With the S&P 500 down and the Fed aggressively raising rates, it’s time to start worrying about the housing market again. The housing market is the last asset class to fall. And real estate generally lags the stock market by about six months.
That said, demand is still strong from first-time homebuyers, trade-up buyers, and institutional investors. If you plan to buy a house, you should also think about what could go wrong. This way, you won’t get blindsided in case things do.
Think about all the people who bought real estate in 2007 and early 2008. Things were going wonderful, then the global financial crisis hit! If they had to sell before 2012, they likely lost money.
For the record, I am still bullish on the housing market over the next several years. The millennial generation is in full buying mode. Inventory and mortgage rates will remain low. Meanwhile, foreigners are likely going to flood the U.S. real estate market again after two years of being shut out.
But like any good investor, it’s good to see the other side of the story. The rate of price appreciation for the housing market will likely cool over the next 18 months.
A Slowdown In Housing Is Inevitable
The pace of house price growth will slow because it cannot outpace income growth by such a wide margin for too long. Bond-tapering and Fed rate hikes started on March 16, 2022. Meanwhile, house prices are high. Affordability is becoming an issue.
This pace of double-digit price appreciation in the housing market is unsustainable. Instead, I think home prices will rise by closer to 8% in 2022, not 16% like it did in 2021.
Let’s go over some more details on why the housing market has some signs of concerns. With such concerns, you may want to invest in a publicly-traded REIT or a private eREIT from Fundrise, instead of buying a single asset with a large mortgage. Diversification is key in this hot market.
Why We Should Start Worrying About The Housing Market
Taking on massive debt to buy real estate at record highs is risky. You need to be sure you’re following my 30/30/3 home buying rule before proceeding. If you follow my rule, you will significantly increase your chances of being able to comfortable afford your home.
Let’s say you lose 50% on your stock and bond portfolio. You’ll be upset, but be fine. If your property loses 20% of its value, however, this means you’ve lost 100% of your 20% downpayment.
Below is the latest U.S. house growth chart from January 1976 to June 2021. According to the Freddie Mac House Price Index, house price growth is at an all-time high. Noice the previous all-time high house price growth in the late 1970s and in 2006.
If you are buying property today, you need to be prepared for a potential rapid deceleration in prices. Therefore, you must buy property strategically if you do buy.
In this scenario, you’ll also probably still be fine – if you don’t have to sell. But when property prices correct by 20% or more, many people become forced sellers because they’ve also lost their jobs.
I understand that millennials are coming of buying age and inventory is on the decline, making competition for buying a home fierce. However, only if you are fully cognizant of the following points I’ve highlighted below should you proceed with a property purchase today.
Things To Know Before Buying Property Today
Before you buy one of the biggest assets in your life, it’s good to know the current market condition. It’s also good to know what could go wrong in the housing market.
1) Rents softened, but are recovering
Given property prices are a function of rental income multiples, a real estate buyer should be looking to buy at similar pricing discounts from peak rental periods.
Rents softened in major cities such as New York City, San Francisco, Seattle, and DC due to the pandemic. However, I anticipate rents to rebound once we achieve herd immunity. But they may not as people scatter to lower cost areas of the country.
Pay very careful attention to the latest monthly rental figures before buying property. Home prices have increased while rents softened in 2020. Therefore, the valuation for home is much higher. Rents need to aggressively rebound by 10% or more in 2021 and beyond in many major cities for valuations to return to normal.
2) Mortgage industry is still very tight
Here’s what’s going on in the mortgage industry, which is as stringent as it has ever been. Only people with 720+ credit scores and 20% downpayment have been able to get a mortgage. This is good in that a fallout is less likely in the future. But let’s talk about some concerns.
Liquidity (Profitability) Concerns: A growing percentage of people are not paying their mortgages and banks are uncertain if and when payments will resume. As a result, his bank is only lending to the most financially fit customers.
Stricter Lending Standards: Due to liquidity (profitability) concerns, banks have significantly tightened lending standards. Here are some of the increased lending standards he mentioned to me back in 2020:
- Temporarily stopped allowing for cash-out refinances
- No longer fully counting RSU values when calculating how much a person can borrow
- Schedule E income (rental income) when calculating how much a person can borrow is no longer included
- No longer approving Home Equity Lines Of Credit (HELOC)
- Minimum downpayment is 20%
- Raised minimum credit score to qualify for a mortgage to 680
In other words, lending standards are as strict as it gets. As a result, perhaps there is upside to real estate liquidity if there is a reversion to pre-pandemic level standards sooner. But if lending standards continue to tighten, it may squeeze out the marginal buyer in the short-term.
3) Mortgage rates are finally creeping higher
Mortgage rates hit record lows in 2020. Now, mortgage rates are on the rise as bonds sell off and expectations for inflation is high.
My last mortgage refinance was in 4Q2019 when I locked in a 7/1 ARM jumbo ARM at 2.626%. I was pumped! However, today, that same rate might be at 2.875%. The average 30-year fixed-rate mortgage is closer to 3% today.
The problem with record-low mortgage rates is that thousands of Americans are tempted to buy too much house. Americans are violating my 30/30/3 home buying rule, which puts the future housing market in jeopardy.
Notice how mortgage rates have soared in 2022. The average 30-year fixed rate mortgage is back to about 5%. Still low by historical standards, but more than 1.5% higher than mortgage rates were in 2021.
Higher mortgage rates in 2022 is the biggest reason to worry about the housing market again. Higher mortgage rates WILL slow down the housing market, which is why you shouldn’t get into crazy bidding wars. That said, I still think prices will increase in 2022 due to undersupply.
4) Prices have surpassed their previous peaks in many cities
While every city is different, if you look at the prices in Denver and Dallas, you’ll find that the prices are roughly 45% higher than they were in 2006-2007. This price performance is similar to San Francisco’s. Meanwhile, hot cities like Seattle and Portland are only about 20% above previous peaks.
The US median existing home price is about 40% higher than its previous peak in 2007. We’re talking about a median existing home price from $250,000 in 2007 to $400,000 today. That’s significant. But then again, 14 years have passed. As a real estate investor, your goal is to invest in markets that have both underperformed and have the potential to catch up.
I would be surgically investing in heartland real estate through Fundrise, my favorite real estate investing platform. Fundrise specializes in single-family and multi-family properties in the heartland, where valuations are cheaper and yields are higher. The firm started in 2012 and has over 350,000 investors and $3.2 billion in assets under management.
As prices fade over the next 12-24 months, investing strategically with a platform like Fundrise makes sense. The investment minimum is only $10, so no mortgage or leverage is needed.
5) Tax reform takes time to negatively impact housing prices.
Conceptually, we all know that limiting state income and property tax deductions to $10,000 and limiting mortgage interest deductions on new mortgages up to $750,000 are net negatives for expensive coastal city real estate markets. However, it takes 1-2 years to start feeling the crunch of tax reform.
Think about it. Let’s say you own an average 3 bedroom, 3 bathroom home for $1.5 million. Your property taxes alone cost $17,000 – $20,000 a year, depending on which state you reside.
Let’s say you earn $120,000 a year. You’ll have paid $6,000+ in state income taxes. In the past, you could have deducted the entire $23,000 – $26,000 from your income. Now, you are limited to $10,000 in deductions.
Some will argue that lower income taxes will offset these deduction limitations. Perhaps.
With Joe Biden as President, a whole host of new taxes could be increased or introduced. Given the government is in a deficit, higher taxes or cuts to resources are an inevitability. Tax reform is a headwind, not a tailwind for coastal city property price appreciation.
6) Inventory is slowly creeping higher
The construction boom we’ve experienced over the past several years is finally showing up in the data as a wave of new inventory hits the market. When there’s more inventory, pricing comes under pressure if demand doesn’t follow. Below is the latest housing inventory under construction and authorized, but not started.
Here is a another inventory of single family homes chart that showed what happened once the pandemic began. However, as of 2Q2022, inventory seems to have bottomed out and is likely going to go back up again.
Here’s another latest housing inventory chart by Altos Research. Housing inventory is still way below normal. However, it’s good to keep an eye on inventory given prices are also much higher.
For some of the hottest cities for real estate, like Austin and Nashville, inventory is definitely creeping higher. If inventory gets too high, these heartland cities are at risk of a housing downturn. Take a look at this chart below that shows single-family permits way up for Austin, Dallas, and Nashville.
Personally, I wouldn’t be investing in cities in the top-right quadrant. Instead, I would be investing in cities in the green, lower-right quadrant. You don’t really want to invest in markets where home prices rose the most while also facing the most amount of increasing supply.
7) It takes a while to recognize a peak.
The housing boom that began in January 1996 ended in March 2006. But it wasn’t until the beginning of 2008 that people started to accept that the housing market had already peaked.
Until 2008, property investors were still clinging to hope or at least were in denial that prices would no longer be going up. Once Bear Sterns was sold for nothing to JP Morgan in March 2008, people started to panic.
Then Lehman Brothers went under on September 15, 2008, a full two and a half years after the housing market peaked. And things got even worse, with the S&P 500 finally bottoming out on March 9, 2009. At least as of 3Q2020, we already experienced an aggressive 32% decline in the S&P 500 in March 2020.
Below is a great chart that shows how badly housing prices corrected in some of our major cities. Notice how the previous boom lasted 10 years and the crash lasted 5 years. Therefore, 20221 could be the peak in the current housing boom and we don’t even know it for several more years.
8) The stock market has crashed multiple times
We saw a violent 20% sell down in the S&P 500 in 4Q2018. Then we saw a 32% decline from peak-to-trough in the S&P 500 by March 23, 2020. The S&P 500 and the NASDAQ corrected by 13% and 20%, respectively in 2022 already. As a result, investors need to watch out.
From policy errors by the Fed, to trade wars, to slowing global growth, to a potential war with Iran, to COVID-19, to a global pandemic, companies everywhere will be more cautious on their spending in 2022 and beyond.
Just know that prices tend to revert back to the mean or overshoot on the downside very 4 – 10 years. Real estate takes 2-5 years to correct, so there is no rush to buy now.
I’m predicting very mediocre S&P 500 returns for 2022. So far, the S&P 500 is struggling in 2022 and the NASDAQ entered bear market territory, but is recovering.
Recognizing Signs Of Housing Market Strength
Although it’s good to worry about the housing market again, let us also recognize that the housing market has continued to rebound. Here are some reasons for the housing market’s continued strength in America.
- The S&P 500 closed up 18% in 2020 and up 27% in 2021.
- A rotation out of volatile stocks into more stable real estate
- Still not enough inventory
- The increased desire for income / yield
- Demand from institutional real estate investors competing against retail investors.
- Foreign buyers will likely come back to the United States in 2022+ with over $200 billion in pent-up demand
- Massive home equity accumulation since 2020 alone, which will buffer downside risk
Buy Real Estate Responsibly
The mass media and the real estate industry will focus on strong demand, strong job growth, and a dearth of inventory as drivers for higher property prices in 2021 and beyond.
That’s fine if you can surgically buy in strong job cities via real estate crowdfunding. The heartland of America is an especially attractive area to buy. Valuations are much cheaper and net rental yields are much higher. There should be a multi-decade trend of spreading out across America thanks to technology.
However, there are more deals to be had in expensive coastal cities like New York and San Francisco as well. Big cities are making a strong comeback and have lagged the overall U.S. real estate market during the pandemic.
If you’re dying to buy a primary residence today, make sure you can withstand a 10-20% correction over a five year time frame. It’s always good to plan conservatively. I don’t think the housing market will crash in the next three years. In fact, I think we’ll average high single digit gains through 2024.
If you don’t have a financial buffer equal to at least 10% of the value of your property after putting down 20%+, then you are not financially prepared for a downturn. You need to try and buy at a price that is at least 5% lower than the previous comparable sale price.
Too much debt is really what will kill you if we ever return to hard times. Buy a house to enjoy life instead of looking to make a profit. As soon as you start hearing regular reports about people putting no money down, then it will be really time to worry about the housing market. But for now, real estate is likely going to continue to outperform equities.
Build Wealth Strategically Through Real Estate
Real estate is my favorite way to achieving financial freedom because it is a tangible asset that is less volatile, provides utility, and generates income. Stocks are fine, but stock yields are low and stocks are much more volatile. The -32% decline in March 2020 was the latest example. However, real estate held steady and appreciated in value then.
Investing in real estate crowdfunding is a solution for diversity and exposure. Instead of taking on a mortgage to buy real estate, you can simply invest in a diversified private eREIT through a firm like Fundrise. If you don’t have the down payment or want to deal with tenants, investing through Fundrise is a hassle-free way to make passive income.
If you are a real estate enthusiast who likes to invest in individual deals, check out CrowdStreet. CrowdStreet focuses specifically on real estate opportunities in 18-hour cities where valuations are lower and rental yields are higher. The spreading out of America is a long-term trend thanks to technology.
I’ve personally invested $810,000 in real estate crowdfunding across 18 projects to take advantage of lower valuations in the heartland of America.
My real estate investments account for roughly 50% of my current passive income of ~$310,000. To be able to earn income 100% passively as I take care of my two young children is a dream come true.
Below is a great chart regarding how real estate performs after previous Fed rate-hike cycles. Perhaps surprisingly, real estate performs very well because rising rents more than offset higher mortgage rates.
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It’s Time To Start Worrying About The Housing Market Again is a FS original post. I’ve been a real estate investor since 2003 and own multiple properties today. Stay alert and bargain hard!
Housing supply is rising. Mortgage rates are rising. This would seem to point towards a softening of housing prices in most places.
One correction: the country is not in “deficit.” Indeed, there is a gusher of tax receipts thanks to capital gains taxes and high-end home turnover, plus great profitability for most major corporations. There is no need to raise taxes, except perhaps to level the field from the “winner takes almost everything” system we’ve been laboring under for 30-40 years. But the people reading this blog are presumably not among them, so bringing out the tax boogeyman just provokes the trolls. As evidenced by many of the comments here.
Mark my word the real estate market will give back 20-30 % of this artificial bubble and very soon~
Music to my ears. I truly hope that happens.
Not to worry. The current president will take care of everything.
The current president will take care of foreigners coming into Texas and distributed via planes, trains and autos to Red States for democratic votes, he will take care of China and Ukraine with his personal investments and family wealth, that and the top 3 power players in the chain of command or our country power houses are the top 3 string puppets…promoted beyond their highest level of incompetence…who pulls their strings? Did you know the Georgia Voting machines were in the AT&T building when the bomb went off in Nashville, TN? The van came from the West, stopped in Dickson, Tn and later the nutcase in Nashville was placed in it afterwards…The Prez stole the election and gullible insecure people…believe otherwise. By the way there is American…not colors or nationalities of America.. you are or you are not American period. Emotional debates solve nothing. And the Prez, VP and House Spkr make the US appear like a diva poodle country barking at a hungry german sheppard world. He wants to socialize the US. Socalize by the way does not and never will mean Equalize. It means those with the means will be forever separated from those without. So yes, the president will take care of everything…so did Satan…believe it to look and be good and take a bite…surely it won’t kill you……Right. Good luck believing that….
Housing supply is up. It’s been going up monthly for the past several months. In June, it was at a 6.3 month supply and I suspect July’s data will show even more supply. The bidding wars have stopped on most homes in many places. Eventually, people won’t be able to sell their house for 100,000 more than they purchased it a year ago like I’m seeing in rural areas. https://fred.stlouisfed.org/series/MSACSR
True about housing supply slowly increasing as higher prices entice more on the fence sellers to list. It just depends on where you are though. Every market is unique.
The pace of housing price growth should slow down. I think there will be some better deals during the winter of 2021/2022.
This prediction sounded rational and I was in agreement at the time. It was hard to imagine how could house prices keep going up.
Here we are in April 2022 and the astonishing rate of home prices has held steady. Interest rates are up 30% from around 3% to now over 4%. These manias are tough on rational folks.
The market is definitely slowing though. Which is healthy and good for new buyers. I still don’t believe the national median home price will go down this year.
I think housing market has really slowed down in Orange County, CA. I’m seeing a 15% correction already from August 2022. I’m hoping it continues to fall and then get a home at a discount price.
MSACSR is for new houses. considering new homes can be for sale and sold before even being completed, it’s best to refer to existing only.
I wish that I had prepared to sell the house, which would have taken a total of about 12 months given repairs, improvements, and clean out BUT it’s been one infirmity after another. Close to being ready, but I think we missed the boat.
Indicators that we are in bubble territory (July 2021):
An abundance of house related reality shows on cable TV
Homes selling online sight unseen
Sales prices 10% over asking
Sales within a couple of days of listing
“Recent sales” in our area. It’s unbelievable the junk that people are buying. The last tulip has been sold, or close to it.
Forbearance on delinquent mortgage payments only added to the problem.
An “economy” that largely consists of unemployment and other programs
Nobody in charge is talking about increasing TRUE WEALTH of the middle class. Job loss by sending jobs overseas, automation, and the effects of inflation can’t be mitigated through endless consumption and taxpayer financed programs and jobs.
Hey Jay, you didn’t miss the boat. While there are things to complain about, please don’t complain about selling a home.
The housing market and the economy in general in the U.S is fake. The federal bank will lower its interest rate when people don’t have money to buy homes , cars and other things. Low interest rate is a formula of a bubble in the long run. We actually not the same powerful country as we were 30-40 years ago.
China took all the jobs ( we gave it to them on a silver platter) and since then we became the consumer and not the manufacturer. That means that when you need to import most of your goods from overseas you have no power and you should buy what they sell you.
Greed is the name of the game here in the U.S the Feds lies to the people the banks will always make money and the little citizen will pay for all of it.
We are in a bigger bubble than we were in 2007.
I agree with this staatement
I tend to agree with this statement, and we’ll said. Reducing interest rates is a attractive incentive for buyers. If the market was as strong as it is portrayed then rising interest rates up to and or around 5% would not shake buyers.
In regards to the FED, and banks boy does this ring true. They always dangle the carrot in whatever way is in only their best interest. You’d think we learn given this historic pattern.
If property taxes $17,000 – $20,000 a month and you earn $120,000 a year, you’ll have bigger problems than being limited to $10,000 in deductions.
The author made few good points but there are others out there who are suggesting a different perspective. My advice is to read as many perspectives as available and form one’s own opinion.
Hi Sam,
Another great post on real estate, good to explore the other way this market could move as we never know. I’ve had a question for you within this category for some time now. You have pointed to a number of key data points in your Real Estate posts which are very useful. I did just wonder though whether you had any guidance for your overseas readers on which data to look at? In particular Japan has quite a unique market, which data points would you suggest we look at over here? Many of the numbers that you highlight are applicable but as I am sure you will remember, housing tends to devalue over a 20 year time frame here with landing being the driver of valuation however mortgages are very low at 0.47% in many cases. Other good points are that it is easier for foreigners to get loans and there is a considerable amount of investment inbound, most notably from Goldman and Blackstone recently investing $2Bn and $1Bn respectively, albeit across a range of commercial and residential properties. One concern though is that Japanese citizens don’t need any down payment at all and the normal term of a mortgage here is 35 years. I have looked into some data including inventory, inbound investment, employment data, # of millionaires, # of starts (tech and others) as well as rankings of real estate investments against other cities in the APAC region. Would you recommend any other key points to look at?
Been an investor for long time both in stocks cryptos and real estate.
Housing is not in a bubble unless and until it burst.
The fundamentals for all asset classes are very weak but the asset markets are detached from the fundamentals for last decade or so.
I have no crystal ball to say how things would turn but I wonder with 16 million people on government dole, impending rent eviction ban going away and UI going away, it’d be interesting to see which way things go.
If you look at places like where I live in North Texas as well as Central Texas, Atlanta, Arizona, Florida and other places that businesses and their employees are flocking to I promise you that regardless of lending practices symptoms of a market in a bubble are evident. At this point my beloved state of Texas has restricted the ability of municipalities to regulate building materials and made it illegal to do so. This may keep the inventory of cheap materials available to accommodate growth but is one of the many symptoms we’ve been seeing along with an EXTRAORDINARY increase in existing home listing prices, almost no exposure time, out of state/country investors etc. this rapid and unsustainable growth combined with price increases on new and existing inventory has created terrible (monopoly powered) choices for utilities in rural areas like mine that are experiencing growth to which we can not provide water to without signing a virtually completely one sided contract with water utilities that have gained the status of “utility districts” AKA political subdivisions with the power of eminent domain. It won’t take much when people are treating an asset market like an equity just because of the market value increasing two fold in a couple years often here…
Hello,
I like the way author has worded his writing in simple words anyone can clearly understand. I work as a business intelligence developer for a Mortgage company and most of the time I hardly understand the trend and terminology. I agree with all the trends, shortage , low interest rate and crazy market. But I would like to share MY experience of home buying.
I call Landon Homes DFW Builder Mafia :(
We booked/paid earnest money , agreed to there stupid terms and condition, agreed to there super duper over price . And went through selecting material and finishes in design center. Within 15day the Mr. Mafia calls and says due to increase in some ….. price they want 60k more than the already over price house. They brutaly terminated our contract as we asked WHY . This is the situation today no human values, no integrity, no honor . JUST Mafia GREED.
I am not half smart as all you readers here but felt very sad/bad so thought of sharing.
Stay strong I had same issues. I integrity and people are greedy and pathetic
I think what people are doing is pretty stupid. When the market cools down a lot of foolish people will realize that they overpaid in a house and their home will lose so much value! Now, yes, you are paying less interest rates, but if you are overpaying in a house, you will not see these interest rates anyway, as you are overpaying of a house that itself will devaluate drastically in the next following years. That’s dumb -_-
The reason why houses inflated is because people don’t want to sell, and dump people think the only one they put out there will be the last one and for that reason they feel like they have to buy it right now! Later they will regret lol
It’s like… if sand had the value of diamonds? Everybody will want sand lol non-sense.
What’s hard to find makes it difficult to get. Good think this non-sense will go away one day and a lot will look back in time and will regret for rushing into it and making it harder for the rest out there (who actually do need a home for real, no stupid investors) :/ if only people were smart enough to get it, they would stop this craziness.
It’s easy common sense to see reality. It’s like coco math
Buyers… you are not getting any advantage of low interest rates if you are overpaying an over price house hahahaha
greed and corruption will be the death of this once great nation
Totally agree!!
The housing market should not be a source of income for any of these greedy bastards!
If I can’t own a house, nobody can!
LMAO… Money is the game. But don’t do it for anyone except you!
Exactly!!!!!
I strongly agree with you!
There is demand and there is money. The biggest issue is that there is no supply, causing the incredible price increases. It’s not about people being dumb or crazy. it’s basic economics.
I wonder how many properties are behind in their payments right now ? What’s going to happen when the foreclosure moratorium ends ? Will we see some bank repo homes out there ? And these loans requiring only 3 percent down payment ? Whose idea was that ?
I just looked at a home that went up $350,000 in 5 months! This is beyond supply and demand. Greed is what I see.
Just got kicked out of our 7 lease option because a buyer came in at 100k over market value… homeless professionals
Now that is messed up. Some sellers were selling homes with tenants in place and expected me to evict once I closed on the home. I was like NOPE. Not me. I will keep looking.
Right on! Integrity to do the right thing.
we also are trying to buy a house (on disability, both of us) and we have gotten out bid on each and every contract…and prices are so high we cant find a house now…what are we to do ?
Dont be fooled.. There is supply. The monopolized home investors (e.g. Zillow, Berkshire, redfin, realtor, etc.) are sitting on vacant homes to help drive up prices.
I agree. Zillow has bought up a great deal of Sacramento properties. In California, that market is one of the first to fall. I am in the Bay Area of California, and people are going $150,000 to $850,000 over asking price.
Right, but in the meantime people are spending $1,500 / month in rent to live and work out of someone’s unheated attic while they approach 35 still waiting until their lives are stable enough to have kids…
I attended a self-paced high school, which meant that, so long as my assignments were handed in on time, I rarely had to go to class. In fact, I skipped 56 days of my final semester, moved to another town, and got my real estate license.
I graduated from college before high school.
I bought a fourplex when I was nineteen, renovated it, and flipped it. I became a real estate broker the next year, and a mortgage broker after that. I’m what you might call house-obsessed.
But not in that HGTV need-to-constantly-move-and-renovate sort of way. More in the how-the-heck-is-everyone-supposed-to-afford-to-survive if we keep letting governments, banks, and landlords take over housing?
The death grip
The first day of real estate college, our professor made a joke:
“Mortgage comes from two Latin root words: Mort meaning death, and gage meaning grip.”
It’s not a funny joke.
It’s actually quite sobering.
A mortgage is a death grip.
And it’s a raw deal, too: You put up real cash as a down payment, plus your house and your credit as collateral, and what does the bank do? It literally creates credit — fake money — out of thin air, which you then have to pay back, with interest and hard-earned real money. And if you miss just 3–6 payments in a row in a 25–40 year window, they take your house away, ruin your credit, and make you start again.
And it’s getting worse
Despite a global pandemic that killed millions and left tens of millions unemployed and underemployed, house prices are at an all-time high.
Canada, one of the most real estate-obsessed nations on earth — and one of the least affected by the 2008 crash — is up 42+% in the past year alone.
Even in Ethiopia, where my wife grew up, a three-bedroom detached house in the capital can cost you $1+ million USD.
The new paradigm
Until recently, most people’s house price paradigm looked something like this:
A house’s market price is the maximum amount that a buyer can expect to afford over the next 25–40 years. But because wages are flatlined and purchasing parity is the same as in 1978, the only rational explanation for this current price explosion is a giant debt bubble.
But what if the paradigm — the baseline assumption of what dictates house prices — is changing?
What if the newly-redefined value of shelter is the maximum amount of annual rent that can be extracted per unit of housing?
For years, banks and ultra-elites (bankrolled by years of money-printing, corporate socialism, and bailouts) have been using their wealth to take control of the world and rent it back to us.
Apple did it with music.
Netflix did it with movies.
Nestle did it with water.
Uber did it with cars.
Airbnb hosts and landlords did it with houses.
The lecherous gig economy did it with employment.
Instead of buying and owning products, now we’re all just renting “services.”
After all, why should people like you and me build equity when a multinational corporation can build equity instead?
So long as your monthly housing-as-service payment remains relatively “affordable” (AKA half your income), the ownership class doesn’t care if it’s rent instead of a mortgage. Thus, house prices continue to rise against all reason as private equity and rent-seeking investors outbid families for control of shelter. Sure, there might be more real estate price crashes, but they’ll just be bigger versions of 2008 — buying opportunities for the hyper-elite. Your home is now a future hedge fund investment. As reader Valerie Kittell put it:
“Airbnb-type models altered the market irreversibly by proving on a large scale that short term rentals were more lucrative than stable long-term residents.”
We’re in the middle of a paradigm shift to corporate serfdom.
What can we do about it?
House owners: Stop enriching corrupt banks — pay off your death-grips and never look back.
Parents and grandparents with means: Help your kids get a start in housing before it’s out of their reach forever. Otherwise, they’re at the cold mercy of landlords, who are quickly switching to Airbnb and temporary lets.
House sellers: Put a perpetual restrictive covenant on your deed that states all future purchasers can only be owner-occupiers.
Landlords and Airbnb hosts: Seriously consider doing the right thing and increase housing stability by selling your extra house to a real individual, couple, or family.
Concerned citizens: Pressure your mayor and city councilors to ban Airbnb and start building thousands of new owner-occupier-only units.
Churches, denominations, charities, and NGOs: Help destroy the for-profit landlording scam by building genuinely affordable not-for-profit rental units.
Municipalities: Ban commercial activity (IE Airbnb) in residential neighborhoods.
Governments: Ban all for-profit residential real estate investment. This is, by far, the #1 most important thing we can do if there’s to be any hope for housing stability in the future.
In a truly civil society, human necessities like shelter wouldn’t be commodified. When you allow speculation and investment in residential real estate, you end up where every other capitalist sector ends up —with a handful of monopolists owning ALL the assets in the industry.
If we keep on our current course, 99% of the global population will be housing insecure within two generations. We’ll own nothing and supposedly be happier, but I don’t believe them for a second. I don’t want to live in a world where people are forced to be homeless because they can’t afford to live in a society that’s economically engineered to impoverish them.
So let’s see if we can be civil for a change. If not, we’ll see millions more houseless people flood the streets of LA, New York, Chicago, Houston, London, Paris, and thousands of equally unaffordable cities.
When that happens, we’ll forget civility was ever even an option.
Right on!
Well said.
Yessssss!!!!! Exactly!!!!
Katie,
I would love to share your thoughtful post on a social media platform, quoting you and citing my source. Do I have your permission?
Thank you!
Sarah
katie
thank you so much for this. We need common sense to win the day over soulless profiteering. You’ve laid out a very sane way to do this.
Have a blessed day!
100% !!!
Although there are a few points here that make sense, there are many scenarios that you haven’t taken into consideration.
1. supply and demand. people are overpaying because of a ton of reasons but ultimately if I have a house they want then there becomes bid war. Capitalism baby!
2. Many people are fleeing the states with with 20K and higher property taxes and buying more land for their bucks. Cant really regret that decision.
3, Lastly, most of these transactions are happening between locations that had amazingly hard impacts from the state government and these people are willing to dole out the cabbage to escape. Again, Freedom isn’t free.
A few things to consider…
Politics is designed to maintain social order by facilitating conflict between the middle and lower classes. Binary political systems are designed to ensure polarity between issues often based on a false choice. Economies are designed to concentrate wealth and influence in the upper class by adding fiscal responsibilities to the middle and lower classes. Money is a protocol for value or currency of exchange based on confidence or belief. Markets are venues for concentrating wealth and influence in the upper class. The housing market is no exception. Houses are typically the largest expense undertaken by most in the middle class. Money is a protocol for value or currency of exchange based on confidence or belief.
The system is not flawed. It is working exactly as designed. The crash has not happened yet, because it has not been triggered. Look at the past 100 years of the Dow or the regularity of runs on banks going back to the 1790’s.
I completely agree with your response/analysis, but I cannot fathom what is your recommendation for buying real estate NOW? Prices are so high, demand so high, interest rates so low, I am so very tempted to jump in, believing this is “The New Normal”, yet…
I think real estate is in a multi-year url market due to positive demographic trends. Institutional investors have lots of capital and are buying rental properties right now.
It’s always worth looking and negotiating deals. There are ALWAYS bargains out there due to mis-pricing, etc.
Out of interest mr financial samurai, are you actually quantitatively trained – and no i do not mean some bs undergraduate economics degree.
Those of us who are quantitatively and market trained have been shit scared of this credit bubble since 2003, and we never though it found ground in the gfc.
You would be the biggest mug in two generations to be buying housing in america today. Let me tell you what crashes housing – labor depressions. That simple. Regardless. 17 million on benefits. Bang. Sorry bozo.
I’m sorry you missed out on such a big run since 2003. The only solution is for you to keep working hard and try to understand where you got your investment outlook so wrong.
At the end of the day, you’re happy with your wealth and are richer, or you’re not. If you’re not, you’ve got take action to improve your situation. Calling my bozo and being angry at how things have turned out won’t help you one bit.
Related: Why The Housing Market Won’t Crash Any Time Soon
Samurai,
Good read, please consider now is the time to raise 1/4%
Housing is being subsidized with ultra low rates which has turned into an addiction. Even though the economy shows signs of overheating, the Fed still won’t raise just 1/4% to prevent inflation to get out of hand, for fear a big Wall Street selloff would occur.
But consider that a 1/4% rate hike now and maybe an additional 1/4% next year, won’t make high priced homes go upside down in value and yet there is unrealistic fear that a 1/4% rate hike now and one next year would kill housing. With no inventory and high construction cost, 1/4% will not kill home sales.
What will kill home sales if if the Fed continues to embrace near 0%. (or an inflationary interest rate policy) Inflation on consumer goods will do more to drain excess liquidity out of the middle class and once they max out their credit card bills, they won’t have enough to make their mortgage payments. If the Fed continues to sit on their hands, I figure after this next Christmas, we’ll start seeing a liquidity crunch begin to happen if the Fed doesn’t put a stop to depleting purchasing power of the middle class, which slows demand, hurts business and kills jobs.
There is very little inventory and lumber prices are getting out of hand, (and everyday consumer goods) 1/4% hike may actually stabilize inflation and lumber prices which benefits new construction and prevent a liquidity crunch, that will surely happen if the Fed keeps embracing inflation.
The Fed will never pull a Bernanke and raise rates too high too fast in 2006-07 and into 2008 raising 1/4% a month for 2 years straight. So what are they really worried about?
All Powell has to do, is say the economy has bounced back remarkably well, enough for the need to slow inflation down, raising 1/4%. Powell will also be reassuring the Street the Fed will still keep rates low. After a little selloff in the S&P, stocks will rebound to newer highs.
Not raising may actually cause the Fed to overshoot their 2% inflation goals and create a severe money crunch on the Middle Class and cause the dominoes to fall enough to be in a toxic deflationary environment. Give it 2 years if the Fed does nothing to deter inflation when lack of purchasing power will for sure create deflation. In this case the Fed waiting it out will in fact create deflation.
Fed backed-up economy and housing market bubble can take so much air before it burst.
Since most mortgage is backed by Fed, those renter properties will suffer the most. You will do no darn thing to exist anyone when government steps in.
The blood bath in housing market has not yet started. Hold tight.
Don’t forget that banks are nearly giving away the money to buy these expensive homes at very little cost. I have seen double digit mortgage rates in my time. See what that adds to the price of a home, if you can qualify to buy one.
In fact, with the government running the presses overtime to produce trillions of dollars not backed by any increase in assets that I know of, many are not even trying to explain this apparent contradiction of all the laws of inflation that I have studied.
I agree with your statement on housing blood bath coming. Realtors, the internet and news surely arent honest about our current situation. I’m looking to buy a new home but waiting for the huge bubble to burst. I needed up and didnt buy in 2011. I’m not missing out this time! Everyone is unemployed, the unemployment numbers are fake, and low interest rates wont mattervto people unemployed because they wont be buying a home. I spoke to a few realtors about market knowing they would not. E upfront. They seem very desperate to sell…begging! Huge red flags. I’m just waiting this out. I’m looking to. Uy a brand new home not used. Any info on how prices on new homes would be affected compared to used homes when the housing market declines or. Rashes. I’m in the Woodlands, tx area. Everything in this community revolves around the oil industry which was crashing before coronavirus and will be a long time if ever it recovers to the pay for employees as in past. So all these oil executives in homes I’m looking to buy $300,000 to $500,000 will foreclose because theres no alternative to work in this area at high level executive jobs. So any advice?
Oil executive comment didn’t age well. ;)
It would help if the people from the west coast a d Yankees from up north would stay the hell out of Texas. Yall being destroying our cost of living since! In the end yall will be exactly were you were when you left those overpriced states! Go to a 3ed world country. Texans will .ake your lives miserable. We love our guns, country music, and kicking west coast and yankee ass! Stay a way unless you enjoy steel toe boots in your asses and slavery!
lol, what’s your IQ, 50?
I’m a slave, a cowboy, and I like steel toe boots. But I love you brotha and wish you nothing but the best!
I hate to say it, but Californians are coming to Texas because foreign investors and people who work in technology are forcing average Californians out of their beloved state. Our country has to STOP foreign investment in our real estate!
Whatever. you guys have been calling for housing to implode for 5 years now. I live in MICHIGAN. Hardly the sought after sandy beaches of Maui, LOL. Its Grey here as much or more than Seattle. I bid $17k over asking on a modest 1100 sq foot home in a middle class blue collar neighborhood this week. Got a thank you for your interest response from the Seller today… “be happy, you came in the top 5 out of 17 offers.” HUH? I don’t ever see this housing market ending. Let me be clear, this was a MODEST almost dumpy starter home I put an offer on, many of you would probably laugh at. So in simplest terms, before this market “implodes,” we’d have to get homes for the other 16 people who lost out on this home. I’m just warning you all, this housing market will NOT end. I’ve been waiting YEARS and its only cost me money. Hey, it makes no sense to me either. But it is what it is.
Hah! Thanks for sharing your anecdote.
Btw, why not move to Hawaii?
I so understand this! I mean- overbidding tract houses in San Francisco area? 1.3 million (300K over asking) 1300 square feet!! Housing crimes- no wonder people are turning homeless- it’s the ole top down demoralization project.
I was planning on buying some more rental properties for investment until this coronavirus hit. With the current uncertainty I’m going to “wait and see” before I buy anything. I learned a long time ago that trying to “time” any industry is next to impossible. What is possible if your skilled and educated is to be able to recognize when certain industry is getting to the bottom or starting to recover since hitting the bottom. I bought my primary residence and all my investment properties during such times and have made out wonderfully.
Going to do the same for this pandemic. I believe that certain segments of the housing market will have a good decrease in price. I’m going to buy when I see that happening. I HATE having over $400K in cash losing money to inflation. However, I would rather lose 2-4% in inflation then lose 8-15% by paying for a property before it starts decline in value. By my estimate I will be able to purchase properties that are not in low class neighborhoods and still earn a 9-14% net return on my investment if I buy at the right time. Since I will be paying cash for everything I don’t have to worry about a substantial amount of risk factors that financing investors have to deal with.
I’m looking to buy another investment property in Texas (Houston preferably) when home prices dip a bit but I’m worried about rental prices softening in tandem, any thoughts?
Would be great if Financial Samurai were to update this article with the impact COVID, people losing jobs but getting mortgage forbearance, etc is having on the current real estate market!