Experts have already stated the current housing market slump as the US Housing Market Crash or Real Estate Market Crash of 2022.
As the Mortgage rates have officially hit the highest levels since 2008.
It’s been over 14 years since you would have seen levels like this which have largely been a byproduct of the monetary policy of the Federal Reserve.
It’s been over 2 months since when US housing market started to plummet which has forced investors like us to keep a close watch on federal reserves’ monetary policy and mortgage rates.
Right now, everything that you must have predicted might be coming to fruition and what you must be seeing is the start of a more serious housing crisis.
To support this statement we would want you to see the current inflation numbers which are worse than expected.
It’s only going to provide even more ammunition for the Federal Reserve to get even more aggressive and make decisions that will negatively impact the housing market.
Foreign mortgage rates have officially hit over 6.33% and this represents the highest mortgage rates that you will see since 2008.
Housing Affordability
The rising mortgage rates which have been observed in this entire cycle show that affordability going down as it has been the biggest problem in this housing market.
The National Association of Realtors has tried to track the statistics as they compare income to the cost of housing to track housing affordability.
If you remember, the last time housing affordability was low was back in 2007 when the housing affordability index numbers went down to a hundred.
The current housing affordability is right around the same levels as you must have witnessed a dip below a hundred back in June as mortgage interest rates started to spike up as the interest rates started to come down.
At the moment you could see the mortgage rates go all the way down to 5.05% on August 01 and since then mortgage rates have surged over 1 and a quarter percentage points.
Currently, it’s at 6.33%, now for housing affordability goes, you must be interested to look for September numbers, isn’t it?
But, first, let’s see the August numbers which were going to be pretty much a wash because half the month the USA was in the low fives the other half of the month was in the high fives.
But so far in September, it was in the sixes throughout that entire period.
June was mostly in the high fives and it was also the highest or the lowest rather affordability level since 1989.
So it’s going to be interesting to see what the September numbers come back at especially since affordability is the number one problem in the current housing market.
Inflation
According to Investyle, barring the affordability issue in America, another prominent issue at the moment as far as the Federal Reserve is concerned is ‘inflation’.
As the inflation rates have shown a massive 8.3% year-over-year increase.
Considering July, an 8.5% increase could be observed but if you look month over month from July to August you will see a 0.1% increase.
We agree it’s worse than expected because right now we’re seeing gas prices go down significantly.
Gas is down over 10.6% just month over month and over 7% percent in the prior month.
When you take that into account, inflation has not been getting under control as it’s going up aside from gas going down.
Clear evidence of it can be seen when core inflation numbers go from 5.9% in July year to 6.3% year over year.
As your core inflation is your cost of goods and services not counting your food and energy sectors.
The reason why it’s a piece of bad news for both the economy and the housing market is because of the federal reserve’s priority to lower inflation by 2%.
So far you must have seen the Fed hike interest rates at a total of 2.25%.
You can anticipate more frequent interest rate hikes along the way as they begin to offload their balance sheet starting this month.
It will increase the speed but even with what they’ve done so far it’s proving that inflation is a tougher battle to face than they initially anticipated.
It could take over 2 years to get down to those 2% inflation levels and even some economists suggest it will take more than 3 years to restore the economic equilibrium in the country.
However, Federal Reserve seems more aggressive than it’s been so far to achieve its goal.
We haven’t even been able to factor in student loan debt forgiveness yet which hasn’t been done yet officially and so when that happens it’s only going to add more upward pressure on inflation.
Demand Destruction
Rising inflation rates can be the triggering factor of the US Housing Market Crash further leading to demand destruction.
Mortgage Bankers Association reported that purchase applications are already down by 0.2% week-over-week.
It has been a continued trend since the past week and now it has reached a point where it’s down over 29 year-over-year.
Redfin recently reported that we’re currently at about 2.9 months of Supply which is the highest level of supply since July 2020.
Pending sales also continue to plummet as you may see declines of over 19 year-over-year along with supply coming on the market reaching a new high.
Even the new listings are down over 18.6% year-over-year as the amount of total active listings starting to go further down.
Months of Supply vs. Active Listings
For you, it’s important to note that there is a difference between months of supply and active listings.
Months of supply is when you take the number of active listings on the market and divide it against the number of homes sold in the last month which gives you your total months of supply.
Whereas your active listings are the total number of listings on the market.
You can categorically see a decline in active listings but a rise in months of supply.
Now with that said the reason you see active listings fall is there is a growing number of home sellers that are starting to feel like it’s not the right time to be selling their house.
Especially with the way that homes are starting to sit longer on the market.
Earlier, the median days on market in the USA was 16 and a half which has now gone up to 28 days, quite surprising, right?
Seasoned real estate investors have predicted the median days will be rising till mid-2023.
As more and more sellers choose to take their house off the market and instead rent it out.
If you look nationwide about 4% of home sellers are doing this but in certain areas like Southern California or Texas, you’re seeing about 10 or 9% of home sellers taking the same route.
On the positive side at least it adds more supply to the rental market which desperately needs it right now.
As more home buyers get priced out of the housing market they start to shift their focus to renting instead.
It’s only going to add more demand as mortgage rates continue to rise so that’s not a bad thing to have a little bit more supply on the rental market.
It’s also important to note that the economy as a whole is starting to slow down and you are already seeing signs of it.
What have Economists had to say regarding the Housing Market Crash?
Notable economists to predict an imminent economic crash are looking at things like GDP, retail sales industrial production, jobs, and unemployment rate.
As the retail sales numbers have shown an increase month over month from July to August of 0.3%.
It may sound good, right?
But in reality, if we look at the bigger picture July numbers year over year were at 10.3% and now it has gone down to 9.1% year over year with August.
Secondly core retail sales were down 0.3% month over month excluding automobiles gas, food services, and building materials.
Thirdly, inflation has driven up these numbers and kind of creates a false perception.
For instance, if you sold 200,000 hamburgers at $5 you get a million dollars in sales you could also sell 100,000 hamburgers at $10 a hamburger and still get a million dollars in sales.
So that’s exactly what we’re seeing because you gotta factor in that if you saw 9.1% growth of retail sales with normal inflation at 2%.
That’s a lot different than seeing inflation at around 8.5% and seeing a 9.1 percent increase.
Will Fed be able to find a SOLUTION for Housing Market Crash?
The Federal Reserve will have a lot on its plate this time as the falling housing market, rising inflation rates, and the risk of recession, all these issues need to be addressed.
In future Feds’ meetings, we can anticipate seeing interest rates hiked at a total of 0.75% which would take us from a total of 2.25 for the year to up to 3% for the year.
You may think, how can it be possible? No matter what, it’s going to happen as inflation proves to be a much harder battle to face than initially anticipated.
We believe that the Federal Reserve will stay aggressive and as a result, we are going to be headed towards an economic crash eventually.
We’re also going to start to see unemployment levels rise and early indicators of this can be seen in the August numbers that came back with a 0.1% increase.
SUMMING UP!
Since the start of the pandemic, the housing market has been adversely affected by mortgage interest rates and the decisions taken by Federal Reserve.
Both issues have played a vital role in determining the extent of the US Housing Market Crash!