Modern residential buildings with outdoor facilities, Facade of new low-energy houses
The housing market is going through a new normal as demand cools and mortgage rates surge worldwide. As a result, analysts have been coming up with their next housing crash predictions. In this article, I will look at the sector’s current state and explain whether the housing bubble will burst in 2022.
The housing market in the United States is mixed as interest rates surge. The Federal Reserve has hiked interest rates by 150 basis points and hinted that it will continue with the trend in the coming meetings. The base case is that the bank will hike by 75 or 50 basis points in its July meeting and by 0.50% in the following meeting. Afterwards, it will shift its policy to normal 0.25% rate hikes.
Historically, the housing sector does not do well in a period of high-interest rates for obvious reasons. Mortgage rates have risen to the highest point in over a decade. As a result, many people don’t have an incentive to take mortgages.
This situation explains why many mortgage lenders like Rocket Companies and Better.com are going through a difficult period. The Rocket Companies (RKT) stock price has crashed by 55% in the past 12 months, while Better.com has made thousands of layoffs.
Data published recently show that the housing market has started to soften. For example, housing starts and building permits declined sharply in May this year. Similarly, pending, new, and existing home sales have also tumbled sharply. However, the Case-Schiller House Price Index remains at an elevated level. With more Fed rate hikes planned, there is a likelihood that this trend will continue.
Many analysts expect that the housing market will go through a crash that is similar to what happened during the 2008/9 crisis. However, it is worth noting that conditions are significantly different between 2008 and 2022.
As you recall, the past housing crash was mostly driven by subprime lending, where banks extended loans to people who could not afford to pay. As a result, the bubble burst when these people struggled to pay as interest rates surged.
Today, the concept of subprime lending has dropped, and the level of delinquencies remains at record lows. At the same time, the labour market is a bit vibrant, with the unemployment rate at 3.5%. Therefore, while home prices will likely decline in 2022, I don’t think that the housing bubble will burst this year.
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