Could The Housing Market Collapse Again? Recovery Talk 'Premature' After Mortgage Rates Surge Past 7%

As fears of inflation push mortgage rates back toward multi-decade highs, economists are warning the resurgence in borrowing costs will deal another blow to the precarious housing market, driving home sales to new lows and proving the recent recovery many hoped would mark a turning point may instead be a short-lived"mirage.

This surge in rates"dealt a fresh blow" to mortgage demand, says Pantheon Macro chief economist Ian Shepherdson, adding he's been"puzzled" by claims the housing market is starting to recover and instead expects total home sales will plummet to a new multi-year low by May if rates remain close to 7%. After collapsing more than 35%, home sales have remained relatively flat since November, but Comerica Bank economist Bill Adams calls the recent respite in the housing market"at least partly a mirage" fueled in part by unseasonably warm weather in much of the country, which helped bolster sales during what is typically the slowest season of the year.

The drag from very high interest rates is"again becoming clear," says Adams, noting mortgage purchase applications plummeted 44% year-over-year in late February to the lowest since 1994. Comerica forecasts existing home sales will drop more than 20% this year—pushing prices, which have alreadyOthers are more optimistic. In a Wednesday note, Wells Fargo economist Charlie Dougherty told clients it's"unlikely" that housing activity will experience a downturn similar to the one last year, but he acknowledged"persistent inflation stands to deflate the housing market's renewed optimism.

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