Will the Housing Market Really Hit a Wall? Or a Reset?

Will the Housing Market Really Hit a Wall? Or a Reset?

Will the Housing Market Really Hit a Wall?  Or a Reset?

The headlines have started to crop up over the last few weeks regarding the housing bubble crash to come.  I have been predicting this for months though.  I preach like a Baptist preacher to my clients on the daily about the sky-is-falling news forecasts to come.  Barron’s piece on Friday is a typical one, “Housing Just Hit a Wall.  What’s Next for Prices, Brokers, and Builder Stocks.”  I won’t belabor the poor editorial of that headline.  It should have been a “?” at the end of the question.  I know, you all catch my goofs frequently.  All with love, dear readers.  I am just grateful you read me at all.  Some of the headlines will come true.  It’s going to be a bumpy ride for many markets over the next year I think; four years in some areas of the country.  But, as I try to find the silver-lining in this mess Joe Biden has created, I see the eighties coming.  And that can be good news in the long run. But for the next six months, watch the headlines tell us the worst.

The Barron’s article has a lot of wonky numbers and jargon in there, but I will try to break down some of it:

“House prices jumped more than 20% in March from a year earlier, but [Analyst Jade Rahmani] expects that rate to plunge to 2% by the end of the year. His baseline view is that next year brings flat prices. His recession scenario, based on a study of past sales volumes, has prices falling 5% next year—perhaps more if mortgage rates rise to 7%. That might not sound like much, but for recent buyers with typical mortgages, a 5% price drop can reduce equity by 25%.”

That sounds bad if you look at it the wrong way.  Keep in mind this piece is written for investors.  I always like to think of the potential home buyer.   Don’t get me wrong.  The shell shock is real.  I am seeing the expected set of buyers just getting hit in the groin with their new mortgage payment details.  Most will power through.  What choice do they have?  Stay renting in an also over heated rental market?  No, they will eat rice and beans over the next few years and make it work. 

But never forget the end of the seventies.  We’ve seen this 3-act play before.  The economy was in a shambles.  People purchased homes with double digit interest rates.  My parents’ last home was bought in 1976 with an 18.5% rate.  It sucked.  At six years old, I sat on the curb next to the woman next door and told her I wished my dad had decided to be a millionaire instead of an Air Force pilot.  The stock answer to all my little girl wants was “no.”  

But the housing market didn’t collapse.  No, we lived through that in 2008.  Instead, we voted for Ronald Reagan who brought with him the policies of Milton Friedman.  Over the next several years, we tightened the economy and brought money back into the banking sector.  It took 3-5 years, but the economy took off and we had hit movies like Wallstreet.  Money was cool again.  Ronald Reagan told Americans what to do on the Tonight Show:

As many of you know, my day job is in new home sales.  It will be a banner year for me economically.  I am grateful for it.  Truly.  But it was never sustainable.  All the windfalls will go into savings and other opportunities as the tide shifts into something else again.  But my hobby is politics, and my view is cynical in the near term.   The Left loves for us to live in fear.  They need it for us to run into the savior-like arms of Big Government.  

Biden will play on these headlines and pundits will squawk about a return of 2008.  The Left will try to use this fear to pour new money into Omnibus packages to bolster the housing market.  The Left will use the fear of potential short sales and foreclosures to beg for money and packages.  They will trot out the sucker who had no business buying a home, even at a 3.5% interest rate and tell us he will be homeless, and millions like him if we don’t DO SOMETHING.  For the Left, they always have to stick their big fat fingers into the pie.  The Dept of Housing and Urban Development will demand new and more risky mortgage packages to keep the applications churning.

But they think the average American is stupid.  They haven’t met with Gen Z or Gen Y people in real life.  Millennials I might rough up every now and again, but even they are not that dumb.  I see them every day.  This younger generation is savvy.  They are savers.  Their parents taught them to measure risk economically.  At least in general.  They will buy carefully and within their budget.  I think we will see less stupidity from them than Gen Xers of the 2004-2008 bubble.  I do feel bad for this young crowd.  They are going to take the brunt of the hit.  Insider writer, Alcynna Lloyd, writes:

As Axios’ Nathan Bomey recently wrote in a newsletter, “As an older millennial, the financial crisis trained me to think that housing prices that go up must come down. But this has the makings of a softer landing.”

In the lowest priced neighborhood in the Austin market, my lowest priced home (a 2-bedroom 1-bath with NO garage…) is selling today for $275K.   But here’s the good news.  Yes, there is good news.  My builder has been raising prices on average $10K a month for the last year.  In 2020 that same home sold for $171K.  That’s insane.  And unsustainable.  Which means, in the face of fewer sales, my builder will raise prices but a mere $5 thousand next month.  If that slows sales too much, it will dip to what we used to do for the whole seven years prior.  $1K – $3K increases.  And I will have to go back to actually selling.  Not just taking names and putting them on a yearlong wait list.  I will actually have to stand up and shake hands and convince them that my home is better than the guy next door.

And that’s what all these stupid headlines are keeping from you.  The housing market (in most areas) will not be hitting a wall.  It will simply go back to being normal.  Or a new normal.  But you cannot fly at a million miles a second because you hooked yourself to a rocket and say THAT was normal.  You cannot unhook yourself from that very same rocket and take a walk complaining that the earth is under your feet.  Where it was always meant to be.

Again, there are real sectors of our country that will take a beating.  Foreclosures might rise in some of them.  Mortgage applications will fall by double digits. But even Fortune Magazine notes some of the differences now from 2007:

“Unlike the housing bubble that popped in 2008, the pandemic housing boom isn’t underpinned by a frenzy of speculation, Moody’s Analytics chief economist Mark Zandi says. While home flipping has certainly ticked up during the pandemic, he says, we aren’t seeing the exuberance of the last bubble.”

But never misunderstand that the Left will want to use those statistics for the power it can weld.  Then remember that 2024 looks like it will be the GOPs to lose.  And with any luck, 2028 and maybe, just maybe 2032.  Reagan, Reagan, Bush.  Follow me?  So, chin up folks.  We are going into a dark tunnel next year.  But if we play our cards right… There is a rainbow at the end of it. 

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1 Comment
  • 370H55V says:

    Sorry but interest rates were nowhere near 18.5% in 1976. They didn’t get that high until 1981 and then mercifully didn’t stay that high all that long.

    I bought a house in 1977 with 5% down and an FHA mortgage at 8.5%. I bought another house in 1981 in another city with a “wraparound” mortgage at 11.5%

    Other than that, I agree with you and hope you’re right and that we don’t experience the turbulence in the housing market that we did in the late 2000’s.

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