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

Forum Index » Real Estate

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

Subject:

Emoticons





More smilies

Text Color: Font: Close Marks

[quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous]More data points - This was two days ago.

"[b]Redfin Reports The Share of Sellers Dropping Their Asking Price Is Climbing Past Last Year’s Rate[/b]"

https://www.businesswire.com/news/home/20220407005936/en/Redfin-Reports-Share-Sellers-Dropping-Price-Climbing[/quote]

Yeah that share went up by 3-4 percentage points. If price growth is slowing which you'd expect given interest rates, that makes sense. People list too high all the time, it's just a slightly larger share now. Doesn't mean much else.[/quote]

Lots more data from Redfin pointing toward a slowdown (this was from more than a week ago, and we are in the height of the spring market). https://www.redfin.com/news/housing-market-update-early-signs-of-a-slowdown/

Even Redfin, which has a vested interest in seeing housing prices go up due to its struggling iBuying business, can’t ignore the stats. https://www.marketwatch.com/amp/story/redfin-stock-tanks-after-forecast-shows-losses-expanding-as-ibuying-business-grows-11645134655[/quote]

Sure, but there's a *long* way between what many of these places were predicting for 2022 even a few weeks ago (10-15% appreciation in most cases) and the catastrophic outcomes that people are predicting on this thread. Double-digit prices increased are obviously not sustainable forever, and interest rates have risen more quickly than most expected because the path of anticipated Fed rate hikes and bond sales has gotten more aggressive than expected. The fact that we're seeing a modest but immediate response is frankly good news, and it cuts against the argument that consumers have entered into some sort of irrational bubble mentality. There's nothing to suggest that any response to increased interest rates is anything more than modest right now.

Inflation is problematic for lots of reasons, as are traditional recessions, but the real danger is always from financial crises that cause systemic issues. In that sense, high inflation actually buys the Fed quite a bit of flexibility. They can hit the brakes pretty hard, and inflation-adjusted prices can drop significantly, but as long as nominal prices remain stable, widespread disruption to financial markets remains unlikely. For example, inflation-adjusted home prices could go down in 2022 even if nominal prices go up by 5%! That's a big part of why a large or protracted decline in nominal home prices is unlikely.[/quote]

I didn’t see any catastrophic predictions in this thread. The popping of a bubble is normal and expected (just as recessions are a part of a healthy cycle of economic activity), and it doesn’t have to result in the systemic issues that took down the economy after 2008. But remember, the last housing bubble burst in 2006, two years before the true crisis began. Prices can and will decline regardless of broader systemic issues like risky credit default swaps etc. In 2006, prices declined because the “lack of supply” narrative turned out not to be true, and demand decreased. That was the popping of the bubble. THEN, if prices hadn’t gone down, all those subprime borrowers who couldn’t make their payments could have sold their houses for a profit. Instead, they were underwater. That’s when the foreclosures started, and the rest is history. [Note - I think there are a multitude of ways we could be facing a systemic crisis in the economy soon, but that is another thread entirely.]

And not tracking your first paragraph. Of course the reaction is “modest” right now, it’s only been a few weeks since rates shot up. And there are still buyers who are bidding homes up because they want to lock in low rates. The irrational bubble mentality has changed - the party is over, and the media narrative has shifted from “buy now or be priced out forever” to “sell your house while you can!”

Inflation is a huge problem for the housing market. In an inflationary environment, people face increased costs from all directions and have trouble making ends meet, which can very well lead to people needing to sell or foreclosing. Raising interest rates is a big problem too, because it is likely to lead to recession and job loss, which again leads to selling and/or foreclosing. There really is no good way out and most analysts are not optimistic that the Fed will achieve a “soft landing.”[/quote]

If inflation is so bad for existing homeowners, why was there no foreclosure crisis when interest rates spiked in the early Volcker years? The answer is obvious: in an inflationary environment, homeowners quickly gain positive equity (in nominal dollars), and so they have a strong incentive to sell rather than default. Even though existing home sales dropped precipitously in 1981 and 1982, homeowners were generally able to wait out the interest rate crunch, and so nominal home prices never fell despite massive interest rates and a severe recession.

Why should we not expect the same outcome, or a weaker version of the same outcome? Like the late 1970s, our high inflation is in large part the result of supply side shocks. Unlike in 2008, homeowners are currently already equity rich, and most of their debt is financed at extremely cheap fixed interest rates. Also unlike in 2008, the Fed has a much expanded toolkit that includes simply committing to buy up assets to keep their prices stable. In order for there to be a financial crisis (the only circumstance in which national nominal home prices have ever declined significantly), you need a good explanation for why the Fed would prefer to let one happen than to simply buy its way out. Much moreso than interest rate hikes, asset purchases can have immediate impacts because they involve buying long term debt directly rather than merely pricing market substitutes to long term debt.

I have always found investment bankers to be pretty mediocre when it comes to actually understanding the markets they participate in. Hype beasts and money chasers, not deep thinkers. You appear to be no exception.[/quote]

Trick’s on you because I am not the investment banker. We are in a very different economy than in the 70s and 80s. Houses are much more unaffordable in terms of price to income ratios. But more importantly, housing has become a new asset class for investors and has therefore become much more volatile and does not track inflation. Because so many properties are traded like stocks and crypto, prices are much more sensitive to interest rate hikes. Homeowners can no longer count on prices going up with inflation. Instead, prices are likely to perform much more like all other assets and will start declining as new interest rate hikes take hold. https://reventureconsulting.com/how-hgtv-and-alan-greenspan-created-a-perpetual-housing-bubble/

In 2022, the increase in housing prices is due to a transitory increase in demand, not a fundamental lack of supply (ie numbers of properties out there). See the information discussed upthread re the near instantaneous and steep increase in price after Covid due to low interest rates and high investor participation. The Fed does not have more tools in its tool kit. The Fed funds rate is still near zero so no where to go but up. And in case you missed the news, the Fed has decided to shrink its balance sheet including potentially selling MBS even though no one seems to want to buy them. The Fed has shown it is wiling to throw housing prices under the bus, especially after such a short and steep increase, to protect Americans from rampant inflation. As they should, because your spicy Zestimate is no where near as important as Americans’ need to put food on the table.[/quote]

Options

	Disable HTML in this message
	Disable BB Code in this message
	Disable smilies in this message

Review message

Search Recent Topics Hottest Topics