Air Is Hissing Out of the Housing Bubble at an Accelerating Pace

Air is hissing out of the housing bubble faster and faster every week.

Pending sales plunged in June and the inventory of homes on the market jumped as mortgage rates continue to rapidly rise.

Pending home sales plunged by 16% year-over-year in June. This follows on the heels of a 12% drop in May and a 9% dip in April. June marked the 10th straight month of year-on-year declines in pending sales.

This represents homes under contract but that have not closed. Existing home final sales tumbled to a two-year low in May.

As sales fall, inventory is rising. Active listings jumped 20% month on month in June to 562,000 homes. Listings are up 19% from a year ago. It was the second straight month-on-month increase with listing rising by 8% in May. May’s jump was the first increase in inventory since June 2019.

According to data from the National Association of Realtors, there were 98,000 more homes listed for sale last month than one year ago.

Average 30-year mortgage rates have pushed to nearly 6.4%. The last time we saw mortgage rates over 6% was right before the housing crash of 2008. Until mid-April, mortgage rates were in the 4% to 5% range. Just one month ago, rates were 5.49%.

Lower-income homebuyers have already been priced out of the market by spiking mortgage rates. The houses that are selling tend to be in higher price ranges.

With the market slowing, more sellers are being forced to lower their asking prices. Price reductions skyrocketed by 50% month-on-month in June, nearly doubling year over year. As Wolfstreet put it, “sellers are trying to get buyers to show up and take a look as foot traffic has dropped and bidding wars have receded into fond memories.”

Wolfstreet called spiking mortgage rates along with a 40% increase in home prices over the last two years “a toxic mix.”

Something has to give, and it’s not going to be the buyers – because they can’t, they’re boxed in – by the sellers. Or there is no deal. And buyers who could buy, the infamous cash buyers, they don’t want to buy at those prices either, now that the craziness is hissing out of the market. No one wants to overpay at the insane peak of what was a totally crazy market.”

Inventory will likely continue to rise as “shadow inventory” comes onto the market. A lot of people bought homes and didn’t immediately put their old houses on the market. They were hoping to ride rapidly escalating home prices even higher. Now that the air is coming out of the housing bubble, these people want to sell. We may well see inventory increase at a higher rate in the coming months, putting more downward pressure on prices.

With the Federal Reserve pushing its base rate up 75 basis points, and most expecting another 3/4% hike in July, you can expect mortgage rates to continue their rapid upward climb. As Reuters noted, the housing market is “the sector most sensitive to interest rates,” and it’s losing speed.

This is just one of the many economic distortions caused by the government and the Federal Reserve’s response to the COVID-19 pandemic.

The Fed blew up a housing bubble when it artificially suppressed interest rates and bought billions of dollars in mortgage-backed securities. Now the central bank has pricked the bubble by pushing rates up.

What the Fed giveth, the Fed taketh away.

Mortgage rates began to fall in late 2018 as the economy tanked and the Federal Reserve ended its post-2008 rate hike cycle. Rates continued to fall as the Fed pivoted back to quantitative easing and then dropped through the floor with the rate cuts and QE infinity in response to the coronavirus. The big spike in mortgage rates we’re seeing today started as the Fed began talking up monetary tightening to tackle raging inflation.

We expect the housing bubble to continue to deflate as we move through 2022. Just how fast the air comes out and the impact on the broader economy remains to be seen.