With 2020 Hindsight, Where Does Housing Go from Here?

By FEMA News Photo (This image is from the FEMA Photo Library.) [Public domain], via Wikimedia Commons

Things couldn’t be worse if you’re in the market for a house, except that they can be and probably will be. As it stands, you can probably buy this photographed “cosmetic” fixer for half a million if it’s in a modest neighborhood or a large city that everyone is fleeing. Housing prices rocketed to the moon in 2020 for what seems to be four primary reasons:

  1. People facing COVID contagion and urban unrest in crowded cities changed migration patterns to get far from the madding crowd.
  2. COVID forced companies that wanted to stay in business during lockdowns to switch to more remote working. Many apparently found out that worked, given that many are staying with it. Employees found out it worked, and they mostly want to stay with it. All of that makes a long commute to the city they don’t want to livable, since it need only happen once a week, instead of everyday, if at all. Seems like a dream come true.
  3. Mortgage rates hit their lowest level in history this year, causing lots of people who wanted to move — and now could move — to … move.
  4. Forbearance laws mean renters are not having to pay rent now. Being unemployed, they are not inclined to upset the apple cart by moving out of a house that is free for the time being. They are hunkering down where it is safe. Months from now when forbearance ends, they will probably skip out on the rent then. (Seems to be the plan, as I have no idea how they will pay the back rent.) That means landlords cannot easily sell their homes right now because no one wants to buy a home they cannot move into because it is occupied by someone who is legally protected from moving.
  5. Repeat the above for homeowners who are not making mortgage payments and are unemployed. They cannot sell without bringing their mortgages up to date, and may not get forbearance on the next house they take out a loan on; so many are not likely not inclined to upset the lemon wagon either while so much is up in the air.
  6. Home sellers who might be willing to take a chance right now likely see with 2020 vision that housing prices are rising out of orbit due to all of the above and appear to have said, “Hold it! Why would I want to sell now when prices are soaring? Let’s ride the rocket higher and hold out on selling our home until we find the ceiling.” Sell high, buy low.

As a result of all of the above, inventory of available homes plummeted throughout the latter half of 2020 and is now the lowest it has ever been in history in many areas. The extreme shortage makes the few available homes rare and almost priceless in the minds of hungry buyers.

As an example, inventory where I live went from a remarkable low three weeks a couple of months ago down to an unbelievable three days now. That means, if no new homes come on the market, every house in the county would be sold within three days at the present rate houses are selling, leaving nothing left to buy. For the last two days, no homes came on the market. So, maybe we are down to one day of inventory now. I’m not sure because the statistics reports can’t fall fast enough to keep up with the market.

As a result, the few homes available (only twenty right now on Zillow priced between $300,000 and $600,000) almost all sell within three days, and the only reason it takes three days is to give enough time for real estate agents to give individual showings (since a COVID lockdown has made open houses illegal) in order to assemble a high complement of bidders and give bidders time to consider their bids. Each house sells with roughly a dozen bids, so almost all homes escalate $30,000 to as high as $150,000 over the asking price.

Nationally, home sales were expected to drop and average of 2.4% month on month in January, as is normal due to winter cold. Instead, they rose 0.6% even in this extremely frigid winter. The median selling price across the nation (which includes all the falling real-estate prices in unwanted cities) has risen 14% year on year. However, where I live in the Northwest, they rose 23%.

If you’re a home buyer things could be worse

You would not think so, but consider the following: If you are sitting on a small cash pile you have saved up for a downpayment or a large cash pile you have from selling a home earlier, inflation is finally on the rise, so your money is now starting to lose value due to ordinary inflation. Interest is still nearly non-existent, so the longer you sit on it, the less you have. That may not be relevant when what you are looking at is housing inflation, which is running much hotter; but it isn’t helping your situation either. (More on inflation in a Patron Post to come.)

The longer you wait, the less money you have if it is invested in secure ways. Now, if it is invested in stocks, you are doing great; but that bubble, as I have been noting in both regular articles and Patron Posts, is looking extremely precarious right now, and the pin that could pop it is bond interest.

Long-term bond yields have been rising rapidly since COVID began when the government launched straight into Modern Monetary Theory without any public discussion — more commonly known as helicopter money because that is where the government issues bonds to raise money to give it directly into the bank accounts of the masses — like dropping money from a helicopter. That has become a routine under COVID through the combination of special stimulus checks and supplemental increases in unemployment checks and in the expansion of the length of time one can collect unemployment. The rate off climb has only picked up in the last couple of weeks.

The slight rise in inflation so far and the anticipation of a sharper rise is driving up bond yields because investors buying bonds want to make sure they won’t lose due to inflation. The government’s promise that it will issue a lot more stimulus checks and unemployment checks, plus add on a lot of infrastructure spending, means it will have to issue even more bonds. More supply of bonds to sell equals the need to pay higher interest down the road to find enough buyers in the minds of today’s bond buyers. That makes interest rise today in anticipation of what the government is about to do.

So, the 10-year treasure bond has risen from a low of 0.508% yield half a year ago (in August of 2020) to 1.346% as I am writing at this moment. And today’s rise alone is about five basis points so far, which is fast in bond terms.

How does all of that affect you as a home buyer? Not only are you losing to inflation, but mortgage interest is generally pegged largely to long-term bond yields. As a result mortgage interest has started to rise, too. Rates haven’t risen much so far. The 30-yr mortgage hit a bottom of 2.65% on January 7th, and is now up to 2.81%. Still, that is in the wrong direction.

To make matters worse, mortgage rates disconnected somewhat from long-term bond yields in the past year because the Fed was scarfing up truckloads of mortgage-backed securities, making it easy for the banks to bundle and sell off their loans at very low interest. The Fed is likely to keep doing that, so that is not much of a problem. However, banks have been slow to raise mortgage rates to track with bond rates, but now that they have started, they are likely to continue.

Here is what Freddie Mac shows mortgage rates have done over the past year, and you can see the sharpest rise since January is in the far more common 30-year mortgage (blue line) because that is more sensitive to longterm inflation concerns:

Compare that to the path of the 10-year bond yield:

As you can see, the 10-yr bond started moving up in August, but banks ignored that (abnormally) with respect to their mortgage rates for months and kept actually taking mortgage rates lower because the Fed has been backstopping mortgages via all mortgage-backed securities they are hosing up.

Now that banks have turned a corner, even though the Fed is likely to keep with the program, all the concerns mentioned above create more likelihood that mortgage rates will rise faster than that they will fall again, unless the Fed increases its MBS program.

The cavalry for homebuyers looks like it might be late

I don’t think anyone saw this tidal change in home buying back dynamics when COVID first struck. I know I didn’t. And I didn’t read anyone who did. Who coulda thunk that a plunge into plague with a government response that mandated our path into the worst unemployment since the Great Depression (I said “depression,” not “recession.”) would cause the hottest housing market in history, beating the housing bubble of the early 2000’s into the dust?

But here we are, depending on where you’re buying.

With all of the above said, I find it impossible to figure out whether it is best to leap in now before the market gets even worse for all the above reasons or to wait for the bubble to explode. I didn’t have ANY problem with that back in 2007 when I yelled for people to get out, but THIS TIME IS DIFFERENT. MUCH DIFFERENT.

By that, I do NOT mean it will not crash. I mean the timing and severity of the crash is far less predictable BECAUSE the housing market is already being supported by massive Fed intervention (those MBS purchases), and it is being supported by massive government legal intervention (those forbearance laws), and it is being supported by massive government stimulus. Everything is already in place to save the housing market because that is what is pushing it up.

So, to figure out when the bubble will pop, you have to ask when enough of that will end to start letting the hot air out or what will come along to pop it and when. I don’t know if the government or Fed ever will stop. They can’t stop any of those programs without risking another housing crash like we had in 2007-2011. And I can’t see them taking that risk.

The forbearance problem has become so nearly impossible for renters, landlords and homeowners to exit gracefully that the government may wind up creating some sort of mortgage/rent bailout when it comes time to bring it to a close. The government and Fed obviously do not have an exit plan, or they, at least, are not even talking about one at present. It appears they’re just hoping the problem will go away.

John Robert Charlton [CC BY 2.0 (https://creativecommons.org/licenses/by/2.0)]

Don’t be surprised by that. Remember how I kept saying the Fed had no exit plan for QE, and it turned out they did not. They sent the market into a mini crash in 2018, as I said they would, and then created a massive repo crisis in late 2019, as I also said they would likely do, due to falling bank reserves. COVID masked their problems and allowed them to save face by giving them the perfect excuse to go back to full-on QE without having to justify themselves, and that ended the Repocalypse monster they created.

So, who knows what they will do to exit or how long they will be able to keep this up? The collapse of the hyper inflated housing market depends on when all the artificial supports give way and whether they give together or just or one two fail. That along with further government bailouts will determine timing and severity.

With the bond vigilantes finally crawling out of the woodwork to devour the party, however, it’s possible rising bond yields will become the single pin that pops the bubble by driving mortgage costs way up now that banks have started reconnecting with government bond yields, but that hardly helps you as a homebuyer because prices will only fall in that situation due to housing payments getting correspondingly more expensive from the interest increases. So, your cost remains the same as housing prices drop to maintain equilibrium. People don’t buy house prices. They buy house payments.

In other words, as interest rises, people will start paying less for a home in order to keep the payment at a level they can afford. While interest was falling (as it is no more) they could keep bidding prices of homes up. Now, will the market suddenly shift to where home buyers start unloading if prices start to edge down because of rising interest? That is hard to say. (You can also count on the Fed to try to stop a bond burst from bringing a rise in government bond interest because the government must maintain low interest forever now in order to prevent a solar-sized debt supernova.)

What you are asking with that question is will homeowners who have been holding off on selling decide the ceiling is in and leap to sell, flooding the market? The problem with the question is its italicized premise. Who even knows how many such homeowners there may be who are waiting for a top to sell versus how many are waiting because their mortgage is in forbearance? Will it be a trickle or a flood if that happens? Will it be enough to offset all the government and Fed props?

So, I don’t even know what to advise myself in this jacked-up, shored-up, speculative housing bubble, except that I feel the pressures remain upward in many ways, and the pin doesn’t look likely to help buyers in the short term (unless there really is a flood of homeowners waiting for the price to turn to make the top). Remember, though, that, even in the last housing crisis, it took years for houses to find their bottom.

Neither the Fed nor the government look likely to change their policies anytime soon. At some point, however, this becomes a bigger bunch of plates than they can keep spinning. Let me know if you can figure it out; but this, at least, gives you the lay of the land. How you traverse such a wild topographical map during a time of earthquakes, I leave all up to you. I’m just the map drawer this time, not the route plotter. I’m not even sure where the next crack will open in the earth’s crust.

Maybe one of you can see how and when those mapped dominoes are likely to fall and plot a course to avoid them as they crash and share that insight with us. If you are a homeowner with no intention or need of moving, you don’t need to care. It will be what it will be, and you’ll know where you are when you get there! But, if you’re a housing nomad at the moment, well, this isn’t nomad’s land! Thar be dragons here.

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