Could a housing crash affect the broader economy?

New York (CNN Business) — The red-hot housing market is beginning to show signs of cooling. Prices have soared to unaffordable levels for many would-be buyers, and mortgage interest rates have soared following Federal Reserve rate hikes and rising bond yields.

But will the housing slowdown hurt the broader economy and cause a further decline in the stock market? That is not clear.

Homebuilder Lennar, whose shares have fallen nearly 45% this year, provided a dose of good news on Tuesday. The company reported earnings and revenue that beat forecasts and said new home orders were up 4% from a year ago.

Lennar shares rose on Tuesday after the news. Rival homebuilder KB Home, which is due to report results after the close on Wednesday, also rose.

However, Stuart Miller, CEO of Lennar, was very cautious in describing the real estate environment. This is a “complicated time in the market,” he said in an earnings release.

“The weight of a rapid doubling in interest rates in six months, coupled with accelerating price appreciation, began to cause buyers in many markets to pause and reconsider,” Miller said, adding that Lennar “You started noticing these effects after the end of the quarter.”

The rise in rates slows, but does not kill, the demand for homes

Miller said that “the Fed’s stated determination to curb inflation through interest rate increases and quantitative tightening have begun to have the desired effect of curbing selling in some markets and curbing price increases across the board.” the country”. He added that “the relationship between prices and interest rates is undergoing a rebalancing.”

This crash is having an undeniable impact on the entire real estate sector. Online real estate company Redfin and several other companies in the housing sector have started to lay off their workers.

Some experts are hopeful that a new housing slowdown won’t wreak havoc on the economy like the bursting housing bubble and collapse of subprime mortgages in 2008.

“Banks are in much better shape now, and they’re not lending to people with no credit or bad credit,” said Michael Sheldon, chief investment officer for RDM Financial Group at Hightower. “If there is a recession, the impact on housing could be slight. There are not as many imbalances as before.”

House prices have also continued to rise in many markets, despite the broader market and economic turmoil.

The National Association of Realtors (NAR) reported Tuesday that the median home price in May topped $400,000 for the first time, hitting a record high of $407,600. This represents an increase of almost 15% compared to a year ago.

However, existing home sales fell for the fourth month in a row, according to the NAR, falling 3.4% from April.

Housing slowdown… but not a drop

“Further declines in sales should be expected in the coming months, given housing affordability issues from the sharp rise in mortgage rates this year,” said NAR chief economist Lawrence Yun.

“However, adequately priced homes are selling fast and inventory levels still need to increase substantially… to cool down home price appreciation and provide more choice for buyers,” Yun added.

But that doesn’t mean prices are going to drop suddenly, as demand for homes remains reasonably stable. The issue is affordability.

“We think the housing market is lining up to mimic the era in the late 1970s and early ’80s when price growth stopped but didn’t crash,” said Brett Ewing, chief strategist at First Franklin Financial Services Market, in a report.

However, many prospective buyers, especially younger ones who want to move from renting to owning, can’t afford a home.

On the contrary, many of the current owners who are selling a property to exchange it and buy another house are able to reach agreements. So while the housing market may be starting to show some cracks, the foundations are still relatively strong. It may take a much bigger jump in mortgage interest rates to scare off would-be buyers for good.

“The median home was on the market for just 16 days in May, marking a new all-time low by this measure,” Jefferies economists Aneta Markowska and Thomas Simons said in a report on Tuesday following the release of the data. existing home sales.

“This suggests that supply remains tight and any new inventory put on the market is still moving very quickly,” they added.

— Anna Bahney of CNN Business contributed to this report.