Housing Market Crash Alert: Is a ‘Bubble’ in Housing About to Burst?

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After months of growth, new home sales underwent a steep reversal in June, reviving fears of an impending housing market crash. With interest rates on the rise, the notion of a real estate recession remains top of mind for many economists. How justified is that concern?

Well, currently, the evidence surrounding a housing crash to-be is still pretty much in its infancy. New home sales drooped 2.5% month-over-month in June, the first negative reading since February. This is a notable miss from the 5% expected new home sale growth. Though, the estimate was made on the basis of May’s 12.2% sales increase, a figure that has since been revised down to a 6.6% jump.

According to some economists, like Conrad DeQuandros, senior economic advisor at Brean Capital, this represents a “bottom-out” in the real estate space.

“The data remain consistent with and provide further confirmation of a bottoming-out in housing activity, with the three-month average of sales rising in every month since November 2022.”

Not alone, the past four months have seen new home sales lowered via post-release revisions. While new home sales are still up nearly 24% from last year, offering a fair amount of shelter to the perpetual real estate bulls, there are some concerning metrics in the industry.

Median home prices are down 4% year-over-year, trending around $415,000. This actually represents a fairly significant decline in home prices relative to the U.S. standard.

It seems housing is maintaining something of a split face. Some metrics suggest a strong, resilient real estate industry, while others are a bit more pessimistic.

Housing Market Crash Fears Swirl as Real Estate Paints Unclear Picture

With the inventory of existing homes still hovering near historic lows, there remain some notable barriers to a true housing recession. Indeed, even relatively bearish housing economists don’t project a significant pullback in prices in 2023.

Speaking of homebuilders, U.S. home construction this year has been, well, strange. While the number of single-family homes sold in the country has been on the rise the past few months, private housing units authorized by building permits have been on a downward slide the past few months. This has accompanied a recent slip in housing starts.

That is to say, while home buyers have propped up home prices somewhat, homebuilders haven’t exactly been grabbing potential home lots hand over foot.

Reasonably so, with 30-year fixed mortgage rates trending around 7% — and subject to continue rising, given the Fed’s recent rate hike — the margins for home construction are undoubtedly weakening.

Recession Fears Still Loom Over Market

Perhaps the most pertinent fear for both economists and realtors is the prospect of an impending recession. In a recession, likely at the throws of perpetually rising interest rates, some homeowners would likely be forced to put their properties up for sale. This boost in supply would allow a corresponding drop in home prices beyond what many economists have projected.

“The current equilibrium that the homebuilders are enjoying may be short-lived,” Richard de Chazal, Macro Analyst at William Blair, told Reuters. “Given what we view as an unstable foundation, Chair (Jerome) Powell should be careful about just how much weight he places on this market.”

On the date of publication, Shrey Dua did not hold (either 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.

With degrees in economics and journalism, Shrey Dua leverages his ample experience in media and reporting to contribute well-informed articles covering everything from financial regulation and the electric vehicle industry to the housing market and monetary policy. Shrey’s articles have featured in the likes of Morning Brew, Real Clear Markets, the Downline Podcast, and more.

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