homebuyer share.
Also, the homeownership rate started growing in the past couple of years after declines for more than a decade. Nevertheless,
markets that have had the largest deterioration in affordability
could see larger slowdowns than the nation as a whole.
A soft landing
The housing market had been flying high, powered by a
strong jobs market, a housing shortage and low interest rates.
Now that the engine of low rates is sputtering, the ride just
Thankfully, a soft landing is a lot more likely than a crash
since two engines are still going strong, for the moment at
least. Job growth remains robust with total employment at
The economy is likely to remain strong over the next six to
12 months because the federal government increased spending and passed a tax cut, resulting in a large “stimulus package” that will keep the economy humming even with higher
The housing shortage is not going away anytime soon:
New home sales and builders’ incentives to break ground
on additional housing have been hampered by higher fixed
costs such as local assessment fees, a labor shortage and
New residential construction is around 1.3 million new
units a year, while trend demand is likely somewhere between 1.5 million and 1.7 million new units a year. Another
way to see how the country is underbuilt is by looking at today’s residential fixed investment as a percentage of gross
domestic product. It’s now 3. 9 percent compared to the
historical average of 4. 6 percent.
A strong labor market and a shortage of housing should
result in a soft landing for the housing market. Just how soft a
landing depends on local housing-market conditions.
For some areas, it means flattish home prices, which would
allow incomes to help catch up to recent price increases.
For other areas, it could mean home-price growth in the
2 to 4 percent range, more in line with income growth.
“The housing market had been flying high,
powered by a strong jobs market, a housing
shortage and low interest rates.”
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