The signs of a U.S. housing market crash are becoming clearer with each passing week.
Nobel-prize winning economist Robert Shiller warned us last month that the U.S. housing market is headed for a crash and prices could soon start falling. Well, it looks like Shiller’s prophecy could soon come true as sales of existing homes in the U.S. dropped more than expected in September.
U.S. housing market is on the edge
According to the National Association of Realtors (NAR), existing home sales in the U.S. dropped 2.2% in September to 5.38 million units. Economists were originally expecting a much smaller decline of 0.7% to 5.45 million units. It is worth noting that the decline in the sales of existing homes comes at a time when the average rate of a 30-year U.S. mortgage remains at a historic low.
The Federal Reserve has been trying to keep the economy and housing market in good shape. Interest rates have been slashed two times since July, and the Fed is expected to go down that path once again in October and beyond. But that’s not going to help the cash-strapped consumer come up with the money to purchase a house.
The decline in existing home sales clearly indicates that the lack of inventory and the resulting increase in home prices is forcing potential buyers to have second thoughts about purchasing residential property, especially considering the cloud of a recession that’s hanging over the economy.
The report adds that the median price of an existing home increased 5.9% year-over-year during September to $272,100. This is the strongest jump since January last year. What’s more, there is just 4.1 months of existing home inventory on the market. The number stood at 4.4 months a year ago and is well below the 6-7 months of supply that’s considered ideal.
Looking ahead, U.S. housing inventories are going to be stretched further and send the market into a tailspin. That’s because U.S. housing starts in September fell sharply after hitting 12-year highs in August.
Building permits in September also fell 2.7%. These stats suggest that new inventory might not be coming on to the market very soon, and that could spell trouble for the housing market.
Sliding consumer confidence could trigger a crash
Fannie Mae had reported earlier this month that the monthly Home Purchase Sentiment Index (HPSI) fell 2.3 points in September after hitting a high in August.
The important takeaways from that report were that consumers were concerned about the security of their jobs and the state of the economy. This was not surprising as job growth in the U.S. is dwindling. The slowdown in the manufacturing sector and the fears of a recession will force consumers to keep their wallets closed.
And given that home prices are still rising thanks to a lack of inventory, consumers will refrain from buying a house. The resulting weakness in demand will be bad news for real estate. Sellers will eventually be forced to lower prices in order to move inventories, thereby leading to a sharp downturn. NAR chief economist, Lawrence Yun, already believes that the U.S. housing market is on the sticky ground:
“The housing market is an unbalanced situation … [Sales are falling and] “prices are just rising and rising.”
As such, don’t be surprised to see the U.S. housing market experience turbulence thanks to the lack of demand and weak consumer confidence.
Last modified: September 23, 2020 1:11 PM