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Concerns about a potential housing crash have intensified this week as investors reacted to the Federal Reserve’s aggressive stance. On Wednesday, the Fed raised interest rates by 0.75% and hinted at an additional 125 basis points increase later this year. So, could this tough approach by the Fed lead to a housing market crash?
The Fed is taking one of its most aggressive stances in decades to combat rising inflation. In 2022 alone, the Fed has implemented 300 basis points in rate hikes, bringing the official cash rate to 3.25%. They’ve suggested that rates could climb above 5% in 2023.
As a result, Americans are now facing their highest mortgage rates ever, with the average rate hitting 6%. Meanwhile, recent economic data suggests the housing market is starting to cool down.
For instance, home sales plummeted by 20% in August compared to a year ago and have declined for the past seven months. With inflation rising and wages not keeping up, many people are struggling to afford homes.
Other data paints a bleak picture for the housing market. Building permits and housing starts are under pressure, with permits dropping again in August, although housing starts unexpectedly rose.
Additionally, house prices have begun to fall as demand weakens and more homes become available on the market.
Will we see a housing crash similar to the one in 2008? Given the current conditions, it’s unlikely. The situation now is quite different from back then. For one, the number of subprime mortgages has sharply declined in recent years, and most major banks have moved away from that market due to tough financial conditions.
So, while the housing market will likely continue to face challenges this year due to high mortgage rates and reduced demand, a major crash like 2008 seems improbable.