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Is the US on the Cusp of a Housing Crash?

Neil lives in Canada and writes about society and politics.
Published: July 4, 2022
Is the US on the cusp of a new housing crisis? Data does not look optimistic.
An auction sign stands in front of a foreclosed house on Oct. 29, 2012 in Warren, Ohio. Data and media chatter show that the United States is on the cusp of an imminent housing crash as mortgage rates have doubled and consumer savings and credit have been annihilated by inflation. (Image: Moore/Getty Images)

U.S.-based homeowners and prospective buyers may be caught in the unwinding apex of a housing crash, data and media chatter reveal. 

Although sellers in hotly contended North American metropolises have become accustomed to high listing prices being met by quick offers accompanied with little or no conditions, everything seems to have changed nearly overnight.

In a June 26 article, Barron’s reported that many homeowners were suddenly faced with an unpleasant reality when trying to sell in June.

In locales such as New Orleans, a 36-year-old woman told the outlet her realtor advised that “as of last week, about 50% of interested buyers dropped out” in conjunction with prices across the market meeting with stiff cuts on sites such as Zillow.

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As the Federal Reserve finally begins quantitative tightening after years of near-zero interest rates, Barrons’ reports the current fee for the average 30-year mortgage had increased to “to nearly 6% from about 3% at the end of last year.”

The outlet explains that this produces a problem for sellers, as buyers who would have previously been given the green light to sign their names onto a $520,000 loan now only qualify for a $400,000 property.

Painful math

But there’s more at stake for potential buyers than just how expensive of a home they can sign a debt on. The cost of borrowing differential between a 3 and 6 percent mortgage is enormous. 

Utilizing Canadian bank Royal Bank’s mortgage calculator, since Canadian mortgage calculators reveal the total cost of borrowing to prospective buyers, a $500,000 mortgage at a 3 percent fixed interest rate amortized over 30 years with a 5 year interest term would amount to $70,561 in interest paid over 5 years and $257,083.23 in total interest.

Meanwhile, a $380,000 mortgage with the same parameters, but at a 6 percent interest rate, results in a cost of borrowing of $108,902 over 5 years and $433,717 in total interest due. 

Additionally, the monthly payment goes from $2,103 to $2,260. 

In short, with higher interest rates, buyers not only qualify for lesser homes, but will face higher monthly payments backed by costs of borrowing that may ultimately exceed the total value of their home, before HOA fees, property taxes, and utilities are even factored in.

Demand destruction

Unsurprisingly, higher rates may be the harbinger of demand destruction. Barron’s reported, “In recent weeks, the volume of applications for a loan to purchase a home, as measured by the rolling 4-week average, fell to its lowest levels since the pandemic’s early days, according to Mortgage Bankers Association data.”

And added that, “Existing-home sales have fallen, too, declining in May to their lowest level since June 2020, according to the National Association of Realtors.”

June 30 reporting by CNBC confirmed the manifestation. They reported that, based on data from Realtor.com, the number of active listings jumped a staggering 19 percent in June, the largest increase in the five years the website has tracked data.

But the number is just an average. For locales such as Austin, Phoenix, and Raleigh, that figure is in the three digits, with Austin the highest at a 145 percent increase.

Despite the increasing abundance in supply, sellers are still trying to get top-bubble dollar for their properties, the article states, noting that June’s median listing price hit a new record high of $450,000. 

However, it’s worth noting that a listing price is only an asking price. 

CNBC stated that based on statistics from property data provider ATTOM, “The median-priced home in the second quarter required 31.5% of the average U.S. wage.”

That figure is the highest it’s been since 2007, just months prior to the 2008 financial crisis, and represents a 24 percent increase year over year.

A June 9 report by Fox Business citing data from Realtor.com stated that listing prices had already begun to plummet as early as March in 10 U.S. cities.

The hardest hit were Toledo, Rochester, Detroit, and Pittsburgh, where average prices fell between 13.7 and 18.7 percent year over year.

Even in more metropolitan venues such as Los Angeles, which has a median home price of $985,500 and Chicago at $399,900, average listing prices fell 5 and 3.7 percent respectively.