The US housing market has taken a significant hit in recent months, with the total value of homes declining by $2.3 trillion, or 4.9%, in the second half of 2022. This represents the largest drop in percentage terms since the 2008 housing crisis. While home prices are not collapsing, it is clear that the pandemic boom has fizzled out, and higher interest rates are driving down demand in the once-hot housing market.
Many economists predict that the decline in the US housing market will continue throughout the year, as mortgage costs remain elevated and sideline potential buyers. Homebuyers, who were already facing record-high prices, took an additional hit from mortgage rates that more than doubled last year. With less competition in the market, the median US home sale price was $383,249 last month, down from a peak of $433,133 in May.
The pandemic has played a significant role in the decline of the US housing market, with tech workers fleeing for more affordable locales. As a result, the total value of homes in San Francisco slumped by 6.7% year-over-year in December, the most of any major US metro area, followed by Oakland and San Jose, which lost 4.5% and 3.2%, respectively. Other urban areas, including New York and Seattle, also saw annual declines.
However, Redfin economist Chen Zhao notes that the total value of homes remains about $13 trillion higher than in February 2020, before the pandemic abruptly tanked the economy. While the housing market has shed some of its value, most homeowners will still reap big rewards from the pandemic housing boom.
Nevertheless, prices are likely to only fall further. Pantheon Macro economist Kieran Clancy projects that home prices will fall by about 20% from their peak by the end of this year, suggesting the median price could tumble another 10% to about $346,500, per Redfin’s data.
The decline in the US housing market is also reflected in the drop in existing home sales, which have plummeted nearly 40% from their pandemic peak. However, the pace of decline slowed in January, raising cautious optimism that the housing market slump could be close to reaching a bottom. The report from the National Association of Realtors on Tuesday also showed the smallest increase in annual house prices since 2012, which should help to improve affordability.
It is worth noting that mortgage rates have resumed their upward trend after robust retail sales and labor market data, as well as strong monthly inflation readings, raised the prospect of the Federal Reserve maintaining its interest rate hiking campaign through summer. This could further impact the US housing market, and it remains to be seen how the market will respond in the coming months.
The United States housing market experienced a significant drop in real estate value in 2008. The drop was due to a combination of factors, including the subprime mortgage crisis, which saw the collapse of the housing bubble and a significant increase in foreclosures. The housing market peaked in 2006, with home prices reaching record highs. However, as the bubble burst, the value of homes began to decline sharply.
The subprime mortgage crisis was the main catalyst for the drop in real estate value. In the years leading up to the crisis, lenders were offering mortgages to high-risk borrowers who had poor credit scores or unstable incomes. These subprime mortgages often had adjustable interest rates, meaning that borrowers would initially pay low rates but would see their payments rise dramatically after a few years. When the rates increased, many borrowers were unable to make their mortgage payments, leading to a sharp increase in foreclosures.
The increase in foreclosures had a significant impact on the housing market, leading to a glut of homes on the market and a drop in prices. In some cases, homes were being sold for less than their outstanding mortgage balance, leaving many homeowners with negative equity.
According to the Federal Reserve Bank of St. Louis, the total value of U.S. residential real estate peaked at $24.4 trillion in the third quarter of 2006. By the first quarter of 2009, that figure had fallen to $18.5 trillion, a decline of almost 24%.
During the housing bubble of the mid-2000s, mortgage lenders extended credit to borrowers who did not have the income or credit history to support their loans. When housing prices began to decline and borrowers began to default, the value of the underlying assets – homes – declined, leaving investors holding the bag.
The crisis resulted in widespread foreclosures and a large number of bank failures. Between 2008 and 2010, more than 1.2 million homes were foreclosed upon, according to data from Attom Data Solutions. The foreclosure crisis was particularly severe in states such as Nevada, Arizona, and Florida, which had seen a significant run-up in housing prices during the boom years.
The decline in real estate values had a ripple effect on the broader economy. With the value of their homes declining, homeowners saw their net worth shrink. This, in turn, reduced their willingness and ability to spend, which contributed to a downturn in consumer spending.
The banking system, which had been heavily exposed to the subprime mortgage market, also experienced significant losses. The Federal Deposit Insurance Corporation (FDIC) has reported that between 2008 and 2010, 370 banks failed, resulting in an estimated $83 billion in losses to the Deposit Insurance Fund.
In response to the crisis, the U.S. government implemented a number of programs to stabilize the housing market and prevent foreclosures. The Troubled Asset Relief Program (TARP), for example, provided financial assistance to banks in order to prevent further bank failures. The Home Affordable Modification Program (HAMP) provided assistance to homeowners who were struggling to make their mortgage payments.
The Home Affordable Modification Program (HAMP) was a federal program introduced in 2009 as part of the government’s response to the 2008 financial crisis. The program was designed to help struggling homeowners avoid foreclosure by reducing their monthly mortgage payments.
HAMP was available to homeowners who were behind on their mortgage payments or at risk of falling behind, and who had a mortgage that was owned or guaranteed by Fannie Mae or Freddie Mac, or was held by a participating lender.
Under the program, eligible borrowers could have their mortgage payments reduced to no more than 31% of their gross monthly income. This was achieved through a combination of interest rate reductions, term extensions, and principal forbearance.
The program also provided financial incentives to participating lenders to encourage them to offer modifications to their borrowers. Lenders received an upfront payment for each loan modified under HAMP, as well as additional payments over time if the borrower remained current on their payments.
HAMP was initially set to expire at the end of 2012, but the program was extended several times, ultimately ending on December 31, 2016. During its existence, the program helped over 1.8 million homeowners obtain permanent mortgage modifications, according to the U.S. Department of the Treasury.
While HAMP was widely seen as a positive step in helping struggling homeowners during the financial crisis, the program was not without its critics. Some argued that the program did not go far enough in helping homeowners, particularly those who were already in foreclosure, and that the program was too complex and difficult for borrowers to navigate.
Despite these criticisms, HAMP remains a significant part of the government’s response to the housing crisis, and its legacy can still be seen in the various foreclosure prevention programs that have been implemented in the years since the program’s expiration.