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The US reckons with a new housing bubble

The most useful feature of the housing market is that it is an excellent thermometer for the country’s economy. It anticipates what will be, so when the market concerned is the American market, which is 25% of the planet’s economy, contagion to Europe is only a matter of time.

US: another housing bubble similar to 2008?

In 2008, the US real estate market had already experienced a very important bubble in terms of volume, compared to that, today there is a totally different picture that makes the two events not at all comparable.

The first bubble was also called the subprime mortgage bubble, with this name being used to identify those mortgages that did not match a first-rate creditworthiness.

At the time, a large majority of Americans took on debt for the purchase of one or more homes given the ease of access to credit, up until loans became increasingly difficult to obtain and the ability to repay less performing and so, in cascade as the mortgages “blew up,” the economy plunged into a state of recession.

The damage generated by that chain of events was made up in numbers only two years ago, in 2020, with remarkable property value growth, 13% year-on-year, far higher than the 20-year average of 2% and even the 10-year average of around 5%.

In this regard, in 2021 the National Shiller Price Index (price trends as a percentage of the housing market) recorded an increase in the value of homes that reached a low of $50,000.

If we disregard Florida, which because of its very affordable taxation may have doped data, the rest of the US housing market has grown tremendously in the past three years, despite a pandemic, war in Ukraine that has touched everyone because of resources, and bear market (which has been hovering for more than a year now).

It was not uncommon to see queues at open houses in the United States last year to buy homes of all sizes and prices, but now things have definitely changed. US families have fewer and fewer resources to spend, and those who do not need it imminently are either giving up buying homes or alternatively finding accommodations of convenience.

This has some effects: on the one hand there are fewer people who can and want to buy homes, perhaps despite the state of need, hence the drastic drop in mortgage applications, and on the other hand the whole industry suffers, more shaky jobs, less demand for kitchens and living rooms, fewer electricians, carpenters, and moving jobs, and so the American economy suffers a sharp contraction.

Data analysis and health of the US housing market

Demand for home loans, both as first and second homes are at 22-year lows, and this is despite the fact that the market is moving very slowly.

The housing market is strongly anticipatory of the crisis to come but it is also very slow, it does not have the same reaction time as the stock market which is often abrupt, first the price of homes stalls, then the buyers disappear and finally the price corrects (this year -8%) with all that follows.

The installment-to-income ratio is most important, and Americans are used to thinking in terms of affordability of the installment. For the same installment today a US citizen can afford a house worth $118,000 less than in 2020, if we are talking about $500,000 houses. This is at a stage when interest rates that are closely related to the installment are 6% but it is not certain that these can go up again and have the spread widen.

That 6% rate is strongly linked to the US Central Bank’s interest rate increase and they are at this level with an overall rate increase of 225 basis points, but the Federal Reserve has already stated not only that there will be at least one more rate increase this year but that the increases will continue next year until inflation reaches around 3%. 

The more rates go up the more expensive mortgages are, compared to the beginning of the year when mortgages in the US were at 3%. Today, after three quarters, they are up to 6.25% and the growth shows no sign of stopping.

A very interesting fact in this spiral of difficulty in accessing credit and falling real estate prices is the percentage of searches for the phrase “how to sell my house now” on Google which registered an extraordinary +2750% in August this year alone.

Going into detail, we can see that the price range most affected will be homes between $500,000 and $800,000 and those under $200,000 despite the fact that for now those in the latter ranges have enjoyed an important parachute such as the fact that home buying has a strongly emotional component and therefore buyers are willing to endure increases in order to achieve the dream of buying a home, but how long this “patience” will last in the face of continued increases is unknown.

The Monthly Supply of New Homes, which is the ratio of newly built homes for sale to unsold homes, is declining sharply, a signal that unsold properties are becoming more and more common.

The US housing market in the past

Compared to 2000, during which there was little supply and house prices had held up fairly well, today there are a lot of houses and prices are sharply declining, this combined with the fact that birth rates are getting lower even in the Latino and African American populations (which historically have higher birth rates) and that pandemic and post-pandemic incentives to buy real estate are gradually ending give rise to the perfect storm of the housing sector in the States.

The only very positive note is the fact that households compared to the subprime mortgage crisis of 2008 are much more solid, but despite this, while last year it was possible to afford to buy 60% of the properties on the market today with the average wealth of American households, this percentage has dropped to 45% (a drop of 15% in just three quarters).

The contagion effect of the housing sales crisis is only a matter of time. Europe, and Italy in particular can count on some of the highest household savings globally, which is a good mitigating factor; to this, we must add the strategic location and the strong impact of tourism and food and wine that increases the value of homes. However, on the other hand, there are concerns about the public debt that could bring the country into default and the nearby war in Ukraine with the ever-present danger that it will turn into a nuclear and global war.


George Michael Belardinelli
George Michael Belardinelli
A former corporate manager at Carifac Spa and later at Veneto Banca Scpa, blogger and Rhumière, over the years he has become passionate about philosophy and the opportunities that innovation and the media make available to us, in particular the metaverse and augmented reality