If you were around in the early 1980s, then you know what high interest rates can do to the U.S. economy and real estate market. So, after a series of interest rate hikes earlier this year, could a housing market crash and recession be just around the corner? It’s definitely a possibility, at least according to one group of experts.
As you may have heard, the Mortgage Bankers Association (MBA), National Association of Realtors (NAR) and National Association of Home Builders (NAHB) wrote a letter to Federal Reserve Chairman Jerome Powell earlier this month. They pointed out that mortgage interest rates have now “reached a 23-year high, dragging application activity down to a low last seen in 1996.”
These associations practically begged Powell to “not contemplate further rate hikes.” Meanwhile, the 30-year fixed U.S. mortgage interest rate hovered near 8% not long ago. Could a real estate implosion happen in the coming months?
Wells Fargo Issues a Housing Market Crash Alert
In a new commentary piece, Wells Fargo economists made their take on the situation crystal-clear. The article is titled “Rising Borrowing Costs Stand to Tip the Housing Sector Back into Recession.”
In the article, the Wells Fargo economists referred to the aforementioned letter sent to Powell by the real estate associations. Furthermore, they compared that letter to a strange incident. Back in 1980, “home builders sent a piece of lumber to the Federal Reserve asking for ‘help’ in boosting housing demand via lower interest rates.”
On top of that, the Wells Fargo article observed that mortgage applications for purchase “have retreated in recent weeks.” Not only that, but these applications, as of Oct. 20, have “fallen to the lowest level since 1995.” Thus, the not-so-subtle message is that a 1980s-style real estate recession is possible.
What You Can Do Now
Should homeowners and investors panic now? I would recommend staying calm while also paying attention to the Wells Fargo economists’ commentary.
The economists pointed out that the “30-year mortgage rate peaked at nearly 19% in 1981.” Of course, the mortgage rate is nowhere near 19% in 2023. It’s hard to believe that the Fed would allow a repeat of the extreme measures taken in 1981 to combat the painful stagflation of the 1970s.
Thus, there’s no need to panic-sell your home or your stocks. Just keep an eye on interest rates and listen closely to what Powell and other Federal Reserve officials say. There may be clues about the future trajectory of interest rate policy. These clues can provide investors insight into the health of the housing market and the economy in general.
On the date of publication, David Moadel 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 InvestorPlace.com Publishing Guidelines.