Stocks are veering south post holiday, following earlier optimism over reports President Joe Biden may lower tariffs on some Chinese goods to help ease the inflation sting.
There isn’t much to explain the moodiness of stocks, which logged gains on Friday, but weekly losses on worries about a recession spurred on by rising U.S. interest rates.
With the economy in flux and rates rising, a big question is hanging over a sector that has been putting money in the pockets of Americans for years. And our call of the day from Capital Economics’ group chief economist Neil Shearing says don’t expect 2008-like housing-price drops.
That’s even as “in real terms global house prices are now running well above their long-run trend, and the recent surge in prices looks alarmingly similar to what happened in the run-up to the global financial crisis,” said Shearing in a note.
In the U.S., mortgage applications are down 28% from their peak, new home sales are off 17% and housing starts down 13%. That’s also being played out across the U.K., Canada, Australia, New Zealand and Sweden, he said.
His next chart shows global housing prices, notably hot in Canada, Australia and New Zealand, but also up in double digits in the U.S. and U.K.
A big difference between now and bubbly 2008 is that surging mortgage debt drove the latter. Homeowners stuck with negative equity and forced to sell led to a downward spiral of the sector. But these days the housing market is far less leveraged and regulations put in place after 2008 have left banks in better shape.
“Instead, the latest surge in house prices has been underpinned by the extremely low level of nominal (and real) interest rates,” said Shearing.
Rising rates will probably squeeze first-time buyers and homeowners needing to finance. “And there are growing signs that this rise in borrowing costs — and the anticipation of further increases to come — is already fueling sharp downturns in housing markets across advanced economies,” said Shearing.
Capital Economics has previously outlined the four stages of housing downturns — 1) Weakness of housing market sentiment 2) Measures of buyer traffic fall back 3) Measures of housing market activity start to drop, and 4) House prices themselves fall.