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

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[quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous]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?[/quote]

Clickbait gets the clicks, amirite?

What specifically do you think is going to happen to “pop” this “bubble”? 
[/quote]

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.[/quote]

+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. [b]For two years people have been FOMOing into houses they can’t afford.[/b] 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!).[/quote]

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

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

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. [/quote]

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