Market uncertainty: Economists outline what to watch as America drifts toward next housing crisis

“That’s our big deal going forward,” said Mark Zandi, chief economist at Moody’s Analytics, a New York-based research firm. “It’s not going to be a house price crash; it will be a question of getting people to become owners so that they can get rich. I think the younger ones are going to have a lot of difficulties.

The coronavirus pandemic has sparked a home-buying frenzy as millions of Americans across the economic spectrum, working from home, search for more space. Low interest rates fueled the buying frenzy.

“You had very few houses and a lot of people were going to try to buy them,” said Nicole Bachaud, an economist at Zillow, a tech real estate market firm in Seattle, Washington.

Buying a home has become much more expensive recently as the US Federal Reserve raises interest rates to fight runaway inflation. Rates for a 30-year mortgage have recently approached 6%, after falling to 2.65% in January 2021.

And real estate agents say they are already seeing cracks in the housing market.

“We’re seeing price reductions a little more frequently than before,” said David Berger, realtor at Compass, a brokerage in New York. “We’re seeing ads staying in the market a bit longer than they were a year or even six months ago.”

Inflation, a bear market on Wall Street following the 20% drop in the S&P 500, the free fall of cryptocurrencies, the war in Ukraine, and high fuel and food prices may conjure up memories of the real estate crash of 2007-2008, but experts said the market is very different this time. Here are five things to know:

1. Don’t expect a real estate crash like the one we saw in the 2007-2008 financial crisis

In 2005 and 2006, US banks lent money to “low quality borrowers” with very low credit ratings, Moody’s Zandi said. Borrowers signed two-year adjustable mortgages, which meant their interest rates would rise after two years due to their poor credit. Fraud by mortgage brokers, appraisers and real estate agents to obtain loans was also widespread.

The subprime mortgage crisis led to a wave of defaults and, ultimately, steep price declines. As these mortgages were bundled into a financial asset or marketable securities and sold on the global market, the real estate tsunami hit global markets.

Mortgages have remained untouched since the financial crisis, Zandi explained, due to regulatory changes.

“Today’s mortgage products are very simple – 30 and 15 year fixed rate loans,” he added. “We’re just not going to see the kind of defaults, foreclosures and distressed sales that lead to big price drops.”

The housing market is undersupplied, with vacancy rates for single-family homes near record lows. Institutional investors like hedge funds and mutual funds are interested in buying homes and are unlikely to sell. They buy with the intention of keeping.

Additionally, the majority of US homeowners refinanced between 2020 and 2021, when interest rates were low.

“People who own homes right now have pretty low mortgages — they’re not worried about affordability,” Zillow’s Bachaud said. “We are seeing an affordability crisis with people trying to get into home ownership. This is the big difference between this market and what happened in 2008-2009.

2. No, house prices will not fall

According to Zillow, the price of an average home in the United States is $350,000, up 20.7% from a year ago.

“A lot of people think, ‘We’ve seen so much growth, it has to come from here,'” Bachaud said. “But what we’re really seeing is that things are just starting to balance out a little faster than we might have expected if interest rates hadn’t been rising so quickly.”

Home prices in some US markets jumped even higher. In Phoenix, Arizona, the average home cost $264,000 in March 2020, down from $433,660 today. In Tampa, Florida, the median price is now $408,997, up from $253,000 in March 2020.

“We didn’t have enough houses, and a lot of people were trying to buy them, which drove prices up,” Bachaud said, referring to the pandemic buying frenzy. “The time homes were on the market – from when a home is listed to when it’s on hold – in many places was less than a week.”

3. People will also be less willing to sell their homes now.

House price appreciation is expected to remain in double digits at least until the end of 2022, experts said. Currently, annual home appreciation is 17%, according to the American Enterprise Institute, a Washington DC-based think tank.

“But a 10% home appreciation is going to be very different from the 20% that owners have seen over the past two years,” Bachaud added.

As a result, people may be less likely to sell their homes.

“They’re not going to give up so easily the high home valuations they’ve seen over the past two years, so the number of transactions is going to drop very sharply,” predicted Zandi of Moody’s.

4. The American dream of owning a home can be a pipe dream for young people

Millennials, those born between 1981 and 1996, are being shut out of homeownership due to a lack of available housing, rising prices, stagnant wages and skyrocketing student debt.

“Young people find it hard to save for a down payment, typically 5-20% of the purchase price,” Zillow’s Bachaud said.

And with today’s higher interest rates, a monthly mortgage payment is more than 50% higher than it was a year ago.

During the pandemic, when the government eased monetary policy and doled out trillions of dollars to encourage spending and keep the economy afloat, 30-year fixed-rate mortgage interest rates fell to 2.65%.

“Just consider the difference between a 3% interest rate and a 6% interest rate on a $350,000 home,” Bachaud explained. “That’s $500 in extra interest that homeowners have to pay every month. »

Young people simply cannot compete with cash-rich investors, both institutional and foreign, who don’t need mortgages and buy rental property.

Rents have climbed in the United States since the pandemic. For example, the median rent in Dallas, Texas is $2,045, up from $420 last year. In Miami, Florida, median rents are $4,000, up $1,500 from a year ago.

Compass’s Berger, who moved to Miami from New York during the pandemic and witnessed South Florida’s boom first-hand, said real estate in the city has no plans to slow down.

“Miami is now a city that is driving demand, attracting international buyers and talent from across the country,” he said.

Zandi of Moody’s Analytics noted that lawmakers “may try to incentivize builders to build more affordable rentals.”

“Affordable rentals,” he said, “are critical to homeownership because they allow people to save for a down payment.”

5. There’s a lot of uncertainty right now

The S&P 500 entered a bear market in 2022, having suffered its worst first six months since 1970. Cryptocurrencies have fallen, with the world’s largest digital coin, Bitcoin, losing more than 55% this year.

Supply chain issues and the war in Ukraine, which has exacerbated soaring food and fuel prices, are making Americans cautious and wary about their spending habits. These factors also influence a person’s decision to make a major purchase such as buying a home.

Still, there are reasons to be optimistic about the housing market, analysts said.

“Unemployment in the United States is at a historic low. People have jobs. We do not have subprime mortgages. The risk of being unable to pay mortgages and foreclosures is relatively low,” said Berger of Compass.

“If we can get inflation under control and maybe the war in Ukraine resolves itself, I think that will stabilize not just stock markets, but markets as a whole. All the markets want is stability; uncertainty drives everyone crazy. And there’s a lot of uncertainty right now,” he explained.

Although he admits the US economy is slowing, Moody’s Analytics’ Zandi is optimistic about the long term.

“The dollar is about as strong as it’s ever been,” he said. “I mean, we are now at par with the euro and even against the Chinese yuan. We’re driving the train right now; we keep the global economy on track.

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