Thu, 28 July 2022 | housing
Owning a home has been the focal point of the American Dream for over 100 years. Rising property prices in recent years have made it increasingly difficult for more Americans to realize that ambition. The ongoing increase in housing costs indicated a seller's market for homeowners. This implies that the lack of inventory, high prices, and rising interest rates might be challenging for anyone trying to buy or rent a property.
But is there relief in sight? Many prospective homeowners are wondering whether the housing bubble is about to pop like it did in 2008, plunging the U.S. into the Great Recession.
Similar to other property markets across the world, the U.S. housing market saw a boom in 2020 and 2021 as a result of central banks lowering interest rates, households relocating to take advantage of "Work From Home" opportunities, and pandemic supply chain issues slowing the creation of new housing inventory.
U.S. home prices increased by 40% between February 2020, at the start of the pandemic, and April 2022, per the Case-Shiller Indices, a leading measure of U.S. home prices. The most recent data for May 2022 showed a slight deceleration in home price growth, with the National Composite Index reporting a 19.7% annual gain in May, down from 20.6% in April.
But the Federal Reserve and other central banks are increasingly hiking interest rates as they fight rampant inflation. Because of this, bond yields and mortgage rates have skyrocketed, which has decreased demand for mortgages and home purchases. According to mortgage company Freddie Mac, the average interest rate for a 30-year mortgage was 5.54 percent last week, more than twice as high as the rate of 2.76 percent from one year ago.
On July 27, the Mortgage Bankers' Association reported its Market Composite Index, which tracks the volume of mortgage loan applications, dropped 1.8 percent from the previous week on a seasonally adjusted basis. Mortgage application volume also decreased for the fourth week in a row, reaching its lowest level since February 2000.
Some economists and researchers are concerned about the slowdown in the US housing market, with some seeing a 25% decline in prices from peak to trough. However, several analysts have dismissed comparisons to 2008, asserting that banks engaged in much riskier lending practices at the time. Consequently, any imminent correction in housing prices will likely be moderate, driven by slowing demand related to consumer borrowing costs.