High interest rates trigger fears of US housing crunch

Telegraph

5 days ago

High interest rates have triggered fears of a US housing crunch as sellers cut their asking prices by more than at any point in the last nine years.
The share of homes up for sale with a price reduction has surged to 20pc, the highest rate since 2016 and up from 15pc when Donald Trump won the election late last year, according to Realtor.com and Capital Economics.
This has led to average house prices falling for three straight months in America, including a 0.3pc drop in May, according to the S&P Core Logic Case-Shiller Index.
Many major cities even recorded larger drops, with prices in Los Angeles and San Francisco falling by 1pc and 0.8pc in May.
Some economists believe that concerns over falling house prices have fuelled Donald Trump's calls for lower interest rates.
James Knightley, chief international economist at ING said that: 'I think this is a key reason why Donald Trump and Scott Bessent [the US Treasury Secretary] have been saying the Fed needs to cut rates.
'There's a nervousness about the housing market, which is the biggest store of household wealth and is so important for the economy.'
Responding to better-than-expected GDP and inflation data on Wednesday, Mr Trump renewed his criticism of Jay Powell, the Federal Reserve chairman.
Posting on Truth Social, he said: ''Too Late' MUST NOW LOWER THE RATE. No Inflation! Let people buy, and refinance, their homes!'
The Fed, however, did not comply when it announced last night that rates would stay the same. Mr Powell said that it still too early to be able to understand the full impact of Mr Trump's tariffs on inflation.
Falling home sales
US home sales plunged to a 30-year low in 2024 as mortgage rates surpassed 7pc to wipe out buyer demand.
Mortgage rates were falling steadily until last autumn, when they hit a low of 6.08pc in September just before Mr Trump's election win, but they have since jumped back to 6.74pc.
US mortgage rates are primarily determined by 10-year US Treasury yields, which have climbed from 3.74pc at the start of October to 4.36pc.
This jump has largely been triggered by investors' fears over the impact of Mr Trump's policies on US debt and inflation.
But these rates are also anchored by central bank interest rates, which the Fed has kept on hold since its last cut in December.
The Fed is expected to continue to hold rates at its next interest rate decision later today.
The president has criticised Mr Powell repeatedly in recent months, recently calling him a 'numbskull' and suggesting that he could find a way to fire him.
Unlike in the UK, where buyers typically purchase homes with two or five-year fixed-rate loans, buyers in the US purchase with mortgage rates that are generally fixed for 30 years.
This means that higher borrowing costs have stalled the housing market.
As mortgage rates have climbed, existing homeowners have become unable to move house because doing so would mean locking in at far higher rates.
But some are now starting to crack under the pressure.
Mr Knightley said: 'People can try and cope only so long in their properties. They can do refurbishments and build extensions. But there comes a point, whether it be structural family changes or job changes, when they have to move.
'This very stretched market is like an elastic band. It can only stretch so far before it gets to a snapping point.
'The risk is that we do see house price falls, wealth falls, there is more happiness and uncertainty for households and that just weighs on economic activity more.'