U.S. Housing Market Faces Potential Crash Amid Rate Hike Effects
For the past two years, the Federal Reserve's approach to raising interest rates seemed to defy expectations, with home prices continuing to climb despite tighter financial conditions. This phenomenon, akin to "Erdoganomics," occurred because the housing market was dominated by wealthy cash buyers who didn't rely on mortgages. However, prolonged tightening is beginning to affect even the wealthiest, and this shift is now evident in the U.S. housing market. Unlike the stock market, which is primarily influenced by the top 1%, the housing market is a key indicator of the broader economy, especially for the middle class. The latest Case-Shiller data showed the first year-over-year decline in the Composite 20 city index since early 2023.
Similarly, Redfin's recent home price data reveals that while average home sale prices hit new highs, the number of transactions has plummeted, new listings are increasing, and price reductions have reached record levels. Key details include: The median sale price reached a record $397,954, a 4.9% year-over-year increase, the largest since March; the median asking price hit $409,975, a 6.1% year-over-year increase, the highest since October 2022; asking prices are leveling off, as fewer buyers can afford the nearly doubled monthly payments compared to 2021. Despite high asking prices, the number of transactions has dropped significantly due to the lack of price-indiscriminate buyers, leading to market stagnation. Active home listings surged 18% year-over-year, with inventory piling up, resulting in 3.3 months of supply, a record for this time of year. It takes longer to sell the median home, with demand plunging 17% year-over-year. The percentage of homes sold above listing price dropped from a record 55% in 2022 to just 32.3%. The number of listings with price drops surged to 6.9%, the highest on record, indicating sellers are starting to lower prices to attract buyers.
If the Fed doesn't significantly cut rates soon, the housing market might trigger a self-reinforcing downward spiral, with more sellers lowering prices, potentially leading to a full-blown housing crash just as the presidential election approaches.