Remember back during the housing bubble when the price-rent ratio of housing got really high and it made everyone worried that maybe we were in a housing bubble? Well, I didn't notice this until today, but we've been back at 2006 levels for a couple of years now:
Actually, it's even a little worse than the chart shows. Interest rates are a bit higher than they were in 2006, so the effective cost of buying a home is higher than it looks.
So are we in a housing bubble again? Or is it really different this time?
How does the housing supply compare to 2006?
My thoughts exactly. Until there is a lot more supply being added, I don't see prices crashing. Stagnating, but not crashing.
My guess is that Trump's tariffs and deportations will keep supply low, making a crash even less likely.
Yes but…
If a recession is caused by something else, it also tends to eventually crash housing. This is because recessions - even non-housing-related ones - cause lots of people to experience sudden drops in income, which in turn increases defaults on mortgages and leases, which in turn causes a recession specific to housing. In the long term, people can only buy what they can afford, and eventually they drop out of the housing market as they move in with relatives, become homeless, etc.
And any of the following could cause a recession independent of this housing indicator:
1) Deporting millions of workers already in jobs that most people don’t want, because we just don’t like the only workers willing to do those jobs for whatever reason
2) Firing significant percentages of federal employees because we’re just ideologically opposed to whatever they’re doing, exacting a personal vendetta against them for having crossed our cult leader or simply think “government sucks”
3) Raising tariffs to make everything more expensive, including all the stuff people need to buy to stay alive and productive in their jobs
4) Cutting social security and Medicare so that seniors’ overall purchasing power falls, causing many of whatever stores and hospitals they depend on to fail
5) Running the government so poorly so that nobody trusts anything it does and people have to retrench their spending and save a lot more for contingencies that government used to mitigate against, like they do in countries run by other dictators
Any of those would eventually negatively impact the housing market even if this indicator and mortgage rates don’t. And yet all of those are allegedly slated to be implemented immediately and simultaneously by the next admin. (There is a parallel universe in which all of those could be phased in so slowly so as to not hurt the economy, but Trump and his enablers don’t strike me as patient people now that they have their trifecta.)
Donald will claim some kind of victory already for threatening tariffs and call most of them off. He's done it before. He will lie about most of the rest too, particularly when he finds out what deporting millions of people will cost in federal spending he's promising to slash.
I hope he actually does everything on your list and tanks the whole effing economy.
I have this theory that the real role of Musk and Ramaswamy is to be the eminently fire-able fall guys for failed policies. They'll spearhead the unpopular stuff and get a super public "you're fired" when the public revolts and Trump's numbers tank.
this sounds extremely plausible. Trump is already appearing to get annoyed with Elon, at least, so using him as a scapegoat will be enormously appealing.
I hope he actually does everything on your list and tanks the whole effing economy
I usually like/learn-from your comments so this is disappointing, emjayay.
I get where you're coming from (make him own it), but lots of real people will suffer if your wish comes true.
It takes a lot of confidence (and privilege) to predict that making life harder for millions will lead to the results you want. Seems to me that the opposite could easily be true.
Re: In the long term, people can only buy what they can afford, and eventually they drop out of the housing market as they move in with relatives, become homeless, etc.
Or simply rent instead of buy. That graph up top indicates the renting has become more affordable than buying for many people.
As for cuts to SS and Medicare, for obvious political reasons those won't touch current retired people (the GOP is not that stupid). Any such cuts will be planned out in the future to affect people still in the workforce when they retire.
Yep - it's different this time.
Housing bubbles have actually been fairly common through history, especially on a local scale. Prices go up and down, without necessarily causing national damage. There were several things which made the 2006 bubble catastrophic. Mortgages were given out to people who had little prospect of keeping up the payments. The mortgages were bundled and the bundles were used as backing for commercial paper which was the basis of the "shadow banking" industry. The loans were supposedly backed up with derivatives, but when the crunch came it became clear that there wasn't enough money to pay off the derivatives.
So there was much more involved than price/rental ratio. How sound are the mortgages now? Are they being used to finance other things? What's up with the shadow banking business? Unfortunately that business is not regulated, so it may not be well known what it is doing.
The next (inevitable) financial crash will probably be due to some other type of overextension, in an area where there is less scrutiny than in housing. How about bitcoin? Is crypto being used to finance anything major? If not, it probably will be in the Trump administration.
From what I can find, home equity is quite high. We don't have many people who risk going underwater if home prices drop a bit. That makes the cascade of foreclosures of the housing bust unlikely.
Peoole borrowed a lot via HELOCs in 2023 and 2024. That could be people remodeling because they don't want to move and lose their low mortgage rate. Or it could be an indication that people need to cash out to pay other debts. But I'm guessing it's the former.
Cascades of foreclosures can still happen, even if “most” people have more equity in their homes. You can’t pay your monthly mortgage with equity - you need actual income to do that. And incomes can fall for tens of millions of mortgage holders for all the reasons I made in my comment above.
For example, me and my partner have about 50% equity in our home. And we are solidly upper middle class in income. But if either of us suddenly lost our jobs in a recession, which also rendered our stocks underwater, we’d spend down our liquid savings in half a year, take a blood bath on stock sales and probably still lose our house to foreclosure sale within a year or two. And we’re upper middle class. Poor and working class people have even more precarious finances, and would likely fail to make mortgage payments after just a few months or weeks of being involuntarily unemployed.
Most recessions don't result in home price collapses. A few unlucky individuals may lose their homes, but the overall housing market stays pretty calm. 2008-2009 was an exception because people were so overstretched with their mortgages and there was so much supply that it was hard to sell even at much lowered prices. People simply abandoned homes, which was pretty unprecedented. That isn't a situation that happens frequently, and seems unlikely today.
Typical recessions involve an average of 20 weeks of unemployment. If you lost your job in a coming recession, chances are good that between unemployment insurance and your savings, you'd be able to weather that amount of time without going into foreclosure.
A recession at some point in the next 4 years seems likely, but a replay of a 100-year financial collapse like the Great Depression or Great Recession does not.
"me and my partner"?
For shame.
Well this Austin, as opposed to the other person using your account, seems like a reasonable person. This reasonable sounding person probably will not go more than half a year before finding employment. While that would not in any way be "good" for you and your partner, it is survivable.
The issue in 2008 is that people did not have 50% equity in their home. They had -20% equity due to those loans that negatively amortized based on 30 day interest rate. Losing an income in a case of being underwater in a home equals foreclosure and bankruptcy.
When entire neighborhoods experience this prices collapse. And pretty soon you have a banking crisis.
I'm not trying to pick on emjayay tonight ... It's pure coincidence that I'm calling him out twice.
A few comments above, emjayay (correctly) shamed Austin for "me and my partner".
But here we have deathawaits (also correctly) using exactly the same construction in "you and your partner".
This is likely an example of the evolution of the English language. When people can't remember the rules, the rules start to change.
I will notice if you fail to call out the morons who are plural (they/them), or complete bullshit (zee, zit, shit).
House flipping was also a huge trend in the 00s, drawing people in who had no idea what it took to succeed in that area. The use of HELOCs as "credit cards" was also a big problem at the time.
This time it's buying houses for short-term rentals...
The scheme as I understand it, is that the investor buys a house to rent out as a STR for a few years to cover the loan (or even buy outright if they are flush enough) and just sit on the property while the price escalates.
Once the prices stop escalating, it's time to decide whether to keep your seat or sell the property at a profit. If the top is in, which it might well be, it's time to unload the property.
Having insurance costs go up significantly makes these projects not pencil anymore without increasing their nightly rent rate, which makes them less competitive.
But all bets are off in areas with a high tourism demand and can bear a price increase.
How about bitcoin?
Every time I see a clip of Michael Saylor on TV I get that feeling in my gut: The mania is here. This will be where the next crash comes.
I don't know if there's any way to derail the crazy schemes of Trump & his billionaire buddies from buying $100 billion of Bitcoin with our taxpayer money in (likely) the greatest pump-and-dump swindle in history. But the chance this ends well are not great.
Using taxpayer dollars to fund a rug pull might just be unpopular enough to get Trump impeached.
I think Bitcoin and the other cryptos will have a big crash, because they’re unregulated and full of criminality and we have absolutely no idea where the actual owners or hard currency is for most of it.
Because we elected a moron enthrall to crypto, the US government will try to bail out some of the crypto losses. But again, this means that a lot of the bail out will go to already rich people possibly living outside America, since crypto is international and opaque.
And then this bailout will fail because it won’t be large enough to matter (there is something like $1.5T in crypto out there and the entire US budget is only like $5T or so) or because of the leakage mentioned above: the dollars spent will go to foreigners, already-rich Americans, banks, etc and not to regular American people who increasingly are putting more of their “savings” into crypto or working for people putting their business’s profits into crypto.
And then those regular people will start defaulting on mortgages and other loans, regardless of how well regulated those loans were or how much equity the mortgage holder had. Because again, you can’t pay your mortgage with equity - you need steady consistent income coming in to pay your mortgage. And dumping millions of homes onto the housing market in foreclosure sales will drive down even the responsible peoples’ investments and equity.
There's also the little fact that 2006 wasn't a housing bubble, it was a financial bubble.
Two, two, two bubbles in one.
Slashing regulations on the financial sector and enforcement of what's left should be helpful. Again.
Well, it will definitely be helpful to the criminals running off with all the money! I have to think those people are all Trump voters, so mission accomplished?
The mortgages were bundled and the bundles were used as backing for commercial paper which was the basis of the "shadow banking" industry. The loans were supposedly backed up with derivatives, but when the crunch came it became clear that there wasn't enough money to pay off the derivatives.
About once a decade (we're overdue) the financial industry repeats the same mistake and crashes everything. Their risk models always rely upon the same assumption: that adverse events (mortgage defaults; asset price collapses; sovereign country defaults; and so on) are independent events. This is a necessary assumption to make the math work. Establishing the risk profile for your model is a nightmare if events aren't independent.
And, most of the time, these events are independent, and the models work. And then, at the worst possible moment, they stop being independent and start being highly correlated.
This happened in 1987 with portfolio insurance. Everyone had assumed that share price declines of individual companies were independent events. And they were. Until the stock market declined 10% in one week, and opened on Monday with another decline. All of a sudden, everyone who had hedged with programmed portfolio insurance started selling all at once. What had been independent events became highly correlated as everyone sold. So, the programmed trading caused prices to decline across the board, which led to more programmed selling, which led to . . . the DJIA losing 23% of its value in one day.
In 1998, the same thing happened with Long Term Capital Management, except with sovereign debt. LTCM placed huge bets on, among other things, sovereign debt that their models showed to be undervalued relative to other sovereign debt. The placed opposite bets on the different sides to take advantage of the spread between them declining. Again, their models relied upon changes in values to the different bonds being independent. And they were. Until the 1997 Asian debt crisis and the 1998 Russian debt crisis. All of a sudden, the price movements of the various bonds they had positions in started dropping in price across the board. This drove LTCM into insolvency, and caused UBS to wobble, thanks to the two firms engaging in some derivatives shenanigans to convert normal income into lower taxed capital gains. And when UBS wobbled, everyone else panicked and started selling. See above for the consequences.
And then there was the 2006-08 mortgage crisis. This happened because the mortgages were pooled into bonds. That wasn't actually new (Fannie and Freddie had been doing it since forever), or inherently dangerous, but the bonds were tranched in such a way that returns got juiced. The models all relied upon an assumption that mortgage defaults were independent events. Which they were. Until a housing bubble popped and across the board declines caused defaults to become highly correlated. It got worse, because the mortgage bonds were so desirable (in large part because of the technical way that banks' core capital reserves were calculated, especially in Germany) had led to an enormous amount of money flowing into the mortgage market, leading to more and more mortgages being made with less and less concern about the quality of the loans. So, everyone started selling. See the above instruction to see above for the consequences.
Everyone likes to believe that the major financial firms are evil, and that this is the source of the crises. And the major financial firms are evil. Trust me on that; I sat in on some of the meetings back when I worked as a options trader for one of them.
But the real crises don't develop because the firms are evil. They happen because those firms are stupid.
I think the price of homes now arises from 1)the number of low-interest mortgages currently held, so that fewer homes are going on the market 2)the recovery from the supply chain issues that dogged the builders of new homes 3)zoning and NIMBYism. Houses really are hard to get now for reasons besides the difficulty of getting an affordable mortgage, although that's a factor, too. I'm from a high-cost region, though, but that's my 2 cents.
There's a ton of new multifamily housing coming onto the market over the next year. That's the only thing that makes sense in more suburban job centers, you can house 50 households in the same land area as 5 single family homes. Single family detached just doesn't make sense in a housing crunch like now. More available housing will take a lot of price pressure off the market.
The other factor is that the incoming administration is almost certainly going to reduce energy efficiency requirements on builders, which will drop new construction costs. There's rumor of a building boom as standards drop, I'll believe it when I see it. Materials still cost, tariffs will not make costs drop, land and infrastructure costs are still high. Whether a bunch of the construction labor force gets deported is a big question.
Energy efficiency standards are a drop in the overall bucket.
Project 2025 is explicitly pro-single family zoning, and Trump is unlikely to anger nimby suburban voters. I think multifamily construction may face headwinds. More cities are looking at imposing rent control, which is popular with urban voters, buy not the financiers of new units. Interest rates are likely to stay high. And tariffs could erase any price drops that lax standards create.
Yeah, I wonder if prospective homeowners would understand that they are forgoing energy efficiency (accepting higher utility costs in perpetuity), but still paying the same price for the home? Instead of getting an efficient home, they'll be sending money (indirectly) to the federal government because we elected an idiot that doesn't understand how trade deficits or tarrifs work. It's honestly hard to invent stupider policies than this, but I guess it will own the libs somehow?
Instead of energy efficiency, builders really need to start selling climate disaster resilience. There's a market for that, especially at the high price points.
Basically nobody builds affordable starter homes, they just aren't cost effective with the price of land and infrastructure needed. The new home market is almost exclusively a move-up offering.
Another problem is schools, the housing market is driven by local school scores and adding more housing means more new schools have to be built - adding to the total cost on municipality side. I'm not sure how much of those costs can be pushed off onto development fees, it may vary considerably.
We are absolutely in another housing bubble. Different this time because the origins are different. Rather than being cause by loose (and I mean non-existent) lending standards and creative loan repackaging, this one is caused by high end investor exuberance. The super low mortgage rates in 2020 and a wobbly Covid economy combined with new freed remote work options to create an optimal investment environment for single family housing. Massive amounts of capital went into housing and they've ridden up the price surge.
Now that the top is in due to a buyers strike and the insurance crisis, those inventors are putting properties back on the market because the handwriting is on the wall. The FED isn't lowering rates again any time soon, and even when they did it had no impact because SF is still overpriced. Even at 5% it's still overpriced.
I don't see prices crashing, but slowly declining over a couple of years. Faster in the areas that are hardest hit by insurers pulling out and local authorities that are putting in restrictions on short term rentals. Businesses pushing workers back into the office will also help here a bit, as much as I oppose the idea.
Florida and Texas are already seeing significant price declines, some areas in CA are deflating as well (the one we're shopping in and tracking prices, nearly everything we look at has had a price cut or two. Initial listing prices are also noticeably lower, except for the occasional delusional seller who lists high with the expectation of having to cut (see also, Black Friday pricing strategy).
You can really tell at this point who needs to sell and who's dug in and going to wait for the right buyer (even as overall prices decline).
Absent a major drop in employment, insurance appears to be the wild card. Inability to get insurance and excessive insurance prices will ultimately grind real estate pricing down.
Curiosity: How was this calculated, Kevin? Standard measures from BLS have the ratio based around 16-20; the FHFA and other price indices are scaled to 100. So what is the Y axis here?
PS: I was going to check how California compares to national, in line with your typical shtick.
Trumpcession
Please.
With mass deportations of undocumented immigrants, the lack of available labor for construction means new housing prices will increase. That in turn places upward pricing pressure on existing housing.
If we're supposed to believe that undocumented immigrants have placed upward pressure on rents, then their removal would cause downward pressure on rents, right?
So we might conclude that Trump's immigration policy will increase that price / rent ratio. 🫠
Irrational exuberance.
A critical difference between the 2006 era housing bubble and today is that home sales in 2024 are much, much lower than at the peak of the bubble.
As we saw during the recent inflation episode and the misplaced comparisons to the 70s, supply and demand are two different forces. While they can be squeezed into a formula and stuck in a chart, we have to remember to consider then independently if we actually want to understand the result of the formula we created.