US Housing Market: will it ever correct?

[Hivemindgammahydra7]

ITT we discuss the US housing market - chiefly detached, single family homes. But any type of home is fair game, here.

Personally, I am struggling to believe that housing prices will ever correct, downward. Like most oldsters, I had a front row seat for 2008, but some things have changed significantly since then, from my perspective.

A. EPIC amounts of liquidity sloshing around, everywhere. That money has to go somewhere.
B. Vanguard, BlackRock, et al borrowing even MOAR FRNs at zero, and buying inventory.
C. Urbanites fleeing for suburbs, and suburbanites fleeing to rural areas.
D. In my area, large numbers of foreign buyers paying cash, most from just one country.
E. Open borders putting pressure on demand.
F. Lending standards have tightened since 2008 - or have they?

I may have left a great many factors out, so please feel free to add them as you see fit. And, please don’t be shy on challenging my A thru F points, above. If I am wrong I want to know, get corrected, and be better informed and educated.

Cheers!

H7

 

[Voodoo]

Where are these foreign buyers coming from? I still think it is all driven by interest rates. If rates do indeed go up 1% or so this year then we will slow down. Throw in some possible deflation from people just up and up dying then things can get really hairy.

Buckle up, that's all I know for sure.

 

[Hivemindgammahydra7]

In my region, China (we’re in the San Gabriel Valley).

 

[Buck]

In my region, China (we’re in the San Gabriel Valley).

you guys building any natural gas free ghost cities up there?

there are several going on down here in my region, near Mexico...we're up for sale next i've read, Governor Greasy is in talks with some cartel...

 

[Hivemindgammahydra7]

you guys building any natural gas free ghost cities up there?

there are several going on down here in my region, near Mexico...we're up for sale next i've read, Governor Greasy is in talks with some cartel...

Only Santa Monica has committed to going NatGas-free, so far (that I know of).

I haven’t heard anything from S.G. Alhambra, Arcadia, or San Marino, as yet. Pasadena would be the one to watch over here, I suspect.

Hope you and your family are doing well, Buck. Happy New Year to you and yours!

Cheers!

 

[Usury]

I think due to underlying inflation that we are unlikely to see a lot of decline, unfortunately.

 

[Hivemindgammahydra7]

I am inclined to agree (but hope very much to be proven wrong, of course).

Thanks for the reply, friend.

 

[Casey Jones]

We have fake money, fake assets, a Potemkin market for securities. The precious-metals market is rigged. Money-printer go brrrr; and prices just keep going up.

We have fake (MMT) economics; fake leaders; laws that are completely ignored. We have a morphing worldwide Oligarch class that seems to think wealth comes from printing presses, and if they lock us all up and make us eat bugs, they won't have to share their printed-up wealth with Little People.

You think ANYTHING normal is going to come of this insanity?

 

[Buck]

Only Santa Monica has committed to going NatGas-free, so far (that I know of).

I haven’t heard anything from S.G. Alhambra, Arcadia, or San Marino, as yet. Pasadena would be the one to watch over here, I suspect.

Hope you and your family are doing well, Buck. Happy New Year to you and yours!

Cheers!

east of me, up / down I-15 'conservancies' are buying acres of property, thousands of acres and are dedicating most of it to the animals while allowing limited, condensed growth, for us humans, most will have solar systems and the newest developments are all electric residential housing

locally, my local 'downtown' was converted to high-rise 'artists lofts' with 'traffic circles' that backup traffic something terrible

my county hired a Russian who destroyed the mass transit system in LA and he's now down here, doing the same thing, has been here for a few years and the bicycle lanes have taken up miles of travel lanes...it's a mess

they pass these losers around, from community to community, county to county, looting local coffers and destroying existing infrastructure (building it all in a manner more pleasing to themselves with no regards for anything local because their ideas come attached with Federal Housing Monies)...

 

[Avalon]

My daughter and her husband want to buy a house this year. I have been trying to keep up with the news. I'm encouraging them to wait and their apartment lease isn't up till June so we have some time. I think housing prices depend on the area you live. Right now RDU is a very hot market with no sign of letting up.

 

[BackwardsEngineeer]

I think you might be approaching the question backwards.... You ask will home prices go down in FRN's? Then will demand continue, ie causing the rise?
Our market has reached a really interesting intersection, prices continuing to rise but not as much as goods and services. They had been leading G & S for the two prior years. This is due to the biggest obstacle which is who is going to pay to push prices to the next level? Look at your home, check recent closed comps near you on similar florrplan and condition, if you're not sure use brillo but assume it is not accurate. Then pull up a mortgage calculator and put that value as the loan amount, add in yearly taxes and insurance, also add in PMI as 100% loans require it. This gives you an accurate estimate of rental monthly comparison. Then check what a similar size home in your area rents for, then you'll be able to see if your market has topped. Once the cost to buy 100% with PMI gets near rental rates the market freezes for all but the chosen few and the dregs... the chosen few push the market top but are long since past the lower levels....

So will prices fall? not sure but the market is definitely slowing and qualified buyers are getting frustrated and tapped out....while cost of all other goods are eating up their excess cash. Something has to bend or break.... my money is on break

 

[Fiat Metaler]

I think due to underlying inflation that we are unlikely to see a lot of decline, unfortunately.

I think the government money printing is going to last for a decade or more, and has and will continue to cause price increases, not decreases.

This past week or so, rates have bumped up. But the Fed can't afford to let them go higher, and they probably move lower from here. If you understand the math behind valuing discounted cash flows, then you understand that lower rates means higher prices.

Normally, when inflation gets going the central bank would increase rates. But the Fed can't afford to do that because its own solvency is at risk. And Washington can't afford to do that because it can't balance its budget and its borrowed short term, not long term.

At some point deflation becomes a risk but those calling the shots have a lot more inflation to try before they allow that.

With respect to housing in particular, there has been pent up demand and constrained supply. It will be years before supply comes into balance with demand.

I think supply is particularly constrained with respect to starter or affordable houses, including townhouses, in areas close to jobs. There is limited land close to jobs, and the cost of building materials, building permits, and labor is not getting any cheaper, if you can get them at all. I've heard horror stories of people building houses who have paid for high-end appliances which are delayed for 6+ months, and this prevents them from getting a government certificate of occupancy to allow move-in and permanent financing.

More at risk are larger McMansions near urban cores - there are not enough Millenials to buy all of those that down-sizing Boomers will be selling. Larger homes in the suburbs and exurbs may have more demand because of relatively better pricing, the recent rise in remote working, and distance from city-dwellers which is now seen as a benefit. My home on almost an acre at the edge of a metro center would cost 2-10 times as much if located closer in. But I would have 10x more headaches from traffic, congestion, and crime. As a bonus, my suburban home has appreciated about 20% in the past year

As for RDU, its a medium sized market that has experienced a lot of growth so supply is constrained. The prospects for growth in the near, medium, and long term are good due to the pharma and bio industries and folks relocating from more-expensive northern areas. I would not be waiting to buy if I lived in RDU. If you look at empty areas where manufacturing facilities are likely to be built, and buy a home close to those, you will probably do well.

 

[Lancers32]

My daughter and her husband want to buy a house this year. I have been trying to keep up with the news. I'm encouraging them to wait and their apartment lease isn't up till June so we have some time. I think housing prices depend on the area you live. Right now RDU is a very hot market with no sign of letting up.

A native referring to the Triangle as RDU. jk. I wouldn't be a buyer anytime soon but the rents are too high also. I think at some point prices have to go down.

 

[hoarder]

B. Vanguard, BlackRock, et al borrowing even MOAR FRNs at zero, and buying inventory.

Their motivations confuse me. Obviously they're fronting for the banking elite and the funds are issued out of thin air with no consequence either way for them. Possibilities include buying housing for third world immigrants (demographic warfare), positioning to crash the market at a predetermined moment or simply driving them up to make money for the banks.

Another factor in real estate prices, although still a few years out, is the die-off of the baby boomers. As the majority of the White population dies off, the real estate market is most surely going to crash, especially anything rural.

But in spite of these factors, I still voted bullish (#3).

 

[Avalon]

A native referring to the Triangle as RDU. jk. I wouldn't be a buyer anytime soon but the rents are too high also. I think at some point prices have to go down.

Its RDU to me now. There is NOTHING left of native NC. Its all been destoryed. You have to go way out to find that. My daughter wants to wait, but the son-in-law is hot to buy. I'm trying to stall him cuz I think prices will drop too. They would be open to moving way out but the remote work wont last and he needs to be close to Cary.

 

[Lancers32]

Its RDU to me now. There is NOTHING left of native NC. Its all been destoryed. You have to go way out to find that. My daughter wants to wait, but the son-in-law is hot to buy. I'm trying to stall him cuz I think prices will drop too. They would be open to moving way out but the remote work wont last and he needs to be close to Cary.

Maybe Sanford.

 

[BarnacleBob]

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[Avalon]

Maybe Sanford.

Lord I remember when Sanford was the sticks. Having grown up in the metropolitan area of DC in the 60s and 70s I know what can happen. I'm surprised it didn't happen here sooner. It all becomes one giant suburb. My daughters and I would love to live on a deserted mountain top. Too bad things like jobs are a factor.

 

[kiffertom]

as long as interest rates are almost zero it will not correct. when we have the first interest rate hike people who are looking for a place will go nuts and buy immediately fearing hikes in the near future which will send prices even higher.

 

[Lancers32]

At some point it just becomes unaffordable though.

 

[.41Dave]

At some point it just becomes unaffordable though.

Or, they just create 40 or 50 year mortgages to increase"affordability".

 

[nickndfl]

Florida is at all times highs. Prices have exceeded and blown through the 2006 top after getting started again in 2015. Prices could go higher, but will eventually plateau somewhere.

Florida median prices have always trailed California. The Sunshine State would need a change in demographics and more industry to get closer to the Golden State. Even though CA is experiencing negative population growth right now, the trend should not last.

I don't know where the market tops and I'm actually looking to sell a couple of oceanfront condos provided I get my price of around $375+ sq ft.

I would love to sell everything and just relax.

 

[Lancers32]

Or, they just create 40 or 50 year mortgages to increase"affordability".

Won't help much if your wages don't keep up. In some areas there is a supply problem but that will get sorted out. Boomers looking to sell eventually is an overhang on the market. This time will not be different. Hard to see you are in a bubble when you are living in it. Nothing goes up forever.

 

[Usury]

They tried 40 year mtgs in the past….not much real pmt diff from 30 yr since it’s mostly interest anyways. So that won’t fix the affordability issue.

 

[.41Dave]

I have no doubt the housing market will correct. Just not sure when it will do so, and whether the correction will take the form of lower house prices or stable(ish) house prices while the dollar crashes and the cost of everything else catches up.

 

[Fiat Metaler]

I have no doubt the housing market will correct. Just not sure when it will do so, and whether the correction will take the form of lower house prices or stable(ish) house prices while the dollar crashes and the cost of everything else catches up.

Its going to correct up for a while because in most places there is still a shortage of houses.

 

[Lancers32]

Lots of areas will see increased property taxes which should keep a lid on some locations.

 

[Bigfoot]

There were 40% more deaths in 2021 because of the vaccines, and that's just the short-term. That number is likely to get higher. It's pretty hard to buy a house when you're dead, at least in this dimension. Of course they can key in zeros in a central bank spreadsheet to overwhelm the number of dead, but all things being equal, dead vaxxed ought to lower house prices.

 

[Scorpio]

For reference,
using a 3.5% interest on $300,000 mortgage

A 30 then 40 then 50 yr amort

from a 30 to 40, saves a couple hundred a month

from a 40 to 50, saves a hundred a month,
but from the current std 30 to a 50 changes the pymt about 300/month

very very roughly
one would need $57k annual income to qualify for that $300k mort with normal down payment

for the 40 year, $49k annual income

for the 50 year, $45k

and of course, all the add ons are not factored in to the calcs,
prop taxes, HOA's, utilities, other debt, change in rates and so on

 

[Fiat Metaler]

I come to a different conclusoin - I think the impact of extending 10 or 20 years is pretty pround.

By extending the term to 40 years, the principal and interest is reduced by 14%. Its reduced by 21% if you go out 50 years. The extension to 40 years is more powerful than lowering the interest rate an intire point, from 3.5% to 2.5%.

Also, at 40 years, some could then qualify for a house worth 7X their annual income. That's incredible if you think about it.

All this is moot though. Extending terms like this puts a lot of risk on banks. The banks learned their lesson during the housing crisis and will only do this to avoid recognizing a nonperforming loan as nonperforming, euphamistically called a restructuring. The trouble then was not the long term of the loan but the small size of the downpayment and relaxed underwriting standards but the result was the same - the banks had loans on their books in a size that dwarfed the collateral.

The original question was housing affordability. Some assume that just because houses in a lot of places have risen 20%-40% over the past 2 years that they are in bubble territory. In the U.S., that rise has taken us back to historical averages of housing affordability, and realize that houses today are a lot larger and have more amenities than in the past. Being close to the long term average, there is still room to rise, and more room is created when wages rise, as they are just beginning to.

While some may be skeptical of the idea that prices can rise higher, the fact remains that the recent significant increases of 20%-40% in most markets has done little to increase the supply of homes. That may be due to supply constraints like not being able to get appliances due to supply chain issues, which prevents a certificate of occupancy, to increased prices for lumber and labor and just plain unavailability of some of these items. There are also natural constraints like a finite amount of land in high demand areas.

Based on how the Fed has been printing, and likely will continue to print despite its tough statements to the contrary, I would expect price increases of about 10+% a year for the forseeable future. That implies a doubling of real estate prices over the next 5-10 years.

I don't see many catalysts for lower housing prices, especially at the entry end of the market. What am I missing?

 

[BackwardsEngineeer]

Scorp laid it all out.... extending terms might give it a boost. But a couple hundred saving will be eaten up by the end of the year in goods and services. Never in my lifetime have we needed the next big thing like we do now....... Flying cars, teleportation, end of disease, magnetic home power sources, mysterious ways to renew the oceans and sky... Something to be the backbone and leader into worldwide growth. That'll kick the whole thing to new levels

 

[hoarder]

Extending terms like this puts a lot of risk on banks. The banks learned their lesson during the housing crisis and will only do this to avoid recognizing a nonperforming loan as nonperforming, euphamistically called a restructuring. The trouble then was not the long term of the loan but the small size of the downpayment and relaxed underwriting standards but the result was the same - the banks had loans on their books in a size that dwarfed the collateral.

It would be a small risk to banks if they loaned their own money, or even depositors money, but the loans are issued by the so-called Federal Reserve. The only risk is that banks might no longer receive interest on loans, which is not really a risk considering their own capital is not involved.

 

[Fiat Metaler]

It would be a small risk to banks if they loaned their own money, or even depositors money, but the loans are issued by the so-called Federal Reserve. The only risk is that banks might no longer receive interest on loans, which is not really a risk considering their own capital is not involved.

That's not quite right. The real risk to the bank is having to recognize - fess up to - a loss. So if people lose their jobs and they foreclose on the homes, they need enough cushion to recover their losses. Extending to 40 years means a guy making $50K buys a $350K home rather than a 250L or 300K home. It means when there are losses for the banks, they are bigger ones.

The relevance of the losses is not whose money it is - you are correct, its all funny money - but rather the bank is out of business at some point as those losses erode its capital. We saw roughly half of banks disappear since 2006 for this reason. So that is going to effect the behavior of banks, which in turns influences the rate of credit (money) creation in the economy.

 

[Lancers32]

Funny money. How many people have seen their wages/income go up by 25-50% the last 3 years? You lose your job the bank gets the house funny money or not.

 

[solarion]

The only risk is that banks might no longer receive interest on loans, which is not really a risk considering their own capital is not involved.

The vast majority of mortgages are sold off by the original bank and ends up in the hands of a quasi-federal franken-agency anyway. Because of this, the deflation some think would come as a result of a collapse in housing market prices is highly unlikely imo.

Their motivations confuse me.

You'll own nothing...and you'll be happy.

 

[hoarder]

That's not quite right. The real risk to the bank is having to recognize - fess up to - a loss.

Fess up to whom?

 

[Fiat Metaler]

Fess up to whom?

auditors, regulators, the public/investors

When a bank is not receiving principal and interest on a loan, it is said to be nonperforming. The loan is on its book at its historic value, less principal and accrued interest. But at some point, when the borrower loses his job that loan is really a fiction. The accrued interest will never be received, let alone the full principal. But writing these loans down or off results in losses on the income statement to the bank which in turn reduce the bank's capital and ability to lend.

They have various tricks like modifying the loan by extending the term or lowering the interest rate. That might allow the borrow to afford the payments and if so the bank can avoid recognizing the loss.

But at some point, it doesn't work. What happened in 2006-2008 is you had couples where they both lost their jobs and they just mailed back the keys to the bank rather than wait to be foreclosed. Getting keys in the mail on a mass scale had never happened to banks before. If forced banks to recognize losses far quicker and deeper than they were expecting.

 

[Fiat Metaler]

The vast majority of mortgages are sold off by the original bank and ends up in the hands of a quasi-federal franken-agency anyway.

This is true, and that system serves the banks. The constraint is that Fannie and Freddie dictate the terms, and that is why loan agreements are all the same. For example, try negotiating a 29 or 31 year loan. Banks won't do it because it doesn't fit the criteria to allow them to resell to Fannie or Freddie.

My only point is the banking industry is not going to move to 40 or 50 year loans. The fact that they hold the loans for mere months before selling to Fannie and Freddie is not relevant because Fannie and Freddie don't want those loans either.

 

[hoarder]

auditors, regulators, the public/investors

When a bank is not receiving principal and interest on a loan, it is said to be nonperforming. The loan is on its book at its historic value, less principal and accrued interest. But at some point, when the borrower loses his job that loan is really a fiction. The accrued interest will never be received, let alone the full principal. But writing these loans down or off results in losses on the income statement to the bank which in turn reduce the bank's capital and ability to lend.

They have various tricks like modifying the loan by extending the term or lowering the interest rate. That might allow the borrow to afford the payments and if so the bank can avoid recognizing the loss.

But at some point, it doesn't work. What happened in 2006-2008 is you had couples where they both lost their jobs and they just mailed back the keys to the bank rather than wait to be foreclosed. Getting keys in the mail on a mass scale had never happened to banks before. If forced banks to recognize losses far quicker and deeper than they were expecting.

Auditors and regulators are owned by the banking elite. The mass media protects banks from scrutiny, if they didn't, the public would understand how the Federal Reserve works.
When a loan is insolvent, a new loan and a different entity can solve that.

 

[hoarder]

This is true, and that system serves the banks. The constraint is that Fannie and Freddie dictate the terms, and that is why loan agreements are all the same. For example, try negotiating a 29 or 31 year loan. Banks won't do it because it doesn't fit the criteria to allow them to resell to Fannie or Freddie.

My only point is the banking industry is not going to move to 40 or 50 year loans. The fact that they hold the loans for mere months before selling to Fannie and Freddie is not relevant because Fannie and Freddie don't want those loans either.

You make it sound like all these entities are independent of each other, just because they're made to appear that way.