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"Housing's New Crisis Coming! Mortgage Demand
Drops As Home Prices Spike 90 Percent"
by Epic Economist
"The U.S. housing market bubble is ready to pop! Many pieces of evidence are pointing to a sizable correction in property values this year as affordability continues to worsen amid soaring mortgage rates. A recent study has shown that home price appreciation has largely outpaced wages in most regional housing markets across the country, with some cities recording a staggering increase of 90% in home prices over the past 24 months. Now, realtors, policymakers, economists, and sellers are starting to worry because a reckoning is threatening to push property values back to their historic norms, reversing the trend that allowed the average price of a home to hit the $400,000 mark.
Applications for mortgages to purchase a home dropped 12% from the prior week, and were down 15% from a year ago. Rising mortgage rates are damaging housing affordability all around the nation. Since the start of the year, mortgage rates have risen over 2 full percentage points, and home prices are more than 20% higher than they were a year ago. Data from the St. Louis Fed showed that median home prices skyrocketed almost 33% from spring 2020. This week, applications to refinance a home loan continued their landslide, dropping another 10%. Compared to a year ago, refinance demand plunged by 76%, marking the end of the refinance boom witnessed during the pandemic. Right now, there is simply a very small pool of borrowers who can actually benefit from a refinance.
At this point, the current state of the market only favors wealthy cash buyers and speculators, who are virtually unaffected by changes to the interest on mortgage loans. “This trend, coupled with low inventory, is causing multiple offers across all price points which are driving prices up even further on top of some crazy asking prices to begin with. With rising interest rates, it is the trifecta of the perfect storm, unfortunately for buyers and would-be buyers who would sell their home if they could afford somewhere else to go,” said Cara Ameer, a realtor at Coldwell Banker in Orange County, California.
With demand slowing due to payment shocks, borrowers pulling back, and the ripple effect of rising rates starting to push the market down, the CEO of real estate data analytics firm Reventure Consulting, Nicholas Gerli, is warning that investors should prepare themselves for another housing bubble burst. In such an environment, a correction in property values has to occur because eventually wages and home prices have to converge again, whether it's by wages catching up or by home prices coming down.
This is only the second time in U.S. history that home prices have risen faster than inflation and wages. The last time this happened was in 2006, just before the housing crash of 2008 - and Gerli warned that since prices today are much higher by comparison than during the previous bubble, the coming correction is likely to be far more acute.
In his view, this nearly doubling in the growth of housing costs has far outpaced national median wages and rent growth, which rose only 5% and 24% respectively over the same time period. For this reason, he believes that Austin and other cities that have experienced the highest growth in annual house payments will see a housing bubble burst first, and the downfall of these markets will be the catalyst to trigger a knock-on effect on prices nationwide.
Needless to say, a housing crash would be horrifying for the US economy given that the housing sector is of paramount importance: a house is usually the biggest asset in American’s savings, comprises a large chunk of the labor force, and is a large contributor to inflation indices. As policymakers continue to play with fire, they may soon end up sparking an explosion that throws not only the housing market but the entire country into disarray."
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