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Data Suggests U.S. Housing Market Crash Could Be Around the Corner

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Data Suggests U.S. Housing Market Crash Could Be Around the Corner
4 min. read
Data Suggests U.S. Housing Market Crash Could Be Around the Corner

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Recent months have shown signs that a potential U.S. housing market crash could be on the horizon. In fact, data from a variety of sources have pointed to underlying issues that could lead the market into a less-than-ideal situation.

Just last month, Nobel-prize winning economist Robert Shiller said that the U.S. housing market could soon see prices start falling due to a crash – and the numbers suggest that Shiller’s prediction might not be that far off.

Drop in Existing Home Sales

The National Association of Realtors (NAR) reported that sales of previously owned U.S. homes had dropped 2.2% in September to 5.38 million units, which suggests that high prices and a lack of inventory are weighing on the housing sector. Economists had expected a much smaller decrease of 0.7%, to 5.45 million units, and this drop in sales of existing homes even comes at a time when the average rate of a 30-year U.S. mortgage is at a historic low.

Meanwhile, the Federal Reserve has been working to try to keep the housing market – and the economy in general – in check. Since July, interest rates have been cut a total of three times, with the Federal Reserve reducing them most recently on October 30; more cuts could be in the future, as well. While that’s a positive move, it might not be enough to help consumers obtain the means to purchase a home.

Increased home prices resulting from a lack of inventory is causing potential buyers to think hard about whether they can purchase residential property. With hints at a possible recession looming over the economy, it’s not surprising that many buyers may be thinking twice about making the move to homeownership.

High Prices, Low Inventory

The NAR report also noted that the median price of existing homes increased 5.9% year-over-year in September to $272,100. This is the largest increase since January of last year. Additionally, the inventory of homes has decreased. Currently, there are 4.1 months’ worth of existing home inventory on the market, while a year ago the number was 4.4 months’ worth. This is well below the ideal situation, which would have six to seven months’ worth of supply.

What’s more, U.S. housing starts also fell significantly in September after hitting a 12-year high in August. As a result, it looks as though U.S. housing inventories will feel an even bigger stretch, potentially leading to a market crash.

The number of building permits also dropped in September – by 2.7% – which means there might not be much new inventory in the near future, further compounding the strain on the market.

Concerned Consumers

Data released by Fannie Mae earlier this month showed that the monthly Home Purchase Sentiment Index (HPSI) decreased 2.3 points in September to 91.5 after experiencing a high in August. Out of the six HPSI sections, three decreased month-over-month, including “Confidence About Not Losing Job” (down 8 points), “Home Prices Will Go Up” (dropping 7 points) and “Mortgage Rates Will Go Down” (declining 6 points).

This information indicates that consumers are concerned about their job security and the overall state of the economy, which makes sense in the context of slowed job growth in the U.S. A stagnant manufacturing sector and concerns about a recession could also keep consumers from feeling comfortable enough to make any large purchases.

Doug Duncan, senior vice president and chief economist at Fannie Mae, said:

“Consumer sentiment remains relatively strong overall, though uncertainty about the economy and individual financial circumstances appear to be weighing on housing market attitudes a bit more than a month ago. Views about the direction of the economy held relatively steady, and the share of respondents who say it’s a good time to buy or sell a home rose slightly. However, consumers who are pessimistic about current housing market conditions are more likely to cite unfavorable economic conditions than the prior month.”

A lack of inventory has resulted in continued home price increases, so the big purchases that consumers might shy away from will likely be residential real estate. This could mean that sellers will need to drop prices significantly in order to make a sale, further affecting the housing market.

According to NAR Chief Economist, Lawrence Yun:

“The housing market is an unbalanced situation … [Sales are falling and] prices are just rising and rising.”

Despite the lack of demand and weaker consumer confidence, having fair warning of a potential housing market crash could allow consumers to put a plan in place before larger issues surface. With such knowledge, consumers could be strategic in their home purchasing and work to ensure that any market crash in the near future affects them as little as possible.

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