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Housing Appreciation

I believe housing is going to adjust and 'cool off' but that doesn't mean 2008 style cooling off, that means cooling down from 20% growth this past year (insane), to something closer to normal (still positive).


1) rates are close to their peak in mortgage terms for the next few years.

2) appreciation will cool down to 'single digits' - not a major drop


Found this wonderful research by KKR Global Macro analysis that I wanted to share as it helps put things in perspective... I edited and removed some parts for brevity.


"there has been a shortage of new-home construction since the GFC. So, we believe today’s housing boom is supported, for the most part, by fundamentals:


  1. There are too few houses and too many buyers. Importantly, the current supply/demand dynamic is strikingly different from the debt-driven speculation that fueled the early 2000s housing boom, when high levels of mortgage debt led to unsustainable demand for housing.

  2. However, today’s home price appreciation/inflation is not only crowding out some buyers but is also leading to higher rents for those who are not able to own a home.


Given this backdrop, my colleagues Dave McNellis and Ezra Max have spent time trying to quantify when interest rates – and hence mortgage rates – hit a level that will cool the housing market without causing a recession (i.e., an equilibrium rate). Though there are many variables to consider, we believe a good guide is the NAR’s Housing Affordability Index (HAI), which reflects household income as a multiple of monthly mortgage payments. When the HAI falls to a low enough level, new homebuyers are priced out of buying, while current homeowners with legacy mortgages cannot afford to move.


Bringing HAI to a sustainable level just above this tip-over point would suggest mortgage rates peaking at 5.8-5.9% in 2023, which is our base case... In this scenario nominal year-over-year home price appreciation would fall from around 20% today to the low to mid-single digits in 2023-25 "


This means we could see appreciate in 2023 cool to -1% to 10% as an expected range with a target of around 3-4% - a normal growth rate even while the market is doing quite poorly.


If that's where we end up, imagine what could happen when rates start to move down and the war is behind us...


How to apply? Showing a client expectations for appreciation range from slightly negative to above average may help them avoid missing an opportunity now because they are afraid about a 2008 repeat in values.


Data - KKR Macros Analysis - 2022 Exhibit 50

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