2022 Year in Review – Part 5



In Part 5, the final post of the financial markets “2022 Year in Review”, we look at everyone’s favorite topic … the housing market.

The 2022 Housing Bubble in the US is BIGGER than 2006, when considering home values adjusted for median income.



Meanwhile, the rapid change in mortgage rates this year is unprecedented.



Two-years ago the average 30-year mortgage rate was 2.80% and the median new home price in the US was $395,000.

Just recently the 30-year mortgage rate reached 7.08% and the median new home price $518,000.

This means a $25,000 increase for a 20% down payment.

It is also a 114% increase in monthly payment, more than double, from $1,298 to $2,779.

This means housing costs (principal, interest, taxes, insurance, PMI) for the average home is now 55% of the average American income.



Conforming mortgage guidelines limit a borrower’s debt-to-income ratio to roughly 45%.

Therefore, the average person in the US can no longer qualify for a mortgage, irrespective of whether they were interested in buying.

In total, this move in mortgage rates from 3% to 7% blocks out 24 million households from a $400K mortgage, shrinking the potential pool of buyers by 47%.



Debt-to-income ratios take all monthly debt obligations into consideration.

With a rapid increase in consumer credit (debt) and a dramatic decline in personal savings rates, the pool of qualified buyers is certainly lower.


No surprise then that home buying conditions (for houses) declined to the lowest level in history.



The decline in spending power, depletion of savings, increase in amount of personal debt, plus the higher costs to service the debt (higher rates = higher payments) has led to the lowest consumer sentiment on record.



For now, loan delinquencies across the board remain low, but there has been a broad uptick since last quarter.



“One of the most reliable indicators of future economic growth is the rate of change in interest rates across the economy.

When interest rates rise sharply, economic growth will cool in the coming months. If interest rates decline rapidly, an economic recovery is likely around the corner.

Interest rates interact with monetary policy and can have an extremely long lead time, up to 12 months, which is why many market participants ignore the warning about economic growth in the future based on a change in interest rates today.

The chart below (posted June 19) shows the 18-month rolling change of a composite basket of interest rates, including mortgage rates, corporate bond rates, and short-term Treasury rates.

The chart is graphed inversely so that when the line is moving lower, it means interest rates are rising, and worse growth is ahead.”

~ Eric Basmajian, EPB Macro Research



So, what does this mean for real estate prices?

Here we have home prices plotted against mortgage rates.

Take note of the orange dot and make your own conclusions about where home prices are likely headed.


The recent high in the 30-year average fixed rate mortgage in November (just over 7%) suggests a 20% drop in residential housing prices over the next 9-12 months.



Although, the housing market has already started to cool.





Fortunately, nearly 86% of American households have mortgages below 5%, and 65% have mortgages between 2-4%.


This means homeowners are more reluctant to move than ever before.



Leading to a drop in sales of previously owned US homes for a record ninth straight month in October.



New home sales are also under pressure as potential buyers are backing out with developers just as their inventories reach record highs, levels not seen outside of a recession.





The timing isn’t great for home builders and the overall housing market.

There is a near record 1.678 million units under construction, a record 7.3 months of inventory.





This suggests a sharp increase in completed inventory over the next several months, which will put further pressure on new home prices (and the broader housing market) at a time well sales have already collapsed into recession territory.



The total number of home sales across the board fell 27% year-over-year in October, with pending sales down 32%.





Conditions favor buyers with only 44% of offers facing competition, a 22% decline in bidding wars giving sellers less options and buyers more room to negotiate.



A big reason is the exodus of investors from the market.



This all adds up to a massive decline in buyer traffic, which usually precedes major home price declines.



The domino that is likely to either kick off the next housing crisis, or hold back the dam from bursting, is employment.

Currently the unemployment rate is near record low levels .



However, that is always the case just before recessions and financial crisis.



When we look closer at the data we see the labor market isn’t as strong as the number suggest at face value as a record number of job holders have more than one job.





What came first the chicken or the egg?

What will trigger the other and cause a recession, housing crash or widespread unemployment?



The Fed is bad at predicting recessions and even worse at forecasting how that it will impact employment.


Therefore, it is likely they keep raising rates until something breaks, that something will be employment or housing or both.

These are the circumstances, to which the Fed has shown indifference.

“If unemployment goes up, that’s unfortunate. If it goes up a lot, that’s really very difficult, but price stability makes the future better.”

~ Charles Evans, Federal Reserve Bank of Chicago President



What a year it has been, and what a lot of data to compile, but thank you for joining me until the end.

The idea of a soft landing, which I wrote about in May, is that the Fed can raise rates without causing a recession.

No one can truly predict the future, but the data we just explored implies a bumpy road ahead.

If the economy continues to worsen, mortgage rates would fall quickly on the back of a rally in long-duration government bonds.
(higher bond price = lower rates/yield)

I suggest you buckle up and stay tuned for my monthly updates next year, including a big announcement from me in Q1.

Until then be sure to follow me on Twitter and Instagram where I share my thoughts and market updates more frequently.

Happy Holidays.


PART 1 | PART 2 | PART 3 | PART 4 | PART 5

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