by SchiffGold  0   0

The Fed has barely started raising interest rates but the air is already seeping out of the housing bubble.

New single-family home sales plunged by 16.6% from March and were down 26.9% year on year. New home sales dropped to the lowest level since the lockdown in April 2020.

New home sales are often viewed as a leading indicator of the state of the overall housing market.

The unsold inventory of new homes spiked by 34,000, a historic month-to-month leap. There were 440,000 unsold new homes (seasonally adjusted), the highest level since May 2008 in the midst of the housing bust. Both, the month-to-month and year-over-year increases in unsold new homes were the largest leaps ever recorded, both in numbers of unsold houses and in percentage terms.

The biggest drop in new home sales occurred in the under-$400k price range, indicating that high prices and rising mortgage rates are squeezing middle-class Americans out of the housing market.

WolfStreet broke down the current dynamics in housing.

Homebuyers struggle with spiking mortgage rates which make the high home prices that much more difficult to deal with. And with each increase in mortgage rates, and with each increase in home prices, entire layers of potential buyers abandon the market, and sales volume plunges.”

US mortgage rate 2022 05 18 MBA

The Mortgage Bankers Association (MBA) data for April 2022 shows mortgage applications for new home purchases decreased 10.6% compared to a year ago. Compared to March 2022, applications decreased by 14%.

The Federal Reserve blew up this 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 allowing rates to rise ever-so-slightly.

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.

Tight housing inventory has kept home prices up even as sales have dropped, but as more and more people are squeezed out of the market, prices will likely begin to fall. While we may not see the kind of crash we saw in 2008, a housing market bust will reverberate through the economy as rising housing prices squeeze Americans already struggling to make ends meet.

And as Peter Schiff pointed out in a tweet, falling prices will wipe out home equity for millions of homeowners.

But lower house prices will offer little relief to new buyers, as rising mortgage rates, utilities, taxes, maintenance, and insurance offset the drop.”

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