The US housing market is seeing its worst contraction since 2006 as mortgage applications crumble, Freddie Mac economist says

us housing market
Mortgage applications are in a "meltdown" as borrowing costs surge.Photo by Brandon Bell/Getty Images
  • The US housing market is entering its worst period of decline since 2006, before the subprime crisis.

  • A Freddie Mac economist said mortgage applications would see a steep drop over the summer.

  • Higher interest rates and home prices are destroying affordability.

An already punctured US housing market is set to deteriorate to levels witnessed in 2006, a Freddie Mac economist tweeted Thursday.

"The U.S. housing market is at the beginning stages of the most significant contraction in activity since 2006. It hasn't shown up in many data series yet, but mortgage applications are pointing to a large decline over summer. Purchase apps down 40% from seasonally adjusted peak," Len Kiefer said.

He added that earlier in the coronavirus pandemic, mortgage applications also dramatically fell, but they picked back up shortly after. That situation is unlikely in the current state of the US economy.

"During COVID in spring of 2020, applications also fell 40% but came roaring back in short order," Kiefer said. "Such a rebound is unlikely in the current environment."

It largely boils down to the Federal Reserve raising interest rates to tame soaring inflation. As consumer prices surge, the Fed has deployed more aggressive monetary policy, lifting the benchmark interest rate to 0.5 percentage points last month in its first double-size rate hike and is set for a series of similar-size increases this year.

That, in turn, has priced out prospective homebuyers, as higher home prices and escalating mortgage rates reduce buyer affordability. And with the US economy predicted to enter a recession in the next year, and inflation at a 40-year high, American homeownership is likely to get harder.

The National Association of Realtors said housing affordability tumbled a record 29% over the past year — the steepest annual decline on record — as mortgage rates and housing prices shot upward.

One economist even said US mortgage applications were in a "meltdown" as borrowing costs soared. In the week leading up to June, the Mortgage Bankers Association said applications for new purchases fell at a 52% annualized rate compared with the previous three months.

"A meltdown, in other words," Pantheon Macroeconomics' chief economist, Ian Shepherdson, said.

A separate survey echoed gloomy buyer sentiment and recorded that about 80% of respondents said it had never been a worse time to buy a home.

"Consumers' expectations that their personal financial situations will worsen over the next year reached an all-time high in the May survey, and they expressed greater concern about job security," Doug Duncan, the chief economist at Fannie Mae, said in a statement.

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