Will There Be A Housing Crash?

Read It And Weep. Then Rent. Then Weep Again. 

There are several ways to look at housing, particularly the prospects of a crash. 

If home prices fall (as they are), crater, or even crash, what happens to current homeowners? The Juice covers that part of the equation in a minute with some interesting and, believe it or not, encouraging data. 

The other big question – what happens to affordability for prospective homebuyers? As we pointed out earlier this week, not much. For two primary reasons. 

One, there’s the down payment. If we go with $450,000 as the typical price of a home nationally, you’re looking at $90,000 if you put 20% down. That’s a meaningful amount of money for lots of people. A 10% decline brings the typical home price to $405,000, dropping the down payment to $81,000. Realistically, this relatively small decrease in how much you need to save doesn’t remove this initial obstacle to home ownership for enough people to make home buying even close to broadly affordable again. 

Not nationally and definitely not in the more expensive markets where the typical home easily hits high six figures and, in some cases, north of a million bucks. 

Source: Mortgage Rates Daily 

Two, there’s the monthly payment. Mortgage interest rates drive this. Even more than the record cost of a home. 

Consider the hypothetical, but potentially very real example, The Juice illustrated earlier this week: 

Let’s say a couple months ago, you came across a $1.1 million home in Los Angeles. At the time, you could maybe get a 5.0% interest rate on a 30-year mortgage. 

With 10% down, you’d be looking at a $990,000 mortgage loan. 

Your payment would have been $5,315 a month. 

Fast forward to today. You read the headlines about this cooling housing market, even and especially in places such as LA.

Take Black Knight’s estimate of a 4.3% decrease in prices in LA and that $1.1 million properly now costs $1.053 million. We’ll say the seller is antsy and lowers the asking price to a psychologically alluring $999,999. 

Assuming this doesn’t trigger a bidding war, with 10% down you’d be on the hook for a $900,000 loan. At a 5% interest rate, your monthly payment would be $4,831. 

However, as of the end of August, interest rates are back up to 6%. This takes your monthly payment to $5,393, which is actually higher than it was before this recent cooldown. 

That was last week! 

To kick off this week, the rate on a 30-year mortgage jumped to 6.25%. 

This brings our hypothetical monthly payment to a whopping $5,541. A whole $148 higher thanks to a 0.25% interest rate increase. 

So, what are people doing who can’t come up with the down payment and/or handle the monthly payment? 

They’re renting. 

Source: John Burns Real Estate Consulting 

Which clearly explains why rent prices continue to rise across the nation, even as home prices start to fall. 

Lots of people have money. Just not enough money to buy, thanks largely to the rates. So they wait and rent. And wait and rent some more. 

All of this said, there is some good news. Don’t expect an all-out mortgag-driven housing crash to occur anytime soon. Scroll with The Juice for the encouraging numbers.