Alarm bells are ringing for American homeowners, who say rising mortgage rates scare away buyers and falling prices deeply affect sellers. Real estate experts say the housing market slump will only get worse, and homeowners should prepare for a terrible 2023.
Will The US Housing Market Crash in 2023!
Property values are set to drop by double digits early next year, and after that, prices will overshoot straight down. The Fed’s historically low interest rates that made mortgages more affordable over the past decade also caused home prices to jump almost 95 percent between the first quarter of 2013 and the second quarter of 2022.
According to the Dallas FED, half of that growth happened between 2020 and 2022. In March 2020, demand for housing was higher than supply because of cheap credit, fiscal stimulus, and the rise of the work-from-home trend. By June 2022, the median price of an existing home was $280,700. In only two years, this figure had increased by a staggering 47%, reaching $413,800.
This impressive surge was even higher than the rise seen in home prices during the last bubble. U.S. homeowners should prepare for an extremely unattractive 2023. U.S. housing prices Low interest rates and the rise in remote work spurred demand between January 2020 and June 2022, an expert said. In the lead-up to the housing downturn 16 years ago, prices rose by 30 percent over a similar period.
The market boom that fueled the current bubble hasn’t just faded away; it’s doing an 180-degree turn compared to a year ago. Mortgage application volume is down 41 percent. There are fewer purchase applications now than at the bottom of the 2008 crash. All of that is due to the highest mortgage rates in two decades.
Some FED policymakers criticized the FED’s policies last week. Dallas-FED economist Enrique Martinique Garcia published a study exposing the worrying effect rising mortgage rates are having on housing demand.
In the current environment, when housing demand is softening, monetary policy needs to carefully threaten the needle of bringing inflation down without setting off a downward house price spiral, a significant housing sell-off that could aggravate an economic downturn.
This could affect inflation, economic growth, and the long-term health of the U.S. housing market. Martinez Garcia said that reasonable estimates of the direct effect on housing wealth show that a real price correction of up to 20% could cut real personal consumption spending by 0.5 to 0.7 percentage points.
He added, referring to the index that tracks consumer spending, that a negative wealth effect on total demand would further restrain housing demand, deepening the price correction, and setting in motion a negative feedback loop. In other words, even the FED admits that a 20% drop in property values could cause a bigger crash if things keep getting worse. But their estimates are still normal compared to how overvalued some markets are.
Diane Swank, who is the chief economist at KPMG, says that 20 percent declines early next year are a conservative estimate. We’re already turning; once prices start falling countrywide, there’s a self-fulfilling momentum to it. In frothy markets, prices tend to overshoot to the downside.
The housing market was so tight before and during the pandemic that it needs a major correction to return to sustainable levels, despite recent price drops. Prices are still higher than in 2006. Charlie Katzenelson, CEO and CIO of Investment Management Associates, says housing prices must fall 40% for affordability to return to normal levels at current interest rates.
In markets like Austin, Texas, where home prices rose 93.5 percent over the last two years, or Northport, Florida, where prices fell 83.4 percent since 2020, a 40% crash still wouldn’t be enough. More pressure is coming for 57 percent of U.S. housing markets that are overvalued by 50 percent or more. It’s the most worrying housing market outlook since 2007.
Glenn Kalman, the CEO of Redfin, thinks that the housing slump will continue to hurt home sales for a while. The problem with demand is that housing has become unaffordable. From October 2020 to October 2022, the monthly payment for an American family purchasing a median-priced home increased by 71 percent, while the monthly payment for the same family renting a median-priced apartment increased by 24 percent, which is still significantly faster than income growth.
Kelman says that home prices will drop even more soon, which is bad news for homeowners. The historic rise in home prices over the past few years has resulted in record amounts of new home equity for homeowners.
But since May, the accelerating correction has caused them to lose $1.5 trillion in home equity. Black Knight data shows that the average borrower has lost $30,000 in equity, and more losses are expected in Las Vegas, Los Angeles, Phoenix, Tampa, and San Diego. Homeowners must spend twice the long-term average of the median household income to make monthly payments.
In October, home sales fell for the ninth consecutive month as high interest rates and soaring inflation kept buyers on the sidelines. This is the longest run of sales going down that has ever been recorded, which is very worrying since the new housing crash is just starting.
In a statement, Redfin’s economics research lead Chen Chao said that the FED’s actions to curb inflation are causing the housing market to slow at a rate not seen since the financial crisis. Redfin reported that home sales dropped 32.1% last month, the worst year-over-year decline in U.S. history.
Many people who want to sell their homes refuse to accept reality and lower their prices. Instead, they think and hope for a miracle, and don’t even put their home on the market or take it off the market when they don’t get any interest at their high asking price, but buyers have become pickier.
According to economist Ian Shepherdson of Pantheon Macroeconomics, who recently told clients that a bottom is in sight for the U.S. housing market, demand is expected to level off in the coming months. As a result, home prices are expected to fall even more over the next few months as falling demand spreads through the market.
The Economist warns that prices must fall significantly to find a middle ground. Economist Shepherdson wrote in late October that the median price of all homes dropped for the fourth straight month last month and was down 8% from its peak in June.
The 8% drop was the largest since the last downturn for this four-month period. Since January, the number of underwater mortgages has doubled, which is expected if home prices fall 40% or more by 2023 and beyond.
In 2008, many Americans owed more on their homes than they were worth. Many households in such a situation would have decided to walk away from their mortgages if the same thing happened again, which would spark unprecedented consequences.
This time around, unemployment will be a key factor in determining how low prices will go. The study says that a sharp rise in unemployment could lead to forced sales and foreclosures, which are often done at steep discounts. CNN’s lead economist, Slater, said.
The unemployment rate has already begun to rise, reaching 3.7% in October. The likelihood of witnessing a catastrophe even worse than 2008 is very real. More and more businesses are announcing layoffs as consumer spending slows. A decisive increase in unemployment is a major threat to housing markets.
In the current market, most mortgages are turned into mortgage-backed securities by Fannie Mae, Freddie Mac, and Jenny May, all of which are backed by the government. The government guarantees the mortgages, and these mortgage-backed securities are sold to investors such as pension funds, insurance companies, and mutual funds around the world.
Banks will not suffer from another wave of foreclosures even if the mortgage credit bubble bursts again. U.S. citizens and investors will feel a modest impact. There is a threat to our financial stability. More and more homeowners are falling behind on their mortgage payments and facing foreclosure. The perfect storm of rising unemployment and falling consumer spending has arrived.
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