Editor’s Note: Erik Lundh is the Principal Economist for The Conference Board. The opinions expressed in this commentary are his own.read more opinions on CNN.
A much-feared correction in US house prices is underway. While this may seem like a déjà vu, the factors behind the recent price spike and current housing market downturn are different than those seen in the 2000s. This time around, the U.S. financial system is primed and a national crisis is unlikely.
It’s true that US homeowners need to prepare for the dire situation in 2023.After years of underinvestment and suppressed supply, the United States housing prices It posted a staggering 45% rise between January 2020 and June 2022 as low interest rates and a surge in remote work spurred demand. For comparison, before the housing recession that began 16 years ago, price increased by 30% over the same period.
But the housing bubble of the 2000s was fueled by predatory lending, poor underwriting, variable-rate mortgages, and rampant speculation. Americans believed that housing was a great short-term investment and that prices would continue to rise. This famously turned out not to be the case.
As degree of interest rising towards 2006, price It finally began to fall later in the year, and homeowners began defaulting on their debts. mortgage paymentAs prices fell further, homeowners rushed to sell their properties, creating a cascading feedback loop across the real estate market. The ensuing financial crisis was triggered by mass defaults of low-quality mortgages embedded in mortgage-backed securities. These assets were suddenly worthless, plunging the financial system into crisis.
Additionally, years of rampant demand spurred builders Over-construction in the early 2000s created a housing glut in the country. As a result, it took years after the Great Recession for demand to process the enormous housing stock that had accumulated. This will home building industrychronic causes under building in the years that followed.
Fast forward to today and things are very different. housing prices That’s because the Federal Reserve is raising interest rates to keep inflation down. This has caused mortgage interest rates to rise.average rate 30 year mortgage Despite a sharp drop last week, it’s still more than double what it was a year ago (3.10% a year ago and 6.61% today). These interest rates have made it difficult for many buyers to finance new home purchases, slowing demand and pushing prices down.
Luckily, supply and demand fundamentals are likely to keep U.S. house price declines in check. Millennials, the largest generational cohort since baby boomers, are aging and considering buying their first home. Unfortunately for them, there aren’t enough. However, this means that highs have started to fall and may continue to fall. Basically, millennial demand will probably help prevent prices from crashing like they did in 2008. This decline is unlikely to trigger another financial crisis.
In addition, new regulations were introduced in the years following the 2008 financial crisis. Bank There is now a need to better capitalize. Lending standard It is much stricter and leads to higher quality loans.many Housing loan Fixed interest rate.When financial derivativesBetter regulated, such as asset-backed securities. All of this is supporting the financial system from the housing market downturn.
Other helpful trends include refinancing Activity in the past few years related to ultra-low interest rates. This has resulted in lower monthly payments for many homeowners and easier mortgage repayments.
In addition, Americans are more equity at home than it did in the lead-up to the last financial crisis. that’s right, loan value ratioThe US mortgage share has fallen to just 42%, the lowest level in 12 years. This creates an additional “cushion” for prices to fall before house prices fall below the loans that support them. So if a home sells at a loss, it could hit the homeowner before it hits the bank.
The ongoing house price correction will affect the US economy, but lower house prices should help quell high inflation. It will certainly come at the expense of economic growth. house construction Activity has already slowed sharply, and consumer confidence (and spending) could similarly deteriorate. But a repeat of 2008 is unlikely.