The housing market, a vital component of the economy, is a topic of great interest and concern.
Understanding these signals can help you make informed decisions.
Predicting a housing market crash is difficult. However, specific real estate signals often serve as valuable indicators of a looming downturn.
One such signal is the saturation of the market with excessive housing inventory. When the supply of homes surpasses the demand, it can exert downward pressure on prices.
As the housing market continues to evolve, paying attention to key signals is essential. Savvy investors can position themselves to make well-informed decisions.
Building Permits Are Down
In March, the U.S. Census Bureau’s Building Permits Survey showed 79,400 single-family building permits filed, slightly surpassing the projected 77,650 permits.
However, there is a worrisome downward trend as the number of permits issued in April decreased to 117,400 (from 131,300 in March). Specifically, single-family permits fell to 74,900 from the previous 79,400.
Building permits typically reach their lowest point in December and January, then rise until peaking in spring and summer.
The U.S. News Housing Market Index predicts a peak in March, then a decline to around 71,000 in April. This is a significant decrease compared to March 2022’s peak of 107,400 permits, indicating a slowdown in new home construction.
As of April 2023, builder sentiment, assessed by the National Association of Homebuilders and Wells Fargo Housing Market Index, rests at 45 out of 100.
Although it has slightly improved from previous months, it is much lower than the impressive 84 recorded in December 2021 and the low of 31 in December 2022. Builder sentiment considers new single-family homes, predicted homes in the next six months, and buyer traffic.
Despite low confidence among builders, it does not necessarily imply an imminent housing market crash or a new housing bubble. In fact, their cautious approach may help avert future problems by avoiding excessive construction.
Debt Default Could Trigger a Housing Market Crash
If Congress doesn’t raise the debt ceiling, it could have severe repercussions for the housing market. However, analysts remain optimistic that a resolution will be reached.
In the event of a U.S. debt default, Zillow projects a substantial decline in existing home sales. Estimates suggest there could be a plunge of up to 23% by September.
The rise in interest rates would challenge homebuyers in securing loans. During a debt default scenario, Zillow predicts a peak of 8.4% for 30-year mortgage rates in September.
Nevertheless, experts believe a housing market crash similar to the one experienced in 2008 is unlikely. In the event of a debt default, Zillow forecasts a modest 1% increase in home prices by the end of 2024 compared to current values, which is 5% lower than the anticipated growth rate.
Although some homeowners may need to sell due to employment challenges, the impact on prices could be limited. The elevated interest rates would offset the usual benefits of reduced prices for buyers.
Zillow estimates that at an 8.4% mortgage interest rate, the typical mortgage payment would increase by 22%, making affordability a significant hurdle for potential buyers.
Although the potential consequences of a U.S. debt default on the housing market are concerning, it is important to note that these projections are based on hypothetical scenarios. Congress is widely expected to agree to raise the debt ceiling ultimately.
A Likely Economic Slowdown
A recession is typically defined as at least two consecutive quarters of negative GDP growth. A rise in unemployment usually accompanies it.
During a recession, the housing market experiences a slowdown as potential buyers become hesitant due to job insecurity. This hesitation can lead to a slight increase in foreclosures caused by the inability to pay mortgages.
However, when the housing market activity reaches a significant slowdown, mortgage interest rates tend to decrease, attracting buyers looking for favorable deals.
Unlike the Great Recession, increased activity in the housing market can help stimulate the economy and lift it out of the recession.
In the third quarter of 2022, the real GDP grew 3.2%, followed by a 2.7% increase in the fourth quarter, as the Bureau of Economic Analysis reported.
As of April 18, the Federal Reserve Bank of Atlanta estimates a further increase of 2.5% in the first quarter of 2023. In April, the Bureau of Labor Statistics recorded a notably low unemployment rate of only 3.4%.
While these indicators do not suggest a recession, most experts agree that a recession will likely occur in 2023.
On the publication date, Faizan Farooque did not hold (directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.
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