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What You Need to Know About the Next Housing Crash

Justice is a business owner. He has been running multiple online businesses for the past 5 years.

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Introduction

The idea of buying a house seemed dumb because the world was going global, home prices were barely moving, and the stock market was holding strong. Buying a house wasn't really as attractive as other investments, but 2020 changed everything.


The fed made buying a house one of the best investments you can ever make. Prices literally rose by over 20 percent. The stock market definitely rose much higher, but it crashed. At the time of this writing, the S&P 500 is up by around 12 percent since its pre-pandemic level, while house prices are up by around 20 percent since the beginning of the pandemic. However, that's slowly changing.

Understanding the Housing Crash

This is not sustainable because, unlike the stock market, where everyone with a few dollars in their pocket can buy stocks, the housing market is different. A house is usually the biggest purchase in most people's lives, so the market barely moves by 1 or 2 percent a year. That's why some economists warned us about another housing crash since the last time house prices rose so much it created the biggest financial crisis in the last few decades.


So since we are seeing more and more such headlines, are house prices finally declining? Did the housing crash just begin? Will the current housing crash be as bad as the crash of 2008?


On the 15th of June, the federal reserve threw an atomic bomb and surprised everyone with a 0.75 percent increase in rates. This is the biggest increase since 1994. That's going to have a devastating impact on the housing market since the last interest rate hike by the fed already caused serious damage to the housing market. It might be difficult to expect something to fall when it's rising so fast, but let's look at what's happening on the ground.


According to experts at realtor.com, more and more home sellers are slashing their prices in certain areas. This is actually serious since just over 6 or 8 months ago, we had cases such as this where buyers are ready to overpay for a house just to be the one who is going to buy that home. Seems like the days when buyers would bid for a house are over. We are entering a new period where sellers might have to enter into a price-slashing war to attract buyers. Redfin reported at the end of May that almost one in five buyers had lowered their asking prices, which had not happened since October 2019. There is a simple explanation behind that.


The vast majority of houses in the U.S. are purchased through mortgages. To be more precise, over 60 percent of homes are financed. When the fed raises rates, the cost of borrowing capital rises, lowering the number of debt borrowers can take with their current income. A smaller mortgage limits their options, resulting in a lower demand, pushing sellers to slash prices to sell, and so forth.


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The credit rating company Moody's allowed Fortune unique access to its most recent, in-depth, and confidential research of the American housing markets. They wanted to know if people with local earnings could support local housing. National home prices are 24.7 percent "overvalued" through the first quarter of 2022. In comparison, Moody's Analytics found that national home prices were 20.9 percent "overvalued" in the fourth quarter of last year.


When the economic inequality between property prices and what people can afford becomes too large, demand begins to fall rapidly. That is when you realize the market is overpriced. As a result, experts at Atlas Research discovered that more than 25% of homes currently on the market have reduced their prices. Zillow discovered a similar pattern in its data. 6.44 percent of Zillow house listings had their prices reduced, the biggest weekly share in more than five years. At the end of the day, economic laws decide the market's course.


In January 2022, the supply of homes finally returned to its pre-pandemic level. However, mortgages were still attractive to drive buyers. However, fast forward to today, and the market has changed drastically. The supply of homes in the market hasn't just risen slightly but is at its highest level in the last 12 years. Last time the supply of homes was at this rate back right after the 2008 crash in May 2010. There are many reasons behind that, of course, but one of them is definitely the fact that sellers have realized that prices aren't going to keep rising if they keep holding on to their assets. They have reached their peak, and the downfall has already begun. If you don't sell now, tomorrow might be too late. The urge to sell before mortgages become too expensive is driving the supply of homes to the roof. That's actually a really dangerous sign of where the market is because it illustrates that the shortage of homes in the market wasn't because we couldn't build more homes but rather because buyers were not willing to sell, waiting for a better opportunity.


The question is, what percentage of the houses in the market were purposefully held by the sellers. If that number is too high, we might find ourselves in a market filled with homes but very little demand which easily can lead to a catastrophe that we have witnessed in 2008. The consequences of 2008 lasted over a decade.


The problem is that the U.S. economy is not in a position to witness another such crisis. The challenges that the country has been facing for the last 2 years are already shaking the economy. Mortgage rates have already hit 6.3 percent, and the real cost to buy a house has officially spiked over 50% in just 6 months. That marks the highest mortgage rate since 2008. Mortgage rates have risen by 3.2 percentage points in the last year, the largest increase since 1981.


Soaring mortgage rates mean many would-be borrowers, who must meet banks' required debt-to-income ratios, have lost their mortgage eligibility. Buyers who are unafraid will just have to pay more—a lot more. It will take us another few months to realize how much the demand is going to fall over the next few months. And if the fed hikes the rates again to over 2 percent as some experts expect, things might get really ugly by the beginning of 2023. Of course, there are experts who are calming us down that a crash isn't gonna happen, and I really hope that's true. But experts also predicted that the average 30-year fixed mortgage rate would climb from 3.1% to 3.3% by the end of 2022.

Conclusion

We can't say for sure what to expect in the next 12 months since there are so many factors that are influencing the fed's policy. The United States is trying to balance between managing its internal affairs at home and standing up to Russia's invasion of Ukraine that's causing worldwide inflation. Rising rates alone aren't going to change everything. If inflation keeps rising, home prices are unlikely to fall since inflation will simply make the cost of building new houses more expensive, which will at least keep prices where they are.


The Biden administration already announced that the president will visit Saudi Arabia to convince the crown prince to increase the supply of oil to fill the gap and finally bring prices down. Will he succeed? I don't think so, since oil-producing countries are making more money than ever. But how negotiations are going to continue will remain to be seen. So the direction the housing is going to be headed isn't just based on the fed's policy but is also greatly affected by external factors.

© 2022 Justice Ndlovu

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