You may have noticed that stocks have started to fall again (the Nasdaq-100 was down over 7% from its mid-July peak at the end of last week).
Sure, there was some negative economic news out of China last week, but what has really changed, is long-term (10-year) interest rates in the U.S..
10-year rates +60bps since mid-July, contributing to recent equity selloff
In fact, 10-year Treasury yields recently reached 4.35%. That’s a rise of 60bps since mid-July – that’s a big move for a rate averaged over 10 years – and a 16-year high (it’s back to 4.2% today).
This puts pressure on stocks because higher long-term rates add to borrowing costs and incentivize saving over spending, hurting profits. It also hurts some valuation models.
What’s pushing rates up suddenly?
Once again, data has shown the economy still seems stronger than expected given the rise in interest rates already.
- The unemployment rate is back (down) to 5%
- After a softer patch, retail sales have been rising for 4 straight months
- GDP data has come in stronger than anticipated, now running at 2.4% annualized (far from below zero which might indicate a recession)
Turns out the Fed was right?
A while back, we talked about how the Fed forecasts (for rates to remain higher for longer) seemed at odds with futures markets (with the purple dot in the chart below far above the light blue line).
However, thanks to the data since mid-July, markets have mostly increased their expectations for how long it will be until we start to see rates cut – and the answer is “higher for longer.” That puts markets’ new expectations (dark blue line) close to the Fed’s own projections for a 4.75% rate at the end of 2024 (purple dot).
That’s pushing mortgage rates to 20-year highs
Treasuries aren’t the only long-term interest rate most of us care about. The increase in Treasury rates pushed 30-year mortgage rates higher too. They hit just 7.1% (chart below, green line) -- a 21-year high.
Less house for the same money…
At higher mortgage rates, the same monthly payment buys less house.
For example, when mortgage rates bottomed in early 2021, a $2500 monthly mortgage payment would get you a $776k home (chart below), with 20% down. Now, that same $2500 payment only buys a $465k house.
So why are home prices holding up?
Given this, you might expect the average price of a house purchase might have fallen too…but it really hasn’t. In fact, the median price of existing single-family homes is essentially unchanged from its early 2022 peak (chart below, green line).
Partly that’s because less houses are trading: Yesterday’s data showed existing home sales fell for a fifth straight month and are down 35% from their late 2021 high.
But that’s a combination of lower demand and supply.
- Demand is lower because fewer people can afford the same house
- Supply is lower because so many people still (luckily) have locked in very low long-term rates a few years ago. Data shows 60% of outstanding mortgages are at rates under 4%, and moving would require refinancing at the new higher rates.
We can see in the chart below that supply is low. The purple line shows there’s only about 3 months’ supply of existing homes for sale – about half the amount that balances supply and demand – and even less than right before the housing boom-related credit crisis.
High rates + high prices = worst affordability since 1985
Despite wages rising, mortgage rates at 20-year highs + home prices staying around highs has also pushed housing affordability to its worst reading since 1985 (chart below).
The weird thing (for the economy) is that it doesn’t really seem to matter. With so many homeowners locked into low interest rates, their interest payments haven’t changed. In short, the Fed’s higher interest rates are yet to dent homeowner budgets, which has also helped spending stay high.
The information contained above is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. Neither Nasdaq, Inc. nor any of its affiliates makes any recommendation to buy or sell any security or any representation about the financial condition of any company. Statements regarding Nasdaq-listed companies or Nasdaq proprietary indexes are not guarantees of future performance. Actual results may differ materially from those expressed or implied. Past performance is not indicative of future results. Investors should undertake their own due diligence and carefully evaluate companies before investing. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED. © 2023. Nasdaq, Inc. All Rights Reserved.
