Economists warn U.S. housing market is falling, bubble might burst soon

According to Ian Shepherdson, the chief economist of Pantheon Macroeconomics, homebuilders' confidence is at its lowest level in two years. He noted that people who recently bought a home would likely lose money due to the housing market's collapse.

A report released by the National Association of Home Builders (NAHB) on Monday revealed that the builder confidence index for June fell 12 points, making it the second-largest drop in the index's history.

In a statement, Jerry Konter, the chairman of the NAHB, noted that the high cost of construction and the lack of land supply have caused many builders to halt their projects.

"Production bottlenecks, rising home building costs and high inflation are causing many builders to halt construction because the cost of land, construction and financing exceeds the market value of the home," Konter said.

Challenge of affordability

Robert Dietz, the chief economist of the NAHB, noted that the rising cost of housing had affected a significant portion of the market. He said that the government should step in to address the supply-side issues and affordability issues.

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Mark Zandi, the chief economist of Moody's Analytics, agreed that the high interest rates and the lack of affordable housing contribute to the country's housing crisis. He said that first-time homebuyers are being priced out of the market.

Before the report's release, some economists warned that the slowdown in construction jobs could indicate that the country's housing affordability crisis is worsening.

Housing bubble might burst soon

The NAHB noted that the drop in confidence this month was the second-largest since the pandemic hit the country in April 2020. However, the report shows that the housing market is starting to reverse its boom-like trend following the Federal Reserve's interest rate increases.

Last month, Jerome Powell, the chairman of the Federal Reserve, said that the housing market would need a bit of a reset before it can fully recover.

During a press briefing, Powell noted that the lack of home sales supply significantly contributes to the country's housing crisis. He said that although the interest rates have increased, home prices are still expected to keep rising.

Powell added that the Fed's recent interest rate increase was needed to help the housing market get back on track. He said the country must return where demand and supply are back together.

Learning from 2008 housing bubble burst

In response to the 2008 financial crisis, the Fed raised the federal funds rate 17 times from 1.0% to 5.25%. This led to higher interest rates on mortgages that were more expensive than their homes were worth. As a result, many homeowners could not make their payments and fell into default.

Subprime mortgage lenders, some of the biggest providers of loans to people with poor credit, went bankrupt.

The assets backed by the housing bubble became worthless as the market value of these securities fell. As a result, funding commercial mortgage-backed securities (CMOs) and investment banks became difficult. The collapse of the securities markets led to a selloff of toxic debt worldwide. As a result, many banks could no longer provide loans to one another, causing many to go into insolvency.