15 years ago, the housing market collapsed under similar circumstances

Fifteen years ago, in the first quarter of 2007, house prices in the US were at an all-time high. According to the St. Louis Fed, the average price for a home was $257,400, a record.

The Fed raised interest rates. After a series of rate hikes, the Fed Funds rate reached 5.25%, its highest point in six years.

We didn’t know it at the time, but a multi-year recession was about to begin. The Great Recession officially started in late 2007 and lasted 18 months. House prices were about to experience a contraction of historic proportions.

Fifteen years have passed and we are about two weeks away from the first quarter of 2023. The most recent data from the St. Louis Fed shows that US home prices are at an all-time high. The median home price in the US is $454,900, a record.

Source: St Louis Fed

The Fed raises interest rates. Earlier this week, the Fed Funds rate reached 4.5%, its highest point since 2007. Some of the country’s top business leaders, including Amazon’s Andy Jassy (AMZN) and Meta Platforms’ (META’s) Mark Zuckerberg, are signaling economic difficulties forward as they lay down thousands of workers.

Are house prices about to experience another historic contraction?

Suppose a buyer buys a mid-priced home in the US for $455,000. The buyer puts down a 20% down payment, or $91,000, creating a $364,000 mortgage.

Two years ago, a 30-year mortgage had an interest rate of 3.25%. This would have resulted in payments of $1,584 per month, not including taxes and insurance.

Today, a 30-year fixed-rate mortgage has an interest rate of around 6.5%. Today’s payment on a $364,000 loan would be about $2,300, an increase of more than $700 per month compared to two years ago.

Meanwhile, the same consumer facing this payment is struggling to make ends meet due to historically high inflation. This takes a significant portion of demand away from the housing market. More demand will drop if jobs are lost during a recession.

Despite all this, housing stocks are doing well.

The S&P Homebuilders SPDR (XHB) gauge has gained about 18% since its October 21 low. XHB has climbed above its main 50-day (blue) and 200-day (red) moving averages.

Chart source: TradeStation

If you are making gains in the housing sector, I would use this rally as an opportunity to get out of these stocks.

Fifteen years ago, the housing market was about to collapse under more or less similar circumstances. While the credit abuses that occurred then have not been repeated, the economic reality for millions of Americans remains undeniably grim. While we probably won’t see a repeat of 2008, housing is likely to underperform in 2023.

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