The Signs are Many
After World War II ended, the U.S. entered a new era of unprecedented prosperity. Homeownership was practically considered a right, not just a privilege, as Americans who worked hard and saved their money had very little difficulty owning a home they could call their own.
This was the reality of the baby boomers, and homeownership was a dream that was within reach for most Americans in the 1950s and 1960s. Fast-forward to 2008 and U.S. real estate was suddenly a distorted, bloated market fueled by “liar loans” and unfettered corporate malfeasance.
In hindsight, the bursting of the 2008 housing bubble and the Great Recession that followed seems like an inevitable albeit tragic event. When spending without consequence is not only permitted but is actually encouraged, there will always be dire consequences sooner or later.
The fallout of 2008 spread with a ripple effect not only within the housing market but throughout the entirety of the U.S. economy. It also took on global proportions – much like the COVID-19 pandemic that should have popped the economic bubble in 2020, but the government and central banks refused to let that happen.
When consequences are delayed, they’ll only come back stronger at some point. This is a lesson that ought to have been learned during the real estate collapse in 2008 – but when we don’t learn from history, it’s bound to repeat itself.
Just as it was during the Great Recession, today’s housing bubble and burst can be attributed to policy errors and rampant spending. In the wake of 2020’s COVID-19 pandemic, the U.S. government printed and spent unprecedented amounts of money in the name of “stimulus” and “relief” (bailouts).
Meanwhile, the Federal Reserve kept interest rates at rock bottom while also flooding the banking system with liquidity. This kept the financial markets happy for a while, but the inflation rate is now soaring and the Fed has no choice except to raise interest rates at every single FOMC meeting this year.
The government was able to prop up the housing market for a while, but when borrowing costs increase dramatically, this is bound to put tremendous pressure on the real estate market. This, coupled with supply chain bottlenecks and high inflation, make it difficult for companies to build homes and for people to afford to buy them.
Federal Reserve Chairman Jerome Powell recently admitted that increasing interest rates will “include some pain,” but there’s too much “pain” for the fragile U.S. housing market to handle right now. Even the researchers and economists at the Federal Reserve Bank of Dallas had to acknowledge the “growing concern that U.S. house prices are again becoming unhinged from fundamentals.”
By some metrics, 2022 looks a whole lot worse than 2008 ever did.
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This has all the trappings of a housing market bubble, but this time around, the bursting of the bubble won’t result from the unraveling of subprime mortgages. Instead, the Federal Reserve’s tightening of monetary policy will squeeze buyers out of the market, prompting a collapse in home prices.
There are signs of cracks forming in the foundation of the housing market if you know where to look for them. For instance, construction worker layoffs have amounted to thousands in Washington State’s Puget Sound with more layoffs reportedly likely to come.
According to S&P Global, around 88% of U.S. housing is overvalued – a figure that serves as an indisputable crisis indicator.
Another reliable bubble and burst gauge for the U.S. real estate market is the foreclosure rate. Nobody buys a home and expects to have it foreclosed, so rising foreclosures are a sign of buyers in desperate conditions and a market that’s about to crack.
Deepening the crisis is the fact that it’s only getting harder for Americans to make their mortgage payments this year. A recent reading revealed that Black Knight’s mortgage payment/income ratio shot up to 31%, the highest reading since September of 2007. For comparison, during the decade of the 2010s, that figure averaged 19.9%.
Again, the Fed’s actions are having a lasting and devastating impact. Consider that on a $500,000 mortgage, a borrower who’s paying the current average mortgage borrowing rate (5.11%) would owe $2,718 per month over the course of a typical 30-year loan. All told, this represents an additional $208,800 in payments. It’s no wonder, then, that so many prospective millennials and Gen Z buyers are putting off their first home purchases.
So, what will the future look like for the American housing market? The Federal Reserve isn’t backing down from its monetary tightening, so expect more prospective buyers to get squeezed out of the real estate market altogether.
The only solution, in the end, might be a great reset like we witnessed after the collapse of 2008. It’s an unfortunate ending to this terrible tale, but this is how it must happen since history repeats itself and the lessons are only learned the hard way.
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