The Impending (Non-)Demise of the U.S. Housing Market (2022 Edition)
Trying to buy a house in the U.S.?
Tough luck.
Right now housing prices, like most other prices, are absolutely skyrocketing throughout the country.
To put it in context… home prices in America have, on average, increased by 20.2% or more over the last year.
Wanted to buy a single-bedroom, middle class home for $300,000? Well, it’s $360,000 now.
And most people… people who want to buy homes in this country… they just haven’t seen their wealth magically keep pace and grow 20% over the last year.
As a matter of fact, home prices are now 9.4 times the average individual’s disposable income.
The highest it’s been since the 2007 housing bubble leading up to the Great Recession.
I need not remind you, reader, that catastrophe ensued the last time this happened.
Not just stock prices going down…I mean credit crunchy “End of America” bedlam.
The fear is that, right now, home prices have FAR exceeded what they should reasonably be.
That’s one of the many reasons why you’re seeing articles in the Federalist with headlines like “Key Indicator Hints America Is Headed For Its Worst Real Estate Crash In History”...
And why you’re seeing blogs talk about the “Epic American Housing Bubble.”
So let’s talk about it…
Let’s dig in to what’s going on with housing and what’s been moving prices up up up…
Let’s go into whether things will crash in the next few years (spoiler: yes, but not in the way you probably imagine)…
And let’s put everything in context to see if this is something the average American trying to build their wealth should worry about.
What Makes Housing Prices Go Up and Down, but Mostly Up?
Housing prices are a great asset for understanding basic economic principles…
Shelter is a basic necessity, so everyone wants it.
Homes and housing are a limited resource, so not everyone can get the one they want.
And homes, as an asset, are intrinsically valuable because you can either live in them or rent them to other people who desire shelter.
So as with any market…
Home prices go up when lots of people are buying (high demand) and there aren’t enough homes to go around (low supply).
But because homes are expensive, demand can be spurred by making debt (mortgages) really cheap. The lower the rate, the more demand.
And… that’s what we’re seeing right now.
Mortgage rates are low (which boosts demand), so prices are going up.
Inventory is low (which constrains supply), so prices are going up.
The correlations charted at the bottom of the image above show this inverse relationship.
But if mortgage rates and inventory were the only weights on the metaphorical scale… I’m not sure things would be moving at quite an extreme pace.
Case in point: 1 in 7 homes over the past year have been bought by Wall Street investors (banks, hedge funds, private equity firms, etc.).
And low-priced starter homes? 1 in 5 of those were purchased by investors.
Makes sense. Wall Street has been generally betting that stock market returns would slow down over the next 10 years (as I’ve also been saying) and so have been shifting their money into real estate (as they did between 2000 and 2006… but more on that in a moment).
So inventory is low because everyone was buying – Wall Street included.
And when it comes to new inventory being added to the housing market?
We’re closing in on 2006 peaks… but homebuilders simply haven’t been cranking out homes the way they were during housing booms in previous decades.
And that’s, again, one of the reasons why there’s not enough housing inventory right now.
Combine that with the fact that there are fewer and fewer places to BUILD new housing in the U.S., as well as zoning restrictions on housing density that prevent multi-unit apartment buildings from getting built…
And there you have the perfect recipe for a housing shortage that spurs higher home prices.
Combine that with the fact that mortgage rates are still near historic lows (which allows poorer people to afford more expensive homes)...
And there’s just no reason for home prices to come down right now.
Now… that’s the simple, like, economics of all this.
And now that you understand this stuff, you can probably intuit a few things:
Home prices will go down if and when inventory increases
Home prices will go down if and when demand evaporates and/or mortgage rates increase
And, hey presto, both of those things are starting to happen…
Which means, THEORETICALLY, prices should level out or decrease over the next few years.
But I doubt–highly doubt–that we’re going to truly see a housing crash the way that we’ve seen, for example, the Nasdaq crash this year.
After all, from peak to trough during the housing bubble in 2006, home prices on average only went down about -25%.
And that was a cataclysmic decline.
Meaning: even if housing prices do decline in the near future, houses won’t be suddenly “cheap,” if we’re just talking about face value.
Unless something extraordinary happens, a decline in the housing market will simply make them the same prices they were between 2018 and 2020.
Oh, yeah, prices might come down temporarily…
And when that happens there will be a lot of tears and gnashing of teeth about people losing their wealth…
But as long as there are “buyers” in the housing market, we’re unlikely to see a “crash” that wipes people out entirely.
That’s because, like only a handful of other markets, the U.S. government is DEAD SET on housing prices retaining their value…
By ensuring there will always be buyers in this market.
Why There Will Never Be a “True” Housing Crash in the U.S.
Now, here’s something most people don’t understand about the U.S. housing market that’s different from most of the world…
The U.S. government has been quietly propping up banks and mortgage lenders since 1934.
The Federal Housing Administration protects banks against losses if low-income borrowers default on their mortgages.
This was passed as part of Franklin D. Roosevelt’s New Deal to help bring Americans out of poverty during the Great Depression.
But real talk: That’s not the only reason this safety net for bank lenders exists.
FDR pushed for this because it appeased members of Socialist Party of America, who were swelling in numbers in the 1920s and 1930s and organizing many strikes, protests, and union activities.
It turns out: If you own a house, you’re much less likely to protest or go on strike or sabotage factory equipment.
So America, unlike basically every other developed nation, has a robust housing (and rental ownership) market because, for nearly a century, the government has made homes affordable to lower income earners.
(And this isn’t a kookoo right-wing claim. This comes straight from Alan Maass’ The Case for Socialism.)
As with gas and oil and farm subsidies, the government creates perverse incentives for businesses, because the burden of risk is partially removed from their decision making processes.
And that’s… partly what caused the Great Recession in 2007.
(Here’s why we probably won’t see a crash like 2007: The huge surge of demand came from promotional variable rate mortgages for poor or “subprime” borrowers. People were buying houses they didn’t even live in, and then they couldn’t afford payments once the promotional subprime mortgage rate ended. Right now, home vacancy is at an absurd low, meaning people are living in the homes they own, and demand for subprime loans has been low for years. We’re simply not seeing the same catalysts that caused the Great Recession in 2022.)
Now that most Americans have their wealth locked up in their homes as a result of these policies…
Home values have become a political issue.
Politicians can campaign on keeping housing prices up up up.
That’s… one of the reasons why zoning boards don’t allow for multi-unit housing developments or low-income housing in areas that need it.
There’s fear that that would reduce surrounding property values.
And if that happened as a result of an elected official’s decision? It’s unlikely that their constituents would vote them back in.
So the problems with not enough housing inventory will persist…
And government housing incentives will persist…
And unless something changes, this will all cause housing prices to continually increase over time.
(With 401(k)s and low bond returns and disappearing pensions basically forcing many U.S. workers to be invested primarily in the stock market, stock prices will soon be a political issue like this as well. This is one reason why I'm basically a perma-bull on U.S. stocks: too many powerful players have too much riding on making sure the line always gradually trends upward.)
So What Can a Regular Investor Do to Build Wealth With Real Estate in 2022?
Listen, I get it, there are two competing desires at work here…
Many people in the U.S. want to own a house. It’s kind of a uniquely American thing.
But with the state of the housing market… folks are concerned about whether the time to buy is now… or if they should wait for prices to come crashing down.
And if they’re tempted to buy now, there’s the obvious fear of a looming crash (which, as I hopefully proved to you, is a little overblown).
So if you’re determined to buy a home in the U.S. now or later… here are some things that might be helpful to you when making this decision:
First off, if you don’t have the cash to afford 25% of a new home in the area you wish to live…
Buying a home is not something that should be on your radar yet.
(Why 25%? 20% for the mortgage down payment, plus extras for fees, maintenance, moving costs, etc.)
Instead, you have to focus on increasing your income. And then save more of your income.
I have an article about that here. And another one on getting more money from your current work here.
Secondly, with mortgage rates going up, your monthly payments for anything you buy are going to go up, too.
That means, in some housing markets, it’s actually cheaper, in the long run, to continue RENTING rather than buying.
There’s a calculator here that allows you to make the comparison and see how many years it would take before renting becomes more costly than buying.
(This is what I did in 2020. My rent was $2,400 per month. But then I saw that I could buy a house three times the size of my apartment and pay $1,400 per month for it. Easy decision.)
Third, if you got a mortgage before 2010, your window of opportunity to refinance your home (i.e., get a new loan to replace your old one) at a much cheaper mortgage rate is closing fast.
Get on it.
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