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America’s Housing Bubble Is Reinflating. Fast.
Updates on both key national price gauges showed US home values continued to rise as summer approached, underscoring the intractability of America's housing affordability crisis.
The FHFA gauge rose 0.7% in May, according to Tuesday's figures. It was the fifth consecutive monthly gain.
"US house prices increased moderately, continuing the trend [but] prices in some regions of the country remained below the levels seen one year ago," FHFA economist Nataliya Polkovnichenko said, as if that's a b
The devil is in the details. First, after the GFC housing was flat in nominal prices for over a decade and new supply was constrained and did not supply enough for population increases. This caused a spike when a demand increase hit. Next when the pandemic hit, there was demand for larger spaces (see spike above)- and the real price of housing was up but much less than nominals due to overall inflation (not including shelter- don’t want to double count). The costs to build new houses had to increase due to supply shortages of labor and materials. Finally, demographics are pushing up demand, as the population of millenials/gen z in their late 20s and early 30s, the prime time to buy a first home, peaks. Also keep in mind there is a bucketload of rental housing being built, so that rental prices are likely to be flattish. This should constrain housing prices in the near future. A bubble suggests that prices are shooting way beyond fundamentals underlying price changes. A 3% price increase when inflation is running 3-5% in no way indicates a bubble- and the fact pattern suggests that prices are going up for fundamental reasons-NOT A BUBBLE. The above article suggests that mortgage rates are too high, and if you look historically a rough spread of 30 year fixed rate mortgages typically is about 150-175 over the 10 year UST rate. RIght now that is 320 basis points. So mortgage rates normally would be 5.50% not 7%. It also suggests that price increases of housing over the next 5-10 years are likely to be on the slow side.
3% growth in and of itself is not a bubble, 3% growth on top of 20% growth, absolutely is. (see graph above)
Also, low income families probably should not be buying housing. They should be renting, until they can afford to buy without taking crazy risks. Housing advocates often focus on low income affordability problems in buying housing. Policy makers should think about helping low income folks. It is just that housing is not where to start. It is supplementing the basics, health care, child care, nutrition, income, and education. A decent place to live is important, but a low income person does not need to own it. Nothing wrong with encouraging affordable rental housing for low income persons. But there is no rule saying low income people need to buy. We tried that out in the 80s, and when ownership rates approached 70%, we had folks reaching, and lenders loosening standards. That lead to a housing crash!
You just said: “Also, low income families probably should not be buying housing.”
That’s an egregious statement and, frankly, it’s not welcome.
To an extent, it’s these kinds of comments (i.e., the “low income families probably should not be buying homes” remark) that make me perversely happy to see out-of-town wealth (real wealth) coming into areas where it wasn’t previously and buying up all the property. That gives the smug upper-middle-class a taste of what it’s like to be lower- and middle-income. Suddenly, that aspirational $1.1 million trade up you wanted is $3 million — because somebody from San Francisco came in and bought the house next door to it for $4 million in cash.
To reiterate a point I make here frequently: The inequality perpetual motion machine is spinning such that all of us save a few dozen individual people, are going to be more or less “poor” within 20 years. It’d be wise to dial back the haughtiness. Owning a $1 million home and a BMW X5 doesn’t make you rich, and it damn sure doesn’t make you any “better” than someone trying to buy a $250,000 home and making payments on a Kia. In fact, odds are the Kia driver is eminently more resourceful and capable.
It is not haughty or egregious. Buying housing can be risky. If a low income person can safely afford to buy- fine. But society should not be fixated on lower income folks owning a home. Society should be focused on lower income folks overall health and well being. That does not mean a low income person should live in squalor. A decent place to live should be a societal goal. But ownership is not for everyone and it should not be an overarching goal of society.
It is egregious. You’re surely aware that for the vast majority of Americans, a home is the only real way to build substantial wealth. Put differently: Most regular people’s wealth is tied up in their home. Without that home, they don’t have much wealth.
So, to say low-income people shouldn’t own homes is to deprive them of the only means by which regular people can reliably build wealth. That’s egregious.
This was unfortunately also Obama’s opinion on housing.
https://thehill.com/policy/finance/230741-white-house-defends-affordable-housing-funds/
You cannot build wealth if you live pay check to pay check, and housing does not necessarily help build wealth if you have trouble providing for other needs because you decided to buy a home/condo whatever. There are many expenses in owning a home that a low income person will have trouble affording. Can a low income family afford a new 10k roof when it goes bad? A new $2000 hot water heater? Oil or gas heat in the winter when energy prices spike? Most places the landlord pays for these things, especially in subsidized housing. While owning a place to live is a good goal, pushing folks to take risks to do it may not make sense. Do you think it is realistic or desireable to push homeownership for someone that is low income and may need to relocate? Or a younger person starting out with low income, who may be starting a career and may not be able to live in one place for long? An elderly person who may not be capable anymore? Many folks are not interested or capable of keeping up a home on their own. It can be more responsibility even if a person has the means. Home ownership is not a one size fits all. If you cannot pay the freight all you are doing is putting folks in a position to fail. It is why State Housing Agencies often require new homeowners to have counseling before buying and borrowing from the state housing agency. As a result of such counseling and a more hands on approach, state housing agencies tend to have lower default rates than VA, FHA etc. It is not an easy lift for many. Lots of wealth was destroyed and lives uprooted during the housing crisis because some of the buyers really should not have bought homes. They were evicted and lost everything. That did not build wealth…..
Listen to Rick Santelli over here. This is the worst kind of propaganda. I’m closing the comments section on this article so I don’t have to police this any further.
Unfortunately, it seems to me that the government is the only entity big enough to help with this problem but because of the far right there will not be the will to actually help. My parents bought a house in the 70’s with a subsidized mortgage rate and the cost of the house was 25k which was also subsidized. The goal was to give them a 30 year fixed payment that would not be more than 30% of their income. This program was through the FHA. The whole neighborhood was built with FHA funds. The houses were spec and they were not given any choices of building materials.
Since the FHA still exists the program could be done again, unfortunately I don’t see the political will to make it happen.
The housing problem with this round of QT definitely seems tied more to available liquidity than it is to prohibitive borrowing costs. Humans have demonstrated a willingness to borrow at outrageous rates to buy the things they want throughout history. Simply raising rates to terrifying levels are not going to be enough to dissuade all potential borrowers from pulling the trigger. If the Fed cares about curbing housing inflation then they need to expedite their balance sheet reduction of MBS assets. Otherwise they are setting a lot of people up for some pain whenever the next recession does finally come.