To The Moon

The problems in our housing market are expanding, not contracting.

Photo by Brandon Griggs on Unsplash

We’ve now entered the “bad for everyone” stage of the housing market.

Well, almost everyone. More on that in a moment. But for now, our existing owners, prospective buyers, and renters are all experiencing some form of suffering when it comes to housing. Given that those groups make up the majority of the population that’s…not great.

Rental prices remain sky-high in Canada, the UK, and the United States, sticking about a third of each population with borderline insufferable costs. Coupled with “first, last, and down payment” requirements, the new rental prices essentially make moving into an apartment the equivalent of a small house down payment. Of course, if renters had a small down payment just hanging around, many wouldn’t be renting in the first place.

Prospective buyers, on the other hand, have seen interest rates soar, and their would-be mortgage payments rise accordingly. Even those who’ve been saddled with a disproportionate (but still rightly earned) share of the blame for the housing crisis — investors — have backed off the market in record numbers, leading to further weakened demand.

Since everyone was so justifiably worried about the housing affordability crisis, we should be applauding these developments, right? Not that simple, unfortunately. While it is possible that investors pulling their funds out of the buyer pool and middle-class homebuyers being priced out of it could lead to demand and price collapse, that isn’t necessarily a dream scenario.

Instead, we have a no-win housing market. And that hurts almost everyone.

Returns

Those who subscribe to the fairly advanced theory of “what goes up must come down” are likely a fan of the latest in the real estate market. While investor-led purchases were heralded by many as the item that would create endless housing runs up to millions and millions in average sale prices, that hasn’t turned out to be exactly true. And while I won’t name names, I remember some of the worst prognosticators.

Photo by Tierra Mallorca on Unsplash

What actually happened was that, as housing price surges slowed and interest rates rose, real estate investing became less attractive. So significantly, in fact, that investor-led purchases actually declined more than purchases did overall — by about 46%. By comparison, during the housing and credit implosion in 2008, they fell by slightly less than that.

So the housing market no longer looks like a tremendous opportunity to investors. That’s great for the rest of us, right?

Not really. The same reasons investors don’t like the idea of buying in right now is the same reason new or prospective homeowners should be concerned — rising costs amid falling asset prices.

The Mortgage Bankers Association and Redfin are both good sources for this data, as they aggregate a lot of it. Redfin’s data center is particularly fun to use if you’re interested in this type of stuff. There, right on the first page, you can see that nearly every major metro in the country has seen a solid — not scary, not small, just solid — price drop in the last several months. L.A., for example, peaked at $900,000 in median sales price last year and now sits at $795,000, or a little over an 11% decline.

Image from Redfin’s data center.

Public Domain.

It’s not just that houses are getting smaller, either — the price-per-square-foot and other metrics are all in similar decline. It’s market softness and increased borrowing costs. And that’s where prospective buyers would hop into a bad deal — while there’s no guarantee that housing prices will stop falling, they’re going to pay steeply for the pleasure of owning one regardless. At least compared to the last few decades.

Based on average interest rates, the $900,000 house in 2020 would be significantly cheaper than the $795,000 house in 2023. Assuming both buyers put down 10% — a fairly average number, contrary to the popular belief that it’s 20 — the $900,000 house in 2020 would give a monthly payment of $3,952. The $795,000 house in 2023 comes out to a little over $5,000 monthly. That’s $12,000 a year more for a house that’s lost $105,000 in value.

So yes, housing prices have gone down. At least nominally. But in reality, they’ve risen considerably.

Locked

But let’s go back to that down payment figure for just a second, shall we? Because we’ve yet to expose how bad this market really is. We’ve covered would-be buyers and investors, but what about the many, many people who bought their homes during the 2021–2022 frenzy?

Well…they got a good interest rate, right? Depending on their timing, yes. Later 2022 buyers? Not as much so. Still, let’s assume a lot of them are locked in at numbers that were, by historical standards, shockingly low.

That’s well and good. And everyone definitely buys into the homebuying dream still, so when people like those I mentioned above were making predictions like “buy now or buy never, prices will never go down again,” it scared people into a tremendously large decision. That’s why I don’t even attempt to conceal my hatred for such charlatans.

Photo by Pedro Forester Da Silva on Unsplash

For some people, owning a home, in general, is not the right move. And — I can’t stress this piece enough — for people already in a home, bigger is not always better, and often doesn’t make sense at all. I could go deep down this route but

Suffice it to say, then, that making a purchase whose total obligations in payments, interest, repairs, taxes and insurance will consume decades’ worth of post-tax income is not something that should be done in a panic or on a whim. And this market is just one of the many reasons why.

With the median home down payment hovering around 13% recently, the median buyer is dangerously close to underwater in most metros. In some — like Boston, where prices have declined 15% peak-to-trough according to Redfin — they already are. Throw in realtor’s fees and other closing costs and there’s a good chance that those who bought during the housing frenzy would need to come out of pocket for a pretty sizeable amount just to escape their current home.

Or, alternatively, destroy their credit and future prospects. A lose-lose. While just the very act of owning a home can often become an anchor that restricts freedom and movement, owning a home that’s worth less than the mortgage balance is an entirely different type of restriction. It’s not just that it’ll take time to move — it’ll take time and money.

Now, in addition to the rather serious ramifications this has on the lives of the individual owners, this also impacts our economy. Makes our population more fixed, and less adaptable. Less fluid. Now for metro areas that have been seeing net-negative migration, it’s a dream come true: a tax base that can’t vote with their feet and has to sit there and take whatever comes their way. For everyone else? Not as great.

And there’s no guarantee that housing prices just level off here, either. Interest rates are due for at least one more increase, and if investor demand doesn’t flow back into the market, there isn’t much else propping it up. The point at which the median household income could afford the median-priced house came and went years ago. There’s not a lot of natural, individual-buyer demand right now.

Looking further out to the future, we have one other factor not accounted for in most of the “buy buy buy” essays — population. Or lack of it. With many developed nations’ population growth slowing, ceasing, or just totally reversing, the supply and demand metrics we’ve grown accustomed to for centuries will not rule the day any longer. There’s no endlessly increasing demand pushing prices forever higher if we start to shed a few hundred thousand people a year.

Photo by mauro mora on Unsplash

While it’s possible that incomes continuing to rise among the wealthiest 5% will create some sort of environment where the investor class temporarily creates massive demand while they buy up every property on Earth (and they have the resources to do it), I don’t find that scenario very likely. If they don’t even like buying in this market, why would they be interested in a similarly high-priced, low-demand scenario? They wouldn’t.

Maybe that situation would be alright for renters and buyers — a glut of supply, no demand. But we’re not anywhere near that yet. This market is just bad for everyone, except perhaps large-scale landlords who’ve taken advantage of housing shortages to permanently increase rent and their profit margins.

Housing

Housing is almost everyone’s largest expense and always has ripple effects on the wider economy beyond what is immediately apparent. As a result, it’s wise to pay attention to what’s happening in this arena, even if you don’t have a personal stake in it. I don’t really like what I see.

While we don’t have nearly the supply on the market to create the precipitous drop seen in the Great Recession, we certainly have another stew going that contains more than enough ingredients to make for a slow rollback on prices. I’m not as confident as I was this time last year, but I haven’t seen anything that makes me think these assets are going to do an abrupt 180 in the coming months either.

I’d like to see housing prices fall to a point where the typical family can afford them again, but I’m not so keen on hundreds of thousands of other people going underwater by six figures in the meantime. Nor would I want to see prices start to tick back up as investors re-entered the market and gobbled up other people’s potential homes for a profit.

In short, I have no idea how this mess corrects itself. But make no mistake — it is a mess.

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