Drastic Drop Unlikely for US Housing Market, Economist Says

A carpenter works on building new townhomes that are still under construction in Tampa, Fla, on May 5, 2021. (Octavio Jones/Reuters)

As the U.S. real estate market slowly cools and sales volumes decrease significantly, whether housing prices will plummet has become a major concern for many. But one economist has predicted there will not be an abrupt collapse as experienced after the previous U.S housing bubble.

Due to the FED’s interest rate hike and rising mortgage rates, people are less eager to purchase homes. Data indicate that U.S. home sales fell to a two-year low in May.

This also applied to the popular California housing market.

According to a report from the California Association of Realtors (CAR), due to a decline in housing demand, home sales in California fell 8.4 percent in June from May and 20.9 percent from June 2021.

The statewide median home price in June was $863,790, down 4 percent from May, but up 5.4 percent up from June 2021.

Shortage of Supply

Although housing prices are on a downward trend, William Yu, an economist at UCLA’s Anderson School of Management, noted that housing prices will not fall drastically because of the stark supply and demand imbalance that still exists in the housing market.

“We probably won’t see a crash like the ones we saw in 2007, 2008, and 2012. Back then, there was an oversupply,” he told The Epoch Times. “This time, there is a shortage of housing supply.”

Some buyers plan to wait for housing prices to plummet before entering the market. Yu advised them not to expect too much.

Single family homes crowd a Los Angeles neighborhood on July 30, 2021. (Frederic J. Brown/AFP via Getty Images)

Fed Aims to Cool Down Housing Market

Freddie Mac’s data shows that the 30-year mortgage fixed rate averaged 5.51 percent for the week ending July 14.

As the Federal Reserve continues to raise interest rates aggressively, housing markets are cooling rapidly in many cities across the United States. Six California cities, including San Jose, Oakland, San Francisco, Sacramento, Stockton, and San Diego, are among the top 10 American cities with the fastest cooling housing markets.

Yu said that the interest rate increase will certainly have a serious impact on home buyers who rely on loans, so housing market cooling down is normal and expected.

“In fact, this is also the main goal of the Federal Reserve to raise interest rates, which is to cool down the housing market,” he said, adding that in his opinion, an overly heated market is not a good thing.

According to Yu, the low-interest rates of the past two years have caused an abundance of money, even to the point of flooding, and now the money is starting to tighten.

“It’s not a bad thing. It’s actually meant to keep housing prices from getting out of control,” he said.

A for sale sign is displayed in front of a house in Washington, D.C., on March 14, 2022. (Stefani Reynolds/AFP via Getty Images)

Difference From Last Housing Bubble

As the housing market cools, many people are worried that the U.S. housing market will again collapse. However, Yu said he believes that a repeat of the last housing bubble is unlikely.

He pointed out that after 2008, the U.S. housing market experienced a prolonged and severe depression, followed by a severe shortage of overall new home supply each year until the last two years, when home starts began to return to their historical average. Due to the long-term shortage of supply, coupled with the population growth rate in the United States, people will notice that the overall housing supply and demand are still unbalanced.

“Many people may ask why housing prices are so high and rising so fast. One of the main reasons is the chronic undersupply of housing,” Yu said, pointing out that this is the key difference between the current situation and the last housing bubble.

“Last time, there was an oversupply. When the housing bubble occurred, there was a severe, long-term digestion period,” he said. “This time, there is a shortage of housing supply, so even if a recession occurs, its effects on the housing market are likely to be less severe.”

On July 13, Jerry Konter, president of the National Association of Home Builders (NAHB), stated in response to a House Fundraising Committee hearing on the housing crisis: “The housing affordability crisis is caused by one factor: as a nation, we have failed to build enough housing to meet demand.”

In order to lower inflationary pressures, Konter urged Congress to pass legislation that would assist the housing industry in increasing the supply of much needed housing.