It looks like the US housing market is going through some tough times, and it's all thanks to rising mortgage rates. As if we didn't have enough to worry about with ongoing inflation and economic volatility, now homebuyers are feeling the pinch too.

According to Freddie Mac, the average 30-year fixed-rate mortgage was 6.65% as of March 2, up 15 basis points from the previous week. And if that wasn't bad enough, mortgage rates could potentially reach November 2022 levels of 7.08%. It's no surprise then that mortgage demand has fallen, with purchase applications hitting their lowest level in 28 years. I mean, who in their right mind would want to take on a mortgage at these rates?

But it's not all doom and gloom. The housing affordability index shows that it is still possible for some homebuyers to enter the market. With an index of 101.2 in December 2022, up from 91.3 in October 2022, it is relatively affordable considering median income, a fixed mortgage rate, and a 20% downpayment. It is a lagging indicator, however, so it is no surprise that it will correct itself in a few months to reflect the fear circulating in the housing market right now.

So, what's driving these mortgage rate increases? Well, economists believe sustained economic growth and continued inflation are to blame. As we know, inflation has been a persistent problem for some time now, and it doesn't seem to be cooling off. Fears of inflation are also pushing bond yields higher, which in turn is driving up mortgage rates.

It's not just mortgage rates that are causing concern in the housing market. Existing home sales have plummeted from 6.34 million in January 2022 to 4 million in January 2023. And while pending home sales have risen to 8.1% in February 2023, up from 1.1% in January 2023, it remains to be seen whether this trend will continue.

Another factor that is contributing to the uncertainty in the housing market is the drop in M2 money supply from 22.051 trillion in April 2022 to 21.149 trillion in February 2023. With less money in circulation, it's likely that consumers will be more cautious about making big-ticket purchases like homes. It’s also worth mentioning that real median household income fell from $72k in 2019 to $70k in 2021. Besides, it is now becoming more attractive to just park the money in the bond market and earn that sweet high yielding returns.

But it's not all bad news. GDP for Q4 was at 26.144 trillion, up 1.6% from the previous quarter or 7.3% from the same quarter of 2021. And while housing units started have fallen from 1.8 million in April 2022 to 1.3 million in January 2023, the January housing inventory was also up by 20k compared to the previous month, the first increment since July 2022. Meanwhile, US building permits stagnated at 1.339 million.

One bright spot in the overall economy is the unemployment rate, which stands at 3.4%, figures not seen since 1969. This indicates strong labour demand and potentially higher wages, which could help offset some of the financial burden of rising mortgage rates for homebuyers. Besides, if we are talking dominos, the mortgage is one of the last pieces that would fall anyway.

Of course, the housing market is notoriously fickle, and it's impossible to predict what will happen next. But for now, it seems like rising mortgage rates, ongoing inflationary pressures, and economic volatility are giving some prospective homebuyers pause and new homeowners shaking in their marrows. If bigger-ticket data has a friendlier inflation implication, rates may correct. But for the time being, it's best to proceed with caution.