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US interest rate rises start to threaten the housing market bubble

Economic growth
By Paul Hodges on 03-Sep-2023

Interest rates began to increase in March last year. And history shows that major changes (up or down) normally take 12-18 months to have their full effect.

The US housing market is a good example. Most pundits still believe it’s in good shape. But dig a little deeper, and things are not quite what they seem.

  • The US has a unique system of housing finance; buyers usually lock in a mortgage rate for 30 years
  • So nearly 2/3rds of people with mortgages are paying <4% as the Wall Street Journal chart shows
  • If they decided to move, their monthly payments might well double with rates now at 7.2%

 23% of homeowners (mainly older people) have paid off, or never had a mortgage and aren’t really looking to move. And so as the Trading Economics chart shows, anyone wanting to buy has a very limited choice.

New home sales are therefore doing relatively well as the Bianco Research chart confirms:

“An astonishing 30% of all single-family homes on the market are now new. This is amongst the highest share throughout history and well above average.” 

In other words, those people who have to move are paying a heavy price. They have a very limited choice, with most owners staying put, at least for the moment. And monthly payments are high:

  • As the Kobeissi Letter chart shows, the median cost of buying a house today is $2748/month
  • This is a 90% (not a typo) increase since 2020 and 70% of post-tax income (the highest in history)
  • Desperate buyers during the lockdowns pushed home prices much higher
  • The payment still seemed affordable as interest rates were low

But today, with rates at 7%+, buying conditions are the worst for 40 years as the Game of Trades chart shows. Unsurprisingly, as the Barchart chart shows, mortgage applications have already fallen to a new 30-year low.

After 18 months of rate rises, it seems likely that the housing bubble has reached bursting point, as the Jeff Weniger charts confirm::

  • National Association of Realtors data show qualifying income for a mortgage is now $104k
  • New York Fed data shows only 21% of under-40s, and 13% of 40-60 year olds are even thinking about moving home
  • People normally spend money on furniture and other areas when they move home, but that market has dried up
  • And so long-established furniture companies like Mitchell Gold, founded in 1989, are shutting down

500 employees are losing their jobs due to weak sales and financing problems.

It’s not hard to work out what might happen next:

  • Most potential buyers are instead being forced to rent, where prices average a record $1859/month
  • But this is a clear sign of trouble ahead, as the Visual Capitalist chart confirms
  • History, as in 2006, suggests this is likely the trigger for a rapid fall in house prices 


The “Three Ds” are now the key to the outlook.  Death, Divorce and Debt create Distressed sellers – people who have to sell, despite buyers being hard to find.

And in this cycle, it seems likely that builders will be the ones to spark the downturn. They have a lot of homes to sell, as the US Census Bureau data for housing starts and permits confirms:

  • Housing starts have averaged 1.5m homes/month since March last year, and permits have been even higher at 1.6m
  • This means many builders now have high levels of debt, having had to buy land and finance the building process

They have done well in recent months, as the second-hand housing market dried up. But now, millions of finished homes are set to come on the market in the seasonally quieter winter months.

Who is going to be able to buy them at current prices? Median US household incomes are $71k, which means most people are well short of the $104k needed to qualify for a mortgage. And, of course, those under 35 – who are more likely to buy a home – earn even less.

Logic therefore suggests the US housing market could well be heading for a hard landing. And it could well be worse than in the subprime crisis, given that house prices and interest rates are much higher today.