The global housing market is starting to soften after years of unprecedented growth due to central banks dropping interest rates to zero during the pandemic. This made mortgages more affordable for people looking to buy homes or invest in second properties. Increased demand for housing due to changes in living and working habits, supply chain issues, and the emergence of a well-capitalized demographic looking to buy homes also contributed to the housing market boom. However, the demand for housing is starting to slow down, and interest rates recently hit a 14-year high in the United States, which could cause housing prices to fall.
Are We Approaching a Housing Market Crash?
Asset markets around the world have been crashing since central banks started raising interest rates. It looks like the last domino is finally starting to fall, and I am of course referring to the housing market where prices have been through the roof until recently. This has many prospective homeowners wondering if a buying opportunity is approaching at last. Today, I’m going to take you through a few of the indicators that suggest the housing market is starting to soften, tell you why prices could still go higher in some places, and when the big crash could come.
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The Housing Bubble
Over the last two years, the cost of housing has been accelerating at an unprecedented pace. In most countries, housing has been increasing by double-digit percentages on an annual basis, with the United States seeing an almost 40 percent increase in median house prices since 2020. For starters, many central banks around the world dropped interest rates to zero and, in some cases, below zero when the markets collapsed at the beginning of the pandemic in March 2020. This made mortgages more affordable in most places, which made it easier for people to buy homes. Not only that, but many existing homeowners took these low mortgage rates as an opportunity to buy a second property for investment purposes, with Redfin finding that the demand for second homes doubled in 2021 compared to pre-pandemic levels in the United States.
Work-from-Home and Millennial Demand
The pandemic lockdowns also increased the cost of housing because of how many people started working from home. According to Pew Research, around 60 percent of jobs that can be done from home are still being done from home in the United States, not far off from the 71 percent peak in late 2020. It didn’t take long for the people working these remote jobs to realize that they didn’t have to live in a small apartment in the city, and many of them decided to move to less populated areas where they could afford a much larger apartment or even a house. Logically, such moves caused prices there to go up. Another housing demand driver is one I mentioned in my previous video about the housing market, and that’s that millennials, those born between 1981 and 1996, are entering their peak home-buying age, basically the period of their life when they’re all looking for a place to settle down.
The Softening of Housing Prices
However, this is slowly starting to change both on the supply and the demand side. Because of the insane demand for housing, home builders around the world have been putting up new units as quickly as they can. As you can see, the monthly supply of new houses in the United States looks like a meme stock and it’s at the highest level it’s been since the housing bubble back in 2008. Now, if the interest rates on treasuries and mortgage-backed securities increase when their prices decline, the Fed cell pressure should theoretically cause interest rates for both treasuries and mortgage-backed securities to rise, which should cause mortgage rates to rise and housing prices to fall.