A few days ago, one regular reader ventured a quip about my (admittedly repetitive) characterization of the US housing market as an unsustainable mini-bubble.
Note I used the qualifier “mini.” Scarred by the subprime meltdown, lenders are still cautious. Generally speaking, housing market participants can’t get away with anything like the laughably cavalier behavior immortalized by Michael Lewis in “The Big Short.” The leverage isn’t there, and in that respect, at least, mentioning the current froth in the same breath as 2008 is almost a total non sequitur.
My critique of the pandemic-era housing boom relies heavily on common sense. Q4 2021 marked the fifth consecutive quarter during which the value of US real estate rose by $1 trillion or more (figure below).
I doubt that’s sustainable. The trajectory is simply too daunting.
There are, of course, myriad back-of-the-envelope ways one can calculate Americans’ capacity to keep buying homes given prevailing prices, mortgage rates and income trends. I’ve eschewed such metrics over the past two years in favor of a simpler, more qualitative assessment: The median American family doesn’t buy things that cost half a million dollars.
The good news is, they don’t have to — yet. In February, the median existing-home price for all housing types in the country was $357,300, according to the NAR. The median new home price last month was $408,000. Neither of those figures are half a million, and $100,000 makes a big different when it comes to monthly payments. Still, those prices are a heavy lift for families, if for no other reason than conjuring a decent downpayment means coming up with at least $75,000 in cash.
For a family of four making under $100,000 per year, saving that much in cash (and I emphasize “cash” because that’s separate and distinct from retirement contributions, emergency savings buffers and other sorts of cushions families need) is a tall order. To doubt that is to suggest the median American family has $75,000 in totally unencumbered cash sitting in a savings account, ready to be deployed. Forgive me, but that doesn’t seem realistic.
A September 2021 study from real estate startup Tomo suggested the average American would need to save 10% of monthly income for eight years to afford a downpayment. In Los Angeles and San Francisco, the figures were 19 and 18 years, respectively. In New York, would-be buyers would need to save 10% every month for a dozen years.
As usual, I’ve buried the lede. The purpose of this short piece was to point out yet another large weekly jump in mortgage rates. With last week’s increase, rates are now the highest since December of 2018 (figure below).
If you’re keeping track at home, first of all, congratulations: You’re reading this article from the comfort of a rapidly appreciating asset. Second of all, note that the four-week increase illustrated in the visual is nearly one full percentage point.
You don’t need to be a mortgage banker to know that if rates continue to rise on that kind of trajectory and prices don’t adjust lower, the pool of eligible buyers for a given price point will shrink rapidly. Those buying at the low-end will be priced out of the market. It’s a mathematical certainty, unless lenders relax their standards.
Already, demand for vacation homes is plummeting. According to Redfin, rate locks for second homes abruptly dropped to a two-year low in February (figure on the left, below). Although demand was still up 35% from pre-COVID levels, the prior month’s figures represented a near 90% increase.
“Rising mortgage rates, combined with rising home prices, are hitting the second-home market much harder than the primary-home market,” Redfin Chief Economist Daryl Fairweather said. “That’s largely because vacation homes are optional. People don’t need a second home, but they do need a place to live.”
Yes, they do need a place to live. But, again, I’d argue that the combination of record prices, surging rates, imminent Fed MBS runoff (and eventual active selling) and constrained household budgets amid the highest inflation in 40 years, is a recipe for a slowdown. You can’t buy what you can’t afford, no matter how much you need it.
A separate Redfin study released this month showed a record 8.2% of US homes are worth $1 million or more (figure on the right, above). That figure was 4.8% in February 2020.
Redfin Deputy Chief Economist Taylor Marr summed it up. “The surge in housing values has turned many homeowners into millionaires, but has pushed homeownership out of reach for a lot of other Americans,” he said, noting that although incomes have increased, they haven’t risen as fast as home prices. That, Marr remarked, “means many people are stuck renting or have to move somewhere more affordable if they want to buy a home.”
A third of New York homes were seven figures or more in February. In San Francisco, nearly 90% were worth at least $1 million last month.