It didn’t take long for white-collar professionals in 2020 to realize that with expanded work-from-home policies, they could buy property almost anywhere. The holiday market has gone haywireExurbs turned bright red. “Zoomtown” like BoiseEven large cities like New York and San Francisco that were losing their inhabitants overheated. Separating Roommates Creates Ripple Effect From the rental market to the housing market
or pandemic housing boom matched U.S. home prices rise a staggering 42% Between March 2020 and June 2022. at least 60% of its rise, Estimates of researchers at the Federal Reserve Bank of San Franciscomay be attributed to the increased demand for “space” that occurred during the pandemic.
Of course, that demand boom didn’t just go away. Mortgage purchase applications down 41%In fact, there are fewer offers to buy now than at the bottom of the 2008 crash.
This rapid decline in demand has led more economists to use the most feared word in the housing industry: “bubble.”
“It was caused by a pandemic [housing] The bubble was caused by the trend of moving to work from home. High-wage workers head to the lower tier 2 middle market for more space. ” KPMG“We went to extremes with WFH [spurred housing demand], but it ended almost abruptly. Part of the reason I think house prices are also falling. Local income does not support much of the value of these homes. ”
Home price growth is rolling over nationwide. From June to August Case-Shiller National Home Index US house prices fell 1.3%. This is the first decline since 2012.
“When you start the process of falling prices across the country, it creates self-fulfilling momentum, because no one is going to catch a falling knife,” says Swonk. “You could easily see a big double-digit decline. I think next year’s 15% is very conservative. It’s already turning.”
when luck We coined the term pandemic housing boom, but we knew that if the boom ended in a recession, we would have to relabel it. pandemic housing bubblewe too set the standard: Markets that drop more than 10% from peak to trough are labeled as pandemic housing bubbles. If KPMG’s prediction comes true, the whole country will be labeled a ‘bubble’.
The four big points from here are luckchat with Swank.
Soaring mortgage rates burst the ‘bubble’
Every time the Federal Reserve switches to rate hike mode, Causes problems for interest rate sensitive sectors like the US housing marketIf these rate hikes become aggressive because the central bank has lagged behind in the inflation battle, it will be even more intense.
Of course, that’s exactly what we saw in 2022. Fed monetary tightening Average 30-year fixed mortgage Interest rates have surged from 2.98% to 7.1% over the past year.This marks the biggest mortgage rate shock since Fed Chairman Paul Volcker’s infamous tightening in 1981.
This mortgage rate shock is significant for two reasons. First, the historically low mortgage rates that also fueled the pandemic housing boom are gone. Second, the surge means many would-be buyers have had their prices cut or lost their mortgages altogether.
Home prices are falling, but that’s not the story of 2008
If U.S. house prices actually fell by 15%, Second Largest Adjustment in Home Prices in the Post-World War II EraA 27% adjustment from 2006 to 2012 alone can beat it.
However, the Federal Reserve has said this is not a repeat of the 2008 crisis.
“From a financial stability perspective, this cycle has not seen the poor underwriting that we saw before the Great Financial Crisis. Housing credit is much more carefully managed by lenders. It’s a very different situation. [in 2022]it shows no possibility, [well] There does not appear to be any financial stability issues.but we understand that [housing] This is where our policies have a huge impact. ” Fed Chairman Jerome Powell told reporters earlier this month.
Swonk agrees with Powell: “This is not a subprime crisis, [the fed] That’s about it. ”
But better lending standards and tighter supply should prevent a repeat of 2008, but not enough to prevent a housing adjustment. At least Swonk thinks so.
“What’s interesting to me is how quickly some of these markets are adjusting inventories that are still very tight,” says Swonk.
Phoenix is very bubbly, Chicago not so much
As luck previously pointed out, the textbook definition of a housing bubble requires three things. First, we will see strong speculation-fueled demand flood the housing market. Second, the surge in house prices spikes far beyond what incomes can support, reaching “overvalued” levels. Third, the housing bubble will burst and house prices will fall.
We saw the pandemic housing boom “Investment Maniac” back to market. Historically low mortgage rates have attracted family landlords, Airbnbs So does the host. Short-term flippers, lured by record levels of rising home prices, also entered the market. by ATTOM dataThis is the highest in any quarter leading up to the 2008 bubble. Speculation? check.
Quarterly Moody’s Analytics calculates “overvalued” or “undervalued” figures for approximately 400 marketsThe company aims to see if fundamentals such as local income levels can support local housing prices. It only matters if the housing market is significantly “overvalued”. In Q2 2022, the typical market was overvalued by 23%. This is up from 3% in Q2 2019 and up from 14% in Q2 2006. check.
While the first two elements of the housing bubble have indeed returned during the pandemic, the third element has yet to hit. Swonk says a “burst” is starting, but it depends on the market.
Why does Swonk think busts change? Some markets have bubbled up a lot more than others.
Look at Chicago and Phoenix, for example. Last time we saw booms and busts in both markets. Considering that in 2006 Chicago and Phoenix were overvalued by 32% and 48% respectively, it’s easy to see why. But this time around Phoenix (currently 54% “overvalued”) was flooded with speculators and suburban buyers, while Chicago (currently 3% “overvalued”) was relatively calm.
Moving forward, housing economists expect markets like Phoenix to be exposed to the risk of a sharp drop in home prices. In fact, Moody’s Analytics currently predicts a peak-to-trough drop of 18.7% for the frothy Phoenix. In Chicago, analyst firms expect home prices to fall by just 3.6%. (You can find Moody’s forecasts for 322 markets here).
Falling house prices help the Fed
Reading between the lines, some economists interpret “reset” to mean “house prices will fall.”
“To be honest, what is driving inflation the most right now? That is the cost of shelter. [the Fed] Swonk said: [home] price. Unsustainable Rise — Needs some fix. The problem is that you can’t choose the magnitude of that correction. ”
A gradual adjustment in house prices would help the Fed keep shelter costs and overall inflation in check, Swonk said. is likely to return to a lower market.
Need more housing data? Follow me on Twitter @News Lambert.
This story was originally Fortune.com
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