Federal Reserve: signs abound that housing market is entering bubble territory

[Anonymous]

Anonymous wrote:

Anonymous wrote:What will this minor correction look like?

Are we talking a home that is valued at $850k drops $50k or more like $100k in value? Or will be even more slight?

I've been very tempted to sell but then that would mean buying another home. The buying part and future corrections are what have kept me from listing.

My sister just closed on a house where they had to offer $50k over asking, waive all contingencies, and do a 3-month rent back to the sellers rent free so their kids could finish out the school year in mid-June. They only got this home because their agent was tipped off by her sister, also a realtor, before it hit the MLS. Before that, they'd lost out on something like 5 or 6 places. The last house they lost out on was a full cash offer accepted - $1.3mil.

Could you sell, pocket the equity cash in a 6 month CD, then buy in 6-12 months during the correction? I know that’s not practical for many people (moving twice, renting in between) but from a financial standpoint that would be the ideal thing to do.

If op goes this route (I haven't read the whole thread), then I'd probably skip the 6 month CD and just find a high interest savings account. At my bank, the savings account interest rate is higher than the 6m CD rate and you aren't locked in at that rate as the Fed raises rates (which should trickle down)

[Anonymous]

Anonymous wrote:

Anonymous wrote:What will this minor correction look like?

Are we talking a home that is valued at $850k drops $50k or more like $100k in value? Or will be even more slight?

I've been very tempted to sell but then that would mean buying another home. The buying part and future corrections are what have kept me from listing.

My sister just closed on a house where they had to offer $50k over asking, waive all contingencies, and do a 3-month rent back to the sellers rent free so their kids could finish out the school year in mid-June. They only got this home because their agent was tipped off by her sister, also a realtor, before it hit the MLS. Before that, they'd lost out on something like 5 or 6 places. The last house they lost out on was a full cash offer accepted - $1.3mil.

Could you sell, pocket the equity cash in a 6 month CD, then buy in 6-12 months during the correction? I know that’s not practical for many people (moving twice, renting in between) but from a financial standpoint that would be the ideal thing to do.

Unless house prices don't actually go down and interest rates go up

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

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Anonymous wrote:

Anonymous wrote:Be wary of over confidence on either side. For my job I get exposure to some of the greatest minds on finance, and the amount of folks that predicted that the market would hit all time highs in the midst of record setting coronavirus numbers and new variants is zilch. The point being, people on an anonymous forum, most of whom are lawyers, doctors, lobbyists, stay at home moms, won’t be able to predict what happens to asset prices, so stop mentally masturbating on here even though it can be fun because it’s a waste of time.

They didn't predict a record high because it is fake.

All US assets from housing to stocks are grossly overvalued because of the Federal Reserve, massive amounts of money printing, massive injection of multi trillion dollar stimuluses, and too much credit liquidity. It is a fake diabetic sugar rush. Bubbles built on cheap and easy money they produce an environment of irrational exuberance when people all think stocks or housing only ever go up always end so badly when the sugar rush ends.

Agree on stock market.

Housing is different. People need a place to live. Unless people are foreclosing we won’t have a bubble “pop”.

This is EXACTLY (word for word) what all of the economists said when they were explaining why there wouldn’t be a crises in 2007.

I don’t know if the bubble will pop or not, but people saying stuff like this to explain why it won’t makes me think it’s more likely, rather than less.

It’s much different today. Predatory lending is not rampant. ARM loans aren’t going to jump out of control.

People were foreclosing because they were in precarious financial situations. That’s not the case today.

No, people were for closing because they were in precarious financial situations and they could not sell their house for what they bought it for.

Do you really think everyone who bought at the top of their DTI last year is in a great financial spot? Do you not see how inflation is affecting everyday Americans? What about the impending recession?

They were trying to sell because they couldn’t pay the mortgage.

Gas & food increases aren’t comparable to huge jumps in mortgages. People can adjust their driving and eating habits. They can’t adjust their mortgage payment.

Sure you can. You can get roommates. You can rent out your place and move somewhere cheaper.

If you can't sell your property for what you paid, why in the world would a renter pay enough to cover your mortgage? Rents would also be done in that scenario. It will be a renter's market (and a buyer's market). Why would a renter move in with you to help you pay your mortgage when there are a lot of other options? Also, what family with kids wants to take a stranger into their home just to pay the mortgage in an underwater house? Most people would vastly prefer bankruptcy to taking in a boarder just to hang onto an overpriced and underwater asset.

*Prices would also be down in that scenario. Rents and purchase prices track together. As housing prices decrease, rents will also decrease as more owners try to rent out what they can't sell (without taking a loss).

Who said the renter would cover the full mortgage? Rent it for as much as you can, pay the bank the difference out of your own pocket, move in with mom/friends.

Who said only families with kids live in houses? Lots and lots of single people own houses, especially in other parts of the country.

And yes, many people would prefer bankruptcy/foreclosure, which is exactly why they decided to walk away when housing prices began to tumble before and during the last crash.

[Anonymous]

Unless house prices don't actually go down and interest rates go up

+1

So far both are raising at the same time

[Anonymous]

Anonymous wrote:

Anonymous wrote:https://calculatedrisk.substack.com/p/housing-dont-compare-the-current

I know this guy has a cult following, but he’s a retired technology executive, not an economist. In my opinion (and, evidently, the opinion of at least some Fed economists) this guy is underestimating the degree to which people are overextended on their mortgages as we head into a potential recession. McBride talks about distressed sales being a big catalyst for the 2007 crash, and that’s right, but that cyclone was also fed by the unregulated secondary derivatives market. Today, we also have an issue of overextended owners, but it’s not as dramatic as 2007 (better lending practices) and even if there are significant numbers of distressed sales, it shouldn’t unravel the rest of the economy (unless the Fed unintentionally triggers this through its planned MBS sell off). So we are looking at a smaller, more controlled version of 2007 (housing price downturn fueled by overextended distressed sales, which itself is fueled by a correction caused by increased interest rates) unless the Fed MBS sell off throws the market into a panic by accelerating the downturn beyond what investors are willing to tolerate in the short term. So anything between a moderate downturn to a spiraling collapse is very possible. My own view (which I hope is more than wishful thinking) is that it will be closer to a downturn than a spiral because I think market regulators learned a lot from 2007 and have some tools st the ready to stave off a complete panic.

What’s so frustrating on this board, and in this substack, and elsewhere is that people are quick to insist this isn’t 2007 because most lending portfolios are on much more solid ground (ie the mortgages in a given bundle are less precarious) than in 2007, and that’s quite right. But what these folks fail to appreciate is that we have new (but equally scary) fundamental problems in the market right now— namely the Fed’s portfolio and market behavior during unpredictable pandemic cycles (an unpredictability that is increased by the looming threat of both a new Cold War and a new recession). So no, the same circumstances that gave rise to the 2007 collapse are not in place now. Instead we have different and potentially scarier problems.

Excellent summary.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:“Our evidence points to abnormal U.S. housing market behavior for the first time since the boom of the early 2000s. Reasons for concern are clear in certain economic indicators—the price-to-rent ratio, in particular, and the price-to-income ratio—which show signs that 2021 house prices appear increasingly out of step with fundamentals.”

The whole article is about how there is a bubble - the fallout might not be as bad as as 2008 but bubble nonetheless. Warning signs are flashing all over.

Market cooling <> bubble

You think there will be a bunch of bankruptcies? Foreclosures?

I think when people’s homes are underwater they walk away. Especially second homes - vacation or rental.

Did people buy those second/vacation homes here in DC or NOVA or Maryland? How would walking away from homes in other far flung places make the market crater here?

[Anonymous]

Did the Fed actually use the word “bubble?” OP? If not, please never ever EVER post here again.

[Anonymous]

Anonymous wrote:A lotta speculators, investors, people who bought at peak FOMO, and RE agents are in denial ITT. The Federal Reserve must be wrong when they use the B word. Prices on assets only ever go up, amirite?

Where did it use the “B” word?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:A lotta speculators, investors, people who bought at peak FOMO, and RE agents are in denial ITT. The Federal Reserve must be wrong when they use the B word. Prices on assets only ever go up, amirite?

Clickbait gets the clicks, amirite?

What specifically do you think is going to happen to “pop” this “bubble”?

Not the PP, but who knows. Could be anything. We won’t know until we know.

I’m more worried that we have an “all asset” bubble that will take stocks down too. The minor stock market correction earlier this year didn’t affect things much.

So…irrational fears.

Rapidly rising interest rates, a threat of an impending recession, 40 year highs of inflation, an gross over speculation in the housing market at not 'irrational' fears.

But even if all of those thing happen how would that lead to anything more than a cooldown?

People need a place to live. Housing is not purely an investment that can lose all value. Unless massive amounts of people are foreclosing we won’t see another bubble.

Did you not even read the Fed's article? Over 30% of hikes are being bought by investors. These aren't people or entities that need a place to live, they're treating housing like it is the stock market. If there's any sign of a recession/economic slowdown or rates rise so high that people can no longer to afford to borrow to buy stupidly jacked up prices for homes that are flip jobs done by speculators/investors then investors will start panicking and try to unload their bags to exit before everyone else. It will lead to a cascading effect for a sell off, plus the 30% of investors will simply buy less.

Your lack of understanding of how markets work is comical.

No, investors aren’t looking at housing like the stock market. Illiquid vs liquid assets, for starters. Investors in housing aren’t trying to buy low, sell high — they are trying to generate income from rents.

You are way out of your depth in this conversation. The Fed didn’t even use the word “bubble.”

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:A lotta speculators, investors, people who bought at peak FOMO, and RE agents are in denial ITT. The Federal Reserve must be wrong when they use the B word. Prices on assets only ever go up, amirite?

Clickbait gets the clicks, amirite?

What specifically do you think is going to happen to “pop” this “bubble”?

Not the PP, but who knows. Could be anything. We won’t know until we know.

I’m more worried that we have an “all asset” bubble that will take stocks down too. The minor stock market correction earlier this year didn’t affect things much.

+1. Ever hear of credit default swaps before 2008? Because that is what really caused things to go nuclear. Yes, in 2007–8 there was an increase in foreclosures (FOMO ended in 2006, people couldn’t afford the crazy mortgages they took out at the same time prices were declining, and those people who couldn’t afford their payments also couldn’t sell for what they bought so they walked away), but it was the liquidity crisis caused by banks doing risky things with mortgage products that really caused the tailspin. That is what caused the 2008 crisis (Lehman and Bear Stearns going under, etc) that caused recession and job loss, which is what really caused the vast majority of foreclosures in 2008-12. Do you really think banks have stopped taking risks? And do you really think normal people stopped taking risks, too? Just look at all the crazy stuff investors are doing right now to get into real estate. Normal people quitting their jobs, taking out HELOCs and cash out refis on multiple houses, etc.

Right now we are already on the brink of a recession. For two years people have been FOMOing into houses they can’t afford. Prices are way out of line with incomes. Banks will loan you way more than you can afford (not everyone will be smart enough not to buy at the top of their preapproval, especially when OMG I have to buy now or less be priced out forever, homes only go up!).

Being “house poor” doesn’t mean people “can’t afford” their homes.

How are they going to default on their loans? Lose their jobs while unemployment is crazy low?
[u]
Market cooldown <> bubble popping.

Some people can't wait 10-12 years for their house to recover its value. They may have a sickness that prevents them from working. They may be downsized from their government job as the federal government continues to contract its workforce. They may need or want to move for professional or personal reasons (this is especially true in DC, which is a highly transient area). Those people will be underwater on their mortgages if there is a significant correction. You don't need a single dramatic precipitating event to cause people to flood the market trying to get some value out their houses as prices begin to descend. A few underwater properties can affect the entire local market.

It's also important to understand that, although a small proportion of buyers in any housing market always end up overextended and get forced into foreclosure, there are many more people overextended in this market right now than is the norm. This is because the combination of (1) pent up desire to move during Covid lockdowns; (2) the increased premium placed on larger homes and outdoor spaces during lockdowns; (3) the incredibly low interest rates, and (4) the feeding frenzy buyers' market this last year all mean that many, many more people over-spent this year (eg spent more than 28% of their salary on their mortgage and/or threw every penny of their available cash into the down payment). As a consequence of these buying behaviors, you would expect to see an increase in the number of foreclosures this year or next, even if housing prices held steady. If prices do not hold steady, then when those more-than-usual number of foreclosures or forced sales hit the market, those sellers will be underwater in their mortgages. Those over-extended forced sales at underwater prices (along with the other kinds of forced sales mentioned above) could potentially cause a housing price cascade.

Of course it is difficult to know the timeline for this, but the feeding frenzy has already showed signs of stopping this week. The next step will be price growth slowdown, then growth decline, then price stabilization, then price downturn. How quickly this develops and how dramatically it affects the overall housing market will depend on how much people panic. It could be a small plateau of correction, or it could be a steeper, longer decline. A lot depends on what else is happening with the economy at the same time, and what happens with interest rates.

This is anecdata, but I bought my house in DC 20 years ago and the neighbors who were here when I bought are still here. My husband is a DC native, so, been here for 53 years. His friends, mainly DC natives, still here. My friends that I met and made 20 years ago, still here. Just like DC is more than the National Mall, the "transient" story is not necessarily the true story of DC.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:What will this minor correction look like?

Are we talking a home that is valued at $850k drops $50k or more like $100k in value? Or will be even more slight?

I've been very tempted to sell but then that would mean buying another home. The buying part and future corrections are what have kept me from listing.

My sister just closed on a house where they had to offer $50k over asking, waive all contingencies, and do a 3-month rent back to the sellers rent free so their kids could finish out the school year in mid-June. They only got this home because their agent was tipped off by her sister, also a realtor, before it hit the MLS. Before that, they'd lost out on something like 5 or 6 places. The last house they lost out on was a full cash offer accepted - $1.3mil.

Could you sell, pocket the equity cash in a 6 month CD, then buy in 6-12 months during the correction? I know that’s not practical for many people (moving twice, renting in between) but from a financial standpoint that would be the ideal thing to do.

Unless house prices don't actually go down and interest rates go up

NP -- this is where I'm sitting. We sold last Fall and moved to a different state and we are now renting. Prices in our new area are way higher than we anticipated based on where they were a year ago when we chose the area. Things are going 50k over list at least. And with interest rates rising - we don't know whether to jump in or wait. Its really stressful.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:A lotta speculators, investors, people who bought at peak FOMO, and RE agents are in denial ITT. The Federal Reserve must be wrong when they use the B word. Prices on assets only ever go up, amirite?

Clickbait gets the clicks, amirite?

What specifically do you think is going to happen to “pop” this “bubble”?

Not the PP, but who knows. Could be anything. We won’t know until we know.

I’m more worried that we have an “all asset” bubble that will take stocks down too. The minor stock market correction earlier this year didn’t affect things much.

+1. Ever hear of credit default swaps before 2008? Because that is what really caused things to go nuclear. Yes, in 2007–8 there was an increase in foreclosures (FOMO ended in 2006, people couldn’t afford the crazy mortgages they took out at the same time prices were declining, and those people who couldn’t afford their payments also couldn’t sell for what they bought so they walked away), but it was the liquidity crisis caused by banks doing risky things with mortgage products that really caused the tailspin. That is what caused the 2008 crisis (Lehman and Bear Stearns going under, etc) that caused recession and job loss, which is what really caused the vast majority of foreclosures in 2008-12. Do you really think banks have stopped taking risks? And do you really think normal people stopped taking risks, too? Just look at all the crazy stuff investors are doing right now to get into real estate. Normal people quitting their jobs, taking out HELOCs and cash out refis on multiple houses, etc.

Right now we are already on the brink of a recession. For two years people have been FOMOing into houses they can’t afford. Prices are way out of line with incomes. Banks will loan you way more than you can afford (not everyone will be smart enough not to buy at the top of their preapproval, especially when OMG I have to buy now or less be priced out forever, homes only go up!).

Being “house poor” doesn’t mean people “can’t afford” their homes.

How are they going to default on their loans? Lose their jobs while unemployment is crazy low?
[u]
Market cooldown <> bubble popping.

Some people can't wait 10-12 years for their house to recover its value. They may have a sickness that prevents them from working. They may be downsized from their government job as the federal government continues to contract its workforce. They may need or want to move for professional or personal reasons (this is especially true in DC, which is a highly transient area). Those people will be underwater on their mortgages if there is a significant correction. You don't need a single dramatic precipitating event to cause people to flood the market trying to get some value out their houses as prices begin to descend. A few underwater properties can affect the entire local market.

It's also important to understand that, although a small proportion of buyers in any housing market always end up overextended and get forced into foreclosure, there are many more people overextended in this market right now than is the norm. This is because the combination of (1) pent up desire to move during Covid lockdowns; (2) the increased premium placed on larger homes and outdoor spaces during lockdowns; (3) the incredibly low interest rates, and (4) the feeding frenzy buyers' market this last year all mean that many, many more people over-spent this year (eg spent more than 28% of their salary on their mortgage and/or threw every penny of their available cash into the down payment). As a consequence of these buying behaviors, you would expect to see an increase in the number of foreclosures this year or next, even if housing prices held steady. If prices do not hold steady, then when those more-than-usual number of foreclosures or forced sales hit the market, those sellers will be underwater in their mortgages. Those over-extended forced sales at underwater prices (along with the other kinds of forced sales mentioned above) could potentially cause a housing price cascade.

Of course it is difficult to know the timeline for this, but the feeding frenzy has already showed signs of stopping this week. The next step will be price growth slowdown, then growth decline, then price stabilization, then price downturn. How quickly this develops and how dramatically it affects the overall housing market will depend on how much people panic. It could be a small plateau of correction, or it could be a steeper, longer decline. A lot depends on what else is happening with the economy at the same time, and what happens with interest rates.

This is anecdata, but I bought my house in DC 20 years ago and the neighbors who were here when I bought are still here. My husband is a DC native, so, been here for 53 years. His friends, mainly DC natives, still here. My friends that I met and made 20 years ago, still here. Just like DC is more than the National Mall, the "transient" story is not necessarily the true story of DC.

The DC metro area is definitely more transient relative to other major U.S. metro areas. That does not negate your anecdata regarding your own social circle. Both can simultaneously be true: DC is more transient relative to most major American metro areas AND DC is anchored by long-time native residents.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Be wary of over confidence on either side. For my job I get exposure to some of the greatest minds on finance, and the amount of folks that predicted that the market would hit all time highs in the midst of record setting coronavirus numbers and new variants is zilch. The point being, people on an anonymous forum, most of whom are lawyers, doctors, lobbyists, stay at home moms, won’t be able to predict what happens to asset prices, so stop mentally masturbating on here even though it can be fun because it’s a waste of time.

They didn't predict a record high because it is fake.

All US assets from housing to stocks are grossly overvalued because of the Federal Reserve, massive amounts of money printing, massive injection of multi trillion dollar stimuluses, and too much credit liquidity. It is a fake diabetic sugar rush. Bubbles built on cheap and easy money they produce an environment of irrational exuberance when people all think stocks or housing only ever go up always end so badly when the sugar rush ends.

Agree on stock market.

Housing is different. People need a place to live. Unless people are foreclosing we won’t have a bubble “pop”.

This is EXACTLY (word for word) what all of the economists said when they were explaining why there wouldn’t be a crises in 2007.

I don’t know if the bubble will pop or not, but people saying stuff like this to explain why it won’t makes me think it’s more likely, rather than less.

It’s much different today. Predatory lending is not rampant. ARM loans aren’t going to jump out of control.

People were foreclosing because they were in precarious financial situations. That’s not the case today.

No, people were for closing because they were in precarious financial situations and they could not sell their house for what they bought it for.

Do you really think everyone who bought at the top of their DTI last year is in a great financial spot? Do you not see how inflation is affecting everyday Americans? What about the impending recession?

They were trying to sell because they couldn’t pay the mortgage.

Gas & food increases aren’t comparable to huge jumps in mortgages. People can adjust their driving and eating habits. They can’t adjust their mortgage payment.

Sure you can. You can get roommates. You can rent out your place and move somewhere cheaper.

If you can't sell your property for what you paid, why in the world would a renter pay enough to cover your mortgage? Rents would also be done in that scenario. It will be a renter's market (and a buyer's market). Why would a renter move in with you to help you pay your mortgage when there are a lot of other options? Also, what family with kids wants to take a stranger into their home just to pay the mortgage in an underwater house? Most people would vastly prefer bankruptcy to taking in a boarder just to hang onto an overpriced and underwater asset.

*Prices would also be down in that scenario. Rents and purchase prices track together. As housing prices decrease, rents will also decrease as more owners try to rent out what they can't sell (without taking a loss).

Who said the renter would cover the full mortgage? Rent it for as much as you can, pay the bank the difference out of your own pocket, move in with mom/friends.

Who said only families with kids live in houses? Lots and lots of single people own houses, especially in other parts of the country.

And yes, many people would prefer bankruptcy/foreclosure, which is exactly why they decided to walk away when housing prices began to tumble before and during the last crash.

Why would anyone do that? Why would you continue to pay on an underwater mortgage under these circumstances?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Be wary of over confidence on either side. For my job I get exposure to some of the greatest minds on finance, and the amount of folks that predicted that the market would hit all time highs in the midst of record setting coronavirus numbers and new variants is zilch. The point being, people on an anonymous forum, most of whom are lawyers, doctors, lobbyists, stay at home moms, won’t be able to predict what happens to asset prices, so stop mentally masturbating on here even though it can be fun because it’s a waste of time.

They didn't predict a record high because it is fake.

All US assets from housing to stocks are grossly overvalued because of the Federal Reserve, massive amounts of money printing, massive injection of multi trillion dollar stimuluses, and too much credit liquidity. It is a fake diabetic sugar rush. Bubbles built on cheap and easy money they produce an environment of irrational exuberance when people all think stocks or housing only ever go up always end so badly when the sugar rush ends.

Agree on stock market.

Housing is different. People need a place to live. Unless people are foreclosing we won’t have a bubble “pop”.

This is EXACTLY (word for word) what all of the economists said when they were explaining why there wouldn’t be a crises in 2007.

I don’t know if the bubble will pop or not, but people saying stuff like this to explain why it won’t makes me think it’s more likely, rather than less.

It’s much different today. Predatory lending is not rampant. ARM loans aren’t going to jump out of control.

People were foreclosing because they were in precarious financial situations. That’s not the case today.

There are many ways asset bubbles can pop. I think the point PP was making was that in 2007 people were saying housing can’t pop because people will always need a place to live. They were wrong.

But since you mentioned precarious financial positions, it is way worse today. In the early 2000s, loan products were developed to allow nontraditional (subprime) borrowers buy a house. Looser lending standards, ARMs to bring down their interest rates, etc. This caused an increase in demand for housing, which lead to irrational exuberance (aka FOMO) and spurred a building boom. Turned out there were plenty of houses and then too many houses, and prices started to decline. When ARMs reset, people who had stretch could no longer afford their mortgage, but also could not sell for what they bought it for so they walked away. The banks holding these mortgages were screwed and by 2008 a liquidity crisis ensued. While banks went under, the stock market crashed, and people loss their jobs. It was during this recession that people REALLy started losing their homes. No job, no mortgage payment. So yes sub prime lending was like a match in the tinderbox, but there are other ways to pop that bubble, including other factors that could cause people to not be able to afford their mortgage.

In 2020, low interest rates, government stimulus, investment activity, and Covid lifestyle issues created a huge surge of demand that has lead to a very similar irrational exuberance (must buy now before I’m priced out forever!). These factors driving demand are truly transitory, and only the exuberance remains. But that exuberance is waning as interest rates have skyrocketed and make real estate look like not that great of a return in your investment anymore. The Fed is deliberately slowing down the economy. People will spend less and lose jobs (Powell himself said employment is too high!). More new houses in the pipeline than since 2006. And with inflation, people who stretched to the top of their preapprovals last year (see Dallas Fed article on price-income ratios) could really have a hard time making ends meet. In 2008, ARM adjustment is what sent these people over their limit - why not gas prices, food prices, and job loss in 2022-23?

But we don't have the over-supply issues we had in 2007-2008. We literally lost a decade of building capacity after the Financial Crisis. We still have a big supply shortage, particularly in areas within 45 minutes of major job centers.

Sure, there's plenty of 1BR apartments out there. But the 3BR and 4BR houses that families need are in very short supply and are selling at a huge premium.

The supply issue is tied to the demand issue, particularly in an area, like ours, that is losing population. Right now with low interest rates and lockdown related emotional purchasing, there is a great deal of exuberance and high demand. That is translating into a lot of overextended borrowers. As interest rates go up, demand will go down and prices will begin to stabilize. At some point thereafter those overextended mortgages are going to come home to roost. People who are stretched are going to begin to see house prices falling and they are going to worry about getting their money out because they put all their money in one asset. Or they will need their money out because of an unforeseen health situation, or job situation, or family situation. Or a divorce forces a liquidation of assets. These things always happen, but when they happen in a market where many people are stretched there will be more than the usual amount of sell offs, and the higher interest rates will mean those sellers will sell at a loss. Maybe not a big loss at first, but as other stretched owners see prices dipping down they are going to want to sell before prices drop further. What people don’t seem to understand is that the same thing that fueled the panic-buying of the last 4 months can also fuel panic-selling: the worry that conditions are going to get worse. That depreciation will accelerate. Would you rather sell at a 5% loss or gamble that you’ll have to take a 20% loss if you wait? For someone who can afford their mortgage and is happy in their home and doesn’t have any unforeseen financial/professional/medical/family emergencies they can maybe wait 10-15 (20?) years to recover their exuberance premium price. But that won’t be everyone. Some people will need to sell and that will continue to drive prices down, which will panic more people into selling. Now maybe none of that will happen, but if you read the article posted yesterday about the Fed’s MBS sell off (from January) it seems clear that the Fed is concerned about a scenario like this as a potential economy-wide disruption. So while no one thinks it is likely it will be 2007 again, no one thinks housing prices are going to continue to increase either. We are in a transition moment and the Fed is trying to very very carefully moderate that transition (ie defuse the potential economic bomb). We should all be hoping they will succeed.

[Anonymous]

1) “panic selling: the worry that conditions are going to get worse.”

It wouldn’t be anywhere close to the scale of panic buying. People will ride out to avoid losses. Just like they did in 2008.

2) “wait 10-15 (20?) years to recover”

Values won’t drop that much - if at all. And unless you overbought in a weak market, it won’t take 10-20 years to regain loss.