Stairways leading to doors of a row of old apartments.
The housing sector plays an important role in the global economy. Besides, home equity is usually the biggest contributor to the household balance sheet in the UK and US. As a result, many homeowners have done relatively well as house prices have surged since the pandemic started. Still, with monetary conditions tightening, analysts are now coming up with the next housing crash prediction. Will it happen?
The Covid-19 pandemic has had a positive impact on home prices. As countries went into lockdowns, many housebuilders slowed their building, stifling supply. But, on the other hand, demand for homes jumped because of low interest rates and the significant liquidity in the financial market.
As you recall, the US Congress passed a stimulus package worth over $4 trillion. In Europe, the EU passed a trillion euro stimulus package while the UK removed stamp duties for home buying. At the same time, people in lockdowns ramped up their savings and were, therefore, able to raise the ever-elusive mortgage deposit.
Other factors pushed home prices higher. The emerging logistics challenges made importing important raw materials difficult, pushing their prices sharply higher. Commodity prices like lumber, steel, and aluminium also surged. The result is that home prices surged, as the Case-Shiller index shows below.
There are concerns about the housing market’s health as interest rates rise. Historically, a rise in rates tends to push mortgage rates sharply higher, which affects demand for homes. But, in fact, recent data shows that the housing sector is worsening. For example, home prices have started falling while new and pending home sales been falling.
Still, this is not an indication that home prices will go through what they went through in 2008 when they crashed hard. Besides, household balance sheets are significantly stronger than they were back then, while the unemployment rate has dropped to 3.6%. Moreover, as shown below, unlike in the past house crash, the single-family residential mortgage delinquency rate has fallen to the lowest level since 2006. This means that while the housing market will weaken, it will likely not be a full crash.
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