America’s Housing Market, “It Was All A Dream”
This month's data on Americas housing market paints a grim picture, shattering the dreams of current and prospective homeowners alike. As the legendary Notorious B.I.G. once rapped, "It was all a dream," and the haunting echo of that sentiment resonates through the current state of the housing market. The dream, it appears, could be turning into a nightmare, and the market's reality is about to deliver a rude awakening to those who dared to dream of stable and lucrative deals in the housing market.
A Dream Unraveled by Interest Rates:
The Federal Reserve's digital purchase of Mortgage-Backed Securities (MBS) from 2020 to 2022, totaling $2.7 trillion, led to suppressed 30-year fixed interest rates (reaching as low as 2% for a brief period and averaged 3% these 2 years).
This made homeownership dreams seem within reach for many Americans. Due to the lower rates, monthly mortgage payments artificially became cheap, which contributed to the booming prices in housing that peaked between June 2022 and June 2023, depending on the region. However, the dream is now unraveling as interest rates hover around 7.3%, reaching a two-decade high over 8% this year as the Fed has stopped buying MBS. These high interest rates make housing affordability at current prices the worst in US history.
Dreams turning into Nightmares: Declining Prices and Surging Supply:
The dream of million-dollar homes is dissipating, with existing home sale prices experiencing a -6% decline from the peak, dropping from $416,000 to $391,000 (as of October 2023 data).
New home sales prices have crashed even more dramatically, plummeting by -18% from their 2022 peak. Adding to the predicament, pending home sales have dropped to a record low (even worse than during the depths of the 2008 financial crisis), and the supply of housing is on the rise up almost 40% this year, creating a dissonance between falling demand and increasing inventory.
The Overture of Oversupply and Falling Demand:
Basic economic principles remind us that when demand decreases and existing home supply rises (40% year to date), prices must adjust lower. The current imbalance in the real estate market suggests a looming correction(one that seems to be taking place now). What may appear as a housing shortage could indeed be an oversupply when there is little or even no demand (based on record low demand for mortgages for current supply). Current inventory is also lingering on the market for longer.
Cancellation Surge and the Cash Crunch:
Redfin's latest report reveals a remarkable 17.2% surge in canceled real estate deals for October, marking an all-time high and signaling a mounting sense of apprehension among prospective homeowners.
The question arises: why this sudden willingness to relinquish the American Dream? The answer lies in the ongoing inflationary pressures and the drastic rise in continued unemployment. Notably, the recent surge in unemployment figures has reached a staggering 1.9 million, surpassing levels not seen since November 2021 and exceeding any other period prior to the lockdowns of 2020.
This surge has left homeowners financially strained. Furthermore, the situation is compounded by an increase in delinquencies in credit card and auto loan payments, with these data points acting as additional contributing factors to the growing unease in the real estate market.
Inflation's Eats Away at Homeownership Dreams:
As Americans check their Zillow app, hoping for a million-dollar valuation, they are facing inflation (a loss of -18% in purchasing power since January 2021), with higher property taxes, utilities, and maintenance costs. The dream of homeownership is now turning sour as recent data reveals that, adjusted for inflation, real estate values are actually losing value, down by a significant -7% and below the 2006 peak when adjusting for inflation. These early data points also happened at the start of Great Recession of 2008, and today's trend is very worrisome for the future of the American Dream for all.
Homes go from Assets to Liabilities:
A home transforms into a significant concern if its value fails to keep up with inflation. Inflation's erosion of purchasing power not only diminishes the real worth of the property but also amplifies financial strain with escalating operating costs. The worry intensifies as fixed-rate mortgages become comparatively more burdensome amid rising interest rates driven by inflation. Homeowners face the distressing prospect of missing out on potential investment gains like 5.5% guarantee returns in bonds, doubling your money in 14 years, incurring a substantial opportunity cost. The anxiety deepens when considering that a declining real estate value may force homeowners to sell at a loss, turning what was once an appreciating asset into a worrisome financial liability. Americans are awakening to this reality, and those who currently own seek to cash out, echoing Biggie's mantra: "Time to get paid."
Living the Pre-Fame Struggle:
Yet, the irony persists—those needed to revitalize demand are living the pre-fame struggle, a prelude to financial solace that echoes Biggie's words “just trying to make some money to feed my family, as all the families are in the struggle." In the midst of inflation and mounting debts, the American Dream remains elusive, and homeownership and financial freedom, for most, is an illusion.
Perhaps it's time to reconsider the notion that homeownership guarantees financial freedom. In the words of the legendary rapper that still hold true today, "If you don’t know, now you know, my man."
