Turns out, free money is a toxin. And now the housing market has cancer.
By Wolf Richter for WOLF STREET.
The WSJ had two anecdotal stories back-to-back about the fallout from the housing bubble and from the artificially repressed mortgage rates.
A story today about a chap in Atlanta who’d bought at the peak in mid-2022. A year ago, he put his home on the market at a price well above his purchase price, perhaps on the notion that prices always go up. Two price cuts later to below his purchase price, he still hasn’t had a single offer, even as expenses are racking up. He is learning the hard way: He who panics first, panics best.
And a story over the weekend about a divorced couple with young children whose big problem is the below-3% mortgage that they refinanced into, and that now forces them to live together, as a divorced couple, because… well, they could sell because they have massive but shrinking gains in their house that they bought in 2017, but they then cannot buy two houses, after price exploded due to the low mortgage rates, and they don’t want to rent.
Similar stories and lamentations have cropped up in other publications and in the social media. And they have replaced the breathless hype about bidding wars that were in part responsible for FOMO — this fear of missing out that leads to hasty decisions.
The hapless chap in Atlanta had bought the 1,600 square-foot house in mid-2022 for $399,000, the WSJ said. He signed the contract within two days of looking at the house and waved the inspections, which came to haunt him with a sewage pipe repair.
Prices in the city of Atlanta peaked in mid-2022, after having spiked by 38% in two years and by 52% in four years, and it didn’t occur to the real estate professionals who extracted lots of money from this deal, to warn the chap that such a historic price explosion, caused by the Fed’s reckless monetary policies, might end in tears. Instead, they did what they could to fuel his FOMO, including feeding the media an endless series of hype that the media turned into clickbait about bidding wars and what not, and this chap fell for it.
And his costs are racking up. There is the monthly nut of $2,950, which includes mortgage payment, homeowner’s insurance, utilities, and lawn care, compared to $1,200 when he was renting. In addition, there was a $13,000 bill to fix that sewage pipe that hadn’t been connected, which a proper inspection might have found.
Prices of single-family homes in Atlanta have since then skidded lower by about 5%, most of it over the past 12 months, according to the Zillow Home Value Index. And price declines have been accelerating in recent months.
The chap then decided to rent again to shed the costs and “headaches” of homeownership and save some money. He put the house on the market at $430,000 a year ago, and then cut the price twice and is now asking $387,500, below his purchase price in mid-2020 of $399,000, and still hasn’t had a single offer.
Here is the inventory situation in Atlanta that he is facing:
He who panics first, panics best.
He should have listed it a year ago at $387,500 and would have been able to sell it at the time, and maybe for a little more, but the real estate industry had polluted his mind with the mantra that prices only go up, and he couldn’t grasp that he was being manipulated to enrich others when he bought in a fit of FOMO.
He told the WSJ that he might need to drop the price again. That’s a good bet, given that he has had no offers. He is making a classic move: chasing the price down. By the time he adjusts his asking price down further, reality will have moved away from him again.
So now, depending on where he is on his mortgage, and how much longer he chooses to dilly-dally around, he may have to come to the closing with some cash.
The Richmond Fed described this issue in its Beige Book for August: “A North Carolina agent said, “it feels like we are living in two markets, those listing at the right price or those listing like it is 2021.”
This prices from yesteryear are a widespread problem and in part responsible for the plunge in sales volume and soaring inventories.
The fallout from the most reckless Fed ever.
The below-3% mortgages – and even below 5%-mortgages – were a product of the most reckless Fed ever when it repressed interest rates from early 2020 through early 2022, with massive amounts of QE and 0% policy rates.
As a result, in 2021 and into 2022, CPI inflation was spiking and reached levels far higher than the repressed mortgage rates. In other words, “real” mortgage rates (inflation-adjusted mortgage rates) were massively negative. It was, or seemed, better than free money, and when money is free, price doesn’t matter, and home prices exploded.
Turns out, free money is a toxin, and now the housing market has cancer, and the treatment is painful.
And now there are stories of the fallout from the below-3% mortgages cropping up in the media. In the WSJ’s story, a couple with young children finalized their divorce in April but decided, because they have a below-3% mortgage they refinanced into, that they have to to live together but separate: he in the house and she in their Airstream trailer in the backyard, with an outdoor shower – luckily, in Florida, not in Minnesota.
They’re part of that lock-in phenomenon because of that mortgage and because home prices have spiked so much due to those mortgage rates.
Luckily again, they bought the house in 2017 for about $265,000. Prices of single-family homes in Cape Canaveral peaked in mid-2022 and have since then declined by 7%. But in the two years to the peak, prices exploded by 54%. And despite the price declines since that peak, prices are still up by 77% from 2017, when the couple bought the house.
So unlike the chap in Atlanta, they could obviously price their house aggressively and sell for it for a still very substantial gain after prices had exploded by 77% since 2017. But what they then cannot do is buy two houses because prices had exploded by 77% since 2017, and mortgages are now back in the normal-ish range. And renting is not an option for them.
Meanwhile, as they go through their daily arrangements, home prices in Cape Canaveral continue to skid lower, by another 0.7% in July.
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Turns out, free money is a toxin. And now the housing market has cancer
I like this analogy….from the looks of it, certain markets are already in Stage II, and other markets like SoCal probably barely got the news they got stage I and it’s still in denial….judging from the charts you regularly publish, seems like one are in stage IV yet, although Texas/Austin are heading that way pretty quick and some markets I am not so optimistic it ever will, though just like cancer, time will tell.
“But what they then cannot do is buy two houses because prices had exploded by 77% since 2017, and mortgages are now back in the normal-ish range. And renting is not an option for them.”
Why is renting not an option for them? Too much shame going back to renter class and the judgemental stares they might get from friends and families for going throwing money at rents again? If that’s the case have fun living with someone you just divorced, I am sure that’s fun, extra fun if it’s a nasty divorce and someone you can’t stand the sight of but hey you are still a homeowner sitting on a gain for now..
Sitting on a massive (non-taxable) gain and don’t want to rent. Boo Hoo Hoo. They sell at a profit, then rent when renting is advantageous. Save up and buy homes when prices drop to reasonable levels. Not a terrible position. Life gives us curves at times and one just has to roll with it. They are doing pretty well compared to those that never got onto the housing bandwagon and have always rented and may always rent. Likely one or both will remarry and end up in a home. What sad looks like – the folks who lost jobs in 08 and had to walk away from their underwater homes with nothing to show for it but debt collectors calling them constantly. Not to proud to rent as it was their only option….
leverage = price to high
I just got off webinar about NEW 102 unit apt complex in Scottsdale
10% occupancy and priced at $35,000,000 or $343k per unit
rent is $2,500 per unit
negative cash flow is $2mil 1st year and another $1.3 2nd year
we repriced it at $20,000,000(this is new in $100k annual avg income market)
soon we’ll have more to come
Are there any credible econometric models that tell us when the bottom will be in, and what pricing ?
No.
I continue to watch Wolf’s excellent chart showing the home price index and Owners Equivalent of Rent. OER was rising with wage inflation and the house price index was flattening the last time Wolf posted this graph. It is was still about 35% more to buy than rent. They were converging slowly.
When the lines intersect, it is the bottom. It means renting is more costly than buying and it makes sense to buy. They intersected in 2012 at the last bottom and diverged after 2014 thanks to FOMO, ZIRP and QE.
When they converge again, investors will start jumping in to make easy money. FOMO for happy complacent renters may take longer to increase. 2012 was strange. It was cheaper to buy than rent but potential homeowners must have been shell-shocked from all of the foreclosures from 2008-2012 and were not buying. Housing Bubble blogs were still predicting further declines. Big investors were buying.
My son is waiting for this great convergence (or within 10%).
I am not entirely sure what could’ve been different for the divorced folks if we were still in 2022 or even 2020 – if they bought their house at the edge of affordability with TWO incomes, there’s probably a fat chance they could’ve been able to “convert” their “one mortgage @ two incomes” situation into “two separate mortgages @ two incomes” situation at virtually ANY point between the time they bought their house till now without resorting to renting or otherwise supplementing their incomes (e.g. by remarrying). In other words, it’s definitely fair to say that they may be screwed now, but I doubt they would’ve been much better off if they had divorced at 2022 or 2020 with the same assumptions…
Turns out, free money is a toxin. And now the housing market has cancer.”
Wolf man – these are the MOST GRAPHIC words you have EVER used to describe the housing market so far. You’re letting the cat out of the bag!
And yes, this is the Great Housing Abomination.
The Americans I grew up watching in movies and series/sitcoms were very tolerant to change. They would complain about it, make fun, but adapt.
Now, it is showing, that it is hard for some chaps out there to change their status quo, and move on.
Makes me recall a statement I read or listened to somewhere. Many people are afraid of very little, but almost everyone is afraid of appearing “poor”.
Long time back, I liked idea of Independent FED but then I realized they screwed us after 2008. Reality is FED hasn’t delivered on their inflation mandate for last 5 years straight . There is no accountability about it in FED. But I also don’t want President in charge of them then they will be mere puppets.
QE was sin. I could understand after 2008 for sometime. But even after 12 years, they didn’t learn their lesson. On top of Himalayan stimulus in 2020 an even small child could tell FED housing market was skyrocketed, they kept on buying MBS.FOMC must have been smoking weed or something to ignore this but obvious fact.
Unless we have recession and unemployment rise, I don’t see huge correction happening in markets like Bay area. After prices tripled in last 12 years, going down 15% from Peak is not a big deal. We need at least 50% correction to bring back those prices to earthly level.
I personally know who did so much cash refinance in 2021, 2% rate era. Smart people invested wisely or hold on their cash.
Best case scenario for people to not panic and introduce market discipline is to have a slow drip of price degradation. That way the speculation and bad behavior is beat out of the market. But that will not introduce shellshock. The realtors need to take it in the chin for awhile and the propaganda needs to be hung out to dry.
The Atlanta chap must feel like he’s pulling out his own teeth to mark down his house an entire 3% from purchase price.
Imagine how he’ll feel when that 3% drop turns into a 53% drop.
What is happening with house prices in the US, Canada, Western Europe and China has not yet reached Eastern Europe. Here people are still under the influence of FOMO. The boom continues. It is happening because governments are borrowing and supporting domestic consumption. But cracks are already appearing in the economies.
Countries like Romania, Poland, and Hungary already have deficits that are difficult to manage. Economists warn of a ballooning economy, but central banks and governments are ignoring it.
What is happening in the US will also happen here, but with much worse consequences, because a lot of people are buying at these ridiculously high prices, while in Us, these people were not so many.
… “they refinanced into, that they have to to live together but separate: he in the house and she in their Airstream trailer in the backyard, with an outdoor shower – luckily, in Florida, not in Minnesota.”
Next on channel 6 evening news, cops say they apprehended the suspect after a 9-hour standoff outside his ex-wife’s airstream trailer in Canaveral. Local leaders blamed FED Chairman Powell for the situation.
Housing price delusion can be shared by municipal governments as well as homeowners trying to sell. The city government where I live has approved and aggressively defends a zoning change to allow construction of a big foot “luxury” condo development that was approved in 2022, but to date struggles for financing. The city administration sees the development as a much-needed property tax windfall and has used our state’s enabling zoning act to override the NIMBY objections of adjacent homeowners. There are similar laws in most states that make it difficult to sue, and NIMBY often losses. Our city fathers and mothers stubbornly refuse to recognize that this is no longer 2022 as the graphs such as the one in this and other recent Wolf’s articles show.