New housing data shows promising signs of stabilization in the housing market. This, however, does not solve the overall crisis.
The housing market is in a bubble, there is no question about it. A bubble, in fact, very similar to the one that caused the 2008 market crash, one of the worst economic recessions in history. However, recent economic indicators signal that there might still be time.
A recent Bloomberg report showed that new-house purchases have gone up in the United States in April. This was rather unexpected, though purchases of newly built homes is a rather volatile value.
Specifically, sales of new single-family homes increased by 4.1%, beating Bloomberg’s estimates by almost double the amount. This increase coincided with a drop in house prices by 8.2%, with the median home value now sitting at $420,080.
With mortgage rates going up, new houses make an increasingly bigger share of units sold, almost a third according to the National Association of Home Builders. At the moment, the supply of new homes should last for 8 months at the current rate.
Accordingly, sales of previously-owned homes dropped to a three months low. Housing prices are still extremely high, making up the bulk of American inflation.
A looming crisis
While data on new-home purchases looks promising, it does not solve the overall housing crisis gripping most of the Western world.
In the US, mortgage rates are now at 7%, bringing the average monthly expense to buy a new home to $2,700 including interest rates, renovations, etc. By comparison, the average monthly rent is $1,850.
The gap between home-owning and rent monthly expenses has never been so large. In 2008, before the housing crisis, the same gap was half as wide.
The housing bubble is going to explode if prices don’t come down soon. It might not happen this year or the next, but the economy is due to collapse again if the housing market does not stabilize.
Right now, the American Federal Reserve is trying to fight the worst inflationary crisis in the last forty years. Interest rates keep going up and, despite previous assurances of the opposite, will likely continue to grow this year.
While general inflation is coming down, core inflation (the long-term effect of consumer prices) remains stable. Core inflation is measured by removing volatile values like food and energy prices. The reason why it remains so high is precisely because of the housing bubble.
Essentially, the Fed might try to fight inflation by raising interest rates all it wants, but it won’t solve the housing crisis and therefore it won’t bring core inflation down.
Why, then, won’t anybody try to solve the housing crisis?
