Why a Housing Market Crash is Coming
Most markets act like a pendulum. Prices go from undervalued to overvalued and back again to undervalued. They never stop at fairly valued. They can, however, remain undervalued or overvalued for years. We are now at what appears to be the tail end of biggest housing price boom ever. According to an article in Fortune “year-over-year U.S. home price growth accelerated to 19.2% in January. That’s up from the 11.3% uptick posted at the same time last year. The latest jump is also well above the peak annual rate (14.5%) posted in the lead-up to the 2008 housing bubble.”
Now, of course things have changed. Mortgage interest rates have risen dramatically recently and are likely to continue to rise. As rates rise, mortgage payments will get so high as to make new home purchases unfeasible for a growing numbers of Americans. The average mortgage payment is hundreds of dollars more a month than they were at the beginning of this year. Combine this with the recession that we are likely already in and things are beginning to look bleak for the housing market.
Not only have mortgage rates risen significantly, with inflation at 30 year highs, they are likely to continue to rise for the foreseeable future.
Popular sentiment is one way to gauge trends. This chart from Google Trends shows that searches for the phrase “housing market crash” are significantly higher than they have been in recent years despite a recent decline in searches.
Forbes, in a recent article states “Housing ‘Party Is Over’: Supply Increases For The First Time Since 2019 As Mortgage Rates Rise And Sellers Cut Prices”. The article continues “After a pandemic-era home-buying frenzy, the number of homes for sale nationwide saw its first annual increase since July 2019 last month, according to real estate brokerage Redfin, which joins a growing chorus of experts predicting the housing market will continue to cool so long as interest rates keep rising—potentially helping prices fall as soon as this year.”
The article continues by pointing out the housing supply rose by 2%, mortgage rates have jumped to 5.7% from less than 3.3% at the beginning of the year and that we are headed for a recession.
So, when you consider that housing prices are at all-time highs, mortgage rates are surging and we are in the midst of what will likely be a very severe recession, the only reasonable conclusion is that the housing market is in for a big correction because we are likely going to see the pendulum go from overvalued to undervalued. The reason that I am so pessimistic is that historically the size of a correction is directly correlated to the size of the boom preceding the correction. Given that the housing market boomed to unprecedented levels, it is extremely reasonable to expect that the following correction will also be unprecedented. The only thing that I see that might cushion the fall in some markets is the low supply of housing. In some markets it is reasonable that prices may fall, but not as much as the market as a whole. Stay tuned, it’s going to get interesting.