The housing sector in the US and other developed countries has done well in the past few years. Indeed, data published by the Federal Reserve shows that the median home price surged to an all-time high of $408,000. This was a substantial increase considering that the price was at $329,000 before the pandemic started. In this next housing crash prediction, we will explain some red flags about the sector.
Red flags about the housing sector
There are several reasons why the next housing crash in the US will likely happen in 2022 or in the coming years. First, the yield curve inverted to the lowest level since 2007 this month. Historically, an inverted yield curve is usually a sign that a recession will happen in the next few months or years. As shown above, home prices tend to decline sharply whenever there is a recession.
Second, mortgage companies seem to be struggling. For example, a company known as Better.com has declared several layoffs in the past few months because of the softening industry. Better is one of the several mortgage providers in the US. Most importantly, the Rocket Companies stock price has crashed by over 62% since its IPO in 2021, bringing its total market cap to about $18.3 billion. This is a sign that demand is waning.
The third reason is in line with the second one. Mortgage rates have jumped to 5% in the past few weeks as investors expect that the Fed will continue hiking interest rates. With mortgage rates so expensive, there is a likelihood that demand for homes will continue slowing down. Also, the market could see higher supplies in the coming months.
US home affordability index
The other housing crash prediction is that house affordability in the US has crashed to a record low as you can see in the chart below. This chart means that most Americans can no longer afford homes because of the rising prices. Therefore, it could signal that home prices will retreat as demand reduces and inflation jumps to the highest point in over 40 years.
As you recall, one reason why US house prices jumped was that the Covid-19 pandemic forced people to spend time at home. With no traveling and coupled with government stimulus and low-interest rates, people were able to save for their downpayments. Now, these factors are ending, which could lead to more challenges. Therefore, a serious housing crash cannot be ruled out.