There could be a historic housing bubble getting ready to burst. But if Zillow Senior Economist Jeff Tucker had his way, you wouldn’t know about it.
That’s because, according to this paywalled article on Inman, a real estate trade publication:
First rule of housing bubbles? Don't talk about them.
Here’s what Tucker thinks: “He is skeptical that a housing bubble is looming, but he worries such talk could hurt future buyers in need of homebuilders to continue producing new inventory.”
It’s a fair point, and in fact no one who owns a home enjoys being told their investment might be worth less than they think. Nobel Prize-winning economist Robert Shiller himself has gotten flak from homeowners for warning about “irrational exuberance” in housing prices. A couple of my friends who invest in real estate reviewed and fact-checked this article for me, then begged me not to publish it.
These are all bad signs. When any asset is priced and valued based on its fundamentals, nobody cares what you say about it. Sometimes, owners actually appreciate negative press because it might depress an asset’s price and give them a chance to buy more at a discount.
However, when an asset is no longer priced or valued based on its fundamentals, then confidence begins playing a stronger role than data. That’s why homeowners and realtors and real estate investors get angry about articles like this. If I tell you the facts about the state of the housing market, you might lose that magical confidence that makes prices continue to rise.
Today, I’m breaking the code of omertà. In this article we’re going to explore the current housing bubble and how much longer it’s likely to last.
There are more than a few warning signs I just can’t ignore.
The return of a Great Recession mainstay
During a period of historically-low interest rates, you wouldn’t expect homeowners to be interested in exotic mortgages, would you? Not until home prices rose well beyond what a typical American family could afford. Adjustable-rate mortgages (ARMs) are both easier to qualify for, and cheaper than a standard fixed-rate mortgage – at least for the first few years.
A rise in homeowner financing with ARMs is bad news for several reasons:
- Housing prices could be unaffordably high
- Borrowers could be underqualified
- Borrowers may be buying to “flip” the home before the interest rate rises
- Borrowers are exposed to rising interest rates
Any way you slice it, a rise in this type of speculative mortgage is bad news for the housing market.
According to a CBS News report: “With surging mortgage rates and real estate prices making it harder to buy a home, the adjustable-rate mortgage is making a comeback.”
The Mortgage Bankers Association drew attention to the new ARM recently:
In the last week, more than 9% of new mortgages were adjustable-rate loans, while in dollar terms ARMs made up 17% of all new mortgage debt.
ARMs became notorious during the 2008-09 Great Recession when an enormous global housing bubble exploded. You probably remember the widespread foreclosures and bank failures that heralded the worst economic downturn since the Great Depression.
In addition to a rise in ARMs, some other notable trends are taking place in the current housing market.
First, according to a recent Wolf Street report:
In November and December last year, the average 30-year fixed rate hovered at around 3.2%, according to Mortgage Bankers Association data, which is when homebuyers got the rate locks for most of these deals in today’s data (green circle in the chart).
The chart illustrating the period where mortgage rates jumped “to the moon” shows you this process began in the fourth quarter of 2021.
This matters because (and you’ll know this if you’ve purchased a home), closing the deal takes months. Richter is pointing out that we’re only now beginning to measure the effects of transactions that started so long ago. The housing market tends to lag the stock market for this reason. In real estate transactions, everything takes forever.
Mortgages are much more expensive now, and we won’t see how this plays out in the housing market for another three to six months.
At the same time mortgage rates are surging, home prices are going up even faster. That’s according to the latest Case-Shiller home price index. Home prices nationwide have jumped almost 20% on average, in just 12 months.
That’s an insane increase in average home prices in a single year.
Richter pointed out that some major cities have seen even more absurd price increases. For example:
- San Diego metro home prices have increased 29.1% year-over-year, and by a staggering 301% since 2000.
- Seattle home prices have jumped 26.6% year-over year, and a whopping 281% since January 2000.
- Miami home prices have risen 29.7% year-over-year, which is, as Wolf pointed out, “the fastest since January 2006, on the eve of Miami’s can-never-happen-here epic Housing Bust.”
Here’s the overarching concern: home prices seem to be following the same pattern of speculative bubbles I wrote about last week.
And that’s bad news, because housing is a lot more important to most families than stocks.
A “double whammy” for more than half the country
According to a Motley Fool report: 56% of all Americans (145 million) are invested in stocks. That number is still down compared to levels we saw before the Great Financial Crisis back in 2008. On average, household account balances are just $40,000 and held indirectly, usually through a retirement account like a 401(k) or IRA.
Don't misunderstand me – I don’t mean to diminish the hard work and thrift required to set aside any amount of money for retirement. However, I sincerely hope most of you reading this article have been able to save more for your own and your family’s financial future.
With this in mind, when a stock bubble bursts and markets drop 50%, it would be alarming for many Americans. It might be enough to drive them out of the market completely. Apparently, it did before – which is why fewer Americans own stocks today compared to the years before the Great Financial Crisis. As painful as a market crash would be for the typical American household, it wouldn’t be catastrophic. At least, not directly.
Homes, however, are a different story.
Even more Americans (65.5%) own a home. There are lots of historic reasons that home ownership has traditionally been more popular than investing in equities. Many families believe that owning a home isn’t just a place to live, but also a solid long-term investment.
The average home’s selling price is $453,000. For U.S. homeowners who also own stocks, which means their home is most likely ten times more valuable than their stock investments. For those who don’t have other investments, well, their home equity is pretty much their entire net worth.
If the housing bubble and stock bubble burst together, it will be the worst-case scenario for tens of millions of American families, especially if they’ve borrowed against either asset.
All of this begs an important question…
Is this housing bubble going to pop?
If you ask the National Association of Realtors, they’ll say, “What bubble?”
If you ask your neighbor who just moved in (and paid more than twice what you did back in 2013 for the same floor plan), they’ll say, “I sure hope not.”
If you ask Robert Shiller, the man whose name is on the Case-Shiller home price index, he’ll say:
U.S. home prices rose at a record rate of 19.7% [2020-2021], and now look very unstable. They might increase further for a while, but that may be followed by serious declines… investing in housing in booming locations may not be as safe a long-term bet as many seem to think.
Opinions are the one thing we have no shortage of.
One analyst I follow closely, Wolf Richter, thinks the housing bubble is “getting ready” to pop because home sales are falling:
In its report, the Mortgage Bankers Association today added that “prospective homebuyers have been put off by higher rates and worsening affordability conditions” – namely the ridiculous spike in home prices over the past 18 months, on top of the surge in prior years, combined with mortgage rates returning to what would have been still very low rates a couple of decades ago.
He also noted that housing supply continues to increase, which is another bad signal for overall market health.
There’s a reason we’ve been calling this the “Everything Bubble.” If you think speculative manias are limited to meme stocks and NFTs, that your home equity is “safe as houses,” this might come as a real shock.
I urge you not to ignore it. Instead, make sure you and your family are financially prepared for anything. (Since we can’t predict the future, the best we can do is be ready for it.)
Ways to protect yourself from the end of the “Everything Bubble”
Today, right now, is a good time to consider re-examining your risk exposure. Back in 2008-09, quite a few people lost a lot of their retirement savings from taking unnecessary gambles in speculative markets. An awful lot of them found home ownership to be a path to financial ruin rather than the American dream.
Don’t forget that your home may be a riskier asset than you thought.
Is your personal risk exposure in line with your goals and time horizon? A brutal bear market that ruins retirees’ savings can be a dream-come-true to a younger family with decades of earning and saving ahead.
Are your savings diversified appropriately, or are they overconcentrated in certain asset classes (stocks, real estate) that are likely to rise and fall in value at the same time?
Many choose physical precious metals, especially gold and silver, as a means of diversifying their savings or as “portfolio insurance” to balance their overall risk profile. There’s another appeal to owning physical precious metals, as well. They’re simple. Their value doesn’t depend on the whim of a central banker or CEO. They’ve maintained their value over thousands of years, while many a speculative asset bubble has inflated and collapsed.
Finally, there’s a great deal to be said about the confidence and certainty you gain from owning real, physical assets. Many a Birch Gold Group customer has told me they find themselves paying less attention to the financial news and more attention to the things that really matter in their lives. They don’t feel like they have to worry about their future as much. And, while it’s hard to put a dollar value on a good night’s sleep (especially during trying economic times), we all know it’s worth quite a lot.
Please take a few minutes to learn about precious metals and their benefits – you’ll definitely want some diversification in your savings in the case your home becomes a “risky asset.”
Peter Reagan is a financial market strategist at Birch Gold Group. As the Precious Metal IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver. Based in the Los Angeles area, the company has been in business since 2003. It has an A+ Rating with the BBB and hundreds of satisfied customer reviews.
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