Will the housing market achieve stability in the next 18 months or will other factors make it more ... [+]
I am not a real economist. I don’t even play one on TV as I once pointed out in a post featuring an actual economist. James Knightley is not only an economist but he works for ING, which Wikipedia will tell you is, “one of the biggest banks in the world, and consistently ranks among the top 30 largest banks globally.” Even better, Knightley is part of what amounts to a think tank within ING with the clever URL think.ing.com. Economists usually are about one notch above insurance salespeople but when you look at the team at think.ing, it looks like the group that I’d send the Bee Signal (this is a Mandeville reference. Look it up) to when locked in a hopeless debate about whether supply and demand is real. They’d rescue me in helicopters and a tricked out Aston Martin.
I digress. As I did in the last post, I’m curious what people who think about housing are concerned about when it comes to homeownership, a topic that people who are struggling in today’s economy might feel isn’t attainable. What does the future of housing look like from the perspective of an economist; and what does that mean for people earning the median wage in the United States today? I asked Knightley the same questions I asked Jesse Prince in my last post, CEO of Happy Nest. And as with that post, I’ll include the expert’s answers without edits but my comments will be in italics.
Is it correct to say that there was something of a bubble in 2021-2022, with many people jumping into purchasing a home because of low rates, especially in cities like Boise with very low prices? That seemed to have ended last year. Are we seeing some kind of reset and if so, what is it?
Nationally we saw prices rise nearly 50% during the pandemic. I think it was down to a combination of ultra-cheap financing and the fact household disposable incomes and wealth was boosted by stimulus payments and a lack of options on which to spend given Covid containment measures. Working from home opened up a wider range of locations on where to live and this has helped fuel demand in areas that in the past perhaps wouldn’t have been considered potential places to live. If you only have to go to the office two or three times a week you may be prepared to tolerate a longer commute in return for the greater space and more pleasant living environment.
Unfortunately, affordability is now an issue. With mortgage rates having more than doubled (we are nearly at 7% for a 30Y fix once again) and with prices 50% higher than they were at the beginning of 2020, it is unsurprising that the number of mortgage applications for home purchase has halved since the 2020 peak, according to Mortgage Bankers’ Association data. For example, last week the MBA reported that the typical 30Y fixed rate mortgage agreed was 6.69% for a $442k mortgage amount. This works out at a monthly mortgage payment of $2850 or $34,200. Not many households will be able to afford that. By way of comparison, when mortgage rates were down at 3.2% as they were in 2021, a monthly mortgage payment of $2850 would have allowed you to borrow $660,000
I’ve said before that when a household is buying a house, in effect, if they are going to have a mortgage, they are also shopping for money. Money is expensive even while housing prices are flat or falling. As I said last year, for people who bought a home in a market like Boise in 2021, and intend to live there long term, this may not be an issue; things change. But if one of those households needs to sell, it means selling at a loss and not being able to buy, a serious problem.
Would you describe the single-family market as volatile? Have rising rates and economic uncertainty caused people to stay out of the market?
Not only is affordability an issue, but there is also a lack of supply. We have very low unemployment so there are few distressed borrowers that could be forced to sell while most home owners will be locked into low mortgage rates. Even if they wanted to sell, the idea of giving up your “cheap” mortgage and refinancing for a different home at much higher rates is not attractive unless you have no option. Consequently, we are seeing transactions fall on a par with the housing bubble fallout from 2005-07, but because of the lack of supply, we aren’t seeing much movement in prices.
See what I said above. Even for households with steady income and a mortgage, making any moves in 2023 is going to be financially fraught and probably impossible, especially for households with less money and in their first mortgage.
Longer term, if there is a slowdown in housing production and since lowering interest rates is no longer on the table to spark production, will there be a long term fall off in supply that means higher prices in the future when the economy booms?
New home construction has been pretty strong over the past couple of years. The issue is the lack of movement in existing homes, which of course where the bulk of the housing stock available for sale normally is. Given many households are locked in by their current cheap mortgage and don’t want to move unless they have to give the financial penalties of switching to a higher mortgage rate, the most obvious path to get transactions higher is if mortgage rates fell.
However, with inflation remaining well above target and the Federal Reserve remaining hawkish, this isn’t going to happen imminently. Now, if the economy has a soft landing and doesn’t go into recession then house prices could indeed remain higher for longer – inflation falls nicely to target and interest rates can be cut gradually we could see this happen. However, my concern is that after the most rapid and aggressive period of policy tightening for 40 years and with banks tightening lending standards significantly, credit flow will be hit hard later this year and unemployment could start to rise as recession fears mount. This has the potential to see the Fed reverse course and cut interest rates around the turn of the year. Mortgage borrowing costs would fall, but with that we could see more price falls as supply starts to rise and demand remains weak.
“ . . . if the economy has a soft landing.” That is a big “if.” The problem isn’t just the economy, but the politics of 2024. What sort of chaos comes with a Presidential Candidate in a jail cell and the possible resulting foment. What if that candidate wins? While the fundamentals might come into focus, the country’s politics – two elderly men heading squabbling factions pulling at the seams of an increasingly fragile social order – does not bode well for families, especially households with less money navigating uncertain employment in a recession.
