‘The housing market looks increasingly vulnerable with a possible price correction’: ING

“The housing market looks increasingly vulnerable with a possible price correction,” says an economist.

ING’s chief international economist, James Knightley, points out that rapidly rising house prices are making it more difficult for would-be buyers to save for a deposit at a time when inflation is driving down real incomes and confidence is suffering.

“In addition to this, the latest housing data shows that this sector is the most vulnerable to the rising rate environment with the growing prospect of a slowdown and possible correction in the coming quarters,” Knightley wrote in a recent note.

The average mortgage rate for a 30-year conventional loan rose to 5.3% last week. The median home cost in April was still at a record $391,200,

Nationwide home prices have risen 35% since the start of the pandemic. Demand in 2020 and 2021 was fueled by massive fiscal and monetary stimulus and work-from-home options. At the same time, supply has been severely limited and construction has been slow to catch up.

The tide may be turning now.

Mortgage applications are plummeting as borrowing costs rise. Home supply is expected to hit the market later this year, when demand could drop.

“Hence our belief that the rapid appreciation in house prices could quickly flatten and possibly reverse itself,” Knightley writes.

“On the downside, this will hurt consumer confidence, as raising interest rates in a deteriorating housing market environment is never a good story. It would also weaken construction activity with a lag and hurt job prospects in the industry, which accounts for 4% of GDP in total,” Knightley said.

FILE – Condominium units are offered for sale in the Dorchester neighborhood, Wednesday, Aug. 18, 2021, in Boston. Rising interest rates are making adjustable-rate mortgages a more attractive alternative to regular 30-year fixed-rate home loans. (AP Photo/Charles Krupa, File)

However, there is a kind of “silver side”.

“Falling house prices would cause inflation to come down faster,” the economist said.

Lower inflation would allow the Fed to move to “reverse course and cut rates to neutral more quickly, which would help prevent a broader and deeper economic downturn.”

Ines is a market reporter who covers stocks. Follow her on Twitter at @ines_ferre

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