This is my latest “Bubble Watch” column. Since May 2018, the reliable spreadsheet has investigated trends to see if any economic or real estate issues are coming. With problems officially here, a “clock” is no longer needed.
Buzz: The bubble burst. Again.
Source: Home values face significant drops as rising mortgage rates and economic unease crush affordability and the willingness to buy of home hunters. Most notably, the California Association of Realtors predicts a 9% drop in values statewide for 2023.
Lessons can be learned in each cycle.
The pandemic wreaked havoc on the wider economy, but surprisingly, it served as a boost for housing. A shopping spree erupted as people sought bigger housing and real estate investments, while mortgage rates hit record lows.
Let’s look at what the housing market has taught us recently, noting some warning signs you may have missed…
Pricing issues: When mortgage rates are lower than inflation, fear.
In April 2021, inflation – 4.2% and a 13-year high – surpassed the average 30-year mortgage rate, which was at a near-record low of 3.1%.
This type of inversion had not been seen for 41 years. Mortgages, on average, are 4 percentage points above inflation.
This suggested inflation was a growing problem. Rates would rise higher as the Federal Reserve used more expensive financing in a so far failed attempt to cool an overheated economy.
Even in September 2022, the Consumer Price Index was rising 8% a year. The 30-year mortgage rate had only surpassed 6%, effectively crushing home-buying affordability.
Isn’t it so funny? When home buying becomes fodder for comedians, get nervous.
The real estate market has a bad habit of getting too popular. In February 2022, a Saturday Night Live TV skit parodied housing insanity with a fake advertisement for Zillow’s online home-search services.
The skit suggested that hunting for a house online was a new love thing. At the same time, two public opinion polls suggested that house-hunting was more popular than sex.
I gave these developments six “stars” on my five-star scorecard.
choice words: When someone important says “bubble”, take it seriously.
In March 2022, researchers at the Dallas branch of the Federal Reserve Bank released a report saying that “home prices seem increasingly out of step with fundamentals.”
The warning was dismissed, ignored for exaggerating the market’s modest risks. Even the report said that the “fear of missing the wave of exuberance” would not be a repeat of the 2000s bubble burst.
But the report’s author, Enrique Martínez-García, told Fortune magazine: “This could be a housing bubble. Evidence suggests it looks like a housing bubble. A bit like a duck. It walks like a duck, it looks like a duck, it certainly could be a duck.”
Click on power: Be careful what you wish for.
Nobody liked to run around town to buy houses. Online home searches have dramatically improved home searches.
The lockdowns have forced home tours to go virtual. This change has greatly improved a home hunter’s ability to select property possibilities with just a few clicks. So now we have a more efficient market.
But efficiency cuts in many ways, including pricing. So expect faster ups and downs. And that change is a permanent change.
slippery supply: Is quick sales just buyer enthusiasm or better business performance?
The pandemic has limited how many homes listed for sale were found in traditional listing databases.
Thanks to better technology, homeowners no longer have to put a house on the market to get price surveys. Computer-aided assessment models will give you a solid guess.
So the offer is now dominated by serious sellers. The historic high levels of listings seen years ago will not be easily replicated.
The resulting short time between a listing and a sale feels more like a matter of improved logistics than an increase in buyer desires.
Bad data: Let’s be honest. We’re all guessing.
The first Bubble Watch in May 2018 dismissed concerns that poor new home sales data boded ill. Because? These statistics are a poor estimate of builders’ selling activity.
Housing data is far from perfect. Most benchmarks only track slices of supply, demand, sales, or prices.
Who is buying? Who is selling? Are they homeowners, investors or second homes? We only have approximate guesses.
And there’s another giant hole in the knowledge – family owners. We know next to nothing about this half of the rental market.
So digest any analysis – even your own – noting for statistical shortcomings.
The 5% barrier: The tipping point was in the rearview mirror.
In 2018-19, mortgage rates approached 5%. Home purchases and price appreciation essentially stagnated.
In 2018, the Fed worried about a buoyant economy and went into high-rate mode. The following year, the Fed admitted an overreaction and reversed its rate policy.
This period foreshadowed real estate market struggles with rates of 5% or more.
And that Fed flip-flop may have led some people to believe that the central bank would not aggressively fight the inflation problems of 2022.
Building blocks: Builders might be a small sales niche, but it’s definitely worth watching.
In January 2022, a widely watched monthly survey of homebuilder sentiment turned negative. Since then, it has dropped every month in 2022.
CEOs see sales cancellations, decreased foot traffic on projects and a need for discounts. The builders’ trade group says we’re in a “real estate recession.”
madness fed: Don’t trust the central bank… but you can’t ignore it.
In 2005, then-Fed Chair Alan Greenspan told Congress it was just “foam” in the bubbling housing markets. The housing disaster that followed made “foam” a huge understatement.
In the era of the pandemic, the Fed has clearly misinterpreted “transient” price increases that were actually serious inflation. Meanwhile, the central bank’s hope that historically cheap money would allow housing to be an economic base worked — for a while.
With that background, who do you want running the economy? Congress? The White House? Or simply the “free” market?
2008: “It’s different this time” is always true.
Industry gurus correctly say that the 2022 market is nothing like the mass stupidity of the mid-2000s, when the previous bubble burst.
Yes, mortgage approvals were of ridiculously poor quality in the early 2000s. When the market lost that momentum, it crashed.
Yes, pandemic-era mortgages were high-quality loans. But they were made at “bargain basement” prices, thanks to the Fed’s temporary generosity.
The new housing challenge is to recalibrate to “full price” financing that has profoundly reduced a home hunter’s purchasing power.
What is the next?
The startling real estate changes of the pandemic era should teach any forecaster humility.
Let my reliable spreadsheet give you some clues about the future using the average home price of California realtors, which peaked at $900,000 in May.
When the bubble burst in the 2000s, the state average was down 59% from the high of $594,500 in 2007. It took 11 years for a new record price to be set.
But the less-discussed bubble burst of the 1990s lowered prices by 20% from their 1991 peak of $211,000. A new high has not been seen for eight years.
With the story stated, I’ll remind you that “it’s different this time” is always true.
Jonathan Lansner is the business columnist for the Southern California News Group. He can be contacted at [email protected]