A New Flavor of Housing Crisis? — Have you been to Baskin Robbins lately? Me neither, but there’s a joke in here about all the different options we have to wax poetic about macro doom and gloom lately. If you don’t know what I’m talking about, LMGTFY.
It’s funny: housing has historically not been viewed as a super sexy macroeconomic topic. Think about your parents’ approach to housing: it’s likely that they own their home and treat it like a savings account.
When you look at home values over time, they typically only went up. People bought them and did the OG HODL. Owning a home has even been a foundational tenet of the American dream for decades.
I’d argue that this changed in the last financial crisis and subsequent Great Recession.
Cheap, promiscuous credit; no income, no job, no problem; exquisite, elaborate financial instruments to go long America’s safest asset class; what’s the worst that could happen?
Well, you know what actually did happen. You’ve probably seen Margin Call or The Big Short, and you get the gist of how it all went down.
Today’s housing crisis is a little different. We’re not seeing millions of families underwater on their mortgages living in homes that are now suddenly worth way less than what they owe on them. We aren’t seeing a wave of defaults, and there isn’t some unexpected financial contagion associated with mortgage-backed securities quickly going tango uniform.
The market today is different. The housing market still has a supply shortage. Between 1950 and 2010, builders slapped together around 11 million new homes per decade. Between 2010 and 2020, only 6.9 million homes were built.
But just the number of new homes is not the full picture. The events of 2020 and a pivot towards a more digitally-enabled economy were a shock to the system. Millennials, in particular, began to demand WFH flexibility and the space and affordability that you can only find in suburban areas.
We’ve lived through a housing boom for the last two years. With the money printer still running and Daddy JPow pouring low-interest-rate gasoline on the flames, demand for housing in this country has skyrocketed.
If you have tried to buy a house in the last 18 months, I’m really, really sorry. That $hit sucked, I bet. If you sold your house, congrats – there’s a winner and a loser in every deal, and you probably hit a home run.
Buyers were forced into bidding wars, often ending in contracts at tens or hundreds of thousands of dollars above the asking price. No inspection? No problem. Just like Robert Kraft’s massage therapist, buyers were willing to do whatever it would take to get the deal done.
Things appear to be slowly changing. Take a screenshot of an outer suburb of a major city on Zillow today, and then compare it to that same area of interest in about a month. Inventory is drastically different today than it was a month ago.
One culprit here is the rise in interest rates. Mortgage rates have ballooned from below 3%, their all-time lows, now to above 5.25% for a 30-year mortgage. This means an extra $250/month out of your pocket for a mortgage at the median home value.
Buyers are suddenly having a harder time qualifying for mortgages compared to a year or two ago. This will have a significant effect on home sales, particularly above the median price.
That being said, historically, a 5% mortgage is not exorbitantly high. Will rates ever drop below 3% again? Maybe, maybe not. How should I know?
But one thing I do know is that we are already seeing slight demand destruction because of ballooning interest rates.
It’s not the end of the world for borrowers. With the recent CPI print at 8.5%, you can borrow money today and pay it back with cheaper dollars. This isn’t usually the case, and consumers can take advantage of it today if they so choose.
Borrowers can also eventually refinance if rates dip in the future. This is something they’re definitely not doing today, though. Refinance applications are down somewhere between 60 and 70%, a metric that might be pointing towards some stability in the housing market that we haven’t seen in a handful of quarters.
This morning, we paid close attention to housing starts data, coming in at a slight expansion compared to estimates. The same was true for building permits.
Clap your hands: these metrics on housing are usually believed to be leading indicators. Even as inventories stabilize and refinance applications take a dump, the wheels aren’t completely falling off the housing market. We can only hope that this relative normalization persists.
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