Rising mortgage rates threatens the economy

30-year mortgage rates have jumped from a low of 2.65% to 4.42% in recent weeks — and the impacts are likely to go beyond the housing market…

What’s the big deal? Rising rates have significant impacts on both the housing market and the rest of the economy.

Monthly mortgage payments jumped 25% in February — and higher payments have various impacts:

• The director of research at John Burns Real Estate Consulting (via FT) sees a sharp slowdown in housing price appreciation.
• The chief economist of Pantheon Macroeconomics predicts a 25% drop in home sales by the end of the summer (via MW).

The worst-case scenario: A big short moment in an economic collapse from debt-fueled bubbles — worsened by financial derivatives.

Unlike 2008, banks today have more restrictions to prevent excessive borrowing. Meanwhile, housing prices and consumer spending will be impacted by rates:

• Inflation is already hitting consumers and rising mortgage payments will add additional pressure.
• Falling housing prices could also impact consumers’ willingness to spend.

Sector impacts: The home construction sector lost in 2022, with the iShares US Home Construction ETF (BATS:ITB) down 23% — after returning 48% in 2021.

• Per JPMorgan, homebuilders are also facing labor and supply shortages like garage doors (via Barrons).
• Homebuilders, like Toll Brothers (NYSE:TOL) and Lennar (NYSE:LEN), have some of the lowest price-to-earnings multiples in the market — per Barrons.

Despite strong balance sheets and market valuations, JPMorgan sees rising rates scaring investors. The financial sector could benefit though — as rising rates mean rising loan revenue.