Who Wins in a long-drawn-out gradual Housing Bust?
It always boils down to this: Regardless of how thin you cut a slice of bologna, there are always two sides to it. When home prices drop after a housing bubble, there are many losers. But here are the winners – including a whole generation (11 minutes).
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The financial sector is a parasite as is local, state and federal governments. Asset inflation was meant to save these entities not the average individual. The assumption is that the FED can engineer a gentle controlled landing of the economy. I am confident if they could control it there would have never been a 2008.
But…the odds of gradual? Also, this assumes clean creator histories at a time Financial institutions will be tightening lending standards. This is where the debt conundrum kicks in. And what about runaway HC costs?
How many times in history have bubbles of this magnitude ever slowly deflated?
It isn’t just one housing bubble.. There are multiple bubbles. Student loans, leveraged loans, auto loans, and all those derivatives and pension funds. Lots of Zombies and Monopolies.
Human’s go from greed to fear rather quickly. Fight or flight.. And of course what has inflated the housing bubble was the high end wage bubble for companies that are either monopolistic or Zombies. It either continues or it doesn’t.. It won’t just slowly change directions where the monopolies lower wages or the Zombies slowly go out of business.
Excellent. Thank you.
Regardless of how thin you cut a slice of bologna, it always has two sides.
-Wolf Richter 2019
Youtube captioned it (at 1:19 minutes) as:
Regardless of how thin you cut a slice of “baloney”, it always has two sides.
I’m thinking the quote works with that too. lol.
Agreed. It seems the american pass time for many has become flipping houses, buying rentals…in fact the “joy” of fixing toilets and dealing with tenant trash almost exceeds the joy of sex for some. Also, far too many folks look at their house (notice I did not say home) as an investment rather than a place to live and build memories, raise a family etc. George Carlin was right on when he said the american dream is consumption….what we’ve done to housing is just another form of consumption. Very sad. One’s heart is indeed where one’s treasures are.
George Carlin said of the “American Dream” that you have to be asleep to believe it.
We’re on a treadmill economy. There aren’t a lot of ways for people to get ahead and save for retirement. A couple of good flips and your retirement looks healthier. FYI..I don’t flip houses but I do understand why people take the risk. I’d go so far as to say we have older generations flipping housing out of reach of the milineals. Older generations lost a lot of their savings from the changing job markets and asset crashes over the last twenty years. Tough situation on both sides of the baloney.
Wonder if anyone on the Fed questions the validity of the 2% inflation rule, because if things change and wages actually start rising again like they did in that galexy a long time ago far far away, holding to 2% could mean falling profits and asset prices
The FED, the FED the FED… I heard Wolf said many times that he “wish” “they” could engineer a slow deflation of house bubbles. I thought about this for a while and I think Wolf is either dreaming or he just broadcast what people wants to hear to attract more traffic.
My thought is this. The reason “common” people are being squeezed out of house ownership is simply because they are NOT good at gaming what FED does comparing to “smart” speculators who front run both FED and “common” people. What ever FED engineers the outcome, they will front run “common” people, rate rise? rate fall? wage rise? wage fall? It never matters. Common people lost their home simply because they are “dum”. Common people only “create” wealth, they don’t know how to do wealth “transfer”. The “smart” ones analyzes every FED move and they “transfer” from common people.
How to solve this? It is NOT ZIRP, QE, 2% targeting, rent control, universal income… Just use sound money and shut the FED down. Sound money and NO bailout will govern and discipline everything.
If you ask the FED to engineer a slow house down turn, I guarantee the “smart” will front run common people again and more people will lose homes. Sigh…….
JZ
The US gave that a shot in 1929 (gold & silver certificates were still in circulation until recalled by FDR in 1932)…didn’t work out so well.
True, the Fed was created in 1913, but it was a pretty weak embryonic institution in 1929; the Banking Act of 1933 (AKA Glass-Steagall Act) significantly altered that, including implementing the FDIC.
A large capitalist system (like any other “-ism) requires regulation for stability; there is no such thing as a perfect “sound money” because money is never a store of value, it’s a transfer of value.
1929 depression was by design, fully explained in; the fruits of graft by Wayne Jett.
Javert, who is it to judge great depression did NOT work well? People who don’t like temperature being low will always say “winter does NOT work well”, but that is the nature, a force higher than human inyelleigence. I understand and respect there is a culture to break any limitation of nature, but the attempt to compel eye remove winter and run summer all the time and other wise “it” does NOT run very well sounds disrespectful for the universe.
I always hate the game, NOT the game game players. The game of money and banking has always two opposing design metrics. Discipline and elasticity. Elasticity is what you need to absorb natural disaster or other shock of the economy. Discipline is what’s needed to remove corruption. I am NOT here to say which one works “better”, all I am pointing out is that all the “elasticity” the FED has created/used has created Boeing 787 and Elon Musk, and the alike. But at the same time, these policies have weakened discipline and created corruptions. Those who are FED friends, who access low rate loans, who are better at gaming the actions of FED and transfer/socialize the risks have DESTROYED working people who spent at their time and effort creating values rather than gaming the FED. This corruption has directed people to spend time studying transfer and game theory in casinos while they should all go read research papers and do their production more efficiently. This is why productivity sucks, this is why Wolf Street exist, this is why you are reading this.
By removing the FED and sound money, it restores discipline and nobody can game the FED mives and transfer the risks. If the mass is poor, the bank is poor. with the FED, the mass is poor and the bank is rich since they don’t need common people’s money. Fed can print it. Sound money will likely to create depression and cause over leveraged people to lose their homes. But hey, if a system can NOT punish wealth transfer through gaming money and reward wealth creation through production, the system will corrupt itself into oblivion.
Unsound money and regulations? Those who game money will game regulations too. The point is, you have to keep it simple and sound, other wise, “dumb” working people lose to “smart” wealth transfer parasites.
“…he “wish” “they” could engineer a slow deflation”
Not sure I said that.
What I did say, and keep saying is this: a SUDDEN steep drop in home prices would be a much bigger problem for the financial system and could get very messy.
But a gradual descent is manageable — and has the positive effects on the economy that I mentioned. So I “wish” that there is NO SUDDEN and steep plunge in home prices. This would be very messy – and it would unleash the worst at the Fed.
Wolf,
What would be the probabilty of “wish” being fufilled?
There are several checks against a sudden drop, one is falling mortgage rates. Fed cannot knowingly deflate asset prices. Faced with their inability to raise inflation, giving mortgage buyers a leg up, they have little choice but to continue to spoon feed the 1%. The states and munis are legislating affordable housing and rent controls, which helps the Fed avoid federal and public criticism. Yellen was notoriously cold to real economic issues. Powell has now thrown in with her, re: her deft handling in 16. In 29 the demise of the private family farm occurred through higher property taxes, and price controls which took away the market. By managing asset prices artificially high, property taxes become punitive and people lose their homes, even with a zero APR mortgage.
Wolf, your worry is exactly my point. The fact that FED exists, those who does wealth transfer game better may well crash some market so that they will force the worst out of FED. When FED is the source of the money, wealth transfer game playing folks can abuse the mass common people. If there is NO FED, the wealth transfer people have NO choice but to align their interest with the well being of the mass common people since if mass common people fails, they have nothing to transfer.
Sorry, my point being if the Fed does not raise it’s 2% rule it may abort any wage increase s.
Wages increases are bottom up, you raise min wage and it percolates higher. The Fed makes housing unaffordable the states address the problem with grants. The US military destroys thousands of lives, its own people, then ignores them and the charities step in, you see the process? Its been said, that Trump cannot institute tax cuts and deregulate industry without the liberal safety net, just as Walmart can’t pay less than a living wage without social services.
In my itsy-bitsy-teenie-weeny portion of the economy where I have an actual metal cutting mold making business I have passed along a large amount of the profit to employees. Eleven to fifteen percent of their gross goes to their IRA account. Most withdraw it and piss it away, but I cannot lead their lives.
I really put the screws to them by demanding that they pay ten percent of the so called “health insurance” so that they would find out just how costly it is. All of the deductions from pay are itemized on their lower check forms.
They are sheep and do not object to being sheared and rendered into mutton.
Reading through some articles on property ownership by age group and one thing that stands out in msm is the meme that the younger generation do not want to start home formation. I think that is really rubbing in the salt, as I do not much read a proper explanation on why they do not want to start households (current prices for example) , it just seems to be more convenient to blame the group of having disorientated, if not individualistic, attitudes. So kudos for undelining the problem of house prices and debt as fundamental.
I flicked through a mixture of charts, by age, by country, and just throw down some figures :
Oz 1981-2016 a near straight line for
25-34 yrs 60% home ownership ending at 45%.
35-44 yrs 75% down to 60%
Uk 1981- 2012 downward curve
16-24 yrs 35% down to 10%
25-34 yrs 60% down to 40%
US 1982-2017 has a downward trend with a reverse increase of ownership to 2005 which then dips to end even lower
Under 35 yrs 40% down to 35%
35-44 yrs 70% down to 60%
In all of those the older/est generation saw much less decline, in UK the oldest generation % ownership has increased steeply.
The fact that the under 35 yrs and 35-44 yrs all fluctuate in parallel does in the notion that it is specific choice of the younger age group to avoid purchase.
One more unusual figure that I am sure someone will be able to explain – all western countries show total home ownership rate over 60%… except for Austria, Germany and Switzerland
https://en.m.wikipedia.org/wiki/List_of_countries_by_home_ownership_rate
?
Having lived in Switzerland for an year, the two reasons that I’ve heard people quote as the reasons for low home ownership in Germany and Switzerland are (1) good housing that was provided for a large portion of people after the destruction of World War II (2) supported by very strong rental regulations which makes renting a secure and dependable option over time.
Thanks, and that is what I am reading on researching this. For Switzerland though the question of unaffordable prices seems very present in online debate I have read. I typed out a summary before logging in to wolfstreet, so that answer to my own question is below.
I’m going to venture a guess on why the youngsters are not in a rush to start their house buying adventure. They can’t. They have to pay off their idiotic student loan debt before they can take on housing debt. They still need cars but maybe not new ones.
Reading up on it the answer to that question goes something like this.
Post ww Germany managed the housing supply with a mixture of policy that guaranteed rental security (socialism being better than communism tenet maybe), that kept the balance between construction and final use equitative. Prices did not boom through private speculation due to lending requirements.
Austria I found no detail but imagine similar.
For Switzerland it is the combination of very high prices and lending standards that has home ownership at minimums. There are various alternative theories offerred but local critique has it as stated.
For the UK post war reconstruction engendered its own policy attempts. It is said that because the oversight was skewed or absent, socialised housing became synonymous to shoddy, and the public chose private ownership as the favoured route.
So it seems that the route favouring private ownership, which is more free market, is also open to mass speculative distortions when combined with poor rate policy and lending standards.
There is clearly a generational rift of understanding in the Anglo-saxon world, where older generations justify their position no matter that as a whole it is not realistic to the younger generations in the environment they step into as they walk out into the world. It is not just the different expectations they are raised to, but those imposed by a more merciless attitude in society, along the lines of fit into what is allocated or be out. Older generations had a much friendlier bonhomie of direction in my opinion, subtle but it made for a real difference.
Either way, here is a closing paragraph from one article
“And German people clearly like how their system of housing works. According to the OECD, more than 93% of German respondents tell pollsters they’re satisfied with their current housing situation. That’s one of the highest rates of any nation the rich-country think tank surveyed. Then again, the Irish and the Spanish—where homeownership is much more widely spread—seem just as happy.”
So in short the free market approach is just fine – as long as the speculative finance is not encouraged. Unfortunately our countries have turned to asset valuation as a form of income, also using it to access offshored productivity. That explains where that leaves those who were not on the ladder when it all started.
If we know that QE caused asset price inflation and it made the rich richer, then why will common people complain if expensive home prices drop?
I would like to see normal come back to home prices.
Thank you Wolf Richter. Similar to Case Schiller index that compares inflation of a home price over time, is there an index that measures that inflation with respect to wages? While I’ve heard you say in a couple of pieces that wages haven’t increased at the same rate as home prices thereby contributing to the housing bubble, is there an index that quantifies it by saying something like median home price increased to 4x that of median salary for this city etc.?
Home price to income ratio
https://www.longtermtrends.net/home-price-median-annual-income-ratio/
My favorite weekly update, thanks wolfman.
Lower home ownership levels for those raising children seems to correlate with central bank money printing and the increased concentration of wealth by the 0.1%.
This hurts the long term future of each country.
Houses are normally built to provide homes for people.
When people don’t have suitable housing they do not marry or raise children.
As long as the people who benefit from higher housing firmly remain in control then expect fewer and fewer people to be able to marry and raise children.
Only the very rich and the very irresponsible government subsided poor will produce offspring. Oh, right we have already reached that goal!
Plenty of children in India. All arranged to get married just in time and to come here with degree and no student debt. Probkem solved.
Thanks to H1B visas that I hoped President Trump would act to restrict.
Like all the illegals he’s hired over the years to build and operate his casinos and hotels? Yeah, right, he’s gonna turn right around and hire Americans at Union wages ….
“no student loan debt”. Any data to back this up? A lot of Indian students in the U.S. take loans back in the home country. The U.S. education cartel absorbs a lot of overseas money.
I took student loans in India to study in Europe and the U.S. in Indian rupees. This was 25 years ago. More and more students in India do this.
If you are going to raise a child and position him/her for success in the new economy, you will need to invest significant resources into that child over 20 years. Far more than in the past.
Pre-K education, private tutoring, mentoring, coaching, etc are essentially a given to get your kid into the schools that are the gatekeepers to an upper middle class life. Most parents have the opportunity to do this for one child, maybe two if they are wealthy. That’s the reality today, and probably another major reason why people who should be having more kids aren’t.
some sf housing gossip: the quality of the new construction is sub-par. on the jobsites it’s like there are no adults around. the developers are massively understating the HOA fees so that the units will sell quickly. These two factors are leaving the new debt-laden owners with serious problems as #1 their property value has peaked and is falling. #2 the fees weren’t enough to cover even a well built structure, let alone a piece of garbage #3 their building is falling apart from water damage and burglaries (which are going completely unmentioned by the media as per usual, but sf has become a city of smash-n-grabs and break-ins).
These HOAs are completely underfunded. so much so that ‘special assesments’ have to be enacted. these are bills to the new owners (with a lien on their property if they don’t pay it!). The hard truth is that many of the HOAs don’t even have the money to sue the developer!
Given this bit of anecdotal evidence one might think you’d get the deflation Wolf is talking about – but this is san francisco – 40%? sustained over many years? I hope he’s right.
I thought the inspection regimes all over NA were improved after the disastrous effects of Condo disease was experienced in one of BC’s past housing booms. However, the problem with these ‘new’ regulations of today is that they use a one size fits all solution for the Building Code, imposing many nonsensical procedures and materials where they are actually detrimental depending on location and building design.
Funny, my brother and I built houses over 40 years ago that are doing just fine. Apartments I worked on 40 years ago are still full and rented, look the same, and have not had to undergo refit. Then, the new housing wraps came along, were mandated, and mositure problems, mold, and rot began to appear. Cheaper OSB sheathing (that wicks moisture) became common. When I renovated/built my current home it was in a non-inspection locality and I used tar paper for underlay with cedar applied directly over…..(3 layers to exposure) like we used to do. Sheathing is fir plywood. The place looks like an Oregon beach-front home, complete with the granola octagon window high up on the living room gable end and the weathering shingle siding (over tar paper).
Oh yeah, I also worked for a union company building those older apartments. We were never told to cut corners, but if we had been we could tell them to go pound sand and didn’t have to worry about being replaced with ‘day labourers’. Then along came the race for the bottom aka decertification, all in the drive for higher profits for developers.
Why does this matter? I know owners in sister condo developments, different buildings…same company, same location, same strata. The newer building failed, yet all strata members assesed fees for repairs and refits, in one case $125K for each owner. Strapping for rain shield makes me think of a woodstove chimney, and I imagine fire racing up the side of a building “behind” the exterior cladding.
Condo buyers beware. Look for new construction home warranties. Look for development insurance. Don’t ‘buy’ the floor plan and appliances. Look at the building practices. Get the advice of a carpenter and pay them for their time and opinion. Many many home buyers are not only paying too much, they are also buying financial disasters.
Modern day new housing in busy locations is problematic in all ways; affordability, practices, quality, guarantees, and viability. People might be better off buying something old and renovating. Outside advice, (not from the brother-in-law), but from a professional might be the greatest saving, ever. Oh, and I am not talking about those ‘Inspection Companies’ mandated by banks and Govt. I once sold a place and the inspector did not even go into the crawl space. For all he knew the sewer could have been discharged onto the slab. He didn’t even look! When we sold my mom’s place, same thing.
The irony is that city buyers pay a huge premium for new construction to avoid such headaches.
I visited SF is 2010 just as the market was beginning explode because I was hearing chatter of huge investment opportunities due to a major start-up gold rush. The articles made SF sound like the streets were paved with gold. What I saw was a disgusting city filled with unimaginable poverty and criminality.
Only recently have I started to hear others complain about the quality of living in SF as if it were a new problem. The city has apparently gotten much worse which I can’t imagine because it was pretty terrible 10 years ago.
One of your best reports Wolf , to summarise this mess is caused by central banking both in USA, Europe, ETC. Now we need solutions much harder to define.
What would be interesting is the real effect of housing cost to actual rents. Rent is much more of a subject of what a renter can or is willing to pay vs. the asset price. In my market rents have gone up over the past 10 years but nothing like the cost to acquire the asset. Times have been good for landlords but higher end landlords have banked on asset appreciation vs. money earned from the asset. Lower asset acquisition could increase the stock of more affordable housing stock for rent.
Mr Powell,
Please listen to this newscast report and do the right thing!
It may be too late for Europe, but we have a bit more time in the US…..
Very fantastic report. I really like it and thank you. I’m waiting for the home prices in GTA (Greater Toronto Area) to continue gradually coming down. Perhaps, if they will continue coming down, I may be able to afford buying one in about 15 years… LOL By that time, I will be in my retirement age so I don’t think I will buy one… LOL I may move to other areas and cities and just pay lots less of rent in other cities than in the GTA. Perhaps, I will spend 8 months in a year in other countries (Thailand, Philippines, Dominican Republic, Hungary, Croatia and etc.) in my retirement where their costs of living are much lower than in Canada while collecting my combined pension plans from my employment and government.
What is going on here? Survival of the fittest. The best educated hardest working Americans are buying multiple homes. Some are turned into rentals for income. So, more of the slackers are renting, and they are renting from top income earners.
Also, if prices decline, it becomes very difficult to get a mortgage unless you have a big big down payment. That is a fact. So, the first time buyer gets screwed. But, the top income earners has cash and will step up and even purchase more rentals.
Jim: so sad, you seem to have much to prove….
Jim, old boy, I will let you in on a little secret if you keep it between the two of us. The wealthiest folks work very little and some of us are also quite mentally dull. What we are is connected to the levers of power through such things as Ivy League schools. For example Blackrock bought a ton of shacks at fire sale prices to rent to the ‘slackers’ with a little help from their bros at the Fed and .gov.
The fun really starts if we can convince the younger generations (and perhaps some older) to go on a rent strike. Let’s see how long those people buying lots of houses with their sweet equity can come out of pocket for their rental payments.
Do your tenants know that you consider them slackers?
Socaljim – Unfortunately for you, the ridiculous tax subsidies for owning multiple luxury coastal properties, allowing foreign money launderers from purchasing RE through LLC’s, and the Fed’s smoke and mirrors asset inflation program are all coming to an end at the exact same time.
We’ll see how big of a genius you are in five years when Cali RE is 40% below current levels and there is a glut rentals.
Wolf – you’ve mentioned a few times recently that a median house price is where half of the houses sold for more than the median price and half sold for less. That’s true but for many people they think median is the average (mean).
The median is the middle value of a data set; i.e if you had the following numbers (representing home values) – 200K, 300K, 400K, 1.3M, 1.4M the middle value (median) would be 400K and your statement that half of the sales prices are less and half of the sales prices are more is accurate.
If the data set was 200K, 300K, 1.2M, 1.3M, 1.4M the median sales price is now 1.2M (vs 400K). Your statement that half of the sales prices are less and half of the sales prices are more is still valid but the perception is that the market pricing is much better in the second example. Its like having shacks and mansions being sold in the same zip code. Given limited information, it’s hard to understand whats really occurring. If more shacks are being sold the median price will be lower; when more mansions are being sold the median is higher.
When mean, median and mode are closely grouped you probably have a normal distribution. When the mean, median and mode are spread out you are probably looking at a skewed distribution that needs greater analysis to understand whats going on.
Why the NAR uses median values in reports is to adjust for the skewed prices in many markets. Unfortunately, having a skewed distribution of sales prices makes for a biased or distorted statistical analysis that sometimes can be regarded as inaccurate, or misleading.
NAR cherry-picks its information to keep the uninformed uninformed. That’s not a typo.
Satya Mardelli
Undoubtedly accurate points, but I think we’d agree there is probably no such thing as a concise, accurate and meaningful way to report real estate prices to the average buyer.
Requiring that level of statistics from folks who probably didn’t take Algebra II is a bridge too far.
That’s why I also heavily cover the Case-Shiller index which uses sales-pairs of the same house (so it doesn’t involve median and average). It has its own set of issues, and doesn’t give price levels. But it’s a good additional metric to be enjoyed alongside median prices.
International real estate demand for “safe & desirable” real estate only continues to increase. The US has 4.3% of global population, and the “other” 95.6% has become less poor. That produces wealthy individuals (legitimate or otherwise) who want to move from their “shit hole” to the US (plus a couple other western countries).
Compounding the problem, US education (especially college) no longer provides Millennials with earning power significantly higher than many other countries. You can debate all day if the quality of US education has declined, but you cannot argue the gap with the rest of the world isn’t rapidly closing (ie: the world is eliminating the huge post-WWII educational/productivity advantage experienced by Boomers).
International plus domestic demand for “safe & desirable” US real estate will only increase (especially highly desirable cities), but the value of domestic labor is stagnate (at best).
Substantial price declines ease the problem for “top 20%” of Millennial domestic buyers, but even 30-50% price declines don’t fix the problem for the average Millennial.
Wolf
Great commentary. Each Sunday evening I look forward to listening to your report.
Cheers
A low cost of living and doing business in general is a tremendous economic boon to every industry outside of the parasitic FIRE (finance, insurance and real estate) sector. Yours truly has never worked a day in his life. I prefer to sit on my a$$, buy off politicians, pay lobbyists, and collect bailouts and bonuses. Keep working hard, peasants. Jamie needs a new boat.
I would think you would need a sustained rise in interest rate in order to have housing prices come down. Many people base their housing purchases off monthly payments, so I’m thinking a return to around 8% mortgage rates would be a decent move down in housing prices. This would be a boon for young people looking to buy. However, a rise of any interest rates nowadays in the globe is seriously deflationary and would put the investor class in a bad mood. Look at the investor class in China rioting when their condos take a dip in price. Of all the developed economies, only the USA was able to withstand a series of interest rate hikes. Every other big economy has been stagnant in terms of their monetary policy. This just tells me the global central banks want elevated asset prices.
Higher interest rates, for example approaching historical norms relative to inflation, would be helpful. This would mean an FFR nearly 2% higher.
Another thing that would be helpful is to follow the advice of Adam Smith, the father of capitalism, and increase taxes on rents until it is no longer profitable to be a rentier. Once all of those rentals become money-losers, the rentiers will lose interest. And once prices start to drop the large scale rentiers will beat a hasty retreat.
The trick is to manage the slow decline that avoids another financial conflagration, which is what Wolf is seeking.
Charles – The US housing market ground to a halt when mortgage rates hit 5%. Major cities are already beginning to rapidly decline. If rates hit 8%, houses will go down at least 50% in value. You are right, nobody has the stomach for that type of pain which is why rates are back down to 4.5%. Rates will have to drop back down to 3.5% to prevent deflation and widespread contagion to the real economy at this point.
Good train of thought. There is one problem though: this much wished-for slow orderly moderation of prices is way too slow, in fact, imperceptibly so. Those 30y or under today may eventually get a chance IF home prices do end up dropping 20-30% in the next few years and if there is gov/legislative help with their student loans. But the 35-44 are royally screwed for life if this baby takes just a few more years without precipitous declines. How is one over 40 supposed to take on a 30y mortgage? So it would seem to me that one generation (mine) will have been thrown in the sacrificial fire pit along with their children. Oh, and I happen to be 5x as educated and hard working and make 6-8x what a 70+ acquaintance used to and is getting in pension while owning a couple 2M+ houses, but I pay 20x in rent what he pays in prop tax. Oh, and btw. this is global: same shite in all of Europe (except maybe where it had already been way out of whack before the crisis) not just the Anglosphere. The financial sacking of generations was instantly replicated where laws allowed it, which is how Western World is defined. No doubt there will be reckoning for many of these older folks also: hypnotized by their paper wealth and faced with crippling inflation demolishing the purchasing power of their pension many I know have been living off credit both CC and the HELOC variety. The banks are coming for them too… and so look who’s going to get the house in the end!! Beautiful game plan: remove young folk from ownership market, make them crippled perma-renters, lend to the hapless parents made redundant or retired and wait till they are forced to sell. Keep all houses and rent them forever after keeping all future generations beholden not just to employers but also landlords always hanging on by a thread.
States need to start countering this by increasing the supply: sart ‘printing’ houses, a QE for home-buyers if you will. And taxing wealth at mark-to-market valuations. And doubly so on the second home and triply so on the third…
But, the ckrruption of gov&legislation is complete and no such thing will happen in time to save said generations.
+1 well said, the ones benefiting seem impossible to wake up to reality too.
Cognitive dissonance or delusional ideology from the I’m “smart” so it’s deserved.
Sad that this is going to destroy the future for all the following generations without a fix, and all the beneficiaries are currently holding the chains on those generations with their rhetoric.
Has more to do with currency debasement than most arguments
Patience – The attitude that “i was born before you and was able to purchase real estate when it was cheap” therefore I am a genius is really disgusting.
Watching the paper wealth of all of these “hardworking” paper wealth baby boomers evaporate into thin air very enjoyable to me.
The generation theft sanctioned by governments and central banks around the world is truly astounding. Deficits and debt are rising fast. This will be the problem of our 8 year olds, who don’t even have the right to vote.
Dont expect house prices coming down in any significant manner. All our economy is collateralized by housing.
The smallest dip in prices will have the Fed go berserk with free money and a second reflation will happen.
As I have said here before, the more people understand the Fed can print without restraint, the more housing will become a valuable asset and a form of money and storage of value. What else can you do to protect your savings in such an environment ?
MM, the situation you are describing fits what I have been seeing in France, Italy and Spain over the past few years: a desperate attempt to reinflate the 2002-2010 real estate bubble, fully backed by insanely favorable monetary policies and the lowest mortgage rates in history.
How well did it work out? If you look at asking prices splendidly: they have shot back into the stratosphere. But as I always say I can ask whatever price I want for this pencil but it’s a completely different matter finding somebody willing to pay it.
Spain struggles to maintain the “Ne plus ultra” line of 30,000 mortgage applications per month deemed absolutely vital by the everybody from the government downwards and that’s after employing every trick in the book, including the return of the infamous 100+% mortgage.
Italy has introduced for the first time the 100%, no money down mortgage in what former Minister of Finance Padoa-Schioppa rightly called a “nightmare scenario”: extremely high asking prices coupled with high (and increasing) housing stock. Speculators haven’t been idle the past couple of years, albeit the repo man has already started to haul away cranes and escavators.
In short if you want high asking prices, mission accomplished. But buyers aren’t biting despite extremely favorable credit conditions.
These countries will become a laboratory for what happens when a real estate crazed society finally meets reality and it will be interesting to watch it unfold.
Memento mori – People were saying the same thing in 2007. The only thing the Fed can do is try to convince the population to go in perpetually increasing amount of debt. There is a limit to which people can borrow which we have definitely reached that point.
Since RE is highly leveraged, it doesn’t take much of a price decline to completely cripple the economy. Prices can and will come down in many areas of the country.
Without question, one decent recession will knock housing priced down, especially in coastal markets. Eventually, that recession will happen. So, if you are a renter, you had better start saving thousands per month. Because once the recession hits, and prices drop, you will see banks drastically tighten lending standards because the value of the home is dropping and they want protection. If you are fortunate and you save north of 25% down, you get in. And if you only get to the 10% or 15% line, that might not cut it. Of course, when things are good, 10% is all you need.
That’s not the way it works in the US because, as I mentioned in a recent article comment, the vast majority of mortgages in the US are guaranteed by the gubbimint.
Basically, the banks just have to conform to Fannie and Freddie’s underwriting rules, whatever those may be. If they do so then they really don’t run that much of a risk on the mortgage since it is guaranteed by the GSEs.
What you write was true back in the day of private mortgage lending but that business has been practically dead since the last recession.
Depends on the market. In high priced markets the GSE limits are too low so they do not work unless you buy in an undesirable area. When you hit prices higher than the limit, private mortgage lending is still alive and well, but the rates are higher.
That’s true but it’s still applies to only small percent of sales in the US (I would guesstimate less than 10% of sales).
SocalJim – Coastal markets have already been crippled by the tax reform act, China putting curbs on moving capital over seas, US laws preventing money launderers from purchasing properties under LLC’s, and rising interest rates. The recession hasn’t even started yet and California real estate is imploding. The question is how bad will it get? 40%-50% price declines? Vacant and boarded up buildings? Yes and Yes.
That would be great, can’t wait! That’s when i get my house within beach walking distance… May not have to do that in Costa Rica after all!
Decent housing is never going to be affordable in high-priced markets without regulation, which is never going to happen because there’s no rentier profit in it.
If you try to introduce appropriate regulation it’ll get you condemned as some kind of socialist and will be told that you’re far better off homeless, or hopelessly in debt, or both, because unrestrained predatory capitalism is so much better, and free markets, freely rigged, are best of all for everybody. After all, the privileged classes are entitled to everything they can swindle, because without them most people would be destitute, and they can prove it.
The class war is over. You lost. And you’re going to keep losing, because to the victor go the spoils. That would be you.
Decent housing will be affordable in formerly expensive markets because technology is slowly but surely automating ALL JOBS. Within 20 years, the unemployment rate is expected to hit 30-40% due to mass automation across multiple industries. Since RE purchasing are mostly highly leveraged, the debt fueled ponzi scheme of perpetually increasing land values will come crashing to a halt over the next 20 years as there aren’t enough employed people to purchase the surplus of houses for sale.
The cost of housing in the SF Bay area is out of any proportion to reality.
I can only chaulk this up the insane salaries being handed out in tech where even your most loweliest of programmers in Silly-Con Valley starts at what, like $150K or more?
On the face of it, these kinds of salaries appear to be utterly uneconomic. I suppose the one thing that is facilitating this ridiculous remuneration to such a large swath of workers is the various types of start-up capital pouring in to the industry expecting said investments to give birth to the next Apple or Google. I guess these investors don’t mind seeing their investment go up in flames if these enterprises don’t make it.
But… if the day of reckoning comes to tech and that venture money were to dry up then the result would be to force salaries in the region back to making economic sense. This will mostly likely lead to a housing crash of colossal proportions in the area.
Max Power – There are certainly high paying jobs in the Bay Area but that doesn’t fully explain the cost of housing. Even a couple both earning $150K (which is well above median income) can barely afford a median house. Housing has been inflated by pure speculation.
The companies can afford to pay employees those salaries because they employ a relatively small number of people compared to other labor intensive industries measured by market cap and profitability per employee. Bottom line is the big tech firms are making insane profits and the employees are well worth the chump change they are being paid.
Wolf – I trust you have read the article in today’s Marketwatch edition which describes the current RMBS delinquency picture.
I’m on a mission about understated delinquencies and defaults lately. The MW article today is very pertinent.
But more significant than private label RMBS, Fannie and Freddie are having huge delinquency problems but are hiding the problem by selling off the delinquent loans. Have a look at (*). And these NPL sales are giveaways from the taxpayer to Wall St as well. I think this is a huge misdeed and and scandal waiting to be exposed. I’ll post some data in a minute.
(*) http://www.fanniemae.com/portal/funding-the-market/npl/index.html
Justme,
Please note that these loans that Fannie Mae is now selling are NOT NPLs. They are classified as “reperforming loans.” These are loans that are now current. But they were delinquent in prior years and were brought up to date, either through loan modifications or because the borrower was able to catch up. So these are good loans at the moment (but they can re-default too in the future).
I went through the FNM webpage and counted: There were 14 NPL sales and 10 RPL sales since 2015. The last NPL was in Sep 2018.
I think the distinction between NPL and RPL may mainly be that for NPL, FannieMae (taxpayer) takes the loss during the auction, whereas for RPL they take the loss BEFORE the auction by forgiving part of the balance in exchange for some token monthly payments by the borrower. The exact nature of how big of a debt forgiveness FNM gave on the RPL loans I do not have, but it could be significant. In any case, both NPL and RPL constitute window-dressing and hiding defaults.
james ullman,
Yeah. This was interesting from a historical perspective since this was about mortgages and MBS issued BEFORE the Financial Crisis, and the unpaid mortgages referenced in the article date back to that time. What it shows is that quite a few of those mortgage delinquencies on mortgages issued before 2008 still hadn’t been resolved by early 2016.
But this has nothing to do with mortgages written after the Financial Crisis.
The title is misleading. “Bubble Era” in the title = Housing Bubble 1 that blew up in 2006 (not the current housing bubble).
The major problem with price declines in a debt deleverage that’s coming is that homes are already in short supply. Builders haven’t been building like in the pre-GFC days, and a recession will put a stop to building entirely. So, even in a major recession, I really doubt prices are going to fall substantially, they’ll probably come in some, but no collapse. As population continues to swell in popular west coast cities, the housing shortage will only get worse.
CR has posted many FNM/FMCC REO statistics (*) that are very misleading, because Fannie and Freddie now routinely auction off delinquent loans in large quantities (**). The stated REO holdings from (*) are
FNM owns 20,156 REOs as of 2018-q4
FMCC owns 7,100 REOs as of 2018-q4
Here are the numbers from auction announcements from FanneMae for 2018-2019 so far
2019-0214 The sale consists of approximately 15,100 loans, having an unpaid principal balance of approximately $3.01 billion,
2018-1011 The sale consists of approximately 21,400 loans, having an unpaid principal balance of approximately $4.4 billion,
2018-0913 The five larger pools include approximately 10,700 loans totaling $1.95 billion in unpaid principal balance (UPB) and the ++++++++++Community Impact Pool of approximately 80 loans totaling $28.7 million in UPB.
2018-0814 The sale consists of approximately 18,400 loans, having an unpaid principal balance of approximately $3.59 billion,
2018-0613 The sale consists of approximately 27,000 loans, having an unpaid principal balance of approximately $6.17 billion,
2018-0515 The four larger pools include approximately 10,300 loans totaling $1.71 billion in unpaid principal balance (UPB) and the ++++++++++Community Impact Pool of approximately 700 loans totaling $134.53 million in UPB.
2018-0313 The sale consists of approximately 9,400 loans, having an unpaid principal balance of approximately $1.97 billion,
2018-0213 The three larger pools include approximately 5,900 loans totaling $1.04 billion in unpaid principal balance (UPB) and the ++++++++++Community Impact Pools of approximately 190 loans totaling $35.68 million in UPB.
(*) https://www.calculatedriskblog.com/2019/02/fannie-and-freddie-combined-reo.html
(**) http://www.fanniemae.com/portal/funding-the-market/npl/index.html
The formatting does not look to great. I will email the post to Wolf in case that makes it easier to reformat, or he wants to use it in some other way.
I have a bad feeling about the stock markets these days, but it might just be the pepperoni.
One issue with a long real estate bubble is that many houses that are poorly built, bad floor plans, bad locations, cut up into multiple garbage units will have big mortgages and these are usually the first to be foreclosed on since they won’t sell in a normal market. I’ve seen the same house be foreclosed on three or four times as each successive purchaser thought they were getting a bargain but the price just kept moving down. I’ve bought many houses for under 20%, sometimes under 10% of the previous mortgage balance, albeit many years ago. When the psychology flips and everyone wants out anyone who bought in the last few years won’t have any equity and will have to bring money to closing. Only someone who has seen this stuff firsthand like me (and Wolf) knows what they are talking about.
Totally agree, a home is not an asset class, it is something to live in. Thanks Wolf for putting this information out there.
I’ve been searching through the Federal Reserve’s website for housing crisis, affordability etc limited to the last year and the only thing I see is from their Community Advisory Council.
I did find a recent Fed Note:
“Living at Home Ain’t Such a Drag (on Spending): Young Adults’ Spending In and Out of Their Parents’ Home.”
The Fed tries to make out why more “young” adults (18-32) are living with their parents…could it be video games? Social media? The fact that everyone else is doing it? Or…maybe…housing costs? Well, no bother, they are still spending money, so all is well.
One thing I take issue with is the idea that the “housing market” is a monolith in the US.
Back in 2008, houses near where I live lost 10-15% of their value vs. huge losses in other parts of the country. Why? Because the mad price increases never happened here in the first place.
Now some areas in this vicinity have had ridiculous price increases in 2012+ years. Others not so much. The areas that had outsized price gains are going to suffer a lot more than the rest.
I think this is true across the US. There are many places where housing prices have gone wild, mostly big cities on the coasts, and many more areas where prices have been reasonably stable. Unless we have a deep general recession, I don’t see prices falling a lot in the latter areas, even though there will be blood in the former.
Good point about normal markets away from the coasts. Speaking about bubble markets, Sir John Templeton said that when real estate drops to 10% of it’s bubble high, then you buy. Something to think about.
When and where has that happened in the last 40 years?
– Charts made by Wolfstreet showed up in a video of Martin North’s “Digital Finance Analytics” (from Australia)
The Fed is the cause of all the economic distortions. Please read “The Fed at One Hundred” by David Howden and Joseph T. Salerno. (2014)
They claim all the economic problems prior to 1913 have been exaggerated. Since the creation of the Fed in 1913 all recoveries have been longer.