Key Takeaways:
- The US housing market continues struggling under higher interest rate.
- Meanwhile, sale of pre-owned homes dropped in Sept.
PATNA (CoinChapter.com) — The US housing prices continue struggling under higher interest rates, with the sudden reversal eating up the demand. Moreover, the housing prices drop is the highest since 2009.
Although housing prices remain higher year-to-year, profits continue to decline at record rates, per the S&P CoreLogic Case-Shiller Home Price Index. In detail, the index tracks the monthly change in the value of single-family homes in the U.S.
Aug saw home prices rise by nearly 13% nationally from levels in Aug 2021. However, the increase is muted compared to Jul’s 15.6% year-on-year gains. The difference of 2.6% is the index’s highest since its inception in 1987, highlighting the record drop in price gains in the beleaguered housing sector.
Moreover, the 10-city composite of the Case Shiller index saw an annual increase of 12.1% in Aug, compared to Jul’s 14.9% gains. Additionally, the 20-city composite, which tracks a wider range of metropolitan areas, rose by 13.1% annually in Aug while recording a 16% hike in the previous month.
The US West coast recorded the sharpest monthly declines, with San Francisco (-4.3%), Seattle (-3.9%), and San Diego (-2.8%) leading the group.
Higher Mortgage Rates Slowing Down US Housing Market
Meanwhile, sales of pre-owned homes fell 1.5% in Sept from Aug, reaching a seasonally adjusted annual rate of 4.71 million units. The decline marked the eighth straight month of sales declines in the US housing market, with sales down 23.8% annually, per a survey by the National Association of Realtors.
A sharp increase in mortgage rates has caused the US housing market to skid to a near stop. For instance, the average rate on a 30-year fixed-income home loan, which was around 3% as the year began, now rests at just over 7%.
As a result, the already expensive housing market became even less affordable, affecting the S&P Case Shiller home price index, a key metric in diagnosing the health of the US housing market. However, the housing inventory continued to drop, despite sales slowing down.
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The 1.25 million houses available for sale in Sept represented a 0.8% drop annually. The tightening supply adds further pressure on US housing prices. The median price of a house sold in Sept was $384,800, which marked an 8.4% jump from Sept 2021 prices.
However, on a month-over-month basis, housing prices are dropping, with Sept recording the third straight month-to-month fall in prices.
US Housing Prices Drop Predicting a 2008-like Recession?
Analysts and economists have repeatedly stated that the Fed will keep increasing interest rates until something breaks. It seems that the prophecies are likely to come true, with the US housing market being the ‘something’ that is nearly broken.
As the reports from the S&P Case Shiller home price index indicate, the housing downturn is gaining traction across the US. Furthermore, the higher mortgage rates have led to a 38% decline (year-on-year) in mortgage purchase applications.
The Fed’s interest rate hikes to fight inflation led to the US housing market collapse, with the regulatory body hoping that elevated interest rates would cool down rate-sensitive sectors like housing.
Historically, mortgage rates have spiked whenever the Federal Reserve entered the inflation-fighting mode. However, housing market collapses have twice led to a wider recession.
In a 2007 paper, economist Edward Leamer noted the relationship between recessions and housing slowdown. Per Leamer, 80% of post-World War II recessions came after a housing slowdown. However, the housing market downturn not only helped cause recessions but was also the underlying cause.
In 1981, the Fed hiked interest rates to combat inflation, resulting in mortgage rates reaching 18%. The resulting housing market downtrend was so sharp it plunged the entire US economy into a recession. On the other hand, the 2008 recession resulted from a housing bubble.
Furthermore, the 2008 recession also had rampant overbuilding, deteriorating household finances, historic levels of overvaluation, and toxic subprime mortgages. Meanwhile, the 2022 housing market collapse shares traits of the 1981 and 2008 crashes.
Similar to 1981, the US housing market has deteriorated due to the Fed rate hikes and mortgage rate shock. And, like in 2008, the 2022 housing market has lost connection with underlying economic fundamentals.
