The housing market looks like a bubble, 2008 regulator says
cnn.com
cnn.com
Here's financial asset X. There are changes in the fundamentals. X becomes a more attractive asset. People notice, and buy, and so the price goes up. That's not a bubble.
People see the price of X going up, and decide that it's a good investment because the price is going up, so more people buy, so the price goes up more. That's starting to become a bubble.
2008 was definitely a bubble. People were buying because the price was going up, not because of fundamentals. A lot of people got burned when the bubble popped.
This? I'm not so sure. If there's an imbalance between supply and demand, is that because of fundamentals (not enough houses)? Or because people are buying because the price is going up?
Even with that, I generally play it safe (20% DTI), so I can only imagine how extended some people are and how that affects the pricing.
If that becomes the case, then populist politicians will eventually get elected and let them fall.
I don't see this happening soon, but stranger things have happened.
For many people, the primary goal isn't lower house prices overall, but a change in approach to how we approach housing (especially zoning) in order to make shelter affordable.
It's not that everyone wants McMansions for cheap, but rather they want to see things built that are reasonable in size and affordable for normal workers. This could be anything from large concrete block apartments (they can be made cozy and nice!) to tiny house villages.
There are many great ways to live which are literally illegal to build in the USA due to archaic and regressive zoning laws, minimum parking requirements, etc.
https://www.youtube.com/watch?v=CCOdQsZa15o
Is there anywhere that doesn't consider a house a depreciating asset?
Housing differs from cars as it is much more common to see people rebuild houses back to new condition, to upgrade them to use modern technology, etc. That effort can retain the outward value of a house as you basically have a new house again, but the deprecation cost is paid during those updates and modifications. You haven't escaped it.
The USA
So, although no one expects house prices to go down - there is an implicit understanding that the actual house depreciates - even if inflation is offsetting that and the land underneath it is pumping the total value up.
Lets imagine the cost to build a house goes up 3% per year - if your house deprecates 3.7% per year - it would only go down .7% in nominal terms (3.7% in real terms).
If the value of the land is 50% of the "home" value, and that appreciates by 6% - then your "home value" goes up in nominal terms & real terms - but not as much as it would have if the house didn't need maintenance (depreciation).
years of earthquakes have also meant the japanese have had to update their houses to newer codes, or else they just collapse. so it's common to just rebuild.
But Generation X holds the balance of power. They are the wildcard.
Good luck hoping for them to vote on tanking house prices.
That would be about half of them.
Baby Boomers + Gen X = 134 million
Millenials + half of Gen Z = 107 million
Young people are outnumbered, and it’s going to get worse.
Numbers from <https://www.statista.com/statistics/797321/us-population-by-...>
Not by the elderly, though. Just like I said, and by your own numbers, Generation X holds the balance of power. They are not yet elderly. Even the oldest ones are still in their 50s – the youngest are still in their early 40s.
https://www.statista.com/statistics/184902/homeownership-rat...
“Talk about a bubble. That’s a classic supply-demand imbalance,” Bair told CNN in a phone interview.
Is it really a bubble though? How much is $278k adjusted for inflation since August 2019?
And if there's really a "supply-demand imbalance", wouldn't that be a further justification for the current prices? I assume she means too little supply for existing demand.
https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=278200&year1=2...
Yes, I think you are right to frame it as a supply shortage. The prices might be rational, eg not a bubble, considering how many people want houses and how few have been built.
Compare Tokyo. [1]
> In the past half century, by investing in transit and allowing development, the city has added more housing units than the total number of units in New York City. It has remained affordable by becoming the world’s largest city. It has become the world’s largest city by remaining affordable.
> Two full-time workers earning Tokyo’s minimum wage can comfortably afford the average rent for a two-bedroom apartment in six of the city’s 23 wards. By contrast, two people working minimum-wage jobs cannot afford the average rent for a two-bedroom apartment in any of the 23 counties in the New York metropolitan area.
[1] https://www.nytimes.com/2023/09/11/opinion/editorials/tokyo-...
Here's CPI for All Urban Consumers: All Items Less Shelter in U.S. City Average. [1] Index level in August 2019 234.853 Index level in Sept 2023 280.869
An increase of 20%. Very similar to overall CPI.
So rent hasn't kept up with housing prices? Some other anomaly in the calculation of CPI?
https://x.com/ModeledBehavior/status/1646151980966879232?s=2...
The housing itself is also cheaper. For example, indoor hallways in apartments are considered luxury.
So while the population of japan is declining as a whole, the metro areas are growing in size.
What's insane is that the mad emperor (the Federal Reserve) is hell bent on making sure there is no labor power in this world, to the degree that they are willing to make the bubble vastly vastly vastly worse for a long time.
No one will sell unless they have to, for a long long time. Home builders are giving up, since borrowing money is so much more unaffordable.
The Fed is making everything vastly worse & will continue to do so as long as regular people can get jobs and make money. They'll only stop after they break the economy.
Idk if the current prices are properly justified. They make sense given that most people don't want to sell with their current 30 year interest rates set so the supply is low, and anyone who does, needs to account for their new interest rates.
$278k in August 2019 has the same buying power as $333,512.66 as in September of this year.
No, the costs of homes-as-assets is not included in CPI (the cost of housing-as-a-consumed-service, rent, either as paid by renters or as foregone by resident homeowners, is.)
> So multiplying by the inflation rate and comparing to the current market is circular.
No, even if it was a CPI component (as all consumer goods are), it would still be correct to use the whole CPI to get its inflation adjusted price.
> A better indicator might be the inflation in the money supply over that same period
No, while money supply changes have an effect on consumer prices, if you are looking for a price deflator for purchasing power equivalence, the CPI or other broad price index (PCE, etc.) is a much better choice, even for consumer goods that will be components of the index.
The best source I found so far is this one from The White House[1]. It claims that
> housing’s contribution rose to 2.6 percentage points, making up half of annual CPI inflation.
[1] - https://www.whitehouse.gov/cea/written-materials/2023/04/27/...
“If supply remains constrained, this could go on for some time,” said Bair, who last week released a new children’s book about bubbles called “Daisy Bubble: A Price Crash on Galapagos.”
> Back then, reckless mortgage lending helped create a situation where demand became artificially strong. Eventually, it collapsed and the market was left with way too many homes.
Yes, and now we have a situation where supply has become artificially weak[0] due to high mortgage rates preventing anyone from selling.
That could be corrected if the Fed has to suddenly lower interest rates to prop up some other too big to fail sector, such as commercial real estate or anything else that seems to be teetering as of late.
I wonder how much that matters. I agree less people are moving, but typically homeowners who sell will also be buyers, so no net change in availability. I guess some people can afford a second home and they keep the old one and rent it out so they can keep the old mortgage, but that must be small compared to people staying put.
What if we change the life necessity to another one — cars. During the pandemic I was thinking about upgrading my car, but I didn’t after prices went up. I’ve just chilled with the same car since 2010 now.
So.. did I contribute to the auto shortage that’s on going? Feels kind of weird to look at it that way
You only lock in a certain rate for 5 years
also unlike 2008, people dont have many adjustable rate mortgages, and if they do, it wont adjust yet
over 50% of current mortgages were started in 2020-2022, locked into to 2-3% rates until 2050! they don't have enough equity yet to sell and live in a different home. the speculators didn't get a continued rally, they're all stuck.
supply isnt going to occur just because aspiring buyers cant buy at these prices or pay a mortgage at 8.5% at any price
any counterpoints that would bring housing prices far lower?
The "everyone will just hold forever" theory doesn't describe markets well. People usually move because they have to: unemployment, run out of space, divorce, death, marriage, etc. This will not change, even if the rate of turnover is slower.
As you note, it's hard for people to move right now because interest rates on a new mortgage are so much higher than what they're currently paying and prices are still cresting rather than falling. So owners are holding out.
But personal circumstances will eventually catch up with them and more houses will start to bleed off the plateau, into a market of buyers facing higher interest rates and therefore lower budgets for nominal price. These circumstance-pressured sales will accumulate, prices will slowly sink off the crest (as they already are) and then sentiment will turn. Media stories will dramatize sinking home values, and the narrative will invite a wave of panic selling and abandoned mortgages as people start to worry that they'll miss the chance to sell or end up caught in an upside-down mortgage.
We can't really know the scale or exact timing of these supply-side phases, and we don't know how it will overlap with changes in demand, but we can reasonably expect this cycle to play out to some degree or another. It could very well "burst" the bubble and suddenly bring prices much lower (answering your own question), or it may not prove to be so extreme because opposing factors that temper the panic/abandonment phase. We're just not there yet and have to wait and see.
right now, I don't see any scenario that I could quantify to support a bearish thesis.
time to short mortgage backed securities folks /s
this article did not specify time horizons, but for reference 10 years in the past was 2013 and 20 years in the past was 2003. the predictive quality of your observation has little utility because there are too many other variables in that time frame, it doesn't make a difference for anybody now to know that there might be a glut of housing a whole nother generation from now, in completely manageable price trends downward across decades. we're looking for a catalyst for a crash, now.
Anyway, I wasn’t trying to give investment advice or make a concrete prediction. I’ve just seen a lot of people say that prices will never go down … and that’s what I question given demographics. There are several widows living in large houses alone in my immediate neighborhood, so just anecdotally, it seems like that situation has to change eventually.
I think we’re actually in agreement that prices probably won’t tank any time soon—although if rates stay high enough for long enough and people simply can’t afford the payments, then something has to give. (It could be that wages will go up and we’ll have a bunch more inflation, though.)
Policy changes allowing substantially more construction finally bearing fruit?
We have a long way to go but there has been some significant movement in that direction, particularly in the most expensive housing markets.
any indications that is outpacing demand?
if supply is less than demand, prices of additional units stay the same or go higher
if supply equals demand, prices of additional units stay the same
if supply is more than demand, prices should go lower or something else is broken like poor transparency and collusion
Even then, as you say, since the 2008 housing crash we've chronically under built housing so we're still in a huge deficit.
And even then, banks would likely hold onto inventory for years keeping prices high.
Here is how messed it is. A listing 4 hours North of Toronto.
800k plus for a shit hole with nothing around.
https://www.realtor.ca/real-estate/26200220/255-town-line-ro...
Advertisements are not transactions.
Said house first listed for $999,999 back in May[1], but didn't sell. It has been listed for $825,000 for over a month now and still hasn't sold.
You can slap a billion dollar price tag on a house if you want. That doesn't mean there is a buyer and says nothing about the state of the market.
> Even today they are still going up.
No. The overall market peaked in early 2022[2] and has been on the downward trend since. In [2] you will even see the infamous dead cat bounce, which is strongly indicative of the crash having already happened, with the market now just trying to figure out where the bottom is.
[1] https://housesigma.com/on/huntsville-real-estate/255-town-li...
[2] https://images.ctfassets.net/gm6df3h7p862/642MhWekUf7LM5PNni... [3]
The house is not in the middle Of the lot so you can Sell half the land.
Honestly looks like a good buy from where I’m sitting in BC.
if this dude was confidently correct he should go make billions on the market
Remember: Michael Burry of The Big Short fame nearly went bankrupt waiting for the market to collapse. You can be right and not get the timing right; the very relevant Keynes quote is "Markets can stay irrational longer than you can stay solvent."
https://en.wikipedia.org/wiki/Michael_Burry
> During his payments toward the credit default swaps, Burry suffered an investor revolt, where some investors in his fund worried his predictions were inaccurate and demanded to withdraw their capital. Eventually, Burry's analysis proved correct: He made a personal profit of $100 million and a profit for his remaining investors of more than $700 million. Scion Capital ultimately recorded returns of 489.34% (net of fees and expenses) between its November 1, 2000, inception and June 2008. The S&P 500, widely regarded as the benchmark for the US market, returned just under 3%, including dividends over the same period.
Is part of the reason it feels meaningless because you only read 10 words of content and it was difficult for CNN to pack a satisfying explanation of the economy into that limited bandwidth?
Why can't a woman can be a dude? I thought we moved past the age of gender exclusivity?
Buy low and sell during the next bubble?
This time, it feels like so many people are waiting for the crash to happen, it may not be as bad as last time.
Better answer: read The Big Short.
First, household formation has accelerated dramatically over the last 5 years (see article below). This trend will likely continue, and/or accelerate for many more years. Many of the major homebuilders have seen this coming (e.g. DR Horton).
Second, the lost value of office buildings did not merely dissipate - it just follows where people are spending time. Data from Kastle Systems suggests foot traffic back to office is roughly half of what it was pre-covid (40% to 50%). Those hours people are not in an office, they are in homes. If you have a bunch of adults spending ~20 additional hours per week in the home, they will value their homes more.
When I was doing appraisal in the aftermath of 08, the buyers driving the speculation looked nothing like the buyers waiting in line today.
https://www.jchs.harvard.edu/blog/surge-household-growth-and....
I'm not sure what this will really mean, except that obviously it will be harder to buy a home for some time, and you'll likely see a rise in renters (which we have already been seeing, and which from my perspective is not a good thing).
The power elite has found out they don't have to build houses and cars in order to make money - just constrain the supply and raise prices. Easy peasy.
Remember - the corporations can sit on foreclosed houses for years and not feel any pain.
Tell me how the free market solves this?