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The US Housing Market is Entering the Most Significant Contraction Since 2006

Posted by Sami Thalji | Jun 10, 2022

The deputy chief economist for Freddie Mac made some noise yesterday when he tweeted that the US housing market is at the beginning of the most significant contraction since 2006. Freddie Mac's advanced research shows that mortgage home purchase applications are down 40% this summer compared with the peak of 2021. The numbers also show that purchase and refinance applications are currently at their lowest level in 22 years.

Mortgage application data is significant because it shows where the market is headed. This data tells us that home sales will significantly slow down over the next few months. From our hands on experience the slow down is already here, with volume being significantly down from the early part of 2022.  

What this means for the housing market is up for debate, bc Freddie Mac also points out that they do not anticipate a significant price drop in the market. The impending housing decline presents a significantly different set of challenges from the housing crash that led to the Great Recession. First, many consumers still have equity in their homes so they will be able to hang on longer before foreclosure or considering selling to cash out their equity. Second, with high levels of equity across the board, banks and lenders will be less aggressive in collections. Third, and maybe most importantly, with the number of homes purchased by investment funds, OpenDoor, and Zillow over the last two years they will work hard to keep their home values inflated, possibly propping up a housing market through false inflation of home values, preventing a significant price decline. The problem may occur when rents reach the tipping point and become unaffordable for the average consumer. While some would argue we are already there, consumers are still managing to pay rent so there are no vacancies in these homes. If investment fund homes start to see vacancies that could be the first domino to trigger a 20-30% decline in prices.

We've previously outlined in this blog that most housing markets throughout Florida are 20-30% overvalued. At some point reality will set in and housing prices will fall in line with actual values. When that happens we will see a significant rise in foreclosures and bankruptcy filings. But when that will happen is a mystery. There are so many factors in the economy that have every expert guessing as to when the foreclosure and bankruptcy filings will start. Interest rates are rising, inflation is at record levels, the stock market is falling, but the job market remains strong, and homeowners that have purchased the homes at these high prices over the last 2 years are in a much stronger position to continue paying their mortgage then they were in 2008.  

What this means is that everyone is just guessing right now. But, the one thing every homeowner and consumer should know is that if you are having financial problems and are considering bankruptcy or are worried about foreclosure then you should act now and not wait until the problem gets worse. Homeowners protecting their equity is the key to long term financial stability through good and bad times.

About the Author

Sami Thalji

Sami Thalji is a native Floridian, born in Clearwater and raised in St. Petersburg, Florida. Sami graduated from Osceola High School in Seminole, Florida before attending and receiving both his Bachelor of Science and Juris Doctor from the University of Florida in Ga...


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