Why a Housing Crash is All But Guaranteed
Real estate prices have exploded over the last several years in the US. While it has been great news for homeowners, the party is about to come crashing to a halt. Markets are all about supply and demand. And, with low interest rates and a booming economy under Donald Trump combined with too few homes, the demand for housing has been very high in recent years. The supply side isn’t likely to change any time soon. But demand is about to crater. Thanks to Joe Biden and the Democrats, we are just entering the leading edge of what will almost certainly be a deep and painful recession. Combined with crippling inflation, the spending power of American consumers is in a nosedive. On top of that, the Federal Reserve has been steadily ratcheting up the interest rates to try and combat the inflationary inferno consuming the economy. 30-year fixed interest rates are currently hovering around 7%. How big of a deal is that?
Let’s look at an example. Suppose you are looking to take out a $264,000 mortgage. A couple of years ago, a rate of 2.625% would have been typical, and your monthly principal and interest payment would have been $1060.36. However, at a 7.0% interest rate, your monthly P&I on the same loan comes out to $1756.40. In other words, your payment today would be an extra $696.04/month, or 65.6% higher than it was just a few months ago for a house of the same price. That is a catastrophic increase. Couple that with a tanking economy, and the pool of potential homebuyers is decimated. Sellers will be forced to slash prices if they want to make a sale.
The high interest rates have an extra insidious effect. Because the borrower is paying so much in interest, the principal they owe on their loan goes down much more slowly. Using the previous example, if the homeowner decides to move after 16 years, at 2.625% he will have paid a total of $203,588.62 to the bank with an outstanding balance of $148,938.98. At a 7.0% interest rate, the borrower would have made payments totaling $337,228.53 and still have $187,769.68 of unpaid principal. So despite paying an extra $133,639.91 to the bank, at 7.0% the borrower would have $38,830.70 less equity in their home after 16 years.
7.0% mortgage rates are a dumpster fire. With inflation still roaring, they are likely to climb still higher. Couple that with inflated housing prices and a shitty economy, and there is no way a crash can be avoided.
