US Housing Sector Facing Existential Crisis

The US housing sector is collapsing rapidly, due to the rising interest rate and unprecedented inflation.

Homebuilders are struggling to find new buyers to sustain their business. Meanwhile, the Fed is expected to increase the interest rate significantly, which is likely to push the housing sector into further chaos.

US Housing Sector Faces Staggering Crisis

According to a chief economist at Pantheon Macroeconomics, Ian Shepherdson, homebuilders turned a blind eye to the decline in house demands, even after the drop in mortgage applications in the first six months of 2022.

However, they have started embracing the reality now, Shepherdson added.

The National Association of Home Builders (NAHB) established that investors are less interested in buying new houses, due to rising inflation and the skyrocketing interest rate, which could go higher in the upcoming months.

As per the latest data of the NAHB, the confidence of homebuilders has been reduced by 12 points in July, which will impact the housing market further.

This decline in homebuilders’ confidence is recorded for the seventh consecutive month now, as it has reached its lowest level since May 2020.

Jerry Konter, NAHB chairman, noted that 13% of homebuilders who participated in the latest survey are even ready to reduce their profits in order to attract more buyers.

Furthermore, Konter stated the skyrocketing cost of land and different production bottlenecks are alarmingly raising the cost of houses.

Homebuilders Are Preparing For the Worst

Experts are claiming that the country has officially entered a housing recession, which will only intensify with the passage of time.

As per the latest statistics of the Federal Reserve Economic Data (FRED), homebuilders started only 982,000 new single-unit houses in June. This is 16% less than the same time last year and 25% down from its recent peak in December 2020.

Reportedly, the existing home inventory will continue to rise as the sellers will not find enough buyers, while homebuilding will remain stagnant. 

Meanwhile, homebuilders are now looking towards the central bank ahead of their next meeting when the interest rate is likely to be increased further.

Some reports are even indicating that the Fed is ready to announce the largest hike in decades. If this happens, it will have a direct impact on mortgage rates, which will push the home industry into further chaos.

Last year, the average contract interest rate for a 30-year fixed-rate mortgage stood below 3%. However, that rate increased to 5.82% on July 19, 2022.

Amid all of these housing crises, housing experts still believe the sector will not implode as it did in the 2008 recession.

This is due to the fact that any increase in the interest rate now will allow the mortgage sector to recover later this year, when the Fed may decrease the policy rate after bringing inflation down.

This article appeared in The State Today and has been published here with permission.