Housing market is headed for a 1980s-style recession, Wells Fargo warns, thanks to ‘higher for longer’ interest rates

Rising mortgage rates and the Federal Reserve’s aggressive rate hike campaign could push the housing market into a recession reminiscent of the slowdown of the 1980s, Wells Fargo warned.

Mortgage interest rates are at their highest level in decades and are approaching 8 percent.

The average 30-year mortgage rate was 7.79 percent as of Oct. 26, according to the latest data from government-backed lender Freddie Mac.

The central bank is expected to leave interest rates steady at a 22-year high of 5.25 percent to 5.5 percent at the end of its two-day meeting on Wednesday.

But officials have made clear in recent months how they plan to keep borrowing costs at higher levels well into next year in an effort to curb inflation – which will trigger a decline in construction and market activity. the bank warned.

“After a broad improvement in the first half of 2023, the housing sector now appears to be contracting, in addition to the recent rise in mortgage rates,” Wells Fargo economists Charlie Dougherty and Patrick Barley wrote in an article. research note.

“While mortgage rates may gradually decline once the Federal Reserve begins to ease monetary policy, borrowing costs are likely to remain elevated compared to recent norms,” ​​she added.

“An environment of ‘higher and longer interest rates’ would likely not only depress demand, but could also limit supply by reducing new construction and discouraging potential sellers with low mortgage rates from putting their homes up for sale.”

Home sales are expected to fall to lows not seen since the global financial crisis as higher mortgage rates deter owners from moving, forcing the property market into a ‘prolonged freeze’.

Rising housing costs have also impacted affordability, pushing homeowners to stay put.

This is evident from figures from the National Association of Real Estate Agents (NAR), existing home sales fell to 4.04 million annually in August, down 15.77 percent from the same month last year.

Meanwhile, Chen Zhao, head of economics research at Redfin, told the newspaper Wall Street Journal that the real estate agent expected the total number of existing home sales in 2023 to be around 4.1 million.

It would mark the smallest number of sales since 2008 – the year the Lehman Brothers went bankrupt.

In the 1980s, the Fed’s aggressive effort to curb inflation pushed the average 30-year interest rate as high as 19 percent, prompting homebuilders to ask the central bank for help.

Dougherty and Barley compared this plea to a letter sent earlier this month to Fed Chairman Jerome Powell of the NAR, the Mortgage Bankers Association and the National Association of Homebuilders.

The letter proposed a list of measures that, in their view, would lower mortgage rates and stimulate housing construction activity.

“The plea for help from housing industry participants, both in the early 1980s and more recently, illustrates the serious impact that higher interest rates can have on the housing sector,” Wells Fargo economists said in their research note.

With mortgage rates rising, the bank reports that the prospects for a ‘housing recovery’ are declining.

“After a rebound at the start of the year, nearly every facet of housing activity has shown signs of slowing down as the Fed has maintained restrictive policies and mortgage rates have breached the 7 percent mark,” the economists added.

This refers to the fact that housing construction and mortgage applications have also decreased in recent months.