“The Housing Market Is Bound To Collapse In Next 90 Days” Mortgage Crisis Will Destroy Wealth
All the leading Housing market indicators are signaling a crumbling US housing market in the coming days. The average 30 year fixed mortgage rate is at 6% today and expected to rise to 8% by the end of 2022, 300 percentage points higher than the 2008 mortgage rate that triggered one of the worst housing crash. Today new home sales are down approximately 30% while prices are down 15% and experts are calling this time the worst possible time to buy a new house as prices are expected to fall by another40%. A huge collapse in new home sales is anticipated this and next month. Housing market and related industries contributes almost 20% to US gdp. And when sales fall 50 to 70 % than things will get really ugly.
1. In the coming months, real home prices are expected to fall and as a consequence, we are going to see a massive negative wealth effect. In this video, we are going to talk about the expected decline in real home prices. First, we will discuss why we believe it is going to happen based on reliable indicators. Subsequently, we will deliberate what it is going to mean for the rest of the economy and the developing 2022 recession.
2. To begin with, let us look at real home prices or home prices after adjusting for inflation. Now the reason why we are looking at real home prices and not nominal home prices is because real home prices are much more impactful for the wealth effect. Many people invest in real estate as an asset to beat inflation. If inflation is 5 percent and your home price goes up 10 percent, you are beating inflation by 5 percent and thus, you are 5 percent wealthier in real terms. If inflation is 10 percent and your home price only goes up by 5 percent, you lost 5 percent of your purchasing power in an asset that was supposed to give you protection and you are actually worse off. Another point is real home prices is the best estimator of the true performance of real estate as an asset class if we analyzing it across a long period of time.
3. For example, you can compare home prices today to home prices in the 1970s without looking at it in real or inflation adjusting terms. This chart shows real home prices since the 1970s and you can observe that real home prices have declined several times, mainly around the recessionary period. The recession of early 2000s was an exception where home prices rose in real terms. Home prices declined almost 30 percent in real terms during the financial crisis of 2008 and it took until 2021 to regain the peak in real home prices from 2006. If at look at the growth rate in real home prices, we can see that real home prices have risen at a 13 percent annualized rate in 2021. This was higher than the peak rate of home prices growth in 2006. Growth in real home prices was positive from 1996 until mid-2006, a period ten straight years which created a prevailing belief that home prices never fall. And here we have another 10-year period. Between 2012 and 2022, real home prices have remained massively positive. Over the last 10 years, real home prices grew at an average of 4.5 percent. The is more than double the 20-year average of 2 percent.
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