The One Thing That Can CRASH The Housing Market!
I have repeatedly blogged about reasons why we are not in a housing bubble:
- Demographics & Demand: Homebuying demographics are peaking, as a surge of millennials is just now hitting peak homebuying age (early 30s). This is in sharp contrast to the 2008 housing meltdown when homebuying demographics hit all-time lows.
- Supply Issues: (A) Builders were constructing twice as many new homes in the years prior to the 2008 meltdown as they have been for the last ten years. This has severely exacerbated supply shortages; (B) homeowners with low 30-year fixed-rate loans are less likely to sell too in order to hang on to their low rate; and (C) homeowners are also worried about the ability to find a new home in a tight market if they were to sell.
- COVID: The COVID crisis further stimulated demand for housing, as people are exiting cities and apartments in general to find more space and to create better work-from-home environments.
- Institutional Buyers: Institutional buyers have been buying up single-family residences en masse ever since the 2008 meltdown. They have little incentive to sell too because they are unable to find better yields in other asset classes. This exacerbates both demand and supply issues.
- Stronger Lending/Skin In The Game/No 100% LTV Speculators: Prior to the 2008 meltdown, no money down or very low-money-down loans with no income or asset verifications were available for almost any buyer with a pulse and an ability to sign loan documents. As a result, speculators dominated the market, buying homes “with no skin in the game” (no down payments), and many, if not most of them, walked away from their mortgages when the market corrected. Nowadays, with lending standards far tighter, we will not see buyers walking away from their homes, both because they have much more invested in their homes (skin in the game) and because they have sufficient “verified” income to make payments.
- Increased Money Supply/The “Denominator:” I blogged about this recently in fact, citing hedge fund manager Raoul Pal. In his Real Vision podcasts and videos, he frequently reminds listeners and viewers that asset prices almost always increase in conjunction with money supply increases. So, we should not be alarmed by the recent surge in both stock and home prices. This is because the price surges were all but inevitable as a result of the “M2” money supply (checking, savings, time deposits) growing at 26% last year. This would imply that we still have a ways to go too, as housing prices “only” increased 13% year over year. 😊
THE ONE THING?
So – what is the one thing that could crash housing?
A surge in interest rates could tank the housing market, because it would create major affordability issues and/or simply scare buyers out of the market.
BARRY HABIB TO THE RESCUE!
But fortunately, Barry Habib was on The National Real Estate Post today to allay our concerns.
Mr. Habib believes a surge in rates is not in the cards for two reasons:
- Deflation is the bigger concern. Habib thinks AI, innovation and technology in general will continue to drive down costs and eliminate jobs irrespective of Fed policy, and this is most definitely deflationary. This matters of course because inflation fears drive up rates while deflation tends to bring rates down or at least hold them steady.
- Yield Curve Control (YCC). YCC is when the Fed buys up both mortgage securities and Treasury debt as necessary to keep yields artificially low. There has been much speculation about whether or not the Fed would engage in YCC, but Mr. Habib explains that it is doing so now and will likely continue to do so.
I encourage readers to watch the video I link to above, and I also strongly encourage agents to share this blog with buyers who remain apprehensive about high housing prices.
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