It’s funny how catastrophes linger in our collective memory, but near-catastrophes fade.
Fifteen years ago, the “housing bubble” that developed during the Bush administration finally collapsed, and almost took down the U.S. banking system with it. To the point where the Federal Deposit Insurance Corporation (FDIC) ran a negative fund balance, due to the wave of bank failures (below).
Source: FDIC, , courtesy of the Federal Deposit Insurance Corporation (FDIC), s
By now, most have forgotten how crazy housing prices were in some parts of the country. And what extraordinary measures the Federal Reserve took to avoid a complete collapse of the U.S. financial system.
We’re still dealing with the fallout from the 2008 near-catastrophe. In particular, that led to more than a decade during which the Federal Reserve kept interest rates low. Lower than the underlying rate of inflation, in fact. As I see it, the Fed recapitalized a bankrupt U.S. banking industry on the backs of U.S. savers.
But that era of below-zero real interest began to end a couple of years ago.
And nothing much has happened. Yet.
Yesterday, a friend pointed out that some economic analysts see the U.S. housing market as once again ripe for a collapse in prices. Given that I own a house, I thought it was well worth taking the time to look at current U.S. housing market data. And while I was originally skeptical, I’d now have to say, he has a point. There’s not a lot of sunshine in the current housing market data.
U.S. housing market, current conditions.
Real (inflation-adjusted) house prices are the highest they’ve been in at least half a century.
Source: Federal Reserve Bank of St. Louis.
Above, you see a housing price index in blue, and the U.S. Consumer Price Index in red. (red). The bump in the blue line above is the collapse of the housing bubble prior to the 2008 recession.
Source: Calculated from the Federal Reserve data cited above.
If I do the arithmetic (above, dividing the housing price index by consumer price index), you can readily see that inflation-adjusted housing prices are at an all-time high, since the Federal government started tracking this index in 1975. In real (inflation-adjusted) terms, housing prices are higher now than they were at the peak of the circa-2008 bursting of the Bush-era housing price bubble.
As a technical footnote, that housing price index should not be affected by the change in the mix of houses. It’s a weighted average of repeat sales (reference).
Housing affordability is worse than it was at the peak of the 2000’S housing bubble.
Source: Federal Reserve Bank of Atlanta
Above is a housing affordability index from the Federal Reserve Bank of Atlanta. Basically, it’s an index of the ratio of median personal income, to median monthly mortgage payment for a newly purchased house. Higher numbers equate to more affordable housing (median new mortgage payment takes up a lower share of income). And right now, that index is lower than it was at the bursting of the 2000’s housing bubble. Meaning that housing is less affordable now than it was then.
Mortgage interest rates are higher than they were at the peak of the 2000’s housing bubble.
Source: Federal Reserve Bank of St. Louis.
That’s a 30-year fixed rate conventional mortgage, shown above. That’s currently just above 7%, slightly higher than at the peak housing bubble.
As importantly, two years ago that was below 3 percent. Compare to the affordability graph above, and it’s easy enough to see that most of the recent, sharp decline in housing affordability is due to the spike in the nominal interest rate of home mortgages.
Just to bring that home, let me quickly calculate the monthly payment for a $1M house, with 20% down payment, at today’s rates, and at the rates that prevailed two years ago. Using a variety of on-line mortgage calculators (with a variety of assumptions about taxes, insurance, and so on), in the last two years, the monthly payment for that home would have not-quite-doubled. Which again matches the affordability index, which was not quite cut in half over the same period.
The upshot of that is that buying a new house today costs roughly twice as much as it did two years ago, in terms of the monthly payment that would have to be made.
Source: https://www.mortgagenewsdaily.com/data/existing-home-sales
I guess it should be no surprise, then, that as the monthly cost of home ownership has roughly doubled, sales have tapered off. Above is the count of home sales from the National Association of Realtors. Existing-home sales are about half of what they were at the most recent peak, coinciding with period over which monthly costs roughly doubled.
It isn’t that simple. But maybe it is.
Housing is the only highly-leveraged tax-free investment available to most Americans. So that, even if you are paying through the nose right now, to make your new monthly mortgage, you are still financially A-OK as long as housing prices continue to rise. Your total return on investment, including capital gains on the eventual sale of your home, may remain positive, despite the high current cash outlays you must make in order to carry that house as an investment.
That said, when the cost of something doubles in two years — not from an excess of demand, but due mostly from the time cost of money — that probably does not bode well, looking ahead.
I’m just going to leave it at that.
So far, it doesn’t look like house prices have begun to fall. But if that happens, suddenly the prospect of capital gains goes out the window, and the cost of carrying a large home, at today’s mortgage rates, rises steeply. So that will be the next thing to watch out for.
The graphs in this post are real. The pictures have been changed to protect the innocent. The pictures are AI-made, from Gencraft.com and Freepik AI.
