Jimmy’s Table PodcastCuriously evangelical. Politically homeless. A dreamer of small things. On this podcast, I am having conversations about the intersection of faith, life, and culture.

The Coming Housing Crisis? – Episode #145

Housing Affordability

Recently the U.S. Federal Reserve issued a warning about signs of a bubble forming in the housing market.

Home values have dramatically spiked in the last two years, with values being up over 27%. To put that in perspective, historically, home values in the United States have tended to only increase 3-5% annually in recent decades.

The Fuel For The Current Fire

First, cheap credit has made it possible for people to borrow more than ever when it comes to buying a house. In December 2020, rates hit a historic low of 2.67%.

Second, housing inventory has dropped dramatically. Zillow recently reported that there’s currently only 729,000 homes for sale in the United States, which is down dramatically from the over 2 million homes for sale just a couple years ago. Active listings are down 18.9% in just the past year alone. Economist say in a healthy housing market there’s 6 months of inventory available. According to the National Association of Realtors latest data, there’s only 1.7 months of supply in the housing market.

Third, housing demand is high. The United States is short over 5 million homes to meet the growing housing needs of America. New households are forming every day, and because of the pandemic, labor shortages, and the increase in the cost of material goods to build a home, builders are unable to build homes fast enough to meet the surge in demand.

Fourth, while interest rates are still at historic lows (relatively speaking), interest rates have recently spiked to 4.67%. As a result of the recent spike, this has created an additional surge of buyers, whose “Fear Of Missing Out” (FOMO) has pushed more and more buyers into the market, who want to buy a house before they can no longer afford to do so. The median home price has jumped 25% from $327,000 in 2019, to $408,000 at the end of 2021. This has eaten into the ability of more and more people to afford a home. According to the National Association of Realtors, the median cost of principal & interest payments (excluding taxes and insurance) has gone from 13.6% of a household’s monthly income, to 17.5% since January 2021, which represents a 28% increase in the median mortgage costs.

Fifth, renters are also feeling a pinch when it comes to housing. Renters have seen the average rent rise 18% over the last 5 years, with rents expected to increase by 10% in 2022. Some large cities have reported rents increasing as much as 40% in some instances. A lot of people who are unable to afford a home are being pushed into the rental market, which has created a surge.

Altogether, the current trend in housing boils down to issues surrounding supply and demand. There’s simply not enough homes for sale to meet current housing demands. As a result of scarce supply, people with the means to buy up existing inventory are doing so in a very competitive manner. Bidding wars abound, which only further drives up prices, with the national average of sale-price-to-list ratio being 102.6%. If you are buying a home in most markets, you should expect to make an offer higher than the home’s current list price.

Is This The 2008 Housing Crisis?

Because of the current exuberance in the housing market, it’s not hard to see why a lot of reasonable people think there’s a bubble forming. That the U.S. Federal Reserve says there are signs of a bubble forming shows we should all be very concerned.

But for those of you old enough to remember the 2008 housing crisis, the current “bubble” isn’t of the same nature of the prior housing crisis. The prior housing crisis was fueled by a combination of speculation, supply outstripping demand, non-existing lending standards whereby mortgage companies made loans to everyone that had a pulse (sub-prime lending), over leveraging, and complex derivatives trading issues.

The current bubble has no relationship to the prior crisis. The current bubble has been formed by cheap credit, low housing inventory supply, and strong demands for housing. The only relationship the current bubble has to the last is that housing prices have been rising.

Will This Bubble Burst?

But the million dollar question that everyone wants to know… is if, and when the current bubble will burst?

I don’t think that’s likely. In order for the current bubble to burst, we would need to see an inversion of supply and demand. As long as their is more demand for housing than the current market is able to supply, we will see home values continue to go up.

However, money is not as cheap as it once was to borrow. Interest rates continue to go up, and we can expect interest rates to continue to climb for the foreseeable future, as long as the U.S. Federal Reserve continues to fight current spikes in inflation by raising interest rates. And while inflation is starting to show signs of slowing down, it’s not likely going to return to “normal” anytime soon.

The rise of interest rates will definitely put downward pressure on housing prices, and how much people can afford to borrow to buy a home. This will likely slow the rate of homes appreciating in value. However, we are still going to be facing a massive supply shortage of homes, as people are simply staying put, and not selling their homes unless they have to.

And when you think about it, why would you want to sell your current home?

Apart from major life events, such as death, marriage and divorce, or taking a job in another city, there’s not a lot of incentive for current homeowners to sell their current homes.

Sure, in selling your home you would likely see massive profits as a result of soaring housing prices, profits you could use as a large down payment on your next home. But, everyone else’s home values have also recently gone up, which offsets whatever gains you see in your current house.

Combined with interest rates more than doubling in the last year, whatever house you buy next will simply be more expensive. You’d likely being paying more for less. Unless you receive a major promotion, you would likely be buying a house in a less desirable location, of smaller square footage, and of lower quality. In essence, your next house would more than likely be a downgrade, not an upgrade, to your current housing situation.

As a result, we currently lack a significant economic catalyst that will cause the supply and demand ratio to invert anytime soon. Inventory will remain low, and demand will remain high. Economic factors may eventually cause a slower rate of appreciation in the current housing market. But there’s not likely going to be a bubble bursting.

What Will Possibly Happen

If I could look into my theoretical crystal ball and predict the future, I think we are going to see a handful of different scenarios possibly play out. I think we might see a combination of any of the following three scenarios. There might be others, but in my mind, these are the most likely situations.

Scenario One:

There’s growing indicators that the U.S. Federal Reserve will likely drive the economy into a recession in order to fight inflation. Raising interest rates mean consumers and corporations borrower less money, less money that they use buy goods and expand business, and that means less overall economic output. Like it or not, our economy is fueled by debt, and debt is used to fuel our boom and bust cycles.

If we collectively borrower less, the engine of our economy comes to a grinding halt. And if all of a sudden people can’t afford their homes because they’ve lost their jobs, you’ll likely see an increase in housing inventory as people are forced to liquidate their housing or lose it in foreclosure activity. Unless of course, the government again issues a stay on foreclosure activity like they did during the pandemic, which also helped dry up housing inventory.

Scenario Two:

We could hit a wall. The bubble won’t burst and home values won’t collapse. But we could theoretically see a scenario where people simply stop selling their homes altogether, as buyers all but vanish too.

Raising interest rates will take away individuals ability to buy a new home at current values. But values will not move all that much, as apart from major life events such as death, marriage, divorce, and employment changes, people will simply stop selling altogether, as they will have no incentive to actually sell. Finding a better home than their current home will become a nearly impossible task.

In this scenario, everyone’s current home will simply become their “forever home,” whether they like it or not. And if they are forced to move because of a major life event, it’s likely they will forced to become a renter, as buying a house simply becomes out of the question. Which has given rise to speculation by some individuals that we may see a decrease in homeownership levels, as American becomes more and more “a nation of renters,” especially as more and more professional institutional investors buy up single family residential housing, and convert them into rental properties.

Scenario Three:

Have no fear, the government will save us! Sigh. Since the government has long considered it necessary to intervene in the housing market, you can be almost certain that whatever happens in our crazy market, that the government will get involved to “fix” things.

Of course, the government being involved in the housing market hasn’t always been a terrible thing. Sometimes the government has actually done a decent job at creating a reasonably stable system that promotes high rates of home ownership. Of course, the same government has also messed that system up a few times, and certainly helped create the system that fueled the last housing crash in 2008.

Indeed, one could reasonably argue that the current crisis we are experiencing is the creation of government. We wouldn’t be experiencing the current crisis if it were not for the ultra low interest rate environment that the government helped create in conjunction with the U.S. Federal Reserve Bank, out of control government spending, ultra strict immigration policies that keeps cheap manual labor out of the country, tariffs that make things more expensive, the government takeover of FHLMC and FNMA under the FHFA, the massive increase in conventional lending loan limits, strict zoning and building standards in many major metropolitan cities and states that traditionally vote Blue, rent controls, stays on foreclosure and evictions, and so much more.

I anticipate that politicians will respond to this crisis by doing a couple things. One, they’ll attempt to loosen lending standards like they did in the late 90’s and early 2000’s. After all, housing values are going up, so we should make it easier for people to get approved for a mortgage! Second, the government will probably try to create more “affordable housing,” by putting caps on things like housing values and coming up with convoluted tax schemes on housing. And third, they’ll probably meddle much more in local zoning ordinances, which because of the “Not In My Backyard” (NIMBY) , makes it more prohibitive to build denser levels of housing, and forces builders to adhere to more costly building standards.

Some of these things could possibly be good, and I would certainly welcome. But I worry the government meddling in housing, while it might bring a couple years of relief, will eventually get us back into yet another crisis just a few years down the road.

(Disclaimer: I am a mortgage underwriter for a living and specialize in collateral appraisal reviews for a mortgage company. I have been in the mortgage industry for over a decade. The opinions offered in this podcast episode are my personal opinions, and should not in anyway be understood to be the opinions of my employer. This podcast in no way is an attempt to offer advice on whether or not you qualify for a mortgage, and should not be considered as such. If you have any questions about whether you qualify for a mortgage or have questions about how the current and future lending environment will impact you financially, you should talk to your mortgage broker, certified financial professional, accountant, real estate agent, and lawyer. I am not giving advice, please do not act on anything I say. What I say is purely speculative and for entertainment purposes only.)

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