The Housing Market: Bracing for a Correction

Housing is in trouble based on interest rates, inflation and unaffordability. Let's explore this...

Inflation is stubbornly climbing, leaving consumers grappling with relentless price hikes. Recent CPI and PPI data confirm this concerning trend, with inflation showing a sharp uptick.

Adding to the pressure, interest rates have rebounded. The 10-year Treasury yield now sits at 4.40%, pushing mortgage rates well above 6%. This creates a perfect storm for the housing market, where inventory is building as potential buyers struggle to afford both home prices and the escalating cost of financing.

This struggle is evident in the performance of the Homebuilder ETF (XHB), which recently broke a critical support level, signaling a potential downturn for housing and related stocks. Technical analysis suggests a possible decline of 15% to $100.87, with a further drop to $85 (a 25% decrease) possible if support fails to hold.

While a housing market correction may help curb inflation, it won't solve the underlying issues of high-interest rates and a weakening economy. Rising jobless claims further underscore these concerns, raising the specter of a potential recession in 2025.

Such an economic downturn would likely exacerbate the pressure on the housing market, leading to increased defaults and foreclosures, and further expanding housing supply.

Many believe the current housing market reflects a bubble. Technical analysis supports this view, suggesting a potential price correction of at least 25% over the next three years.