This Housing Bubble Could Be Worse Than 2008
From Peter Reagan, for Birch Gold Group
Back in November we covered how inflation, mortgage rates, and prices were making things worse for the housing market – in other words, for everyone who owns a home (or has a mortgage) and everyone who invests in housing (developers, real estate speculators etc.).
Looks like the bill has come due, and the housing bubble is about to return to earth…
Side note: Why are we talking about this? Well, maybe you remember the last time the housing market collapsed? We call it the Great Financial Crisis, the worst period in the global economy since the Great Depression. The S&P 500 lost 50% of its value during the ensuing 18-month bear market. That’s why. The housing market is a leading indicator of incoming financial crisis.
Let’s start by looking at the more optimistic commentary that is still making the rounds. For example, Norada Investments attempts to make the case that the housing market is slowing, but won’t crash:
This time around, there are far more purchasers than available properties, the exact opposite of what occurred in the 2000s. The majority of bad mortgages have been eliminated. Lenders have significantly stricter requirements on borrowers.
So far, so good!
In fact, maybe too good… If there are really more purchasers than properties, why is Lennar (the #2 homebuilder by market cap) shopping an inventory of 5,000 houses to big rental landlords? Why are more than three times as many new home sales being canceled, compared to a year ago?
Does it sound to you like there are more purchasers than available properties?
In this next bit, Norada returns to reality:
However, this does not mean the economy is immune to the recession. Two consecutive quarters of negative U.S. gross domestic product, or GDP, often indicate an economic collapse.
This much, at least, is true (though to call a recession “an economic collapse” is an overstatement).
Never fear, despite Norada’s confusion, there are many more bullish stories! For example, Realtor.com’s Clare Trapasso claimed that demand for houses is high enough that supply can’t meet it:
The housing shortage is just too severe as there are far more people looking for homes to buy and rent than there are homes available.
Keep in mind the median home price is $450,000… If that quote stated, “there are far more people looking for affordable homes to buy and rent…” then I’d believe it.
Now, let’s take a quick look at reality.
This chart shows that new single family homes for sale have been skyrocketing since 2012, and then again in 2020 after a brief respite. The housing market isn’t as oversupplied as it was just before the Great Financial Crisis – but we’re looking at the second greatest oversupply in the last 60 years:
While the second graph reveals that the median price of those homes is also skyrocketing during the same period:
But while inventory and prices both appear to be extremely high on these graphs, the number of single family homes sold has actually been declining fast since 2020:
So, to sum these three graphs up, we have the following:
- More homes are still being built – adding supply to the market
- Prices are historically high
- Sales have been crashing for two years now
High prices, oversupply and slowing sales – that sure seems like recipe for plunging prices.
And I’m not the only one that thinks so – an astonishing number of home buyers are getting cold feet…
Home purchase cancellations skyrocket
But on top of that, home buyers are seeing signed contracts to buy new homes canceled by buyers at a furious rate.
Here’s what that looks like from the perspective of a real estate consultant:
Regionally, October home builder cancellation rates were highest in the Southwest at 45% followed by Texas at 39%. pic.twitter.com/L5zWjE5K7X
— Rick Palacios Jr. (@RickPalaciosJr) November 22, 2022
If buyers are willing to cancel signed contracts on commercial real estate at a rate up to four times higher than the previous year, that looks like another signal the housing bubble is popping right now.
So how did this bubble develop in the first place? The same as most speculative bubbles do – people confusing temporary changes for a “new normal.”
Pandemic policies contributed to the housing bubble (and the crash, too)
In addition to canceled orders and plummeting sales (mainly due to overpriced housing), a paywalled Fortune article snippet revealed some big city home prices are now falling 15%. This sharp decrease appeared to take place after the housing market heated up during the pandemic, thanks to work-from-home policies:
KPMG: The Pandemic Housing Bubble is bursting – U.S. home prices falling 15% looks ‘conservative’
Regardless of the cause, it certainly seems like home prices have risen to unsustainable levels in the last few years. (Just to put this in perspective, a 15% drop in home prices would only take the national average home price back to where it was in March 2021! )
Home prices are up nearly 50% over the last three years.
In other words, home prices must fall an awful lot more before they return to reality – something like the 40% drop we saw when the housing bubble of the 2000s finally collapsed.
And don’t forget that mortgage rates continue to climb (thanks to continued Fed rate hikes). If $400,000+ is already too much to spend on a home, higher interest rates shrink our home-buying budgets even more…
Now, why am I talking about this?
That’s why I’m keeping an eye on the housing market… I consider it a leading indicator of incoming trouble.
Time to consider a safe haven for your savings?
Let me remind you: the last time the housing market collapsed was the worst period in the global economy since the Great Depression. The S&P 500 lost 50% of its value during the ensuing 18-month bear market. Should that happen again, how would you fare?
Until inflation eases, home prices return to reality (and the stock market, too!), a lot of everyday American families are searching for a safe haven for their hard-earned dollars, especially their retirement savings.
Physical precious metals, especially gold and (to a lesser degree) silver, have historically proven highly resistant to inflation. And during panics and severe financial crises, diversifying with gold and silver can help protect – or even grow! – your savings.2022, Featured, financial crisis, housing bubble, housing market