Investing in housing is the quintessential American way to build wealth. All you have to do is take out a 30 year mortgage or two and make the payments. With patience and luck, you can eventually become a millionaire.Unless, of course, you buy Entering a huge housing bubble like the 2000s.
Are we in a housing bubble?
The evidence says yes. Calculating affordability is as brutal as it was in the post-World War II era, but the demographic picture clearly shows that there is no underlying reason for prices to be as high as they are now ( More on this later). iShares Home Construction ETF, the leading ETF that tracks the residential real estate industryBat:ITB) is down 30% this year. But if you dig into the underlying economics of the housing market, ITB should probably fall more.Housing loan now over 7%Most buyers will not be able to finance their homes unless prices fall at or near the time of the 2008 housing crash. In addition to changing home ownership with meaningless bubble prices, the interest rate shock effectively burst the housing bubble. A rapid monthly price drop is now in effect.
This is not your father’s 7% mortgage rate
Ten years ago, the median home price in Dallas-Fort Worth was about $160,000.this Reached $405,000 This SummerFurthermore, 10 years ago Median 30-Year Fixed Mortgage Rate It was about 3.4%, now it’s more than double. The story is that there is a huge housing shortage, and everyone needs to borrow as much money as possible to buy a house as big as possible… Hurry up and don’t miss it! There is a possibility that
Back in 2012, even if you were able to make a 20% down payment, the median house principal and interest would set you back. $567 per month– Buying a house is easy. Under the same assumptions, the principal and interest payments would be $2,155 per month.
Median Approximately 29% increase in income Mortgage payments have increased 280% in Texas over the past decade. That’s a terrible deal! Especially when you consider that the property tax is also tripled in many cases. Yes, there are plenty of people here old enough to remember paying much higher mortgage rates in the past. The difference was that they were paying for it in lower-priced housing, not paying multiples of their salary just to buy basic starter housing at 7% interest.About 75% of buyers need access to financing, so homes very sensitive to a higher rate.
But everyone is moving to Texas, right? There are people, but not as many as you might think.Texas has historically been fairly cheap because, unlike California (which Texas is always compared to), it doesn’t have many constraints on supply. Number of housing units per person Prices are much higher, but roughly at 2008 levels. This suggests that the housing boom was not caused by an actual “housing shortage,” but rather that the Fed and the world’s central banks artificially held down interest rates for years as a sort of economic science experiment, pushing interest rates below 10%. It’s a clear argument that it brought inflation and inflation. economic turmoil.
I’m picking this example a bit haphazardly because from 2008 to 2012, home prices were generationally cheap and were initially underestimated. But now, in 2022, acquaintances have stumbled and are trying to leverage seven times their and their significant other’s pre-tax income to go all out in the ever-rising housing market.
So, if you misuse it, you could effectively lose years of salary by paying an inflated purchase price with 7% interest. That’s certainly not a bet I’m willing to make.The unemployment rate will likely not be as high then, and the damage from a foreclosure standpoint will be limited, but from an economic standpoint, housing definitely more wrong price more now than in 2007.
Most of the English-speaking countries of the world have similar housing bubbles, although my main focus is on the United States and Texas, which I am familiar with. Canada, Australia, New Zealand There are a lot of reports now about huge bubble booms and price crashes.
US housing starts vs.demographics
Population growth has slowed since the pandemic. In 2021, the US population is estimated to have grown by about 0.1%, essentially nothing. It is expected to recover to around 0.3% per annum over the next few years, but the lack of babies indicates that at some point the population will begin to decline.
if we use 2021 quote capped Assuming a 0.3% increase in population, we have added 1 million people to our population. on average, 2.5 people per householdThat means we need to build 400,000 homes to meet demand. Housing is also becoming obsolete (perhaps 300,000 units per year), and as the economy creates wealth, there is a natural demand for villas (up to 100,000 per year, perhaps). This translates to approximately 800,000 housing starts per year.
Well, last year we actually built 1.6 million US home. In 2020 we did about 1.4 million. In 2022 at the pace of 1.5 to 1.6 million. Demographically speaking, we find ourselves building about twice as many houses as we need, which doesn’t make sense.
Again, there are stories of people leaving the cities and flooding the suburbs, driving prices up. But how can we explain why prices have risen in cities as well? prices are expected to rise.
What actually happened is very simple.
- The Federal Reserve faked a pandemic to effectively lock mortgage rates at 3% for almost two years. This has caused prices to skyrocket, distorting the market and causing a “housing shortage.”Before this, the world’s central banks, such as the European Central Bank and the Bank of Japan, were insane Quantitative Easing (QE) ProgramThis has led to an influx of global money into U.S. Treasuries, resulting in lower U.S. mortgage rates than otherwise. So while prices skyrocketed, revenues did not. QE policies are fine in an emergency, but when abused they cause far more problems than they solve. Now QE has been reversed with QT, allowing the free market to set prices again instead of politicians. The results were a little shocking, and his mortgage interest rate soared to 7%.
- Crazy eviction moratoriums and foreclosure moratoriums have allowed millions of people to live without paying rent or mortgages, preventing inflation and finding affordable housing even if they have jobs. caused a housing shortage for those who did not. It was effectively occupied by squatters. Behold, politicians disappeared from the rental market, Asking rent is falling Because high prices destroy demand.
- Bubble psychology started, prices started to rise, and people got on the momentum. When FOMO hit, people didn’t want to miss out on the opportunity and started pouring money into purchasing not only their primary residence, but also second homes and rental properties. Being able to borrow more than 80% of the purchase price of a property from him makes it easier for FOMO and speculative thinking to take hold.This has nothing to do with politics, Sir Isaac Newton Nankai bubble– and before that the infamous dutch tulip bubbleScottish journalist Charles Mackay I later wrote a book with several chapters on asset bubbles. unusual delusions and crowd madness; A must read for anyone who trades stocks.
There is a famous picture of monkeys dressed as aristocrats exchanging tulips at the exchange during the tulip bubble.
This is the only time house prices will rise by 30%, 40%, 50% or more. Some inadequate government policies that were supposed to help but ultimately backfired and the collective psychology of millions of people who believe this time is different and YOLO I believe that is the way.
The long-term question for the housing market and investors in commodities like ITB is who will buy the millions of homes under construction as population growth slows to zero? If you have a good rate, don’t worry, prices are set by marginal buyers and sellers. But for companies whose business models have been built around ultra-low, government-subsidized mortgage rates, blistering inflation could quickly become a checkmate.
House prices are falling rapidly
Initially, I underestimated the full picture of the problem in the housing market. I bought stocks like Home Depot (HD) and compass (COMP) and lost money, but c’est la vie. ). But with everything going on in the real estate market, homebuilders look like grenades here and are by and large the top holders of ITB.
ITB Top 10 Holdings
As you can see here, many homebuilders are using DR Horton (DHI), Renner (Len), Toll Brothers (TOL), and PulteGroup (PHM) trades at a PE ratio of less than 5.0. We sound the alarm that these stocks are value traps. I believe that a low PE ratio turns into a price-to-loss ratio as profits turn into losses. When people pay free market interest rates for housing, speculative appetite for housing dries up and the demographic situation worsens. Again, I don’t know who will buy all these houses!
How fast are prices falling? In some hot West Coast markets that have seen pandemic price increases without population growth, Up to 3% per month (30% or more annually). here is some data From May 2022 to August 2022 (i.e. when mortgages were at 5.5% instead of 7% – before the interest rate shock really took hold). These price drops are rapid and pronounced, spreading from west to east.
Hot markets such as California, Colorado, and Austin, Texas are seeing 10% peak-to-trough drops. Florida has held up so far, but I think the crazy profit size will make them one of the worst performers overall when the adjustment starts.
Notably, all this is happening without rising unemployment. If the unemployment rate rises from his around 3.5% to around 6% (the historical average), millions of homes across the country could hit the market and prices return to pre-pandemic levels or below. There was an unprecedented foreclosure crisis in 2008, and high levels of home wealth in 2022-23 make foreclosures less likely, but nevertheless a large inventory build-up and a large may be put up for sale.
I think it’s in the 2th or 3th time of the housing adjustment. Now nearing full speed, the adjustment will likely continue for another 18-24 months, with more than 30% cumulative home price declines across the country, which could clear up the pandemic surge and some afterward. Home prices could fall by nearly 50% in hot markets in the US and other countries such as Canada, Australia and New Zealand. This has big implications for anyone looking to buy or sell a home (the right move is to stay put), as well as investors in housing stocks. A roller coaster is underway and one of the biggest bubbles ever ends in a blast.