My son was recently looking to buy a home in Austin, Texas.
He thought he held all the cards, given that he’s highly qualified and given that the internet continues to scream that Austin is ground zero for the housing meltdown.
But…not so much.
Rates fell 1/2% and buyers swarmed back into the (sub-$1 million) market.
I share this because I think that will happen in many markets as rates fall, given the amount of pent-up demand there is right now.
So, the question is: will the falling rates/pent-up demand factor outweigh the threats to the housing market?
Housing Bears And Bulls
Here are two of the biggest housing bears: 1) Nick Gerli; and 2) Darth Powell.
Here is the best counter to the bears: Logan Mohtashami.
Threat #1: Boomers Selling
The internet says that the market will be swamped with inventory when boomers start selling en masse for two reasons: 1) they’ll soon be too old to remain in their giant homes, meant to house six kids, a dog named Tiger, and a housekeeper named Alice; and 2) falling asset prices in a recession will force boomers to sell to find liquidity for margin calls and living expenses.
Mr. Mohtashami might remind us here that this is probably not a significant concern in the near term for a few reasons: 1) the aging process will take many years to play out, so they won’t be selling all at once; and 2) boomers have an enormous level of equity, so even if housing prices correct, few will be selling out of desperation and they will have other options (like reverse and cash-out mortgages).
Threat #2: Wall Street Selling Its Homes En Masse
I’ve seen this threat discussed over and over for the last few years. But the fact is that Wall Street (large institutional investors owning 1,000 homes or more) owns less than 1% (about 0.73% per Grok) of all homes nationwide. Wall Street is a far less powerful force in the homebuying market than most people realize.
Threat #3: FHA Foreclosures
X is lit up with claims that the Biden administration kept as many as 1 million FHA borrowers out of foreclosure with payment assistance. Grok says this is way overstated too. The Biden administration helped about 550,000 borrowers during its term, but not all were FHA, and many needed assistance just because of COVID.
So, while a recession could foster a lot of FHA foreclosures, it will be nothing like we saw after 2008, as FHA borrowers are a much smaller proportion of borrowers than subprime borrowers were (about 8% to 10% less); FHA borrowers actually have verifiable income (unlike most subprime borrowers back in the day); and FHA borrowers are all owner-occupants in sharp contrast to subprime borrowers who were often speculators (investors are far more likely to let properties go).
Threat #4: Airbnb Owners Selling En Masse
I blogged about this a few years ago, as several housing analysts were convinced that we’d see an onslaught of inventory as a result of overleveraged Airbnb owners being forced to sell.
This threat too is way overstated for several reasons: 1) the total size of the short-term rental market is not that large, comprising less than 1% of the overall housing market (per AirDNA); 2) even if owners start to sell, they won’t sell all at once (much like aging boomers); and 3) many short-term rental owners have a ton of equity, and can still effectively take advantage of long-term rentals and/or sell on their own terms (without panic selling).
Threat #5: Job Loss Recession
Mass layoffs could result in millions of forced sales, crashing the housing market – so say the doomsayers. But Mr. Mohtashami reminds us that only a small portion of homeowners lose their jobs in recessions, that credit profiles are stronger than ever, and that borrowers have more equity than ever before, and that 40% of homeowners have no mortgage at all.
Conclusion
All of the factors above combined could result in a housing price correction, and we’re seeing that play out in some markets already (see Florida). However, the pent-up demand resulting from falling rates will offset much of the impact (ask my son about Austin, Texas).
