WisdomTree Minds on the Markets
Minds on the Markets
Minds on the Markets
October 3, 2022
We are fascinated by the buyer versus seller game theory in U.S. housing. It’s all about interest rates.
When COVID-19 first hit in February and March 2020, investors did what came naturally: they bought bonds. With yields tumbling in 2020’s first half, some Americans stocked up on toilet paper…while others got on the phone with their mortgage broker.
Many Americans refinanced at 3% or even lower. The window of time for low rates wasn’t fleeting either; a year ago, the average 30-year mortgage was written at 2.9%. Last week, it hit 6.7%, a one-year move that came so rapidly it exceeds all other spikes since 1981 by order of magnitude.
One of the theories making the rounds: with sellers locked in at 3% on their current dwelling, they will be reluctant to list it if it means the next place will have to be financed at nearly 7%. That would offset the exact same calculus of the move-up buyer, who will also have to stay put, lest their payment double or triple just to have one more bedroom. Voila! A housing market in stasis, with prices unable to drift down.
Housing bulls also point out that, unlike the housing bubble of a generation ago, this one was characterized by an abundance of cash buyers. For those of us who remember the “no income, no job, no problem” stories, this market really was backed by conservative underwriting and sophisticated institutional owners. It’s a reasonable enough argument. But there’s just one thing: this cycle’s cash buyer was willing to landlord because cap rates offered a yawning gap over the 0%–1% that was on offer in bonds. Those days are over; 10-Year Treasuries are bouncing around 4%.
Suddenly, landlording doesn’t look like such a great business.
Beyond the mortgaged buyer and the institutional investor, another large cohort of potential buyers is the first-time player, a renter. We have a question: why would some surfeit of renters jump at the chance to buy a house for 95 cents on the dollar at a 6.7% cost of debt when they didn’t take the plunge when rates were 3%? We think many will type their numbers into a mortgage calculator, throw their hands up in frustration and keep renting. The ownership math simply does not work at the current prices.
That leaves one major group who can act: those who own their house free and clear. This is the cohort least affected by the mortgage arithmetic. We suspect most people are unaware that 39% of all owner-occupied homes are mortgage-free. It amounts to 32 million houses and apartments.
Two in three of these owners are over age 60. One bullish theory has it that they will observe the paucity of buyers and choose to hold off on listing their house, restricting supply. The opposite tack, which is the one bouncing around in our minds, is that some will view home prices just a few percentage points off all-time highs and choose to list now, lest they get stuck selling for even lower prices when reality grips their neighbors. Then there is the other route: they simply list their homes at a normal pace, owing to a steady rate of divorce, downsizing, death or a move-in with their adult children.
But who will buy? It would seem, as far as we can tell, that we have a total collapse in potential buyers right on down the list of financial profiles. The mortgaged buyer, the cash buyer and the renter have all had their math upended. We suspect many sellers will be surprised to find their family home sitting on the MLS for longer than expected.
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