Posted on 02/16/2022 10:25:35 AM PST by Mr. Mojo
A shockingly large price bubble appears to have formed in the real estate market.
Although it’s impossible to predict economic crashes with certainty, a key economic indicator suggests the U.S. housing market is on the verge of an unprecedented crash, one that could end up being the biggest in America’s history.
Following the 2008 stock and real estate market crashes, the Federal Reserve, Democratic-led Congress, and the presidential administrations of George W. Bush and Barack Obama began an unprecedented effort to pump new dollars into the financial system — and, to a lesser extent, the economy at large.
The strategy behind the flood of quantitative easing, government takeovers, stimulus checks, and government welfare programs that followed was that the Fed, working in conjunction with Congress and the White House, needed to prop up the economy to keep it from sliding completely off the cliff.
One of the primary tools the Fed used to accomplish its goals was to keep interest rates at near-zero for years on end. From 1980 to 2000, the Fed’s federal funds rate — the primary driver of interest rates economywide — rarely dropped below 4 percent, and it was common for interest rates to be 5 percent or higher.
However, from 2009 through 2016, interest rates were consistently much lower than 1 percent. Beginning in 2017, the first year of the Donald Trump presidency, the Fed began to more aggressively raise rates, but it only briefly topped 2 percent in 2018 and 2019 before the Fed once again slashed rates to near-zero as part of its plan to address the effects of the Covid-19 lockdowns.
When interest rates are kept low, it’s easier for governments to spend more money than they take in, because debt is cheap. Additionally, banks and other financial institutions are more likely to lend out money for high-priced items.
The real estate market is especially sensitive to rate changes, because a home is usually the biggest purchase a person will make in his or her lifetime, and the vast majority of purchasers rely on large mortgages to complete the purchase.
When interest rates are kept extremely low, people can afford to take on more debt, because the monthly payments cost less. As a result, sellers increase their prices.
This is one of the reasons the real estate market crashed so hard in 2008. Following the September 11, 2001, terrorist attacks, the Fed kept interest rates low, encouraging people to take on higher-than-usual levels of debt, especially in the real estate market.
Rather than learn its lesson from the 2008 crash, the Fed doubled down on this failed strategy, and then tripled down during the Covid-19 response. Congress and the White House were all too willing to cheer the Fed on, since lower interest rates have helped them expand government programs without begging foreign governments to finance U.S. debt.
As a result of these policies, a shockingly large price bubble appears to have formed in the real estate market. The average sales price of a home in the fourth quarter of 2021 was $477,900, compared to $403,900 in the fourth quarter of 2020 and $384,600 in the fourth quarter of 2019. That’s a $93,300 increase in just two years, by far the biggest increase ever recorded in just 24 months.
Further, the 12-month home sales price increases for the second, third, and fourth quarters of 2021 were all above 17 percent, the highest hike recorded over a three-quarter period since at least 1963, the earliest date in the Fed’s data made available online.
Put simply, Americans have literally never seen housing prices skyrocket like they are now for this long of a period. And every time they have approached the numbers we are seeing today in the past — in the 1970s, late-1980s, and early to mid-2000s — there was a massive real estate or stock market crash that soon followed (or both). There appear to be no exceptions, other than a few rare cases where housing prices increased quickly immediately after a crash had occurred.
Determining the size of a market correction is extremely difficult, but if the 2008 crash is an indicator of what’s in store for us today, then if the current real estate bubble pops soon, as all bubbles inevitably do, it could end up being the largest real estate crash in history.
The bubble that developed from 2002 to 2007 peaked at around a 47 percent price increase, before plummeting by 20 percent from 2007 to the first quarter of 2009. If we see a similar pattern emerge for the bubble that has been developing since roughly 2012, then we could see housing prices drop by 30 to 40 percent over a two-year period.
Whatever the final numbers end up being, the evidence is clear: based on data reported over the past six decades, America appears to be on the verge of an epic real estate crash.
As painful as such a correction would be, it is likely necessary. The price increases we’ve been seeing in recent years are primarily the result of inflation and reckless monetary policy, not real economic growth.
However, there is a chance that housing prices will not drop, or only drop minimally. If the Fed decides to continue to keep interest rates low, despite the ongoing inflation crisis, it might prevent a real estate crash the size and scale of the one discussed above. It will come at a cost, though — more inflation, even bigger market distortions, and perhaps the collapse of the dollar.
Regardless of what the Fed does in the short term, it’s clear that America’s disastrous monetary-policy chickens are coming home to roost. Prepare accordingly.
Wonder who has finally started clueing in the punditry. Not like this could not be seen coming for over a year now.
Need an excuse for the next multi-trillion $$$ emergency funding (bailout).
Too big to fail II, coming right up!
I’m well positioned for a real estate collapse. Bring it on!
Three years ago my girlfriend’s house appraised for $160K. Realtors are approaching her saying they can get $250K for it today.
As long as home prices are cheaper in CA than they are in China, Chinese buyers will continue to buy here and pay over asking and pay cash. . .it would seem.
I’ll have to keep my eye on some land deals after the crash. These can be exciting times.
My wife and I are seniors. We own our home outright (no mortgage, no liens, no encumbrances). We have no children. We’ll live in this house — the only home we’ve ever owned — until we push up the daisies. If the value of our house tanks, I hope the real estate taxes tank accordingly.
fun factor? there’s been a couple cycles now where the build costs went up mid-build due to whatever, but doesn’t make the house intrinsically any more valuable...
good luck wi that
I say that even if it means my own home declines in value by $50K or so to pre-pandemic levels.
Long overdue.
Good, I need a place in the free state of Florida.
Absolutely. The deals are going to be the high end properties that are leveraged to the hilt (and then some!).
In 2008 some of these palatial homes were foreclosed and ended up selling as low as 20% of their outstanding loans.
Part One
Rahmbo
IBD Editorials ^ | November 6, 2008
Posted on 11/6/2008, 8:28:47 PM by Kaslin
Transition: Barack Obama campaigned on a promise to change the partisan tone in Washington. So why did he pick a take-no-prisoners partisan for his chief of staff?
The high-level White House selection of fellow Chicagoan Rep. Rahm Emanuel, the sharp-elbowed, foul-mouthed head of the Democrat caucus, doesn’t exactly augur well for the kind of noncynical air-freshening Obama voters had hoped for.
After Emanuel helped the Democrats win Congress in 2006, he told a gathering of celebrating staffers and campaign workers that Republicans “can go f*** themselves,” according to Chicago Tribune reporter Naftali Bendavid in her book, “The Thumpin’: How Rahm Emanuel and the Democrats Learned to Be Ruthless and Ended the Republican Revolution.”
Emanuel also has a favorite pejorative for GOP foes — “knucklef***s” — though he prides himself on being “an equal-opportunity pr*ck.” Indeed, he was overheard telling a fellow Democrat candidate whom he was helping win office:
“Don’t f*** it up or I’ll f*** you.”
And he once sent a dead fish in a mahogany box to a Democratic pollster with whom he quarreled while working as a fundraiser in the 1980s.
(Excerpt) Read more at ibdeditorials.com ...
We built two years ago. We are seeing around 75% appreciation in our neighborhood. This is insane. It’s nice here and all, but it’s not THAT nice.
As long as it happens under President Mashed Potato Brain’s reign, I’m all for it.
She should cash out, crash out at your place until the crash, and then upscale at a mere 100K at depression prices.
a key difference between then and now is that the residential real estate market is frozen, at least it is in Colorado where less than 2,000 dwellings (including condos) are for sale on the Front Range between Castle Rock and Fort Collin ... in effect, no one is selling because there’s nothing to buy as a replacement ...
consequently, even though housing prices MIGHT crash, the ramifications in the financial system will be minuscule compared to 2008, because there won’t be trillions of NEW, fraudulent mortgages that suddenly go poof, since there have been very few new transactions in the first because of the frozen marketplace ..
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