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In the wake of the mortgage rate hikes, home prices are expected to decline another 5 percent by mid-2023, according to Matthew Pointon, senior property economist at Capital Economics. He lays the blame for the decline on mortgage rates above six percent. In his view, the housing market will start to slow down, and that could trigger a major crash.
Home prices are falling
The latest statistics show that fewer homes are selling. Meanwhile, institutional investors have stopped buying homes. These investors raise capital from global investors and use it to buy homes. Because of this, they have plenty of cash to spend. As a result, rents are increasing. As long as mortgage rates are high, that trend will continue. As a result, many first-time buyers will have to remain renters. However, the shortage of single-family homes is preventing many sellers from selling their homes.
The latest figures from CoreLogic, a leading index of U.S. house prices, show that prices are up by 13 percent, which is the highest gain since February 2006. Moreover, home prices are up in some states, including Idaho, Arizona, and South Dakota.
The housing market is poised for a correction, but a crash isn’t imminent. A decline of single digits in national peak-to-trough prices seems likely, but declines of 20 percent or more seem improbable. The reason is the severe shortage of homes. Home builders have struggled to keep pace with household demand since the financial crisis hit. As a result, the supply of homes in some areas has been limited, leading to high home prices.
The lack of inventory is a major obstacle to a real crash. The National Association of Realtors reports that there was a 2.4-month supply of homes available for sale in September, but that figure fell to 2.0 months in February. The lack of inventory means that home buyers have to bid up the prices. This means that the supply-and-demand equation won’t allow a crash in the near future.
Supply and demand
Although home prices have been pushing affordability limits, experts are convinced that the housing market will not crash anytime soon. The reason is that the supply of homes is still relatively low compared to demand, which is a good thing. According to the National Association of Realtors, this lack of available inventory is the primary reason why buyers are having to bid up prices. In addition, the supply of homes is still very low compared to historical trends.
Experts say that the housing market will remain tight through 2022 and 2023. While a housing market crash in this time frame looks unlikely, it’s impossible to rule out unforeseen disruptions. As a result, the housing market has been incredibly competitive, with bidding wars and multiple offers becoming the norm.
Fed rate hikes
The latest interest rate hike from the Federal Reserve has created a huge uncertainty for buyers and sellers, as the move has lowered affordability. The Federal Reserve wants to keep inflation under control, and the new rate hike is intended to do just that. Higher rates make purchasing a home more expensive, especially for first-time buyers and lower-income families.
This week, the Fed is set to hold its next meeting. Most market participants anticipate another 75-bps rate hike from the Fed. The question now is whether the Fed should keep rates this high. The recent Wall Street Journal reported that the Fed has serious concerns over the balance sheets of American households. They also worry that high rates will lead to a job loss recession.
Las Vegas bubble
One of the biggest issues in the housing market right now is the lack of inventory. While the housing bubble has burst, some cities still have a large number of empty homes. In areas where inventory is low, housing prices are extremely high. This makes it difficult for a new buyer to compete in the overpriced market. In these instances, buyers must opt for other options like renting or downsizing.
Many experts believe that the housing market is going to slow down in the coming years. In fact, they expect annual appreciation to slow to single-digits and some markets could experience home price declines.
Predictions for a housing crash
While many people believe that the housing market will crash in the coming years, this is not necessarily true. In fact, experts predict that the housing market will be much more stable in the next 5 years. In addition, tighter lending standards and fewer first-time buyers are likely to keep prices from falling dramatically.
In a recent report from CoreLogic, a real estate research firm, experts said the housing market will not have a massive correction in the next few years. While CoreLogic expects home prices to increase by 5% in the next year, they also cite several reasons why the market might be more volatile than it currently is. In the last year alone, home prices have grown five times faster than the median income in the United States. Moreover, CoreLogic estimates that 65 percent of regional housing markets in the United States are overvalued.