The new mortgage shock
Why house prices may be in trouble
In a big serving of bad news, there are crumbs of comfort
Photograph: Getty ImagesLIKE MANY politicians, Donald Trump dreams of having his cake and eating it.
In January he told his cabinet that he wanted to make houses more affordable, but also “to drive housing prices up for people that own their homes”.
A government that could do both would be a true cakeistocracy.
In the real world, only homeowners have been gorging: house prices are near record highs in many rich countries.
Homebuyers have gone hungry, especially after post-covid inflation pushed up bond yields in 2022-23, making mortgages more expensive.
Now bond yields are rising again, and mortgage rates with them, as central banks raise interest rates to fight stubborn inflation while governments suffer from debt bloat and fiscal heartburn.
The average rate on a new 30-year home loan in America is nudging 7%, up from a bit over 6% a year ago and nearly double what it was before the pandemic.
Borrowing costs are rising in other wealthy countries, too.
This time, however, the result may be lower house prices.
This is something that, for all their cakeist proclivities, politicians should welcome.
The latest bout of interest-rate rises is not yet as acute as the previous one.
But the housing market today is less resilient than it was.
As variable-rate mortgages have spread across the rich world, the prospect of higher monthly payments may deter buyers, particularly now that households have mostly run down their covid-era savings.
Meanwhile, the supply of houses is up a bit compared with the 2010s.
House prices are unlikely to fall much in nominal terms—they seldom do, outside deep recessions.
Yet even a decline after adjusting for inflation could be a healthy digestive.
Chart: The EconomistFor a starter, if many people are unable to afford a home it weighs down the economy, especially in big cities that power 21st-century commerce.
Although wage growth has comfortably outpaced inflation in America, the total cost of owning a home has grown even faster in recent years.
Cheaper houses would be of particular benefit to first-time buyers, who often struggle to save enough for a down payment.
Falling prices may also reanimate the housing market.
In the past few years it has frozen rigid in places where fixed-rate mortgages remain popular, as they are in America.
Homeowners there have clung on to their rock-bottom mortgage fixes, meaning that fewer homes have changed hands in the past four years than at any point since the global financial crisis of 2007-09.
This has curbed economic dynamism by making people less willing to move elsewhere to seek better jobs.
In today’s economy homeowners may at last prefer to sell now rather than wait for prices to fall further.
The last benefit of a housing slump is to remind people that houses are a poor long-term investment.
For decades governments have told households to treat their homes as saving vehicles, and in many countries lavished them with tax breaks.
A house has virtues as an asset: investors can count on a premium on account of its illiquidity and it gives ordinary mortals access to financial leverage (setting aside the wild world of retail options trading).
Yet treating your house as a financial asset violates some basic tenets of investing, which becomes apparent when prices fall.
It is undiversified (unless you are a serial landlord), related risks are hard to hedge (insurance gets you only so far) and returns are highly correlated with your future income (a downturn could bring down both your wages and the value of your property).
Plus the more a family’s finances are tied up in a home, the greater the NIMBY temptation to block development, which could dilute its value.
The causes of the latest rise in interest rates—inflation, debt, geopolitical tensions—are nothing to cheer.
Its effect on house prices may offer some cake crumbs of comfort.
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