Over the last few years, housing prices in America have skyrocketed. The income to housing price ratio has reached the same level as before the housing market crash in 2008. All the indications in the market predict that the current housing market is in a bubble and a market crash is coming.
Eviction and Foreclosure Moratorium
Since the pandemic’s start, federal and state governments have put an eviction and foreclosure moratorium that prohibited evicting a tenant or foreclosing a home. These moratoriums were effective for more than two years. Only recently, these are getting expired across the country.
Recently banks started foreclosing many homes nationwide. Therefore, many new foreclosed homes will come into the market soon. These new home inventories will increase supply, thus lowering home prices.
Even 2 years ago, the national mortgage rate was less than 3%. However, recently the mortgage interest rate has gone past 5%. A $400,000 house with 3% interest on a 30-year fixed mortgage has a $1686 monthly payment. However, the same house with a 5% 30-year fixed mortgage has a $2,147 monthly payment. That’s a $461 difference.
Over the last 2 years, the mortgage interest rate has increased steadily; the housing price has also increased. According to Zillow, in January 2020, the average home price in America was $249,000. However, in January 2022, the average home price increased to $327,000. That’s a 31% price increase over 2 years which never happened before.
Home prices were reasonable before the 2008 market crash, but subprime mortgages triggered the housing crash. At that time, almost everyone got qualified to buy homes. People bought homes that they couldn’t afford and lost everything. However, the recent market bubble is different.
This time, getting a mortgage is moderately easy, but the house prices and interest rates have gone up tremendously. Therefore, many new home buyers are in a precarious scenario.
The Federal Reserve is raising rates every few months. As a result, the economic slowdown has started. This slowdown will trigger countrywide layoffs in various industries. As a result, many homeowners will lose jobs and homes.
Inflation is rising uncontrollably. Everything costs more now: cars, gas, groceries, food, etc., including home insurance.
People’s income has been the same in the last two years, but the cost has increased. Even the price of electricity, natural gas, and home heating oil has risen at a record pace.
Early Signs: Layoffs at Mortgage Companies
For the last 2 years, various banks and mortgage companies have been hiring every week. But this has changed in the previous few months. Recently, they started laying off people. It only means that they are not doing good business as they previously did.
The effect of the housing market downturn doesn’t come overnight. It lags 8 to 10 months. Therefore, if the mortgage companies lay off people right now, it proves that not many people are interested in new homes anymore. It could be because of high housing prices or because people don’t qualify due to inadequate income.
When the demand wanes, the house price must come down. It has several repercussions. In the last several years, big investment firms such as BlackRock bought homes throughout the US as an investment.
The mortgage interest rate is now almost 5% for an individual. However, a big institution like BlackRock can borrow billions of dollars at a meager interest rate, such as less than a 1% interest rate. But as the federal government raises the interest rate, these institutions would try to close their previous debt and borrow less.
If the market sees a downturn, these investment firms will get rid of their houses as soon as possible. Thus, accelerating the house market downturn.
Global Supply Chain Crisis
The global supply chain crisis has been prevalent for the last several years. The cost of building materials such as lumbers, insulation, concrete, etc. has risen more than 300%.
During the last 2 years, making a new house was challenging as everything got shut down. No one could work, such as contractors, workers, plumbers, roofers, electricians, and painters. However, as more people in the housing industry started working, new houses are now coming to market. Thus, the housing shortage is now easing.
Loss of Jobs
In the last few months, the job market has cooled down. Many companies have started to lay off. The recent pandemic has devastated many businesses. This loss of jobs ripples effect can be seen throughout the country.
Loss of jobs, exorbitant housing prices, inflation, and stagnant wages make it impossible for many to become homeowners.
The stock market and the housing market revolve in a cycle. Nothing goes up indefinitely. What goes up must come down. The current home prices are unsustainable. All the indicators in the market are now red. Something is wrong.
In a market, when everyone is buying, one should sell, and when everyone is selling, one should buy. Currently, the housing market is hot. People are now buying homes all cash over the asking price. This market has eerily similar feelings to the 2008 housing market.
Early Signs: Zillow
A few years ago, Zillow started the real estate business. However, in November 2021, they stopped their business and laid off 25% of their staff. Zillow knows where the housing market is heading. If they thought that the housing industry would boom in 2022-2023, they wouldn’t have stopped their real estate business. It’s an early indication that the market downturn is coming.
The stock market crashes overnight. However, the housing market doesn’t crash overnight. It’s an 8-10 months-long process. Once the overpriced home doesn’t sell, the owner would lower the asking price. When the homes start to sell at a lower price than the asking price, it sends a signal throughout the market. This coupled with the higher mortgage interest rate, the influx of foreclosed homes, inflation, and loss of jobs will trigger the housing market crash.
One should wait 12-15 months to purchase a home in this market. The wait is painful but rewarding. No product price goes up forever. The housing market will crash, and the cost will come down. Thus, a purchaser can save a tremendous amount of money if they wait 12-15 months.