This is my final Bubble Watch column. Since May 2018, the trusted chart has been looking at trends to see if there are any upcoming problems in the economic or real estate markets. With hassle, a “clock” is officially no longer required here.
Buzz: The bubble burst. Again.
Source: Property values are facing significant falls as rising mortgage rates and economic turmoil affect affordability and homebuyers’ willingness to buy. Most notably, the California Association of Realtors is forecasting a 9% decline in value across the country in 2023.
Lessons can be learned in each cycle.
The pandemic has devastated the entire economy, but surprisingly it has boosted housing construction. A spending spree ensued as people sought larger homes and real estate investments while mortgage rates hit record lows.
Let’s look at what the housing market has taught us recently and spot some early warning signs you may have missed…
Pricing Issues: When mortgage rates are lower than inflation, fear.
In April 2021, inflation — 4.2% and a 13-year high — surpassed the average 30-year mortgage rate, which was near a record low of 3.1%.
This type of reversal had not been seen in 41 years. Mortgages run an average of 4 percentage points above inflation.
This implied inflation was a growing problem. Interest rates would rise as the Federal Reserve deployed more expensive financing in a previously failed attempt to cool an overheated economy.
Even in September 2022, the consumer price index rose by 8% annually. The 30-year mortgage rate had just surpassed 6%, effectively crushing home affordability.
Not so funny? Be nervous when buying a house becomes fodder for comedians.
The housing market has a bad habit of becoming too popular. In February 2022, a Saturday Night Live TV skit parodied the housing craze with a fake ad for Zillow’s online home search services.
The skit suggested that online apartment hunting was a new love affair. At the same time, two public opinion polls suggested that house-hunting was more popular than sex.
I have given these developments six “stars” on my five star bladder warning scorecard.
choice words: When someone important says “bubble,” take it seriously.
In March 2022, researchers at the Dallas branch of the Federal Reserve Bank released a report stating, “Home prices increasingly appear to be out of step with fundamentals.”
The warning was dismissed and dismissed as an exaggeration of the market’s modest risks. Even the report said the “wave of exuberance for fear of missing out” would not be a repeat of the bubble-bursting crash of the 2000s.
But the report’s author, Enrique Martínez-García, told Fortune magazine: “This could be a housing bubble. The evidence suggests it looks like a real estate bubble. A bit like a duck. It walks like a duck, it looks like a duck, it could very well be a duck.”
click performance: Be careful with your desires.
No one liked walking around town to buy houses. Online house searches have dramatically improved apartment hunting.
Lockdowns have forced trips home to go virtual. This change has greatly improved a home hunter’s ability to review property opportunities with just a few clicks. So we now have a more efficient marketplace.
But efficiency falls short in many ways, including pricing. So expect faster ups and downs. And this change is a permanent change.
Slippery supply: Are Fast Sales Just Buyer Excitement or Better Business Development?
The pandemic limited the number of homes for sale found in traditional listing databases.
Thanks to better technology, owners no longer have to put a house on the market to get a price research. Computer-aided valuation models give you a solid assessment.
So the offer today is dominated by reputable sellers. Historically high levels of entries seen years ago are not easily replicated.
The resulting short time between listing and sale appears to be due to improved logistics rather than increased buyer demand.
Bad data: let’s be honest We all guess.
The first-ever bubble watch in May 2018 dismissed fears that weak new home sales data were a bad omen. Why? These stats are a lousy estimate of construction company sales activity.
Apartment data is anything but perfect. Most benchmarks only track parts of supply, demand, sales, or prices.
Who buys? Who sells? Are you a homeowner, investor or second home? We only have rough guesses.
And there’s another huge knowledge hole – mom-and-pop landlords. We know almost nothing about this half of the rental market.
So, digest any analysis—even yours—by noting the statistical flaws.
The 5% hurdle: The turning point was in the rearview mirror.
In 2018-19, mortgage rates approached 5%. Home buying and price increases have essentially stalled.
In 2018, the Fed worried about a hot economy and went into rate hike mode. The following year, the Fed admitted it had overreacted and reversed its interest rate policy.
This period heralded the struggles of the housing market with interest rates of 5% or higher.
And that Fed flip-flop may have led some people to believe that the central bank would not aggressively tackle the inflation problems of 2022.
Building blocks: Builders may be a small sales niche, but they’re definitely worth checking out.
In January 2022, a well-publicized monthly home builder sentiment survey turned negative. It has fallen every month since then in 2022.
CEOs see sales cancellations, declining footfall on projects and the need for discounts. The builders’ merchant group says we’re in a “housing recession”.
Fed Follies: Don’t trust the central bank… but you can’t ignore it.
In 2005, then-Fed Chairman Alan Greenspan told Congress it was just “foam” in the bubbly housing markets. The housing debacle that followed made “foam” a massive understatement.
In the pandemic era, the Fed clearly misinterpreted “temporary” price hikes that were actually serious inflation. Meanwhile, the central bank’s hope that historically cheap money would make housing an economic staple worked — for a while.
With that track record, who do you want to manage the economy? Congress? The White House? Or just the “free” market?
2008: “This time is different” is always true.
Industry gurus rightly say that the market of 2022 has nothing to do with the mass stupidity of the mid-2000s when the previous bubble burst.
Yes, mortgage approvals were ridiculously poor quality in the early 2000s. When the market lost that boost, it cratered.
Yes, pandemic-era mortgages were high-quality loans. But they were made at “bargain prices” thanks to the Fed’s temporary generosity.
The new challenge for housing construction is to recalibrate to “full price” financing, which has severely curtailed a home seeker’s purchasing power.
The surprising housing fluctuations of the pandemic era should teach any forecaster humility.
Let my trusty chart give you some clues for the future using the average California real estate agent home price, which peaked at $900,000 in May.
When the bubble burst in the 2000s, the national median fell 59% from the 2007 high of $594,500. It took 11 years before a new record price was set.
But the bursting of the less-discussed bubble in the 1990s drove prices down 20% from the 1991 peak of $211,000. A new peak was not seen for eight years.
With the story, I want to remind you that “this time is different” is always true.
Jonathan Lansner is a business columnist for the Southern California News Group. He can be reached at [email protected]