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September 20, 2022 at 03:18 PM
What You Need to Know
- The fortunes of households that bought homes before the rise in borrowing costs that began earlier this year are diverging from those that did not.
- It's a “haves versus have nots” situation based on when, or whether, you bought your home.
The 2008 financial crisis created of a set of real estate winners and losers — both at the household and geographic level — based on how they were positioned in the housing market at the time.
Many saw the equity in their homes wiped out, and communities with economies heavily dependent upon residential construction and real estate activity -– such as fast-growing Sunbelt metro areas, particularly in the outer suburbs –- saw unemployment soar, setting back them back years.
Central business district cities such as Manhattan and San Francisco, with economies less tied to housing construction and where workers were less likely to own homes, bounced back first.
This bifurcation contributed to the widening of economic inequality in the following years, with jobs and wealth growing faster in urban cores than in the places that suffered the most wealth destruction and unemployment during the housing downturn.
Now, we’re experiencing a different kind of housing-related economic inequality as mortgage rates rise in response to the Federal Reserve’s battle against inflation.
The fortunes of households that bought homes before the rise in borrowing costs that began earlier this year are diverging from those that did not. By extension, the fortunes of communities with a higher share of homeowners are diverging from those with a greater proportion of renters.
This time around it’s homeowners and the suburbs who are the winners, while communities with a greater share of renters are losing due to the highest mortgage rates in a generation.
A good way of visualizing this is a through a series of charts from Michael McDonough, chief economist for financial products at Bloomberg LP. that shows the change in monthly mortgage payments in the Austin, Texas, metro area using average home values and prevailing 30-year rates over time.
As late as 2020 the average monthly payment was around $1,200 per month, but today, due to the surge in home values and rates, it’s above $3,000 per month.
This is bad news for would-be homebuyers in Austin and for those who earn a living from the buying and selling of homes, but the vast majority of homeowners in the Austin area owned their dwellings before the surge in values and mortgage rates.
Even to the extent higher rates lead to falling home prices, slow the Austin economy and lead to job losses, unemployment in the metro area is very low at around 3%.
