Will Rising Mortgage Rates Crash The Housing Market?

June 22, 2022

The rapid rise in mortgage rates has created no shortage of "experts" predicting a housing market meltdown. We went from an all time low of 2.65% on the 30-Year fixed rate mortgage, to now pushing above 5.5%. 

Should we be expecting a meltdown in the housing market? Let's go over a few reasons why the housing market will likely not be crashing anytime soon. 

We still have low mortgage rates relative to history, but the sharp rise over the last few months made an already expensive housing market that much more unaffordable. Let's say you are purchasing a $1M home (assuming 20% down). For every 1% increase in the mortgage rate, your monthly payment increases by $500. Given this, it won't be surprising if the housing market meaningfully slows down from its record setting pace, but we are a long way off from any form of market crash. Let's go over the reasons why. 

1. Not Enough Inventory

There are simply not enough homes to meet the demand. And, this doesn't appear to be changing anytime soon. This chart shows the number of homes being built every year over the last 50 years. After the housing crisis in 2008, home building dropped off dramatically. 

What's crazy is in the 1970s there were roughly 200 million people in the US and two million houses were built per year. There are now 330 million people and just over one million houses are built per year. As a result, we don't have nearly enough homes relative to the demand.

2. Demographics

Demographics are playing a large role in the demand for houses. There are 72 million millennials in the U.S. and they have reached prime buying age. Before this, millennials often chose to rent in cities vs buying a home. But now, the average millennial is 33 years old, and they are starting to settle down and have a family and are a huge source of demand for housing.

Millennials accounted for more than half of all mortgage loan applications in 2021. The strong demand from millennials doesn’t appear to be slowing down anytime soon considering they are expected to be the largest share of the population for the next decade!   

3. Strong Consumer

Even though home prices have gone up at a faster pace now than they did in the years before the 2008 housing crash, homeowners are in solid financial shape this time around. The chart below shows mortgage debt as a percentage of disposable income. It is at the lowest level on record. Homeowners are not over levered and have plenty of capital to pay their mortgage. This is the exact opposite relative to the years leading up to the 2008 financial crisis.


To sum it all up, on the supply side, we have far too few homes available and a long runway before more homes can be built. On the demand side, we have a massive demographic shift creating huge amounts of demand, along with a strong consumer that is flush with cash. This likely means, despite rising mortgage rates, we are nowhere close to a crash in the housing market.