Home Buys hit 16 year low

Summary

Home sales have hit a 16-year low, the lowest since the 2008 housing crisis. The sharp decline is attributed to rising mortgage rates, currently averaging 7%, which have made buying and selling homes unaffordable for many. This has caused a 'frozen' housing market, with inventory dropping significantly. While inventory has slightly increased, potential recessions and rate cuts could lead to a surge in unsold homes, severely impacting homeowners' equity. A potential economic crash may follow, leading to reduced consumer spending and rising job losses. The solution could involve massive spending cuts and tax reforms, though this seems unlikely given Congress's current behavior.

Takeaways

• 😀 Home buys have dropped to a 16-year low, the lowest since the 2008 housing crisis.
• 😀 Existing home purchases fell 5.9% in March from the previous month, marking the biggest drop since the Fed's rate hikes began in 2022.
• 😀 In some regions, like the West, sales dropped even further, by 9.4% in a month.
• 😀 Before the pandemic, monthly home sales averaged 5.5 million, and in 2021 it was 6 million.
• 😀 The main factor driving this market slowdown is rising mortgage rates, which have averaged 7% in recent months.
• 😀 Historically, 7% mortgage rates are not particularly high, but compared to the 3% rates during the last two decades, they significantly hinder home buying and selling.
• 😀 The current 'lock-in' effect means that many homeowners are unable to sell or buy due to the financial strain of higher mortgage payments.
• 😀 This situation has caused housing inventory to drop nearly 50% since the Fed's rate hikes began.
• 😀 Young people facing financial difficulties are also contributing to the market freeze, further exacerbating the problem.
• 😀 A potential recession could lead to a housing market 'unfreeze,' with an influx of unsold homes that may negatively impact home equity and consumer spending.

Q & A

Why have home purchases recently hit a 16-year low?

Home purchases have hit a 16-year low primarily due to rising mortgage rates. In March, existing home purchases fell 5.9% from the previous month, marking the largest drop since the Federal Reserve began raising interest rates in 2022. The 7% mortgage rate has made it difficult for many to afford buying homes.

How does the current mortgage rate compare to historical rates?

The current 7% mortgage rate, while relatively high compared to recent years, is not historically extreme. In the 1990s, the average mortgage rate was about 7.5%. During the 1980s, mortgage rates were even higher, reaching into the double digits.

What is the main issue with the Fed’s interest rate hikes?

The primary issue with the Fed’s interest rate hikes is that they have increased mortgage rates from the historically low 3% to 7%. This sharp increase makes it unaffordable for many homeowners to sell, as they would face much higher mortgage payments, thus freezing the housing market.

What does the 'lock-in effect' refer to in the housing market?

The 'lock-in effect' refers to homeowners being reluctant to sell their homes because they cannot afford to take on a new mortgage at the current 7% rate. This has led to a significant reduction in housing inventory, as fewer people are willing or able to move.

Why are young people struggling in the housing market?

Young people are struggling in the housing market due to financial difficulties, including rising debt levels and the challenges of affording homes. Many are also facing 'doom spending,' which exacerbates their financial instability and makes homeownership less accessible.

What impact does a frozen housing market have on the broader economy?

A frozen housing market can have serious implications for the broader economy, as it reduces consumer spending, which constitutes two-thirds of the U.S. economy. Lower home sales and declining home equity can also lead to reduced wealth, which may trigger a broader economic slowdown.

What could happen if the housing market 'unfreezes'?

If the housing market unfreezes, it could lead to a large number of homes being sold, potentially leading to a glut in the market. This could cause home prices to drop, significantly impacting homeowners' equity and reducing Americans' overall net worth.

How much equity do Americans currently have in their homes?

Americans currently have $52 trillion in home equity, which makes up more than a third of their net worth. This substantial equity means that even small drops in home prices could have significant financial consequences for many households.

What is the potential consequence of a 1% drop in home prices?

A 1% drop in home prices could erase over $500 billion from Americans' collective balance sheets, reducing their wealth and possibly leading to a decrease in consumer spending. This, in turn, could trigger a chain reaction, affecting the broader economy.

What is the proposed solution to the housing market problem?

The proposed solution involves significant spending cuts to create room for tax cuts and deregulation. This would help stimulate the economy and allow wages to catch up with rising home prices before they plunge. However, such changes are unlikely due to the current political climate in Congress.