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June 09, 2021

Is the U.S. On the Verge of a Housing Collapse?

Is the housing market too hot? That is the question millions of Americans have been asking recently. Those who lived through the 2008 housing crisis have noticed some eerie similarities between the current housing market and the housing bubble of 2007. Searches for the phrase “When is the housing market going to crash,” are up 2,450% over the month of May, which goes to show how concerned the American public is about another potential crash.

The concern is not unfounded, as there are some alarming similarities to the housing boom over a decade ago. For instance, according to JP Morgan Research, “After robust gains over the past five years, the nationwide nominal house price index is now 40% above its 2012 low-point and 4% above the peak reached in 2006.”

The senior director of Fitch Ratings, Suzanne Mistretta, stated that “slowing employment recovery and still-high unemployment levels are not supportive of long-term sustainable price growth.” This comes from a report where Fitch determined that homes are currently 5.5% overvalued nationwide. In some urban areas, Fitch estimates that homes are more than 10% overvalued, and in the worst areas the overvaluation is as high as 30%.

Even the experts who tend to be more optimistic about the prospects of the housing market have admitted the current growth will not last. Robert Dietz, chief economist at the National Association of Home Builders, is on record saying we’re not going to see a crash. However, he also points out that, “when home prices are growing faster than incomes, ultimately that is an unsustainable trend.”

In November of 2021, housing prices were increasing at the fastest rate since the housing collapse and subsequent recession. It is now July 2021 and price appreciation has not slowed down.

According to Fitch, even markets like the State of Washington and Rhode Island have a disconnect between the market fundamentals which support growth and the rising rate of home prices. These markets typically see a more sustained increase in housing prices, so this shift could indicate a larger issue.

On top of these indicators is the current forbearance on mortgages. Many Americans have been allowed to make reduced payments or skip their payments entirely. Additionally, a moratorium on foreclosures was put into place. By June 2020, 4 million Americans were in forbearance on their mortgage. Joan Trice, CEO of the Collateral Risk Network stated that having all of these homes default at the same time, “would tank the market.” The moratorium was put into place to stop this from happening, but when it is lifted, we could see some major issues.

Despite the signs of a possible housing market collapse, there are some indicators which signify that the current market is much different than the 2007 housing bubble.

For one thing, the reproduction costs of building a have been rising. If new homes are more expensive to create, a floor of value is created on existing homes.

Additionally, we are currently short 5.5 million homes in the United States, which is a stark difference from 2007 when there was too much supply. Not to mention, In 2007 the market saw a drop off in demand. Compare that to today’s market where demand is high and there are more millennials looking to buy than there are baby boomers looking to sell.

There is also the benefit of current home equity being at record levels, which reduces the foreclosure risk we saw in 2007. The Federal Reserve announced that U.S. home equity was more than $22 trillion at the end of 2020, which is nearly double the amount of outstanding mortgage debt at $12 trillion.

As unsatisfying of an answer as this may be, there is an argument to be made on both sides of this issue. What we know for sure is that the current housing market is on fire and people are receiving great value on their home right now. The market will inevitably slowdown, whether that comes in the form of an economic catastrophe or a slight market dip is yet to be seen. However, if you’re going to sell your home the time is right now.