In 2020, at the beginning of the COVID pandemic, home prices shot up. This makes sense, considering that there was a limited supply of new homes and interest rates dropped to historically low levels, which lowered mortgage rates to historical lows and helped spawn high demand for housing.
As interest rates have gone up this year, we have now gotten to a point where demand seems to be falling off.
In 2019, the average price of a house was $274,600, with a mortgage rate of 4.04%. By June of 2022 that number had jumped to $423,300 with a mortgage rate of 5.6%. But from June to July, home prices declined nationwide by 0.77%. This may seem insignificant, but this is the worst single-month decline since January 2011 when prices dropped by 0.9%. In fact, this is the second-worst dip since 1991.
Meanwhile, according to the National Association of Realtors, home sales are predicted to have dropped nationally by 1,220,000 or by 20% compared to July of last year. Added to this is the fact that July, historically, is one of the busiest housing sale months as families typically move when their children are out of school. Since January, we’ve had a 25.9% decrease in existing homes sales.
But it doesn’t end here. Compared to last year, mortgage rate locks are down 57%, and the last six months have shown a steep downturn. A mortgage rate lock allows you to reserve an interest rate for a period while applying for, renewing, or refinancing a mortgage, so the drop in locks substantiates the decline in the demand for homes.
Could the housing market bubble be bursting?
The housing market data above could be an indication that the housing bubble is leaking or even going to burst. A few weeks ago, we wrote about Michael Burry —who predicted the housing market crash of 2008 that set off the Great Financial Crisis — and his dire predictions of a US financial crash caused by the bursting of the stock market bubble. Bubbles build in the same way, whether we’re talking about real estate or stocks: The market keeps expanding until it can no longer bear the increase and pops, potentially dropping in value exponentially.
This, however, is a somewhat academic view of what is a very real and personal cataclysm to many Americans. As stated by Investopedia:
“Housing bubbles have a direct impact on the real estate industry, but also on homeowners and their personal finances. The impact a bubble can have on the economy (e.g., on interest rates, lending standards, and securitization practices) can force people to find ways to keep up with their mortgage payments when times suddenly turn and get tough. Some may even have to dig deeper into their pockets, using savings and retirement funds just to keep their homes. Others will go bankrupt and foreclose.”
This may sound apocalyptic, but it’s based on reality — think of 2008.
The threat may be real
Let’s add this view to the reality of where we are economically. While the Bureau of Economic Analysis hasn’t yet released the third-quarter data, the US has seen a significant drop in our Gross Domestic Product. (GDP is the value of all goods and services produced in a country during a given time, and as such, it’s an exceptional indicator of the strength of an economy.)
With two consecutive quarters of negative growth (-1.6% in the first quarter, -0.6% in the second), we are — based on many analysts — in a recession. Additionally, we still have nearly double-digit inflation rates, and President Biden just declared that he wants to add upwards of an additional $500 billion to the national debt by forgiving student loan debts, most likely adding to the inflation fire.
Since the housing market makes up 15–18% of GDP, a major downturn in the housing market could have a substantial impact on the US economy like it did in 2008.
We may experience again a loss of financial stability falling well beyond the value of our houses. This should concern all Americans. Robert Kiyosaki, renowned author of Rich Dad Poor Dad, once said, “Financial freedom is freedom from fear.” In this current market, do you have that freedom?