America Faces a Housing Bust
wsj.com
wsj.com
Well the problem with that is that housing busts are usually associated with rescission (can't buy a house without a job) and rising interest rates (can't borrow the money anymore).
AFAIK, we have been in a recession since 2008. IMO we never really got out of it.
We will either bust hard and go into an actual depression, or we will forever stave off a true depression by…
Working for the same wage for years and years while costs go up and raises only happen to slightly offset cost of living.
We’ve been doing that for about 8 years now
It would've been arguably true in 2015 or so. But then we had years of high job growth, high median wage growth, and generally great economic conditions, right up until COVID, and then we actually recovered very quickly from COVID.
Like, is inflation high? You bet. Could we go into recession? We absolutely could. Did we have the last 8 years of costs going up and raises only happen to slightly offset cost of living? Absolutely not.
https://econbrowser.com/archives/2021/08/yet-more-alternativ...
Helps to show that it's not an effect dominated by the very rich, and thus throwing off the average, and also that it's not that hourly wages have stagnated but people work more hours -- since they're broadly similar, we should feel strongly that it is a real increase in "normal people's" actual wages.
There are more data available if people want to look for it. This is a surprisingly complex subject for something that initially sounds simple, so it helps to get a few different views into it, but the upshot is: since the teens, people have been paid more.
EDIT to add: People are just slow to update on this. If you look at the world in 2014, then it seems a lot more reasonable to be skeptical that normal people will ever get a raise. Then, you'd had basically 15 year of stagnation, before that a little rise, and then more years of stagnation at a lower level.
Wages are noticeably down since 2020.
WSJ and others prefer to report nominal wages (unless the article is about business costs), but you don't have to fall for the scam.
But 2014-2020 was very different.
Times like this make me glad to be in the US though. As bad as it gets here, it will be far worse in the developing world and Europe.
What do you mean by "continued stimulus"? There is no natural rate of interest.
That's complete nonsense. The National Bureau of Economic Research, the body which officially declares recessions in the US, defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."[1]
Aside from the 2020 pandemic dive, there has been positive GDP growth every year since 2008.[2]
[1] https://www.nber.org/news/business-cycle-dating-committee-an...
[2] https://www.macrotrends.net/countries/USA/united-states/gdp-...
Getting a loan now for developing multifamily or single-family properties is significantly higher than it was last year. That means fewer projects are starting. Rent has already been rising, but may rise even faster next year as new supply dries up.
Single family houses may go down in price -- but we all know that isn't really what people care about if they're buying. They usually care about their monthly mortgage payment. And, obviously, that is likely to go up with raising rates, unless there is a very significant downturn in home prices.
The Fed's primary tool is interest rates -- but while we could use a cooling of investment into bubbly areas (like, maybe tech equities and crypto) -- we still desperately need more investment into housing. It's a shame that they will likely move in tandem and we'll just get less investment in everything.
The old "it's a supply constraint" argument will not age will IMO. FWIW, the fed agrees:https://www.federalreserve.gov/econres/feds/volatility-in-ho...
I think we've now just seen that same pattern catch up with more places. I know people in Austin and Houston who were complaining that prices were already getting too high before 2020. That's where the folks priced out of CA were going even then.
I wouldn't argue that two years of insanity will correct itself.
But that doesn't mean the overall housing market is going to go anywhere but "still up and up" in most major US markets.
Austin median price in January of a few years (from https://www.recenter.tamu.edu/data/housing-activity/#!/activ...):
1990: 71,000
2000: 132,872 (+87%)
2010: 174,386 (+31%)
2020: 305,000 (+74%) (pre-covid, January 2020)
2022: 476,000
That 2022 number ramped up hard over that 2020 one, but that overall trend is still nuts. Even with the huge bust towards the end of the 2000s the decade ended well up.
Inflation calculator here (https://www.usdinflation.com/amount/305000/1990) tells me 71,000 in 1990 would otherwise be worth 156K today, so housing has been getting more expensive more quickly than most things for quite a while.
That's a supply issue (EDIT: or total market/policy failure creating an artificial one. Or at least a "construction issue" - you might say the population increase means its a demand one instead, but on this time frame... it's a failure to not serve the continually growing population.)
Which is not entirely dissimilar to the general discussion around gentrification - those who can afford to pay more can displace those who can't - but a sort of special case that doesn't require migration.
Seems like there would be some sort of game theory aspect - this only works if something close to every landlord is pushing prices up?
I think what we're really seeing is more the high-migration "gentrification" case yet applied to populations that normally aren't who you think of as being the ones on the receiving end of gentrification: the 100M-dollar-buyers are pushing out the 10M-dollar-buyers are pushing out the 1M-dollar-buyers from California and then they go to Texas and push out the 500K-dollar-buyers... and it continues to flow out to touch everyone else too.
Certainly, low mortgage rates drove home prices way up... but does that mean high rates could drive them down? I mean, maybe over a long period of time as existing mortgages get paid off (?) but for now while the vast majority of mortgages out there are lower than the going rate, won't that just keep constraining the supply and prevent the price of houses from dropping significantly?
You'll still have sales - some people will die, some people will have to move for various reason, etc - but how much it will fall seems like a very hard to predict question.
With rising rates, the counter pressure on prices from buyers may not exist in large enough supply to prevent the investors selling from driving prices down.
Something like this: https://www.homelight.com/cash-offer
Rising interest rates would reduce demand at higher price ranges, for example, causing a drop. At the end of the day costs are only part of the equation.
I don't think that means the fed is doing the wrong thing though. Fixing our energy bottlenecks will take a decade or more(regardless of rates. refineries and nuke plants take 10+ years to build), so pulling back demand to be in line with that supply seems like the right thing to do. It will hurt, but it is better than entrenched inflation and wage-price spirals.
> They usually care about their monthly mortgage payment.
True, but not for me. I care about price, because the price never changes yet I can always refinance. Also, your initial assessed value, at least in California, is a big factor in the lifetime(or more) amount of property taxes you'll be paying. I would much, much rather have lower prices and high interest rates.
Overall I think housing will sort itself out. We already have plenty of units in the pipeline. Also, we're going to grudgingly transition, as a nation, towards more efficient, higher density housing whether we like it or not. Energy prices combined with policies to combat AGW will, over the long term, incentivize more urban living. I'm not a fan of it, being a suburban lover, but it is what it is.
If you're unfortunate enough to be out of work, you won't be able to refinance your loan. And if you're upside down on your loan, you can't refinance either.
This is really difficult to describe as a general trend due to endogenous actors like the Fed.
Recessions can co-occur with low rates as the Fed expands to try to spur investment in the economy. They can also co-occur with high rates that choke investment.
Never reason from a price change
After seeing how pandemics can sweep though dense areas, I think many people want no part of being forced to live in high density areas. Quite the opposite actually.
So there is no correlation.
But sellers do care deeply about this number. If they added on a $50k garage, they want to see that money come back. It may cause some potential sellers to decide to become landlords instead.
Example for California: https://www.calhfa.ca.gov/homebuyer/programs/index.htm
https://business.nv.gov/Homeowner/Homeowner__Assistance_Prog...
Seems to me the best way to get markets to allocate more capital towards housing would be to eliminate costly restrictions on building.
The argument that ever lowering interest rates lead to "affordable" homes is not evident in any real world data that I've looked at. Evidence points to the contrary.
Houses are always priced at what people can afford to pay for them. The median price of a house is directly linked to size of the mortgage a couple working for median wage can be cleared to loan by a bank.
5% mortgage rate? For a $200k home that's $10k per annum to cover the interest. 2% mortgage rate? That $200k home is now $500k. The devious detail here is that the time to pay off the loan changes completely. The $200k home can be paid off in 25 years with $670/mo plus interest. The $500k home? 62.5 years with $670/mo plus interest.
It gets even better - assume the 5% mortgage rate equals 5% inflation rate. In a high inflation, high interest rate environment, the $200k home is devalued by 5% per annum. Assuming wages keep up with inflation, the $670/mo payment is smaller and smaller piece of the total income.
A couple earning $100k together per year spend $18k or 18% of their (pre-tax) income on their $200k home during the first year. If their income stays the same but is corrected for inflation, 25 years later their income will be $338k in inflated dollars but their mortgage payments will be $18k / $338k = 5.3% ! Eaten by inflation!
Compare this to a scenario where another couple buys a $500k home in a low interest rate, low mortgage rate environment. During the first year, their payment is equal to the other couple. After 25 years of 2% inflation/interest rates/mortgage rates assume their wages keep up with inflation as well. The couple's combined income will be $164k in inflated dollars. The mortgage payment will be 10.9% of their total income.
The "2%" couple pays over twice as much as share of their income as the "5%" couple after 25 years and the "2%" couple is expected to keep paying the loan down 2.5x longer (62.5 years vs 25 years).
This is basic high school math with nothing fancier than exponentials, so I'll leave the equations as an exercise to the reader.
> …the numbers don’t work anymore.
What numbers? None were given as an explanation for a “bust” except for a mortgage rate that is less than 6% and an increase in home prices since January.
We are not in 2008. The market may cool but the economics of home purchases are still pretty strong: lack of supply and increased demand from the large generation now ready to buy houses.
https://www.federalreserve.gov/econres/feds/volatility-in-ho...
Housing increased 30% over the last two years, and I seriously doubt anyone's wages increased by that much. Add inflation and increased interest rates and things will have to come down.
I get that there's a lot of anger about Californian building regs but post fire lower build back levels isn't the peg to hang this on.
wrong Sir, but only in this way -- there are more sq km in California than in plenty of entire countries (not AU). The regulations you refer to are the "Wildland-Urban Interface" which is Federally mandated .. Santa Rosa is a relatively settled place and (mostly) not in that so-called WUI.
On the other hand, Australia does indeed bear some resemblance to California in places due to drought and also, the flammable Blue Gum, here called Eucalyptus Tree. The answers here are multi-layered.
https://www.srcity.org/DocumentCenter/View/25294/CWPP-WUI-Ma...
Isn’t too much leveraged speculation what causes every bubble? Cheap debt fuels leverage and speculation/FOMO foments demand.
It did not find that there is no supply issue with housing, but rather that we can't attribute the most recent housing run up to unique supply issues starting in 2020.
Somewhat obvious to anyone with eyes. Doesn't mean new construction wouldn't lower prices.
If so, there's probably still holdover from the last crash to cause splash in the next one.
So imagine you're BoA and in one town you back 5000 mortgages. Let's say 500 of those are about to default. You've already sold "paper" that includes all 500 of those loans, some of which may have been in the AAA tranche. In order to keep your AAA tranche from collapsing, you buy those 500 houses outright and sit on them, providing the illusion that your securities are healthy. It's cheaper and simpler.
The downside is, when the market collapses, BoA is still stuck with 500 houses and will have to sell them eventually. They don't care. They're just trying to hold on to them until the securities they sold mature. Once that happens, all bets are off and they dump the houses into a depressed housing market.
Housing prices are going to collapse. Badly. You can bet on it.
Sell every bit of real estate you own. Now. If you can.
Rent for a year or two. Then jump back in when it hits bottom. You'll pocket a ton of cash and then have the same or better property at a significantly lower cost.
I say cash in and buy something later. A lot of people will lean towards stability, but a savvy financial person would sell sell sell.
It's not just a dollars and cents issue when it's your actual home.
Land is a totally different market and hardly affected at all by interest rates since almost nobody will give you a mortgage for vacant land.
Even if the house is on a hunner acre wood.
It's my understanding that this is what a lot of people who sold their homes recently at the top of the market are doing exactly this. And this is one of the things that is driving up the prices of rents. If you pocketed a substantial windfall you are probably fine with paying an inflated rental price while you wait out the market. It's hard for me to imagine anything will be different in two years if all of these same people waiting out the market plus first time home owners all attempt to get back in to the market at the same time. Isn't it just the pandemic housing rush all over again?
Did you consider those that got 30 year 2.5% mortgages that will need to take out 6-6.5% mortgages currently & possibly higher in 1-2 years?
So if those were 30 years mortgages the collapse should be fairly far away?
I fear a future where houses are nearly exclusively bought by institutional investors because the amount of capital needed to secure a reasonable mortgage will soar and banks in turn will view the retail buyer as too much risk because of the need to have very high income for 30 years.
Somehow pressuring banks to give ridiculous money to people they clearly shouldn't so they can all bid against each other is not a long term solution. In fact, it's a solution that we have seen fail numerous times.
Unless government addresses this, the future is one in which you live in a home owned by a corporation.
I don't know what percentage of these institutional rentals are intended to be held forever, or in long term funds, etc. versus part of a trade like other assets when financial conditions like debt costs change.
Just seems like there is so much demand for housing and the fact that investment funds are now buying homes en masse as investments just makes me think the market will remain expensive.
But who knows, I hope I'm wrong!
Overall, expect a slower economy over the next year or two, and along with it, slowing price increases and, in some cases, price reversals.
If we repeat the 70s, expect this to cycle, with periods of inflation followed by periods of tightening.
Further, houses are just way too damn expensive relative to disposable incomes from a historical perspective. Personally I don't expect a crash, but I do expect a softening in most markets followed by stagnation.
Interesting enough, this is what the FED is looking for when they increase interest rates to reduce inflation. They can't control supply but they can reduce demand with higher interest rates.
The local news has been reporting on this bust in the Seattle area but median prices are barely down from a year ago. People are still lucky if they can get pre-purchase inspections. Californians, Texans, Midwesterners, Southerners still moving here in droves. My sister in law back in the midwest just spent 400k on a house in the middle of nowhere in Southwest Michigan. Welcome to the new order.
You're referring to Wednesday's Seattle Times piece[1], I assume? Median prices are still way up from a year ago. They're down from last month.
[1]: https://www.seattletimes.com/business/real-estate/king-count...
I don’t see any scenario where a home becomes trivial to afford before 2032. People should just start getting used to the fact that it’s going to be an expensive purchase.
Here's what I think so far that's talked about:
- It's gotten too expensive with the interest rates. Even people who can afford it are raising eyebrows - if you do the math, on a 500K loan you're paying 600+ more a month in interest alone. Next, many people cannot afford it anymore.
- People lost a hella lotta money in the stock and crypto markets. I know I did. People feel poorer. Even worse if a fraction of your income is in stock (looking at you, FAANGies). That's less down payment money.
- Sellers have ridiculous expectations. I heard a phrase recently, there are two types of sellers, those who know there's a downturn and they better price accordingly and lower prices, and those who haven't realized it yet.
Here's what isn't often talked about but I believe is true:
- Many, many people bought second homes. Some of these people take advantage of hybrid remote, some of them are taking advantage of Airbnb profits. Alas! Companies are calling people back to the office (there is ENORMOUS pressure from government and business groups due to the economic effects of people not being in the office -- NYC has a ~ 7 percent unemployment rate!). Next - inflation is eating into desire for renting Airbnbs. Next - people who lost a lot of money in the markets may sell those homes.
- If you're thinking about selling in the next year or two, you better list Now. That's the bottom line, and people are realizing that.
- The "historic low inventory" I think is media propaganda. Yes, it's technically true, but inventory isn't all inventory, it's for sale inventory. There's nothing endemic about that.
- The crash appears to be gestating in a few boom-and-bust "remote work is here to stay" hotspots like Phoenix, Austin, Boise...
And there are the institutional investors. Some think they're in it for the long-haul (private equity funds are for 10+ years, right). Some think they're going to dump at the first sign of trouble (appreciation is no longer happening, and yield-wise there are alternatives like bonds now).
Conclusion - I think buyers will have a lot of relief coming up, especially if you're a buyer with a good down payment and a lot of cash cushion.
Edit - I've been here long enough, I should learn better list markup etiquette.
Re: housing inventory, go use google news to read articles from 2006 on the housing supply. They said the exact same thing to justify the prices. Then 2008 hit and suddenly we had plenty of supply.
I think there is also a tremendous amount of leverage in the system, albeit different from 2008. Now you have people who followed internet financial gurus and built up large portfolios of rental properties(>$100M in many cases). These folks may soon face issues servicing their debt as vacancies shoot up and their cash flows dry up. We're really in the very early stages of the correction. Remember, 2000 took 2 years to crash, 2008 took 18 months. We have no idea what the next year will bring.
Can you share some of those blogs you would recommend?
YouTube-wise I've grown fond of "Wealthion" which has interviews with analysts in the financial industry, not all with the same views (although there's pessimism these days). And they're not gold bugs like Kitco News.
[0]: https://www.washingtonpost.com/us-policy/2019/02/06/people-l...