The housing market is starting to crack – Sellers are cutting prices
fortune.com
fortune.com
But since most people aren't forced to sell, the available supply will shrink, which will push up prices eventually, until people can sell at a profit again. The rising rates also make it harder for developers to get loans, and lower prices make development projects riskier, compounding the supply problem.
I'll go a half-step further and say that unless this is a result of broad actions that have made home-building less costly, it will be temporary. Whenever house prices go down, home-builders become less incentivized to build new homes, and so less homes get built, and prices go up again. This will happen unless the price drop was a result of houses becoming easier to build
If there's a glut of people owning houses but not living in them and not successfully renting them, then that does reduce supply, but they're also suffering opportunity cost. If they're willing to throw away money like that I don't think increasing supply would help -- they'd just buy up the new houses as well.
Edit: I think I see where the confusion is. You are right that the literal supply of houses doesn't increase or decrease unless people stop/start renting or new homes are built. But the supply of houses available for purchase depends on whether people want to list them right now or not. Which is influenced by current prices because most people won't sell at a loss unless they have to.
So, to a first order approximation, there is no change to ratio of supply to demand. The absolute level or supply is irrelevant. The absolute level of demand is also irrelevant. What matters is the amount of supply relative to demand.
It does not matter to the overall supply and demand picture if someone “can’t afford to sell” because they also can’t afford to buy. People who do have to sell will get fewer offers, and so people who are still in the market to buy have less competition.
What really matters is how many renters are converting to buyers, how many owners are dying or moving to nursing homes, and how many investors are buying or selling rental units. Higher interest rates tend to have little effect on mortality, but do discourage first-time homeowners and investors.
I also understand that current sales will sell for less because there is less demand. That's why I mentioned that sales comps will be pegged to the few transactions that occur. But you have to look at the number of transactions, not just the most recent prices. In real estate you have a price cycle but also a volume cycle. Fewer transactions occur at low prices because sellers don't want to sell when prices are low. The exception would be if many people are forced to sell because they can't make their mortgage payments, but that doesn't appear likely at the moment.
House sellers are generally those who have gone to meet the saints. They move from one place into another yes, but where they go they don't play any part in the housing market – I hope!
The housing supply will increase dramatically in the next decade, not by building but by attrition.
More than 55% of all homes in America are owned by Silent Gens or Boomers[0]. That figure includes non-SFHs, of SFHs I've read they own >70% of (lost my source unfortunately). They are going to start dying of en masse within the next decade. That means A LOT of SFH are going to hit the market, all around the same time.
The share of millenials and genzers who are financially fit to even purchase a home are going to be far less than the amount of people who are dying.
For the non-believers, it's all written in the demographics. Unless we import a shit load of migrants who can also afford expensive real estate, or we print money so that institutions can buy these properties, the prices are going to sink like crazy.
[0]https://ipropertymanagement.com/research/homeownership-rate-...
Unlikely. There's a very high likelihood the house will have to be sold, either to pay off debts of the deceased (or bereaved), or because the children already have their own lives going, or because they don't want to assume the tax burden, or simply because each child wants their share to do with as they please.
>or sell it and buy a different house to live
This is what's going to happen. All of these property will be sold. A very small percentage will be assumed by the children because of the all issues mentioned above.
I don't understand this sentence.
The number of houses that get sold or transferred to living people is of course exactly the same as the number of houses vacated by people who died. It can't be anything else since houses don't evaporate when the owner dies.
Just the yearly taxes on my home would be a significant burden to many.
That doesn't change anything with respect to the existence of the house. Someone might take a loss (the heir or a bank) but no matter, the house continues to exist and someone else will end up owning it.
> Just the yearly taxes on my home would be a significant burden to many.
If nobody can afford it that just means the price (and thus tax) will drop until someone can.
1) Not 55% from your article. Youngest boomer is 59. That's about middle of the 55-64. So split the difference, it's 43.8%. Millenials are larger than boomers. Gen X is larger than Silent generation. If your thesis of them not being able to buy when they die off is correct, well, see #2 and #4 below.
2) People that inherit don't have to sell. Many will simply rent as it could be tax advantageous. Or they move in.
3) Construction costs (labor, materials) will inflate minimizing new supply.
4) The Fed has no choice but to bring rates back down and keep printing. National debt is $33T which is crazy but unfunded liabilities are 211T! We're well on our way to paying 1T in annual interest. 65% of spending is mandatory. Debt historically % of GDP is 46.9%. End of 2022 - 97%. [1]. Interest rates cannot remain historically elevated and the only way out of the debt load is to print print print. This helps assets and affordability (debt service) for investors and the genx, millenials to acquire. The US and world got drunk off a cheap dollar.
So I disagree on the macro of your thesis. Certainly some areas will be affected though with boomer/silent passings but that will be due to a demographic change in demand, gen x and younger not desiring those areas for numerous reasons.
I'll be holding assets as inflation continues, and probably rips again in the near future. It will be traditional inflation (actual economy) or inflation in the financial economy (stocks, assets). One or both have to rip from inflation. There's no way out of the debt load.
Likely the powers that be will print money to hand over to institutions to gobble up real estate who will then rent out the properties to the incoming mass migration wave into the US. Most of these new arrivals have a almost zero percent chance of becoming home owners with the current pricing and wage suppression going on.
It seems to me various real estate investment groups have essentially unlimited lines of credit to buy up properties. On the commercial side they seemingly can ride out many of their units being empty for YEARS.
80% of the silent generation is already dead along with 33% of the baby boomers. Between them, around 8,000 people die every day, and that has been going on for quite a while.
When do you expect this to start having an effect on prices?
What else to do with an inherited house than either live in it or sell it?
Obviously the outcome for the family is very different and worth examining, but for the moment I'm considering the broader impact on the housing market.
The historical housing bubble was caused by artificially low interest rates adopted worldwide. Ever-increasing housing prices is bad for people who own homes (higher property taxes, property tax distortions across cities, higher fees when changing houses) and those who don't own any. Low interest rates discourage saving and encourage unproductive speculation and house flipping.
The people benefitting from the status quo are only those who make money off trading and borrowing fees (banks, realtors), and the occasional person who left a high price area to a low price area.
California homeowners insulated from property tax due to prop 13.
You've got the mechanics a bit wrong, but the point is that your property tax, in real dollars, goes down YoY, as it cannot do anything but that due to Prop 13. In particular, it cannot even track the real dollar (let alone increase).
This is a well-known issue and underlying cause of a number of CA's political problems, biggest of which being the housing crisis. It's further well-reported how two identical homes, in the same neighborhood, can have vastly different property tax rates, with one paying very little, and one paying a lot, because the latter is owned by someone younger such as a millennial. These are the simple mechanics of Prop 13.
I'm glad you were able to raise your kids, but my generation is being screwed out of that, as we cannot break into the housing market, cannot get affordable healthcare, and cannot get meaningful real wage growth. My affordability limit as a SWE is something like $4k/mo, and homes in my market are ~$6k/mo. Either I do like the OP suggests — pay way above affordable and take on the huge risks that come with that — or I continue to rent and cannot get into a starter home from which I might start a family.
The problem with prop 13 is that it also covers commercial property. This is a serious loss to our tax base with no good reason.
easy loans plus not enough building are the reason can't afford a home, not prop 13. The average length of homeownership in CA is less than five years. They turn over.
The way California has done property tax is hilariously bad, commercial properties get no cost basis step up forever? until recently People can inherit property with infinite value without a reassessment? come on. Imo prop 13 is at the root of most of the state's problems.
The reason people lobby for prop 13, particularly older property owners who vote, is because of the appreciation you mentioned.
That should not be happening in the first place, because the state should not systemically under-build housing. The government policies which cause that underbuilding are lobbied for by the same demographic that enjoys the benefits of prop 13. If it's for personal preference in lifestyle or a quest for artificially increasing home value it doesn't matter there's no reason to create an aristocracy in California.
We need to change those policies so we can build enough housing supply to meet demand, and treat housing like a commodity good that it is. Instead of this absurd game where we underbuild on purpose and patch over the issues to the best of our ability for the benefit of a relatively small supply of homeowners who bare none of the social costs.
No, you wouldn't. You could have taken out a HELOC for a tiny portion of your appreciation over those years to pay your fair share of taxes, the way people do in literally every other state.
Glad you got yours, though.
I'll pay taxes on the appreciation when I sell so the government will get theirs.
Should I also only carry a variable rate mortgage so that I pay whatever a new home buyer pays?
Should the government spend whatever they take in even if their costs haven't increased with home values?
Sorry home ownership is not affordable. It hasn't been in California since the late 90s. I threw 20 years of savings at mine so I could have a reasonable mortgage. I actually would be better off financially if I had put that money in the stock market.
Now with remote work, you don't have to live near a work center, opening tons of location possibilities. I wish that happened before I bought.
Besides, local government expenses have to be covered somehow. It’s just putting it on new homeowners who are not beneficiaries of the capped property tax from years ago.
Governments should not be dictating prices, they should be influencing supply and demand in order to affect prices. Doing it the “easy” way will simply distort supply and demand and the pain will still have to be felt somewhere.
For example, if the goal is lower property taxes, then the solution is lower local government spending / more efficiencies / more population to spread fixed costs over.
I think that second category should also include retirees who downsize from their empty nest SFH to a cheaper, smaller condo, which is something that I think happens way more than occasionally.
End result is, no new SFH on the market.
Jokes aside, I would like a list of reasons why people could own homes build out of grunt work 100 years ago but cant today with all the truly marvelous technology.
Besides choking in the red tape stuff like: wood is expensive if you don't plant trees. Long ago people planted the trees (where the house was to be build) when the baby was born.
On the contrary, ever-increasing housing prices have allowed generations of home-owners to reap immense amounts of tax-free income by borrowing against their real estate. For large parts of the population, having a job is not the way they make a living. Borrowing money is how they make a living, having a job and even a career is just the ticket they need to be able to borrow as much money as possible. In many countries the majority of the population make a living by borrowing, while only a few by working.
The only people who actually make a living by working are the idiots, and that's why they remain broke their entire lives and have nothing to give their children after they pass away. Usually they don't even have children.
This system works as long as there's more money to borrow to keep real estate value going up and more idiots born to work for a living. And when the jig is over, all debts of the real estate owners will be forgiven, while the rest will be sent off to die in some war.
Does anyone else remember when the top upvoted HN comment on the leaked FTX balance sheet article was “I work in the crypto industry and FTX is going to be fine…”? Because I remember that.
The problem I have with this is that regular people that have to mortgage the house don't get any better deal (higher interest == higher monthly payments), but the forced price reduction does give a better deal to anyone who can pay cash (investors for example).
You can't renegotiate your high-principal, low-interest mortgage later. (Well, you can, if rates go up, but why would you want to?)
With a low principal, high interest rate mortgage, refinancing to a lower interest rate reduces the amount you were going to pay, without you having to spend any money.
For example, lots of people that bought in 2015 to 2019 at higher interest rates made out great, they paid a lower price for their house, then refinanced in 2020 to lower their interest costs (and sometimes even got paid to refinance).
Unless you invent an elixir that makes people live 200 years or if the elderly start burning down their houses out of spite, there will be no housing shortage.
No, most of the planet has above-replacement birth rates.
The developed world has below-replacement birth rates.
People migrate from the former to the latter, resulting in net population growth in ~nearly country in the world.
There are only a handful of countries experiencing population decline. Japan, Venezuela (Shocker), Russia (Shocker), Ukraine (Also a shocker...), and now that I think of it, almost all of the rest are other former Soviet Block countries. Their populations are declining, because people are actively getting the hell out of them, and nobody wants to/is allowed to move into them.
Have you? Have you considered that the countries at the top of the chart you linked have a lot more people in them, than the countries at the bottom of the chart you linked? Which is why the average # of births per woman, world-wide, is 2.3?
There are exactly 19 countries that had a population decline between 2015 and 2020. 13 of them were former Soviet states. One is a failed state. [2] One isn't even a country, it's a territory of the US, and anyone in it can just buy a plane ticket, and move somewhere better[3]. Three are Western European, and one is Japan. All but two (Italy and Japan) have high numbers of people trying to leave them.
[1] https://en.wikipedia.org/wiki/Population_decline#Contemporar...
[2] Or so I hear on the news.
[3] For some definitions of better, that include 'Having electricity at some point within 11 months of a hurricane making landfall.'
Real estate doesn't care how people got into your country, it just cares that they did.
I'm seeing single-family houses going for $310k that should be going for maybe 2/3rds of that on a good day. Typically they're flipped houses.
If you were to bring down the value of every single-family home in the US, that means accepting about 2/3rds the value of each of these mortgages, along with all of the securitized derivatives of them. That's a 2007-2009-level crash, which the banks just won't tolerate.
The far more likely play is that large regional, national, or international investors wait for the price to drop a little more and use what is basically an infinite pile of money to buy them up for speculation or rental stock, which will keep this problem going.
I've been hearing a lot of "should be" talk like that recently - like folks complaining that people are paying $50k for a normal SUV that "should be" $30k or whatever.
What are we basing "should be" on? Some affordability metric? Our gut feeling about what a comparable thing cost a few years ago?
If I sold my house and someone told me I should have sold it for 2/3 of what I sold it for, I think I'd sit in stunned silence for a moment and then just laugh.
When you consider who this kind of housing was built for - younger married couples with two children - the problem becomes apparent. You can't cover COL, costs of raising children, a mortgage on a $310k house at 7% interest, an auto loan note at the same, and student loan debt on $56k household income. Wages are stagnant, so something has to go. Typically, it's the idea of children or the idea of owning a house. This has implications for the economy 20 years from now. There won't be as many consumers and workers to participate in the market, and those that do exist are likely to have access to less generational wealth because their parents were more likely to rent than to own. Neither bodes well for economic growth or stability. That's what I mean by "should cost" - a value that allows for a seller to sell a home at a reasonable price to a party that wishes to carry out the life stage activities that provide for future economic growth.
We're really just mortgaging quarterly earnings for those with major residential real estate holdings (like pension funds paying out to those born during the Baby Boom) with future economic growth at this point. When asked if they'd rather have sustainable growth that will see them able to put food on their tables 20 years from now or make the line go up over the next 90 days, capital has chosen the latter. That _will_ have a consequence down the line, and it won't be a good one.
1. Ban AirBnB short term rentals by people who do not own and live in the house.
2. Ban foreign ownership of real estate. A nations laws are there for the benefit of its people, not some random billionaire from china looking for a place to park his money.
3. Much more relaxed zoning, preferably at a national level, or at the very least, at state level. Something akin to Japan where multi-tenant residential housing is permitted in all but a few zones.
If all of the above were in place, I'd have no problem with houses going for 'whatever the market will bear'. Sadly our housing market is captured by people with vested interests in making home ownership unaffordable for most.
1a) If you town bans short-term rentals but the next town over doesn't, then guess what - the investors just migrate and you haven't actually changed much.
1b) Highest and best use is a really important concept. There are properties that make for not great permanent dwellings but are great short-term rentals. When you put artificial restrictions in place, it doesn't actually help supply.
2) There is so much money here in the US that even banning foreign ownership doesn't matter much. I live in a tourist / second-home market and it's people from the region who are buying up the investments.
3a) My community went to relaxed zoning years ahead of the state. Helped a little, but not as much as everyone hoped. Turns out that it is still expensive to build multi-family, ADUs, etc and not a fit for every life need.
3b) While zoning changes are good, I continue to hammer on income / jobs as a bigger factor in many markets. Don't come at me with SFO or some other example - every market is going to be different. But in places like mine, the make up of the economy is a bigger factor to affordability than zoning or these other changes. Fixing the whole regional economy is not a simple problem and it doesn't campaign well in political stump speeches like "fix zoning" does.
On the contrary: you've changed the housing supply in your town. Sure, some of the money will go to the next town over, but if you're running your town as if it's a business you deserve to end up with a hollow wasteland.
> 2) There is so much money here in the US that even banning foreign ownership doesn't matter much. I live in a tourist / second-home market and it's people from the region who are buying up the investments.
Given what I've heard about the amount of properties being bought up by Chinese investors (which tracks with what else I know about the market and how China has been progressing in recent years, so I have no reason to doubt it), I think it unlikely that, were they all to be forced out of the market, domestic investors would be able to simply fill the vacuum with no net change. Investment dollars chasing real estate may be far more plentiful than is healthy, but they are not infinite.
Obvs every market is going to have its nuances and differences... in my area, the largest city banned new STR a few years ago - and absolutely nothing changed. Ironically, the smaller city next door that didn't ban is growing and thriving on multiple levels in ways the town that banned is not. Likewise, because the county (and next county over as well, which is just a few mile away) didn't ban, all it really meant was that city that put in place a ban received less tourism tax revenue while all the other entities benefitted.
The other nuance I was trying to communicate - we had a lot of housing built during the war to support the training base. They are great little houses for a weekend visit, but they stink as permanent dwellings. This is a part of the supply / inventory problem I don't hear discussed enough. For example, if you have a ton of 4000 square foot houses ($$$$) but your buyers are all first-time / first-upgrade types ($$), you've still got an inventory problem.
So I don't see flippers as being the big deterrent to prices falling. If they haven't caved yet, they will in a few months.
> If you were to bring down the value of every single-family home in the US, that means accepting about 2/3rds the value of each of these mortgages, along with all of the securitized derivatives of them. That's a 2007-2009-level crash, which the banks just won't tolerate.
And how, specifically, do you think the banks are preventing this? Not just "it's a conspiracy - we all know it". OK, maybe so. What's the mechanism?
As for the second point, simple. They just refuse to renegotiate loans. Same as 2007-2009. They've gotten far pickier about who it is they loan out to, too, so it's less likely to result in the foreclosure of the home than it was during that time period. The flip side of that is that there's a shrinking pool of families that can afford to take that sort of cost on.
https://www.zillow.com/homedetails/36-1st-St-Mc-Gill-NV-8931...
Still not building enough, and the market always cools in winter.
Big Tech isn’t killing the internet. All the Ferengi that went into engagement farming are with their clickbait.
The housing market hasn’t meaningfully changed until I stop seeing every single story 1k sq-ft, 2-3 bedroom 1-2 bath house being listed for over half a goddamn million dollars in a 70k pop city.
I started waiting for the market to crash 10 years ago, and I’m likely going to keep waiting for at least as long, barring a catastrophic economy collapse, which would be even less desirable than the current situation.
That said I still don't think there will be a collapse unless there is like, worse unemployment than 2008. But - prices could still easily drop 10-15% if this is a more mild recession.
That being said - it could be the best time to buy, but not for those that lose their job.
I'm curious about this, because from what I've heard, a lot of investors are incredibly happy with the higher interest rates as they're paying cash for a lot of homes, which has been squeezing real homeowners out of the market since they are able to shortcut by making offers on houses without requiring financing.
I have multiple friends who received cash offers from investment companies when selling their homes. It's fairly common and well known.
"We buy houses" companies are everywhere. It's their entire strategy.
Those securities defaulting are a trailing indicator of price as you need a mortgage to be underwater (or mass economic failure) for a mortgage to fail.
https://www.cnbc.com/2023/11/08/mortgage-rates-plunge-and-de...
The Fed doesn’t directly control the 10y yield like they do the federal funds rate
> housing affordability has become abysmal for a large portion of millennials and other people of prime homebuying age, “sidelining potential buyers,”
> a prospective homebuyer needs to make $114,627 to afford a home in today’s market, which is a 15% year-over-year increase and the highest annual income on record needed to comfortably buy a home.
… yes, because slight more homes had to lower their price, the cracks are really showing. Were those home lowering to a price point still on a market price curve pointed squarely at the moon, or were these buyers trying to flip a home 2 months after buying it and doing 0 renovations (a listing I have seen more and more often recently) and hoping to get rich quick?
All this, combined with consumer stimulus, increased remote work, major swings in domestic migration and household composition [5], and you have red-hot housing prices.
[1] https://scrippsnews.com/stories/corporate-investors-are-purc... [2] https://tax.thomsonreuters.com/en/glossary/bonus-depreciatio... [3] https://www.bakertilly.com/insights/new-regulations-provide-... [4] https://www.nar.realtor/qualified-opportunity-zones [5] https://www.federalreserve.gov/econres/notes/feds-notes/the-...
and
Non paywalled article: https://finance.yahoo.com/news/housing-market-starting-crack...
We’re nowhere near that. Only chance of this happening in the near term is sharp increase unemployment.
To put in perspective what a program to bring prices down would actually look like, Sweden launched a program in the '70s to build a million homes in ten years, when its population was 8 million. We have not seen homebuilding on that scale in the United States for decades, if ever.
It's simple supply & demand. We can't reduce demand -- people need shelter. The solution is providing supply. No amount of fiddling with interest rates, corporate real estate investment, or whatever else, will alleviate the housing crisis. (# of houses available) / (# of needy families) << 1. Fix the ratio, or live with the crisis. Everything else is lipstick on a pig.
(Not disputing just no experience personally).
[0] https://www.axios.com/2023/11/02/dc-housing-rent-antitrust-l...
More likely scenario to solve the affordability issue is 40-50y mortgages, and socialistic handouts by states (like CA is doing).