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The housing market in the US and other wealthy countries is showing signs of trouble as interest rates rise. Recent data reveals that both new and existing home sales are dropping as buyers become more cautious. This trend is mirrored in other markets as well—cryptocurrency values have plummeted by over a trillion dollars, and stocks have experienced a significant downturn. So, what does this mean for the housing market, and when might a crash occur?
Home prices have surged dramatically over the past few years, largely because buyers have been drawn to the low-interest rates. In the UK, the average home price has reached a record high of £278,000. In the US, it has hit an all-time high of $429,000, which is a significant increase compared to before the pandemic. Similar trends are seen in countries like Australia and New Zealand.
Several factors have driven this price increase. First, interest rates have been at historic lows for a long time, making borrowing much cheaper. Second, the cost of building materials like lumber has spiked recently. Third, the pandemic increased demand for second homes, particularly in the US. Additionally, governments in the US and other countries pumped trillions into the economy through stimulus packages, much of which ended up in the housing market. Many people also saved a lot of money during lockdowns.
However, there are signs that a housing crash might be imminent. Mortgage rates have surged to a decade-high of 5.9%, and they might rise above 7% by the end of the year. With inflation also on the rise, housing demand could cool off.
Pending home sales have dropped for the past five months, indicating a decrease in homebuyers. Additionally, with the average US salary around $64,000, it would take someone over six years of savings to afford an average home.
Other assets have also seen sharp declines recently. Stocks have dropped significantly, affecting many 401(k) accounts, and cryptocurrencies have also fallen sharply. Given these trends, the housing market might be the next sector to experience a downturn, which explains why shares of home builders have fallen.
Lastly, there are signs that housing price growth is slowing down, which often happens before a market crash. For instance, the average home price in the UK rose by 9.3% in March, down from 11.3% the previous month. This aligns with recent predictions and suggests that the housing market could face a significant slowdown.