The property boom is showing signs of fading during the traditionally hot spring home buying season in the United States. House price growth in Boysie, Idaho, slowed sharply, rising just 0.4 per cent year-on-year last month, down from 4.1 per cent in June last year.

Last year, under the Fed's loose policy, mortgage rates fell and demand for home purchases in the United States was strong.In addition, the change in housing concepts caused by the epidemic and the influx of millennials into the housing market have also contributed to the growth of housing demand, with housing prices soaring in many cities, represented by Boysie.

However, as the Fed began its rate-raising cycle and mortgage rates soared, the average 30-year fixed mortgage rate rose to 5 per cent for the first time in a decade on Friday and continued to rise, coupled with soaring house prices and rapidly deteriorating housing affordability.

Bloomberg reporter Jonathan Levin pointed out in a column on Monday:

The rapid growth of house prices is unsustainable, and the fade of the US real estate market boom began in Boysie.

Earlier, Morgan Stanley analyzed house prices and sales in five periods in the history of the US real estate market in which "lending rates rose by more than 100 basis points in six months". Combined with the background of higher lending rates, the conclusion was drawn:

Sales of existing homes are likely to peak and stabilize or decline, and house price growth is likely to slow sharply over the next 12 months.

The ebb starts with the hottest markets.

During last year's property boom, Boysie, the capital of the inland city of Idaho, became the hottest real estate market in the United States.

Due to a mild climate and a strong education system, a large number of Californians poured into the area to buy houses during the outbreak, the Boysie property market boomed and house prices rose sharply. House prices in the Boysie metropolitan area are more than 76 per cent above the long-term trend line, according to research from Florida Atlantic university.

When the momentum is reversed, it is the market with the highest valuations that will be hit first.Boysie's house prices are stabilizing. Average house prices in Boysie rose just 0.4% last month, down from 4.1% in June last year, making it the first to show a downward trend among the 100 largest housing markets in the United States, according to Zillow, an online real estate company.

Not only Boysie, but other hot cities were also affected during the outbreak. Jonathan Levin pointed out that the economic slowdown has hit some western cities, as well as housing prices in Austin, Texas, Phoenix and Tampa, Florida.

The incredible rate of growth is unsustainable and a slowdown in demand could mean that prices will eventually reverse. Jeff Tucker, a senior economist at Zillow, warned that the cities with the biggest house price increases will be hit hardest in the recession because of population mobility.

Last week, the average interest rate on 30-year fixed mortgages rose to 5 per cent for the first time in a decade, triggering a crisis of affordability. Bank of America Corporation economist Alex Lin pointed out in a recent report thatHousing affordability is at its lowest level since 2007, the year before the housing bubble burst.

The National Association of Realtors (NAR) recently estimated that as many as 9 million buyers may give up this year because of rising interest rates.

But there are also voices pointing out that slower growth does not necessarily mean prices will start to fall. Overall, unless interest rates rise sharply, housing inventories near historic lows are likely to boost prices to some extent. Unlike during the bursting of the housing bubble, household finances are strong, and many buyers lock in long-term mortgage rates below 3%, so they have little incentive to rush to buy.

Learn from history: what happens when mortgage rates rise rapidly?

With the rapid rise of mortgage rates and the continued growth of house prices, what will happen to home sales and prices?

Analysts Morgan Stanley analyzed in a previous report that Morgan Stanley selected periods in which mortgage rates have risen by more than 100bp in six months since 1990. They are April / August 1994, June / July 1996, August / October 1999, July 2008 and June / September 2013.

1. Home sales: mortgage rates rise during the climb, then peak and tend to stabilize or decline

In terms of home sales, the first look at existing home sales in the United States, with the exception of the 2008 subprime crisis (GFC), the seasonally adjusted annual rate (SAAR) of existing home sales rose with it during the rise in mortgage rates, and reached the highest level.

This time is no exception. In the year to January, sales of existing homes increased by 8.7% compared with the previous five months.In addition, at the end of the rise in interest rates, existing home sales will peak.In the year that followed, sales began to slow. By analogy, if this trend continues, we may see the highest level of existing home sales in the coming year.

The NSA index of national home prices shows a similar situation, with sales rates tend to rise during periods of rising interest rates.For now, despite the strong performance of SAAR, sales of existing homes in NSA have actually fallen by 2 per cent in the past five months.

The same is true of new home sales, but the situation is slightly different because it is slightly more volatile. When interest rates rise, home sales will rise and then level off. After a sharp rise in mortgage rates for 9-12 months, SAAR sales began to fall. From the NSA index, excluding seasonally adjusted, you will find that in the current environment, new home sales are falling.

In addition, in terms of NSA existing and new home sales, the level of existing and new home sales in 1994 and 1999 was lower than in 1996 and 2013, and mortgage rates continued to rise in the following 12 months.

2. House prices: interest rates continue to rise in the first six months

In terms of house prices, like home sales, house prices will rise during the six-month period when interest rates rise.At the same time, the annual house price appreciation (HPA) during this period tends to be between 2 and 10 per cent. The difference is that in the months since 2022, HPA has been close to 20%. The increase in house prices and the sharp rise in mortgage rates have led to an unprecedented increase in monthly mortgage loans for home buyers.

If you try to control the income variable, the HPA level is still high during this period. Historically, people seem to be able to afford repayments in terms of income because of low interest rates. The difference this time is that housing affordability has deteriorated rapidly over the past 12 months (chart 13).

The prospect of housing sales is depressed and the growth rate of house prices may slow down sharply.

How will the house sales and house prices go this time?

In the past few months, people's affordability has deteriorated rapidly, one of the reasons is that the supply of housing is very tightThe inventory of existing housing is at an all-time low.

Historically, inventory levels have varied over five periods, but they have never been as low as they are today. And it is not only existing stocks that are nervous, but also new ones. The rate of housing completion has been increasing, but it did not return to its original level until July 2008 after the GFC period, as it did in 1992.

Tight inventory levels have put pressure on home buyers, but some changes in new inventories are likely to be seen in the rest of 2022.The number of houses under construction has reached the highest level since December 2006Although inventories are tight, the extra supply will ease the upward pressure on house prices as these houses are completed by the end of the year.

Real estate activity and home sales will begin to slow, especially as the outlook for existing home sales may be lower, as has been shown in the mortgage application data.In the past eight weeks, the number of applications has fallen by 11% compared with last year.

In addition, as mentioned earlier, mortgage rates continue to rise after the first six months, and home sales will weaken. Given that the Fed will tighten monetary policy more aggressively, 10-year Treasury yields are expected to continue to rise, as will mortgage rates. That means the rise in mortgage rates is not over, with sales of existing homes falling 6-7% in 2022 compared with last year. Morgan Stanley expects new home sales to be more resilient, driving inventories up by about 5 per cent.

In terms of housing prices, Morgan Stanley concluded that with the easing of inventory tensions, house prices are likely to slow down significantly in the next 12 months.House price growth is expected to slow to 5 per cent from 19 per cent in 2021.