The danger to the economy is NOT inflation
SUMMARY: Housing prices are surging to new records with no end in sight. They’re being fueled by historically low-interest rates — but also investors and economists’ belief that the housing market has a unique ability to support runaway prices.Fuel prices are on their way down and the supply chain is finally loosening up so retailers can hold sales. The real danger to the economy though is high home prices because they can’t be sustained and when the bubble finally busts a lot of people are going to see their home values drop 30–40%.
1200 square foot condos in Michigan that were selling for $300,000 are now selling for $450,00 with taxes that are over $1000 a month. With more people working at home a lot of people want to move to states that aren’t as crowded and they can have a life but short supply and the increase in prices of raw materials has driven up prices.
According to the National Association of Realtors, the U.S. has underbuilt its housing needs by at least 5.5 million units over the past 20 years. That’s a stark comparison to the previous housing bubble in 2008 when overbuilding was the issue.
According to the National Association of Realtors (NAR), the pace of home price appreciation slowed in the third quarter of 2021 compared to the previous quarter, rising 16% year-over-year (compared to 22.9% in the prior quarter). But this double-digit price growth is still strong considering that annual home price growth over the long term averages around 3.5%.
Home prices rose in 99% of the 183 markets NAR tracked in the third quarter, and 78% of them saw double-digit spikes in appreciation. In other words, it’s just another day in a super-hot housing market. The market is not be driven by future homeowners either. Investors are adding to the soaring home prices, elbowing out primary buyers (those who intend to live in the home) with deep pockets. Investor purchases spiked 59% in July 2021 compared to the same period last year, according to a report by Realtor.com.
Economists forecast even more price increases ahead. Zillow projects that national home price increases will slow but not start to decline. It sees 13.6% growth from September 2021 through September of 2022, a faster pace of increase than its previous forecast. Goldman Sachs forecast earlier this month that prices would rise another 16% by the end of 2022.
Those price increases cannot be sustained.
Ivy Zelman, an analyst who portended the 2008 housing crisis as early as 2005 worries that there won’t be enough people to buy the houses we’re building, contrasting the general refrain that there’s an overabundance of demand. Falling fertility rates, an aging population, an uptick in multigenerational housing, and not enough immigrants to make up for the reduction are the main drivers of a declining population and new household formation.
Homeowners have been reaping enormous gains in equity, but they also face the possibility of losing some or all of the appreciation they’ve captured if we are indeed headed for a downturn
Most economists don’t see a major housng bubble but if interest rates rise to say 4% it will cool the housing market. But what about people who paid top dollar for their homes and find out that their homes, in 3–4 years, are worth as much?
Some realtirs are noticing that more buyers are now proceeding with caution. “I do not see the same level of desperation and urgency we saw a few months ago,” one says. “After large price increases, many properties just don’t feel like such a good deal anymore.”
The current pace of home price appreciation is unsustainable, realtors say. “I am worried that the price run-up is going to choke off first-time buyers,” said Lawrence Yun, chief economist for the National Association of Realtors. “This simply cannot continue.”
A lot of people and analysts are bullish on the housing market and in some markets they may be right but in a LOT of other markets they could way off target. A house or condo in the Midwest that is selling for $400,000 plus may snare many home owners in a loss of substantial equity and that could be an issue for the economy.
Originally published at https://www.newmediaandmarketing.com on November 21, 2021.
