As rapidly as mortgage rates are rising, the once red-hot housing sector is cooling. Do we face a housing slowdown or full-blown crisis?

The mere phrase “housing crisis” makes people twitchy. The last housing crisis, when the collapse of the subprime mortgage market helped trigger the Great Recession of 2007-2009, haunts our collective memories. To this very day, the global financial meltdown of 2008 has left enduring scars, akin to PTSD.

Let’s gauge the depth of the housing market’s current woes. The state of the housing market should concern all investors. There is no direct link between the housing and broader stock markets, but major movements in either can influence the behavior of the other.

Instrumental in this equation is the American “wealth effect,” which refers to self-perceived affluence among consumers. About three-fourths of the U.S. economy is consumer spending, which greatly relies on sentiment. A pillar of consumer sentiment is the condition of the housing market, because for most Americans, the home is their biggest asset.

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Rising interest rates make homes less affordable, of course. The Federal Reserve’s annual meeting this week at Jackson Hole, Wyoming occupies center stage. Investors are waiting for Fed Chair Jerome Powell’s remarks on Friday with bated breath.

Despite the powerful summer rally, investor fear persists amid monetary tightening and indications of a deceleration in economic growth. The Fed’s increasingly hawkish monetary policy is boosting borrowing costs for individuals and businesses.

The Fed is trying to quell inflation without crushing the economy, a feat that’s known as a “soft landing.” But for the U.S. central bank, successfully executing such landings is rare.

That said, U.S. stocks rebounded Wednesday, snapping a three-day slide and reassuring investors that the rally remains alive. In pre-market futures contracts Thursday, the major indices were extending their gains. The voices warning that we’ve witnessed a “bear market rally” have been quieted (for now).

Will the housing market slump this summer hurt the economy and torpedo the rally? That’s unclear, especially since home prices still remain historically high.

Black Knight, a mortgage analytics firm, reported Wednesday that home prices declined 0.77% from June to July, the first monthly decline in nearly three years and the largest single-month decline in prices since January 2011. The decline also represents the second-worst July performance since 1991.

Rising interest rates, a shortage of homes for sale, and the long run-up in home prices created a “perfect storm” for home prices to tumble.

Keep in mind, home prices in July were still 14.3% higher versus July 2021, more than three times the historical annual price growth.

What’s more, Moody’s Analytics currently finds that 183 of the nation’s 413 largest regional housing markets are “overvalued” by more than 25%.

Low supply has been the biggest contributor to the still-elevated price of homes, although that imbalance is getting corrected.

In a separate report Wednesday, the National Association of Realtors (NAR) said that pending home sales, an index that measures signed contracts on existing homes, dropped 19.9% in July compared with the same month last year. That statistic has declined for eight of the past nine months. Here’s a city-by-city breakdown of the worst declines:

Contract signings declined by double digits in all four regions on a year-over-year basis. The month-over-month decline from June to July was 1%.

A stabilization of home sales would require considerably lower Treasury bond yields. However, the requisite plunge in Treasury yields probably won’t happen until the economy sufficiently weakens to curb overall inflation. As of this writing, the 10-year Treasury yield hovers at 3.1%, its highest level since June.

But the NAR report offers strong hope for the housing market: “In terms of the current housing cycle, we may be at or close to the bottom in contract signings. This month’s very modest decline reflects the recent retreat in mortgage rates. Inventories are growing for homes in the upper price ranges, but limited supply at lower price points is hindering transaction activity.”

Higher interest rates have dampened, not killed, housing demand. The new numbers about U.S. housing have been weak, to be sure, but this bellwether sector appears to be bottoming, as the NAR suggests, which would be good news for the broader market. It also helps that the jobs market is robust, wages are rising, and consumer confidence is picking up again.

Put away those atavistic fears. A redux of anything that resembles 2008 is not on the horizon.

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John Persinos is the editorial director of Investing Daily.

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