Mortgage rates are spiking, so people are putting off buying a house. Those who already own their four walls are staying put because they know they’ll never get better loan terms than they have right now.

In the meantime, household formations are exceeding housing starts by about 2,000 units every 12 months. That’s actually nothing new – it’s been the persistent trend for almost five years now. The pandemic briefly accelerated that shortfall, but the demand for new homes – whether single- or multi-family – has been outstripping the supply for quite some time.

“Home prices are dropping like it’s 2009,” screams a recent Housing Wire headline. But that sounds like panic talking. No matter where you go for the data – the Case-Schiller index, the U.S. Department of Housing and Urban Development or the Black Knight consulting study referenced by Housing Wire, what you’ll find is a leveling off, or maybe a one-percent dip in a given month.

The damage is contained, at least so far, in the prices of existing homes. But even there, the bad news sounds a little overblown. True, the median sales price of an existing home dropped from $413,800 in June to $389,500 in August, according to the National Association of Realtors, but that’s still higher than the $354,000 figure at the start of this year. In the meantime, monthly existing home sales have declined from 6.5 million in January to 4.8 million in August.

So, it’s not beyond the realm of possibility that the price of new homes will likewise decline in the near future. Yet ownership of even a pre-loved home remains beyond the means of many. Mortgage rates are one factor, but tight supply is at least as much to blame. Thus, people are choosing to continue renting.

The news is no better for tenants.

Rental disorders

There is clearly a price to be paid for deferring a home purchase. According to nationwide realty broker Redfin, the median asking rent breached the $2,000 per month barrier in May, for the first time in history. That median asking rate had been fairly steady in the $1,600-to-$1,700 range for years. Tenants could expect a 2%-to-4% annual hike, but for more than a year, landlords have been pushing through increases as high as 17% on average.

Of course, all real estate is local and it’s not that bad for renters in a lot of places. In a lot of other places, though, it’s even worse. Rents declined slightly in Minneapolis, Kansas City and Milwaukee. (This might be influenced by baseball fans moving out of these towns in shame, but that’s just a working theory of ours.)

Rents in Cincinnati, Seattle and Nashville, though, have increased by almost one-third in the last 12 months. But that’s nothing compared to tech magnet Austin, where leases now cost almost 50% more in May 2022 than they did in May 2021.

Rent increases have slowed down since then, but at 6% year-over-year they are still running hotter than historical norms. And in case you’re wondering why the Consumer Price Index (CPI), the most widely cited inflation gauge, keeps going up despite the recently interrupted downward trend in gas prices, rent is a major culprit.

“Rents have always been important in measures of inflation, due to their outsize share in most household budgets,” according to Bloomberg. “They comprise a little over 30% of the headline consumer price index, and about 40% of the core index.”

What next?

Whether you own or rent, prices are in flux. The general trend is still upward, but there are some troubling signs of weakness in the real estate market.

Blogger Bill McBride cautions against comparing this new vulnerability to the absolute mayhem of 2007-2009, but makes a case that it bears resemblance to the 1978-1982 realty bear market, during which inflation, combined with rising mortgage rates, eroded the desirability, and thus the value, of owning a home.

Are we really back to stagflation days and, if so, what does that mean for the market for your most valuable asset? You might want to talk to a financial advisor before making any decisions about selling, buying or building.