Brace for 8% mortgage rates to drag the US housing market into a 1980s-style recession, Wells Fargo warns

• The US housing market looks like it's headed for a recession, Wells Fargo has warned.
• Mortgage spiking to nearly 8% will cause homebuying to plummet, according to the bank.

The Federal Reserve's aggressive interest-rate hikes could be about to trigger a housing-market recession that echoes the slowdown of the 1980s, Wells Fargo has warned.

The central bank has signaled in recent months that it'll keep borrowing costs at a higher level for longer well into 2024 in a bid to quell inflation – and that'll fuel declines in both construction and activity, according to the bank.

"After generally improving in the first half of 2023, the residential sector now appears to be contracting alongside the recent move higher in mortgage rates," economists Charlie Dougherty and Patrick Barley wrote in a research note last week.

"Although mortgage rates may gradually descend once the Federal Reserve begins to ease monetary policy, financing costs are likely to remain elevated relative to recent norms," they added. "A 'higher for longer' interest rate environment would likely not only weigh on demand, but could also constrain supply by reducing new construction and discouraging prospective sellers carrying low mortgage rates from listing their homes for sale."

The average 30-year fixed-rate mortgage has climbed from under 4% to just shy of 8% since the Fed started tightening in March 2022, per data from Freddie Mac.

Higher borrowing costs have driven a decline in construction of new US houses, further tightening a supply-starved market, and encouraging many existing homeowners to stay put to cling to historically low rates they'd previously locked in. Just 1% of Americans sold their houses over the first half of 2023, according to data from Redfin.

In the 1980s, the Fed's aggressive war on inflation drove 30-year mortgage rates as high as 19% – prompting Jackson, MS-based homebuilders to send the central bank's chair Paul Volcker lumber with the inscription: "Help! Help! We Need You. Please Lower Interest Rates."

The Wells Fargo economists compared that desperate plea to a letter that the National Association of Realtors, Mortgage Bankers Association, and National Association of Homebuilders sent the Fed's board of governors earlier this month. The three groups called chair Jerome Powell to make clear that he was calling time on the bank's current rate-hiking campaign.

"The plea for assistance from housing industry participants, both in the early 1980s and more recently, illustrates the severe impact higher interest rates can have on the residential sector," Dougherty and Barley wrote.

"After perking up at the start of year, nearly every facet of housing activity has shown signs of relapse as the Fed has maintained a restrictive policy stance and mortgage rates have breached 7%," they added, referring to the fact that home sales, mortgage applications, and indices tracking homebuilder confidence have all declined in recent months.