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"Housing Crash Is Coming! Mortgage Rate And
Lumber Shortages About To Pop The Housing Bubble"
by Epic Economist
"The U.S. housing price bubble is facing extra pressure as soaring lumber prices are slowing the construction of new housing units, keeping inventory tight, and pushing prices even higher. Meanwhile, inflation fears are mounting as the coming 1.9 trillion dollar stimulus package has just passed, which consequently led mortgage rates to unexpectedly hike over the past few weeks. Record-low interest rates were the main booster of the latest housing market rally, but experts say they are expected to trend higher this year. Thus, amid expensive inputs, supply shortages, heightened rates, and skyrocketing home prices a housing market crash looms, as the price bubble grows increasingly more unsustainable with each passing day. That's what we're going to discuss in this video.
The red-hot U.S. housing market has outperformed pretty much every sector of the economy during the current recession, primarily supported by historically low mortgage rates and an elevated demand. However, rising mortgage rates are about throw cold water on the market and cool off demand, as housing prices continue to soar to unprecedented levels and buyers face further difficulties to find a place to call home.
This means that demand is not only being crushed by the dangerous housing price bubble but also by the prospect that lenders will keep rising mortgage rates buyers won't be able to pay. On the other hand, the bubble continues to be expanded as supply remains tight. All across the country, homebuilding dropped more than expected in January, falling 2.3% on a year-on-year basis, while housing starts declined 6.0%. The housing rally is being threatened by lack of land and expensive inputs, as builders have been alerting that record-high lumber prices were adding thousands of dollars to the cost of a new home and causing some builders to abruptly halt projects.
Lumber prices have almost tripled, with boards used in residential construction jumping 250% since last spring, says the letter. Now, lumber is trading at $1,000 per thousand board feet, an all-time high, and this extraordinary hike has lifted the national average price of a new single-family home in the U.S. by more than $24,000 since April 2020. Prices for wood are still expected to record further gains this year, as Forest Economic Advisors experts pointed out that home building and will renovations cause demand to outstrip production, and production is going to have a hard time keeping up with demand growth.
Consequently, on top of enabling the expansion of the price bubble, and increasing the imminence of a dramatic housing crash, the affordability crisis will financially impair the next generations, as homes are the main asset of a large part of the population, and if there aren’t enough homes to meet the growing demand, the largest generation of the U.S. won’t be able to start building equity, which will in turn make them more economically vulnerable than previous generations.
More importantly, the looming housing market crash, the affordability crisis, higher mortgage rates, and widening wealth gaps are all a result of growing inflation. Central banks have fueled the housing price bubble by enacting near-zero rates in a time inventory was lean. In that way, they artificially created a "wealth effect" that was simply not sustainable.
The 1.9 trillion dollar stimulus package will send interest rates to pre-outbreak levels of about 3.5%. That is to say, once the economy reopens and more money flows into the economy, if demand doesn't bounce back soon enough, central banks won't be able to sustain the bubble unless they keep pouring enormous amounts of money inside the market, but that won't remove the dangers of a crash, it will simply slow down the process.
If house prices are going up, but incomes and population aren’t going up, then you’re either going to have a crash or the market is going to move to a permanent level of being less affordable. Even if higher interest rates temper demand a little bit, it could take years before the supply of housing can meet demand, and throughout this process, millions of Americans will remain priced out of the market.
Although no one can accurately predict when a housing market crash will occur, we have to keep in mind that the more assets are inflated and prices get out of touch with our economic reality, the fewer people will be able to afford such exorbitant prices. Let's remember the two things that were boosting the rally: record-low interest rates and an elevated demand. Mortgage rates are already spiking, and if demand drastically drops, that's the end game no central bank will be able to reverse. A price correction is just a matter of time, and we shouldn't ignore the warning signals."
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