The Housing Bubble Popped, and You Missed It
Mortgage rates have been over 6% for over a year and a half now (they passed 6% in September of 2022) and haven’t looked back. The folks that have been sitting on the sideline waiting for a housing bubble to pop, missed a very loud noise that eerily sounded like water, dish soap, and a Dollar Tree bubble maker that came from the housing market in June of last year.
Wait, what? Yup, home prices DID come down – and they came down quite dramatically. But, somehow the national headlines missed it!
While the talking heads have been focused on inflation and politics, after reporting that home prices hit another all-time high in Q4 2022, (when the average sale price in the US was $479,500) someone forgot to report that just a short 6 months later, the average home price fell to $418,500 (June 2023). That’s nearly a 13% drop!
For comparison, the post 2008-09 subprime housing crash, when all said and done, when that mess cleaned itself up, the housing market dropped by 19.03%.
So why didn’t it make headlines this go around? Likely because there wasn’t a very snazzy story to along with it. There wasn’t a recession, no mortgages written in a Dog’s name, no bank repos, no foreclosures, no government bailouts, and no Christian Bale making (in my opinion) one of the best movies of all time about it. Our nation was still “fat and happy”. A little indigestion was that was felt and we moved on.
So, is there another bubble on the horizon? Likely not. In fact, these have been the ONLY two times in the history of ever (going back all the way to when data was first collected – to just about when Marty McFly went to 1955 with Doc Brown in the DeLorean) that we’ve even seen housing prices drop over 10%.
For the last 9 months, prices have since stabilized, and have seen a slow but steady rise. Since last June home prices have risen 0.5% and have been boringly resilient.
So why isn’t another bubble going to pop?
#1. There won’t be people walking away from their homes at the level that we saw in 2009 because, well, what is their alternative? 78.7% of all homeowners have a rate under 5% and 90% of all American homeowners have a rate below 6%. Mortgage rates were falling while the 2009 sub-prime crisis was happening.
In addition, the average rent for a Single-Family Home in America is currently over $2,000 a month ($2,018 to be exact). If someone must walk away from their home, the alternative is a rent payment that’s nearly equivalent to the interest, taxes, insurance, and HOA that they are currently paying on the house they now own. Rent and mortgages on single family homes have never been this close in monthly cost.
#2. Negative Equity is nearly non-existent. In 2009 nearly 1 in 4 homes (23%) owed more on the mortgage than what the house was worth. As of March 2024, CoreLogic reported the number of homes in the United States that is underwater was at 2.1% (or nearly 1 in 50). Homeowners nowadays simply have so much equity in their house that they simply aren’t going to walk away from it like they did in 2009.
#3. Second Mortgages. I do believe that there is economic pain coming. It seems to be a storm that is staying offshore and is refusing to make landfall. That said, because homeowners have so much equity in their homes – they have essentially a security blanket/insurance policy to help them ride out the tough times when/if they arrive. The HELOC rush hasn’t started yet. In fact, according to MoneyGeek.com – in 2023 there were less folks with HELOCs at lower balances than just 5 years earlier in 2018 – but according to Experian so far in 2024 – those balances and available credit lines are up 6% year over year. Perhaps it’s a sign of some folks starting to batten down the hatches, OR it could be a result of America’s insatiable thirst to spend. A habit that is clearly a part of our post-Covid economy.
Is now the right time to buy? The data suggests that even if a recession does make landfall, the housing price correction that we saw because of the jump in interest rates isn’t likely to repeat itself. Freddie Mac is predicting a 0.8% rise in housing between now and the end of the year. Assuming that is true, that means that you’ll be paying about $3,400 more for that same house that you see on Zillow or Redfin at the end of the year, vs. buying it today.
I don’t say that as a sales pitch, I say that as a person that just tries to follow the math.
Disclaimer:
My predictions are my own and based on individual research and don’t reflect that of C2 Financial Corporation. If there are 36 super computers predicting the weather, just imagine how many there are used to predict economic conditions! And still, they aren’t always right! Do not use this article as a basis to make financial decisions in your investment portfolio. Only do so with the guidance and advice of a licensed Financial Advisor.
Sources:
https://fred.stlouisfed.org/series/MSPUS
https://www.freddiemac.com/research/forecast/20240418-economic-growth-moderated-labor-market-robust
https://thehill.com/business/4404959-nearly-nine-in-10-us-homeowners-have-mortgage-rate-below-6-percent-report/#:~:text=More%20than%20three%2Dquarters%20of,3%20percent%2C%20according%20to%20Redfin.
https://worldpopulationreview.com/state-rankings/average-rent-by-state
https://www.huduser.gov/portal/pdredge/pdr_edge_research_072012.html
https://www.corelogic.com/press-releases/corelogic-number-of-underwater-us-homes-drops-by-15-percent-annually-in-q4/
https://www.moneygeek.com/mortgage/analysis/heloc-statistics/
https://www.experian.com/blogs/ask-experian/research/home-equity-line-of-credit-study/
* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.