A former federal regulator who served when the 2006 housing bubble burst is concerned that today’s housing market is on an unsustainable path.
The housing market’s affordability is worse than it’s been in decades as mortgage rates toy with 8%. The median price of a U.S. home was $322,500 in the second quarter of 2019. Then the pandemic housing rush hit, and prices across the nation shot up. High mortgage rates sent sales spiraling, but home prices only experienced a minor correction before heading back up. In the second quarter of this year, the median price was $416,100, according to the Federal Reserve Bank of St. Louis.
“Talk about a bubble. That’s a classic supply-demand imbalance,” Sheila Bair recently told CNN.
Bair, who served as a federal regulator when the mid-2000s housing bubble popped, nearly taking down the entire financial system, said home prices today are “bubbly” following years of low mortgage rates.
A housing bubble can form when prices rise to unsustainable levels. This can be caused by speculative buying, as was the case during the sub-prime mortgage crisis when people who could not make the monthly payments on their mortgages were buying homes with very little money down. The bubble popped when home prices dropped and many people owed more on their home than it was worth.
A bubble can also be caused by irrational exuberance, in which a surge in prices leads to a buying frenzy.
“When rates were cheaper, a lot of people wanted to buy. You ended up with really frothy price increases. That was pretty predictable,” said Bair, who led the Federal Deposit Insurance Corp. from July 2006 until July 2011.
Although Bair said home prices need to correct downward, she’s not confident that will happen anytime soon because there’s still a shortage of homes on the market and she doesn’t expect the bubble to violently burst.
“If supply remains constrained, this could go on for some time,” said Bair,who last week released a new children’s book about bubbles called “Daisy Bubble: A Price Crash on Galapagos.”
There were just 1.1 million existing unsold homes on the market as of the end of August, down 14.1% from the year before, according to the NAR. “Letting that bubble deflate a bit would probably be a good thing,” said Bair. “People who already own their home – and I’m one of them – don’t want to hear that. But for those who want to own, I hope home prices do come down.”
Over the past year, the median home price has increased by 23.8% in Los Angeles, 18.2% in San Diego, 15% in Richmond and 14.6% in Cincinnati, according to Realtor.com.
The good news is Bair does not see a repeat of the bursting of the mid-2000s housing bubble, which set the stage for the Great Recession. That’s in part because a typical homeowner today has more equity in their homes than a homeowner during that time. Only 1.1 million homes, or 2% of all mortgaged properties, owed more on their mortgage than their home was worth in September, according to CoreLogic. That is a small number compared with the share of properties underwater during the sub-prime mortgage crisis, which topped out at 26% in the fourth quarter of 2009, according to CoreLogic’s equity analysis, which began in the third quarter of 2009.
In addition, mortgage lending standards are significantly tougher today, meaning fewer people are borrowing more than they can afford.
“I see much less speculation in the housing market today, thank goodness,” said Bair.
And unlike in the mid-2000s, homeowners today have built up a significant cushion of equity. That means they shouldn’t find themselves in a situation like during the subprime meltdown where many owed more than their homes were worth.
“Even if home prices adjust a bit, people should not be under water,” said Bair.
Legendary investor Jeremy Grantham shares Bair’s concern about a housing bubble. He has been warning of an eventual plunge in home prices around the world.
“Real estate is a global bubble,” Grantham said on The Compound and Friends podcast last month. “Home prices will come down…30% would be a pretty good guess.”
Yet others on Wall Street are confident home prices will continue rising.
Despite high mortgage rates, Goldman Sachs expects US home prices will increase by 1.8% this year and then accelerate to 3.5% growth in 2024. Similarly, CoreLogic forecasts that home prices will increase by 4.3% from June 2023 to June 2024.
Although UBS acknowledges home prices have spiked to “dizzying heights” in recent years, the bank only sees two cities around the world at risk of being in a bubble: Zurich and Tokyo. That’s down from nine cities a year ago. Miami, Los Angeles, Toronto and Vancouver are among the cities that UBS says are in “overvalued” territory.
Fannie Mae CEO Priscilla Almodovar said it’s “unusual” that home prices have not taken more of a hit from high mortgage rates. “What has surprised us the most is the stickiness of home prices,” Almodovar told CNN in a recent interview. “Supply is the issue. There is no place to go. There is a lack of inventory.”
That’s the main reason Lawrence Yun, chief economist at the National Association of Realtors, says homebuyers shouldn’t hold their breath waiting for a drop in home prices.
“There is not going to be a home price crash,” Yun told CNN. “When you have a housing shortage, home prices simply cannot decline in any measurable way.”
While a temporary dip in prices is possible, Yun said a “prolonged” drop of 10% to 15% “cannot happen in this tight supply market.”
Yun noted that many assumed London was in the midst of a housing bubble years ago – only to see prices continue to rise, albeit with fewer people participating.
“It became only a playground for the wealthy. I hope America doesn’t go in that direction,” he said.
In many ways, today’s housing market is the polar opposite of the one that preceded the Great Recession.
Back then, reckless mortgage lending helped create a situation where demand became artificially strong. Eventually, it collapsed and the market was left with way too many homes.
“Today, we have an imbalance the other way. Too much demand, not enough supply,” said Yun.
The NAR has estimated the supply of homes needs to basically double to moderate home prices.
“It’s creating social inequity. The only way out of this situation is we have to induce more supply,” said Yun.
A former federal regulator who served when the 2006 housing bubble burst is concerned that today’s housing market is on an unsustainable path.
The housing market’s affordability is worse than it’s been in decades as mortgage rates toy with 8%. The median price of a U.S. home was $322,500 in the second quarter of 2019. Then the pandemic housing rush hit, and prices across the nation shot up. High mortgage rates sent sales spiraling, but home prices only experienced a minor correction before heading back up. In the second quarter of this year, the median price was $416,100, according to the Federal Reserve Bank of St. Louis.
“Talk about a bubble. That’s a classic supply-demand imbalance,” Sheila Bair recently told CNN.
Even though Bair said home prices need to correct downward, she doesn’t expect that it will happen anytime soon because the U.S. is also experiencing a housing shortage, which has helped keep home prices high even amid today’s high rates, per CNN.
“If supply remains constrained, this could go on for some time,” she told CNN.
Bair doesn’t expect the bubble to burst, but she said “letting that bubble deflate a bit would probably be a good thing.”
“People who already own their home — and I’m one of them — don’t want to hear that,” Bair told CNN. “But for those who want to own, I hope home prices do come down.”
The good news is that Bair said she sees “much less speculation in the housing market today, thank goodness,” compared to the mid-2000s, per CNN. She also noted that even if prices come down, existing homeowners have built up a significant amount of home equity over the past several years alone.
So “even if home prices adjust a bit, people should not be under water,” Bair told CNN.
How prepared is the real estate market for unpredictable black swan events?
The 2008 financial crisis gets thrown onto the list, but it was a gray swan that was predictable – and widely discussed for 2-3 years in advance. Things could have been done to avert that crisis – like stopping Angelo from talking up Countrywide’s neg-am loans while he was quietly dumping $300,000,000+ in stocks.
The Hamas uprising in Israel will be considered a black swan event, and will likely capture the attention of everyone world-wide for the foreseeable future. It will be a distraction like the Persian Gulf War when watching rockets and missles was a major event on TV, or like the OJ trial.
Both of those events happened during some of the most difficult real estate markets, and that’s probably not a coincidence – major distractions can impact the market. But at least they were both of those were helped by being in a declining interest-rate environment.
In the low-inventory/unaffordability era, will the Israeli conflict be the last straw?
I think we can expect the rest of this year to be dormant – both buyers and sellers have to be looking for any reason to take a breather, and the Hamas massacre will provide a good reason to sit out the next three months. After 9/11, the local market rested for a few weeks but the conditions had been so red hot in 2001 that it got back on track quickly. But in 2001, the NSDCC median sales price was $570,000 and ez-qual mortgages were everywhere. This year, the MSP is $2,180,000 and getting a mortgage is miracle work.
I was hoping for 300+ NSDCC sales in 4Q2023, but now I think the count will be closer to 200 sales.
There will be buyers who really need to move, and/or they find the perfect house at the perfect price – which is no small feat. There will be sellers who need to sell and can’t wait until 2024 – or don’t want to take the chance on the market getting worse.
Will there be discounts?
They have been in the works already. Here’s an example in the south end of Aviara:
The two on Golden Star were built by Davidson, but I’m not sure that will carry any gravitas with today’s buyers. As recently as last month, sales were closing for list price or higher, but look at the two that closed this month. I represented the buyers of Merlo Ct., and after the discount slide that started on Piovana – a house that was completely original and no effort was made to dress it up – we were able to continue at Merlo because it was the original owners who had paid $395,500 in 1998. They could afford a discount, and wanted to get on their way to the east coast.
There will probably be 5% to 10% discounts (or more) being negotiated – especially on the high-end. Any sellers still on the open market over the next 2-3 months must be motivated, and buyers are going to take advantage.
The social media won’t be helping either. This is another visual being sent around, but nobody mentions that the guy wrote it in 2013, and a lot has changed since then:
I suggested for years that boomer liquidations were inevitable, but I’ve given up hope. Seniors want to age in place, mostly due to the excessive cost of senior facilities. Between reverse mortgages and in-home care, more people can live out their life where they are most comfortable – at their long-time home.
Expect fewer homes for sale – and even fewer quality buys available. More buyers will be looking for a discount, but will have to lowball to get one. Just the fact that a home is on the market now is evidence enough that the sellers must be motivated – but they probably won’t reflect it much in their list price.
I asked them to write a blog post for bubbleinfo.com. I think my job here is secure……
In recent years, the real estate market has been experiencing a phenomenon known as a “bubble.” But what exactly is a real estate bubble, and why is it causing such a stir in the industry?
A real estate bubble occurs when the price of properties in a particular market rise significantly and then drop just as dramatically, often due to market speculation and overheated demand. This results in a situation where property prices are not supported by economic fundamentals such as income and employment growth.
Bubbles can have serious consequences for both the real estate market and the wider economy. When the bubble bursts, it can lead to a sharp decline in property values, causing homeowners to owe more on their mortgage than their home is worth. This can result in widespread foreclosures, a drop in consumer spending, and a slowdown in economic growth.
In 2013, fresh off the biggest housing downturn in their lifetimes, 73 housing industry executives compiled the Top 10 Signs of a Housing Market Bubble at our Summit Conference in Laguna Beach, CA. Assessing the criteria that we set almost a decade ago (10 quantitative and 10 qualitative), we have found that 16 of the 20 housing bubble signs are now flashing red.
In last month’s client-exclusive housing outlook webinar, we called out some signs we are seeing:
Mike thinks this year’s price explosion was unusual, and is working its way back to a more-normal pace. I agree with Mike, and think the market will split, with those products that have been the hottest (one-story homes, family homes with yards and pools, etc.) will stay red hot, while those on the fringes (inferior locations, condition, age, etc.) will struggle to keep up and their appreciation rate will flatten faster.
Here is his Twitter thread, and webinar – thanks Mike!
The housing market is hot as home prices continue to rise, but Nobel Prize winning economist Robert Shiller predicts prices will eventually drop. “They’ll come back down, not overnight, but enough to cause some pain,” Shiller told Yahoo Finance Live.
The latest S&P CoreLogic Case-Shiller national home price index posted a 13.2% annual gain in March, the fastest pace prices have risen in more than 15 years. Last week, the National Association of Realtors (NAR) reported the median existing-home price in April was $341,600, up 19.1% from April 2020.
“This is not a market that collapses overnight,” Shiller said. “It’s less short run volatile than the stock market. But you can see that we’re seeing price increases now that haven’t quite been realized since those years just before the financial crisis.”
Shiller said there is no “clean explanation” why the housing market is so hot. He expects it to continue another year or two driven by low interest rates and the COVID-19 pandemic work-from-home revolution.
But Shiller cautions that people are also driven by narratives and market sentiment. It’s a topic he wrote about in his book “Narrative Economics: How Stories Go Viral and Drive Major Economic Events.”
“I think it is some kind of irrational exuberance,” he said. “People are having fun, and they will as long as prices keep going up.” He said today’s housing market looks similar to 2003. “There is excitement and people are talking and some people are bidding way more than the asking price and that becomes a narrative or a story.”
But he tempers his comparison saying the current housing craze is different from the mortgage crisis that caused the last housing bubble to burst.
“So it’s not the same as 2003,” Shiller said. “It could be stronger. I think we have better protections, we have better supervision of lenders. So I don’t know if we should be worried about 2007, 2008, 2009 happening again.”
The current run up in prices, according to Shiller, “is disquieting” and he cites Phoenix as an example. “The biggest increase over the last year was Phoenix and home prices have gone up 20% in one year,” he said.
Shiller points out that demand in the housing market gets all the headlines while supply tries to catch up. Record prices for lumber, he says, are driving up prices for newly built homes. “The builders might be building to profit from these high prices now. But, it hasn’t happened yet,” said Shiller and that has him worried.
Shiller helped create the CME S&P Case Shiller home price index futures 15 years ago so people could hedge their risk during housing markets like this one. “So our futures market is now predicting big increases over the next year or more but it’s not certain,” he said.
“It kind of reminds me of the spirit that ended after World War II,” Shiller said. “There was a spending spree by people. They were jubilant the war was over,” he said comparing the mood of the country then to the mood now as the United States emerges from coronavirus pandemic.
Shiller has been too conservative on his predictions because he’s an ivory-tower guy. If he were to talk to potential home sellers, he’d find that there aren’t many – if any – who have to move so badly that they would sell for “substantially lower” prices. The next phase after the frenzy will be the stagnant/plateau stage where the demand thins out and sellers wait for that perfect nuclear family with 2.2 kids to come along some day.
Nobel prize-winning economist Robert Shiller is worried a bubble is forming in some of the market’s hottest trades. He’s notably concerned about housing, stocks and cryptocurrencies, where he sees a “Wild West” mentality among investors.
“We have a lot of upward momentum now. So, waiting a year probably won’t bring house prices down,” Shiller said.
According to Shiller, current home price action is also reminiscent of 2003, two years before the slide began. He notes the dip happened gradually and ultimately crashed around the 2008 financial crisis.
“If you go out three or five years, I could imagine they’d [prices] be substantially lower than they are now, and maybe that’s a good thing,” he added. “Not from the standpoint of a homeowner, but it’s from the standpoint of a prospective homeowner. It’s a good thing. If we have more houses, we’re better off.”
All that matters is whether the bubble going to burst.
Four reasons why it won’t:
No easy money – buyers have to be solid qualifiers.
Foreclosures are extinct.
Everyone has loads of equity (except 2021 buyers).
No easy place to move to.
For the bubble to burst, we would need an event to drive down prices. Sellers would have to panic and cheap-sell for less to start a downward cycle. Even an earthquake probably wouldn’t be enough.
