The U.S. economy is definitely deviating from the script, and we just got more evidence that “Housing Bubble 2” is bursting. Experts were expecting that new home sales in the U.S. would rise in October, but instead they plunged 8.9 percent. That number is far worse than anyone was projecting, and many in the real estate industry are really starting to freak out. And to be honest, things look like they are going to get even worse in 2019. One survey found that the percentage of Americans that plan to buy a home over the next 12 months has fallen by about halfduring the past year. Mortgage rates have steadily risen as the Federal Reserve has been hiking interest rates, and at this point most average Americans have been completely priced out of the market. Home prices are going to have to come way down from where they are right now, and just as we witnessed in 2008, rapidly falling home prices can put an extraordinary amount of stress on the financial system.
But of course it isn’t as if this latest report is coming out of nowhere. The truth is that new home sales have fallen in four of the last six months, and so a very clear trend is now developing.
Sadly, most mainstream economists still don’t seem to be understanding what is happening. According to Reuters, the consensus estimate was that we would see new home sales rise 3.7 percent in October, and so an 8.9 percent plunge came as a real shock.
Sales of previously owned U.S. homes posted their largest annual decline since 2014 in October, as the housing market continues to sputter due to higher mortgage rates that are reducing home affordability.
One worrying indicator: The average debt-to-income ratio for mortgages insured by the Federal Housing Administration, which makes up about 22% of the housing market, is now at its highest level ever.
As housing prices fall, millions of Americans will suddenly find themselves “underwater” on their mortgages. In other words, they will owe more on their homes than their homes are worth. During the last recession, many “underwater” homeowners ultimately decided to walk away rather than continue to service ridiculously bloated mortgages.
But the truth is that economic conditions are not likely to remain stable. In fact, many are projecting that the approaching downturn will be even worse than 2008.