Robert Galbraith/ Reuters
Seventy-eight percent of community bank executives expect US housing to crash by 2026, a survey showed Wednesday.
The fears come amid the fastest home-price growth in at least 45 years and people tapping home equity at the fastest rate since the 2007 bubble.
Some economists, however, argue that price growth will slowly cool throughout 2022 without a market crash.
Economists expect US housing to slowly cool off after running white-hot in 2021. Community bankers worry the end of the buying frenzy will be much more dramatic.
Seventy-eight percent of community bank executives predict the US housing market will crash at some point in the next five years, according to a survey published Wednesday by software firm MANTL and Wakefield Research. The widespread concern follows several months of record-breaking home inflation that’s left buyers struggling to keep up. And as builders fail to match supply with demand, experts wonder exactly how the market will normalize: with a fizzle or a bang?
Banks are concerned the market has a long way to fall
US house prices were up 18.1% year-over-year in August, according to CoreLogic’s home price index. That’s the fastest rate of home inflation in at least 45 years.
Much of the price surge has been fueled by a historic shortage of houses. US home inventory plummeted to record lows earlier in the pandemic, leaving buyers to bid against each other on too few units. Those bidding wars boosted prices higher and dented affordability across the country.
It’s not just that prices are high. When adjusted for inflation, home prices have risen to record highs for five months straight. Prices now surpass the peak seen in 2006, just before the market crashed and fueled the global financial crisis.
Americans are gambling with those gains, too. Home equity is the difference between what someone owes on a mortgage and the value of their home. Soaring prices have lifted home equity across the board and led more owners to use their homes like credit cards, pulling cash from their house to cover other expenses.
Homeowners pulled more than $63 billion in equity from their homes in the second quarter, according to analytics firm Black Knight. That’s the largest single-quarter sum since mid-2007.
Still, mortgage holders rest on much sturdier foundations than in the late 2000s. Ninety-eight percent of borrowers in active forbearance have at least 10% equity in their homes, Black Knight said. During the Great Recession, only 40% had that much equity.
Otherwise, bankers think the economy looks promising
Ninety-five percent of executives are optimistic about the economic conditions in their local communities over the next year, according to the survey. The vast majority of communities’ small business owners touted local banks and credit unions for playing important roles in the economic rebound.
Other signs suggest the housing fears are overblown. Federal Reserve Chair Jerome Powell downplayed worries in April, noting the central bank didn’t see “the kind of financial stability concerns” that powered the 2008 crash.
“We don’t see bad loans and unsustainable prices and that kind of thing,” he said in a press conference, adding that he hoped builders “can react to this demand and come up with more supply.”
Other signals suggest the price surge is already fading. While year-over-year price growth sits at record highs, monthly gains have started to ease up. Prices rose just 1.3% through August, according to CoreLogic, slowing sharply from the 1.8% jump seen in July.
The S&P CoreLogic Case-Shiller price index lags somewhat, but it also shows the rally cooling off. Prices gained 1.6% in July, according to the measure, marking the weakest one-month growth since February.
It will take a few more months to determine whether the late-summer slowdown is a blip or the start of a larger slowdown. Still, the latest data suggests bankers’ fears are somewhat overblown.