The Resilient U.S. Economy: Navigating Rising Interest Rates

The U.S. economy has proven to be remarkably resilient in the face of skyrocketing mortgage rates that have plunged the housing sector into a deep freeze. While the era of affordable borrowing may be a thing of the past, there are signs that the broader economy could experience a shift in the coming months.

In October, yields on ten-year Treasury bonds briefly surpassed 5%, with mortgage rates for 30-year loans hovering around 8%. As a result, consumers will soon feel the sting of elevated interest rates, impacting their credit card bills, auto loans, and medical debt. Businesses that relied on abundant and cheap capital may find themselves reaching the end of their financial runway. The potential insolvency of these businesses could pose significant risks to banks heavily invested in their debt. Despite its surprising resilience, the economy is by no means invincible.

However, it is unlikely that the catalyst for an economic downturn will come from the housing market. Home sales have already hit record lows as homeowners choose to hold onto historically low fixed mortgage rates obtained during the pandemic. This limited supply has effectively balanced out the declining demand. While rising mortgage rates may decrease the demand for housing, the transition from 6% to 8% rates does not have the same impact on buyer budgets as the leap from 3% to 6%.

In summary, while the housing sector is facing challenges due to rising mortgage rates, the U.S. economy as a whole has shown resilience. The impact of elevated interest rates will have far-reaching effects on consumers and businesses, potentially posing risks to banks. However, it is unlikely that the slump in home sales will be the primary driver of a catastrophic economic break. The future of the economy will depend on various factors beyond the housing market alone.

The Future of the Housing Market in 2022 and Beyond

We can anticipate a moderate increase in distressed sales, particularly among homeowners who were enticed by teaser rates in 2022, set to expire in 2024. This could result in a slight uptick in new listings, potentially leading to a marginal decline in home prices. However, there is a silver lining as cash buyers eagerly seek discounted properties.

Cash Buyers: An Influential Force

Cash buyers are currently holding a significant sway in today’s housing market. They make up approximately one-third of all buyers, marking the highest share since 2014. Homeowners with substantial equity have the advantage of selling their homes and reinvesting in more affordable markets without the need for mortgages.

The Paradox: Economic Turmoil and Housing Market Relief

Ironically, if the economy faces turmoil and experiences a downturn, the housing market may find some reprieve. In such a scenario, the Federal Reserve is likely to take swift action by lowering interest rates. This would make homebuying more affordable, mirroring the trends observed during the pandemic recession and the 2001 recession. Surprisingly, while the broader economy falters, there could be an increase in housing demand.

A Frozen Housing Market?

If the economy continues to withstand the strain of high interest rates without breaking, it is expected that the current freeze gripping the housing market will persist for at least another year. Signs of a gradual thaw may only begin to emerge towards late 2024, coinciding with an economic slowdown as consumers grapple with personal debt. However, should the economy reach its breaking point, the housing market could potentially become the sector that defies the downturn.