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"A Housing Crash Is Ahead: Construction Shortages
And High Interest Rates Will Bust Housing Bubble"
by Epic Economist
"An extreme housing crash is ahead! In face of highly inflated home prices, rising mortgage rates, shortages of construction materials, an anemic inventory, and the coming expiration of the mortgage forbearance period, consumer confidence hit record lows. Even though the housing market boomed in 2020, while several sectors of the economy collapsed, it has significantly cooled this year, and experts are warning that its reckoning day may be at the corner. Industry specialists have reported that, at this point, the housing market has exceeded bubble levels, and they worry the remarkable slowdown registered since the beginning of 2021 will inevitably set the stage for a major price correction in the coming months. And that's what we're going to analyze in this video.
According to the assessment of the former Chief Economist at Alliance Bernstein and financial analyst, Joe Carson, there is an underestimation of how serious the housing inflation problem actually is. The gap between the actual change in house prices and owners' rent largely exceeds the "bubble" levels. Last month, owner's rent went up 2% over the past 12 months. Conversely, house price inflation soared 11.4%.
That gap over 900 basis points outstrips the 800 basis point gap registered during the last housing bubble peak of 2007-08. On one hand, surging home prices led to an affordability crisis that is keeping first-time home buyers outside of the market, while, on the other hand, it has contributed to a massive increase in household net worth, hitting an astonishing $12 trillion in 2020, with nearly half of this figure generated by an unprecedented gain in equities' market valuation.
Although high wealth-to-income ratios alone aren't predictive of a crash, they have proven to be signs of vulnerability and tipping points. In short, just as we've seen during the months that preceded the previous housing crash, household portfolios are oversized and unbalanced, fueled by a massive gain in a single asset, and such conditions make the market vulnerable to abrupt and sharp corrections.
The most critical vulnerability for household portfolios is an acute rise in market interest rates. Carson stressed that market interest rates will have to readjust upward, calibrating the liquidity needs of the economy and finance. But keeping in mind that several market watchers are predicting a 2% 10-year yield - which is only 40 basis points higher than from current levels - would trigger a stock market crash of at least 20%, can you even imagine how sharp the next housing market crash would be if 10-year yields rose to 3%?
Yields are already rising, bond prices are collapsing, and mortgage rates have started to soar. The Mortgage News Daily reported that last Friday, the average 30-year fixed-rate mortgage rate hit 3.45%, an increase of 70 basis points from the low at the end of December, which was at 2.75%.
In February, sales of existing homes fell by 6.6% from January to a seasonally adjusted annual rate of 6.22 million homes, according to a report released by the National Association of Realtors yesterday. Additionally, several new home contracts were canceled due to an uptick in the cost of lumber and other construction materials. Lumber prices skyrocketed more than 170% over the past year, adding over $24,000 to the cost of a new home. Metal products, concrete, appliances, and other expenses are also surging due to the latest supply chain breakdown.
Jerry Howard, the CEO of the National Association of Home Builders explained that “first-time homebuyers are the ones that really drive the housing market,” and since affordability has weakened substantially, particularly for first-time homebuyers home price growth is fast exceeding income growth, which means the current home valuations are becoming increasingly more unsustainable.
It's important to remember that weaker affordability will be the key driver for a slowdown in housing this year. If buyers can't afford to pay the price, prices will have to adjust. In view of all of these unbalances, all signs are indicating that a price correction is not a mere "possibility", but just a matter of time.
The market is losing its ability to sustain itself because it has gone way too far, especially because this extraordinary rally is happening right in the middle of one of the worst recessions we've ever had. And circumstances are not working in favor of any sort of improvement. Instead, everything around us is collapsing.
Supply chains are breaking, constructions are being halted, unemployment is still growing, wages are decaying and higher mortgage rates will likely be the pin that will pop the housing price bubble. All things considered, we can expect the next housing market crash to be the most extreme in all US history. All evidence is here. But there are none so blind as those who will not see."
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