Mortgage Rates Are Falling. Does That Mean a Housing Market Crash Is Off the Table?

  • Mortgage rates fell 31 basis points in the past week, to below 5% for the first time since April.
  • Some believe this may reflect a softening real estate market.
  • Others feel this reflects the growing uncertainty surrounding a wider recession in the U.S.
housing market crash - Mortgage Rates Are Falling. Does That Mean a Housing Market Crash Is Off the Table?

Source: SewCream /

Yesterday, 30-year fixed rate mortgages dropped below 5% for the first time since April. For some, this reads as a positive sign that a housing market crash is more fantasy than reality. For others, this is just a temporary reprieve.

Mortgage rates have taken a surprise downturn over the past week. The average 30-year fixed mortgage rate fell 31 basis points to 4.99%, well below the 5.3% figure recorded a week earlier. While nowhere close to its pandemic level, it’s also quite a ways away from the 5.81% level in June, the highest in 13 years.

It may seem strange to see mortgage rates drop just a week out from the Federal Reserve’s fourth hefty interest rate hike this year. For much of 2022, the 30-year has largely tracked interest rates, rising along the same tide. It seems recent recession fears have lowered borrowing expectations, putting downward pressure on mortgage rates.

“The high uncertainty surrounding inflation and other factors will likely cause rates to remain variable, especially as the Federal Reserve attempts to navigate the current economic environment,” said Sam Khater, chief economist at Freddie Mac.

As mortgage rates have risen this year, home sales have cooled off. Droves of sellers are lowering their asking prices, as rising mortgage rates push many would-be buyers out of the market. In fact, home sale cancellations have recently trended at their highest level since the start of the pandemic.

Rumors of a housing market crash have circulated Wall Street for months. Today’s news may prove informative to the potential of a bubble burst.

What Do Falling Mortgage Rates Mean for a Housing Market Crash?

Through most of the year, home prices have skyrocketed. Despite this, some believe the real estate market is already in the midst of a recession, benchmarked by six months of consecutive home sale declines. Others believe the notion of a housing bubble burst is far overstated — that housing is not only unlikely to fall, but may in fact continue to rise.

30-year fixed mortgage rates historically track with 10-year Treasury yields.  Both offer insight into the level of uncertainty and fear in the economy. Falling mortgage rates generally reflect a fear of a greater economic pullback. They may also represent pushback from the host of contractionary forces pinching the housing sector this year.

In that regard, things like pending home sales, as tracked by the National Association of Realtors, provide insight into the health of housing. Unfortunately, not all is bright on that front either. Pending home sale prices fell nearly 4% in April, to their lowest level since the quarantine.

In addition, the Dow Jones Equity REIT Total Return Index, which measures all publicly traded real estate investment trusts in the Dow Jones, has only continued to sink this year. This reflects a generally negative investor sentiment over future real estate valuations.

With that said, there are some strong barriers against housing downturn. The inventory of available homes in the U.S. is still very low. This makes it difficult to imagine a wider pullback in home prices, given a general imbalance between supply and demand. Falling mortgage rates would perpetuate that imbalance, offering greater resistance against a crash.

On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Article printed from InvestorPlace Media,

©2022 InvestorPlace Media, LLC