Why the US Will Avoid the Worst of the Global Housing Crash
The 30-year fixed rate is structured to better withstand downturns.
Home prices are sinking worldwide with many of those markets suffering because their mortgage structures differ from the US’ 30-year fixed-rate.
At the end of September, home prices in New Zealand had fallen over 6% since their peak, according to CoreLogic, and Canada and Australia had similar declines of 5.5% and 4.8%, respectively.
Growth reversed in the U.S. too, but at far less negativity, down 2% from the peak.
US Banks Don’t Directly Bear the Risks
New Zealand had the biggest boom with prices rising 46% since January 2020; the U.S. and Canada followed closely with 41% and 38% increases, respectively. Australian prices rose 28% during the same period.
Additionally, and coincidentally, all four countries are experiencing high inflation that has led to sharp interest rate increases from their central banks.
“In the US, mortgages are securitized, meaning that banks do not directly bear the risk of mortgages but rather sell them to government-sponsored enterprises (GSE) like Fannie Mae and Freddie Mac, which package the mortgages into mortgage-backed securities,” CoreLogic explains.
Homebuyers, therefore, receive more favorable bank loans and for longer periods — such as 30 years — with no prepayment penalties and the option to refinance the loan at any time if rates change.