There’s a huge warning sign that the housing market could be headed for trouble

Mortgage applications have reached their lowest level since 1996, showing a fall in demand for new houses, while inventories have yet to recover since the COVID-19 pandemic, indicating a lack of supply.
The combination of low demand and low supply could spell trouble for the housing market in the future.
“When you go from record low mortgage rates to levels that we haven’t seen for almost 20 years, you destroy both the demand and supply,” Mohamed Aly El-Erian, an economist and chief economic advisor at Allianz, told CNBC in August.

The housing market could face even greater trouble in the future as both supply and demand slip following low mortgage rate applications and a tight supply of homes, according to multiple sources.

The number of mortgage applications declined 2.9% in the week ending Sept. 1 compared to the previous week, bringing it to the lowest level since 1996 and showing a drop in the demand for new homes, according to a Mortgage Bankers Association (MBA) press release. The supply of new homes for sale is also dropping and inventories have remained below pre-pandemic levels, culminating in a drop in both supply and demand and indicating possible danger in the housing market.

“The decline in mortgage applications reflects the reality that the income for many families simply cannot shoulder the mortgage payments of a new home given the combined impact of sharply higher mortgage rates combined with the surge in home prices,” Joel Griffith, a research fellow at the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation, told the Daily Caller News Foundation.

Existing home sales fell 2.2% in July from June and 16.6% year-over-year, coming to only 4.07 million sold in the month, according to the National Association of Realtors (NAR). Part of that drop in demand can be attributed to rising costs for existing homes, which increased 1.9% in July year-over-year and exceeded $400,000 — which it has only done in three other months.

“When you go from record low mortgage rates to levels that we haven’t seen for almost 20 years, you destroy both the demand and supply,” Mohamed Aly El-Erian, an economist and chief economic advisor at Allianz, told CNBC in August. “And that’s the irony, that supply has come down and demand has come down as well. That is the way you destroy a housing market.”

The high average 30-year fixed-rate mortgage, which reached a 20-year peak in August and topped out at 7.23% before ticking down to 7.18% by the end of the month, is also putting downward pressure on demand due to resistance to pay at high-interest rates, according to mortgage giant Freddie Mac.

Representing a decrease in supply, the total number of homes actively for sale decreased by 7.9% in August year-over-year, while the total number of unsold homes decreased by 9.2% in the same time period, according to Realtor. Inventory ticked up in August by 3.5% compared to July, but has still failed to reach near pre-pandemic levels and remained 47.8% below what was typically seen in 2017 to 2019.

The daily average 30-year fixed mortgage rate, as tracked by Mortgage News Daily, over the past 10 years.

Blue line = under 3.00%

Red line = over 7.00% pic.twitter.com/IYTx1CCtAI

— Lance Lambert (@NewsLambert) September 7, 2023

“The unaffordability of the home market is partially the result of onerous local regulations. But the primary driver is a combination of government and Federal Reserve policies,” Griffith told the DCNF. “The federal government continues to subsidize housing finance by backstopping the portfolios of Fannie Mae and Freddie Mac.”

The Federal Reserve, as of August, held around $2.5 trillion in mortgage-backed securities for the top mortgage companies Fannie Mae, Freddie Mac and Gennie Mae, according to the Federal Reserve Bank of St. Louis. The Fed began buying mortgage-backed securities in 2009 to stabilize the housing market, with the amount peaking just shy of 2.8 trillion in 2022 before falling slightly, with the substantial size of the holdings subsidizing the mortgage giants and warping market costs.

“Inflationary policies of the past three years of a gusher of federal spending financed largely by more Federal Reserve printing drove up prices across the board, including the labor, materials, and land needed to construct homes,” Griffith told the DCNF.

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