Is a housing catastrophe on the horizon? According to BofA, this is unlikely.
According to Chris Flanagan’s team at BofA Global Research, the combination whammy of rising mortgage rates and increasing property prices has resulted in “collapsed” housing affordability in America.
According to the BofA team, the situation has gotten so terrible that it now compares to “historically low affordability readings” in the fourth quarter of 1987 and the first quarter of 2005.
Those years also happen to coincide with the 1987 “Black Monday” stock market disaster, when the Dow Jones Industrial Average DJIA, 0.29 percent dropped 22.6 percent in a single trading session, and the onset of the subprime mortgage crisis, when housing values soared from 2000 to 2005, peaking in 2006.
Existing home sales dropped 33% after the 1987 crash and 45% during the subprime mortgage crisis. In a weekly client note, Flanagan’s team stated, “We think a 35 percent peak-to-trough existing-home-sales fall is plausible in this cycle.”
Home prices, which rose a record 20.6 percent yearly in March, are likely “at or near the peaks for this cycle,” according to the researchers, given that a large portion of the gain is likely due to historically low mortgage rates, which have since evaporated.
From 2.75 percent last winter, the cost of a 30-year fixed mortgage roughly doubled to around 5.25 percent in May.
The rise came as the Federal Reserve began laying out plans to hike interest rates and reduce its roughly $9 trillion balance sheet in an effort to combat inflation, which has recently reached near 40-year highs.
According to FactSet data, while home prices have continued to rise this year, household wealth invested in stocks and bonds has suffered, with the S&P 500 index SPX, 0.40 percent down 14 percent from its Jan. 3 closing high through Monday and the Nasdaq Composite Index COMP, 0.44 percent down nearly 24% from its peak.
According to Flanagan’s team, even in a “draconian” scenario when the “supply side for housing is fundamentally impacted by lower affordability, the supply side remains exceptionally supportive” of home price increase.
Home supply was already scarce before the epidemic, as many families sought larger homes outside of major cities to accommodate remote employment. This is a crucial component in BofA’s prediction of a 15% increase in home prices in 2022 and a 5% increase in 2023.
inflation hedge: to the extent that there is any housing difficulty, and forced sellers emerge, we believe owner-occupied or non-owner-occupied bidders will be present to at least partially absorb the sales,” they said.
