Worries about the next housing crash continued rising this week as investors reflected on the extremely hawkish tone by the Federal Reserve. The Fed decided to hike interest rates by another 0.75% on Wednesday and pointed to another 125 basis point hike this year. So, will this tone by the Fed crash the housing market?
US mortgage rates rise
The Federal Reserve has embraced one of its most hawkish tones in decades as it continues fighting soaring inflation. In 2022 alone, the Fed has delivered 300 basis points rate hikes, bringing the official cash rate to 3.25%. The bank has hinted that interest rates could surge to more than 5% in 2023.
As a result, Americans are paying more for their mortgage than they have ever paid before. The average mortgage rate has jumped to 6%. At the same time, recent economic numbers point to a situation where the housing market is cooling.
Data published this week showed that home sales crashed by 20% in August compared to a year ago. They have fallen in the past 7 months straight. Besides, with inflation rising and wage growth struggling, many people are not affording homes.
Other numbers have pointed to a worrying situation for the housing market. For example, building permits and housing starts have remained under intense pressure. Data published this week showed that building permits dropped again in August while housing starts rose unexpectedly.
Additional numbers revealed that house prices have started falling as demand wanes and as the number of homes being put in the market increase.
Next housing crash prediction
So, will the next housing crash happen in 2022? This question is often asked in relation to what happened in 2008 during the Global Financial crisis. In my view, a crash similar to that will not happen since conditions are significantly different from what they were back then.
For one, the number of subprime mortgages being sold in the US has dropped sharply in the past few years. Most big banks that were in that business have abandoned the sector because of the tough financial conditions.
Therefore, I believe that the housing market will continue struggling this year as demand wanes amid high mortgage rates. However, the chances of a major housing crash similar to what happened in 2008 is highly unlikely.