By Craig Erwiin, Ph.D.
Markets can reverse course suddenly. A few months ago it seemed the stock market could only go up. Then it started tumbling and it fell hard and fast. Now we’re mired in a bear market.
For the past few years the housing market has been on fire, but now it too is cooling fast. National Association of Home Builders (NAHB) CEO, Jerry Howard, warned recently that the housing market has been in decline for months and is now on the verge of recession. Plus the NAHB warns that home builder confidence is slipping. One reason that the housing market is cooling is that the Federal Reserve (Fed), the U.S. central bank, has been raising interest rates rapidly in an effort to cool the economy and fight inflation. This pushes up mortgage rates, which, along with record high home prices ($416,000 in June), means many would-be buyers can no longer afford a house. Even though there are more homes on the market, fewer can afford them.
Are we likely to see a repeat of the housing crash of 2007? No. Although the overheated housing market is now cooling off, conditions are quite different now than in 2007 when the housing market crashed so hard it nearly destroyed the global economy.
What are we likely to see now? According to the S&P Case-Schiller U.S. National Home Price Index, home prices have fallen two straight months, even as rising inflation makes homes more costly to build. Builders are likely to build fewer homes because higher inflation and mortgage rates reduce demand for them and make them more costly to build. Home prices may continue to fall, but they are unlikely to crash. Demand for homes is likely to continue to slow as rising interest rates put homes out of reach for more people.
Cycles come and go. Even though the Fed is trying to cool the economy, at some point it will stop raising rates and perhaps even start cutting them. Then another housing boom may begin. If you missed your chance to buy a home during the past few years, you will probably get another chance. So start saving for a down payment because, by the time you have saved enough, houses may be cheaper and mortgage rates may be lower.
Have you noticed changes in the housing market this year? Are you trying to buy or sell a house? If so, how would you describe the market?
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