8/16/2022: Housing Starts Fell Sharply in July
When the Fed increases rates, housing activity slows.
Housing starts in July fell 9.6% from the month before to a seasonally adjusted annual rate of 1.45 million, which is lower than July 2020’s number of 1.51 million. Building permits declined 1.3% to 1.7 million. The rising interest rates is definitely a big factor in slowing housing starts. The average mortgage rate on a 30-year fixed-rate mortgage was 5.22% last week, according to Freddie Mac. A year before, the rate was under 3%. For a $400K mortgage, the monthly payment for a 30-year mortgage is $1,686 when the rate is 3% but would jump to $2,201 when the rate is 5.22%. That is a 30% increase on monthly mortgage payment. If people can only afford the same monthly payment, the amount they could borrow will dramatically decrease. As illustrated above, a $1,686 monthly payment corresponds to a $400K mortgage when the rate is 3% but only to a $307K mortgage when the rate is 5.22%.
The decreased borrowable amount will dramatically impact the house prices. If the mortgage rate goes up to 8%, the borrowable amount would become $230K for the same example mentioned above. I believe this is a very big risk for the housing sector and the overall economy as 50% of the household net worth is tied to real estate and this networth is highly leveraged. It appears that builders are slowing down in building new houses and real estate brokerage Compass also lowered their guidance. It would be interesting to see how this plays out but everything hinges on how high the interest rate will go. I don’t think people have a strong consensus at the moment.