Various events throughout the U.S. have led to a chain of new measures put in place that can lead to the housing market collapsing. It is still a hot market as of the time of this writing. Properties are still being sold above asking price. There are buyers looking to find a new place they can call a home. However, that may soon change.
What will be covered in this article are a few events that will potentially lead to the market shifting back into a buyer’s market. This will be important to know if you are a new homeowner, or planning to purchase a house in the future.
Consumer Spending
Consumers have increased spending on food, goods and necessities. I shared an article about it on “Why the American Middle Class is Disappearing,” which you can view here to see statistics. Consumers, during the midst of the COVID-19 lockdown, had received extra financial assistance from the government.
Two of them included the four stimulus checks and the COVID-19 unemployment benefits. The later included $300+ extra money on top of what claimants qualified for every week. That, in conjunction with less spending during lockdown in 2020, gave Americans extra money in their bank accounts.
With that extra money, Americans went on a spending spree. So much that prices increased. According to Money.com, there was a 9.1% increase in consumer prices in the 12 months ending in June 2022. With increase in consumer spending, demand has outweighed supply. Some stores have empty shelves as result of limited inventory.
Supply chains, though making greater progress, are still catching up from prior restrictions that were put in place during COVID-19. Trucking companies who haul goods across country have to deal with rising diesel fuel costs. This, in addition to short supply, means higher prices, which can lead to inflation.
The car industry is one example. Many car dealerships during 2021 had to increase the price of their motor vehicles. Importing restrictions during COVID-19 lead to a delay in new vehicles coming into the states. This lead to short supply in vehicles to purchase.
Interest Rate Hike
Another reason the real estate industry may potentially collapse is from the recent interest rate hikes. According to the same article from Money.com, during the first half of 2022, the Federal Reserve initiated four interest rate hikes. This included two 0.75% point increase back to back. By the third quarter of 2022, the added interest rate rose to 2.25%.
But that’s not all. Just September 21st of 2022, according to CNN, the Federal Reserve tripled down on the 0.75% point increase hike. So with that added 0.75% interest rate, brings the total to 3.00% added interest.
So that means for every $10,000 borrowed, a 0.25% interest rate hike equals $25 in annual interest costs. Borrowers will have to keep that in mind when making large purchases that require financing.
What is the Reason For the Interest Rate Hike?
Higher consumer spending equals inflation. Impulse spending on goods have increased year over year. The short supply creates the issue where suppliers and stores may struggle to keep up with demand. This translates to high prices in physical products.
The reason why consumers are purchasing more is, aside from the government assistance, also from low interest rates. Lower interests means consumers can better qualify for loans and credit cards. This explains why credit card usage has gone up since mid 2021.
Therefore, the Federal Reserve has to step in to create balance. By increasing the interest rates for loans and credit cards, it will help control consumer spending.
How It Affects Housing
The higher interest rates means extra in annual interest costs per year. This will lead to higher mortgage payments for homeowners.
Here’s an example below:
Say you want to purchase a new house. The asking price for the house is $600,000. You are willing to put down 20% of your own money. That equals $120,000 in upfront cash. That brings the amount you need to borrow at $480,000. Therefore, you acquire a $480,000 loan.
Now during 2021, the average interest rate in the U.S. was 2.65%. Getting a rate like this of course would have depended on your credit score. But say you get a 30-year mortgage loan at the 2.65% interest rate. Below would have been your monthly payments, including property taxes and insurance:
Now in 2022, with the Federal Reserve initiating five interest rate hikes this year, the average interest rate in the U.S. is around 6.28%. Again the rate can vary depending on your credit history. But worst case scenario, if you got a $480,000 30-year mortgage loan at 6.28% interest, here’s what your mortgage payments would be:
That is a $1,030 difference in monthly mortgage payments per month. That equals $12,360 in total extra money you must pay per year at the 6.28% rate.
People looking for housing will have to shop to find the best loan or make a higher down payment. Homeowners who take in new or existing mortgages may see their monthly mortgages increase. This can create a sudden financial burden for several homeowners.
The Eviction Moratorium
This situation can add more fuel to the flames. As from a resource in The Business Journal, lawyers have shared that they are seeing a higher increase in evictions across the nation. This is the eviction bans have slowly been lifted throughout the U.S. These eviction bans were previously put in place during COVID-19.
During the eviction ban between 2020-2021, several landlords received no rent payments from their tenants for months. Several tenants basically took advantage of living rent free. However, many tenants also legitimately couldn’t make rent payments due to losing their jobs and the vast delay in receiving unemployment benefits.
Many tenants during this time also had the option to seek rental assistance, with details to get started on NLIHC.org. Those to sought assistance meant a further delay in evictions.
Landlords now have to weigh their options. They may have to wait on that rental assistance (or rent payments), evict if they can, or sell their property to clear all encumbrances. If they choose the option to sell, they could have to sell their property at a discount. This is especially true if the property is outdated, has structural issues, or was thrashed by the tenants. But if sold at a discount, this can cause property values in the area to decrease.
Signs That The Housing Market May Crash
A lot that has been shared in this article has been based on data and statistics. But here are some more signs that can potentially lead to the real estate market collapsing.
According to Bank Rate, the housing market is slowing cooling down. However, the market is still hot and there are still a lot of frantic buyers that are paying well over asking price for a house. They are sometimes paying $100,000 over the listing price. This is because of the large bidding wars for properties that have taken place especially during 2021.
Even though there are new proud homeowners, there have been many that have lost their place of residence. The key real estate market statistics shared by Bank Rate showed about 30,881 U.S. foreclosure filings that took place as of May 2022. This included default notices, properties scheduled for auction, and bank repossessions.
Around 2,857 of those properties banks and lenders repossessed and have converted into real estate owned properties as of May 2022 (REOs for short). This figure, and the amount of foreclosure filings, have likely gone up since May.
Also as of July of 2022, according to Bank Rate, the median house price reached $403,800. The median house price dipped slightly from $413,800 a month prior.
More resources provided by Forbes mention the top five cities in the U.S. that are likely to see the biggest drop in real estate values. Their chart below shows these top cities:
Another resource by Go Banking Rates further emphasizes the potential housing crisis. They provide a list of 40 top cities that will likely see the biggest real estate value drops. Some of those cities include:
- Jacksonville FL
- Miami, FL
- New York, NY
- Rochester, NY
- Houston, TX
You can review their article to read their statistics. The data includes housing units in each city, the percentage of properties that are delinquent, and foreclosure sale percentages.
Conclusion
The real estate market had reached a high peak during 2021. And while it’s still a hot market full of frantic buyers, the market is slowly shifting. The high cost for goods means consumers have been spending more money on those goods being that they had extra money to play with.
The consumer spending has led to inflation. The Federal Reserve has been taking huge measures during the year 2022 to bring interest rates higher. They are or will eventually reach a level where consumer spending will decrease. But with these higher interest rates, means more homeowners struggling to keep up with mortgage payments.
Homeowners who struggle to pay these higher mortgage payments may have to either modify their loan. Or worst case scenario, their property will go into foreclosure. Properties under foreclosure means they may sell at a discount. This could bring the value of properties down throughout the U.S.
This information is to help you in the event you are considering owning a new house. It’s important to know the right time to make a large purchase. However, you also need to be aware that having money for uncertain times where a recession may hit is very ideal.
I’m not a financial advisor. But I do recommend that you start planning for your financial future. How do you plan to manage your finances? Let me know in the comments below.