Is Housing Crashing?

Scary real estate data is causing some observers to ask “is housing crashing?”

In particular, the U.S. foreclosure rate rose 13% between September and October 2019, ATTOM Data Solutions estimates. However, the US foreclosure rate is still 17% lower than it was in October 2018.

Moreover, the number of home repossessions through foreclosure rose by 14% between September and October 2019. Thus lenders are foreclosing on more homes but the foreclosure rate is still low.

Strangely, one reason why foreclosures are increasing is that it could be easier to sell foreclosed properties. To explain, housing prices are still rising which indicates a strong demand for homes. Thus lenders have more incentive to foreclose on homes because they can sell them. 

Is Housing a Bubble?

Housing prices rose in 93% of American metro areas in 3rd Quarter 2013, the National Association of REALTORS estimates.

However, the average house price in America fell by 8.8% in September 2019, Reuters estimates. In detail, the average home price was 8.8% lower in September 2019 than in September 2018, and 7.9% lower than in August 2019.

Tellingly, September 2019 new home sales fell by 0.7%, the U.S. Commerce Department estimates. New home sales in some parts of the country fell faster. For instance, the number of new home sales in the West fell by 3.8%, and new home sales fell by 2.8%.

Interestingly, the rate of new home sales in the Midwest rose by 6.8% in September. I suspect lower housing prices are raising demand in the Midwest.

Finally, sales of existing homes in the use fell by 2.2% in September 2019, the National Association of REALTORS estimates. Thus demand for housing is falling which could trigger a recession.

Is Southern California in a Real Estate Bubble?

Incredibly, demand for housing is still growing in some markets.

For instance, the number of new mortgages issued in Southern California rose 14% between October 2018 and October 2019, The Orange County Register estimates. In contrast, the number of homes listed for sale in Southern California fell by 10% in the same period.

Housing analyst Steve Thomas tells The Register, Southern California is not in a bubble. Thomas tracks housing trends through his Reports on Housing Local Real Estate Snapshot.

It’s Worse than a Real Estate Bubble

Ironically, Thomas could be right, Southern California and other areas of the country could be in a worse situation than a real estate bubble.

Southern California could be experiencing a “Zombie Real Estate Market.” The Zombie Real Estate Market occurs when real estate prices rise so high properties do not sell.

In the Zombie Market, prices stay high or keep rising for a long time even though nobody buys. Hence, the area is full of empty homes gathering dust, Realtors delivering pizza, and ordinary people with no place to live.

Notably, Zillow estimated the average home price in Los Angeles at $696,900 in November 2019. Tellingly, Zillow describes the Los Angeles real estate market as “cool.” That means property is not moving in LA, yet home prices are rising.

Renting is now Cheaper than Buying

One reason why homes are not selling is that renting could be cheaper than buying in most American communities.

Renting a three-bedroom home is more affordable than buying a median priced home in 59% of the 755 US counties ATTOM Data Solutions analyzed. ATTOM’s 2019 Rental Affordability Reportestimates home rises grew at a rate of 6.7% in 2018, while rental prices grew at a rate of 3.5%.

One reason rents are lower is that ATTOM claims home prices are growing faster than paychecks in 80% of US counties. Thus, working people have less money so they buy fewer homes.

Income Inequality Drives Zombie Real Estate

Hence, income inequality drives Zombie Real Estate because it creates a market in which only the affluent can afford to buy a home. Since there are small numbers of affluent people, the number of home sales falls.

Notably, average rents rose faster than weekly wages in 52% of the housing markets in 2018, ATTOM surveyed. In contrast, home rices rose faster than wages in 80% of the markets ATTOM surveyed in 2018. Plus, housing prices are rising faster than rents in 70% of the markets ATTOM examined in 2018.

Consequently, renting makes more sense economically in most of the US real estate markets. This situation creates Zombie Real Estate because demand for homes is lower, as the demand for rentals rises.

A related problem is that it is hard to construct new rental housing in many US cities. To clarify, zoning and other laws make it difficult to demolish single-family homes and build multifamily rentals. Thus, houses sit unsold and empty while rents rise.

What can the Federal Reserve do?

Frighteningly, Zombie Real Estate could make the Federal Reserve’s standard cure for weak real estate markets; lower interest rates, ineffective. The theory is that lower interest rates lead to cheaper mortgages which kickstarts housing.

Notably, the Fed cut interest rates three times in 2019. In October, America’s central bank cut interest rates by 0.25% to 1.5%, Money reports. Mr. Market, however, responded with weaker demand for housing.

Personally, I think interest rate cuts make housing bubbles worse by lowering mortgage interest. To explain, that floods the market with cheap credit which makes it easier to buy property at high prices.

That drives up home values and prices average people out of the housing market. Tellingly, the infamous Australian real estate bubble has resumed because that country’s central bank is cutting interest rates, The Guardian observes.

In fact, low interest rates contributed to the Great Housing Crash of 2007-2008 by making it easy  to give mortgages to people with no money. The infamous NINJA (no job no income and no assets) loans, for example.  

Attack of the Zombie Real Estate

I don’t think we will see a repeat of that this time around. Instead, I predict we will see Zombie Real Estate prices rise to new highs ordinary people cannot afford. Sellers will jack up housing prices, hoping a wealthy sucker with a big line of credit will come along.

Strangely, I think the best thing the Fed could do is raise interest rates, and crash the real estate market. To explain, raising interest rates will discourage buying by making mortgages more expensive. That could force property owners to cut sale prices to amounts ordinary people can afford.

However, I think raising interest rates is impossible for the Fed in today’s political climate. Tellingly, Liberal Scott Morrison won an unexpected victory in the 18 May 2019 Australian general election. Morrison won after the Reserve Bank raised rates. Thus the fed will not raise interest rates though it is the right policy.

The Federal Reserve Cannot Save Us

Hence the Fed will need to come up with new tricks for stimulating the economy. Unfortunately, the Fed’s power to stimulate is limited to adjusting interest rates.

Congress controls other forms of stimulus such as higher government spending, increased government benefits, and expansion of the welfare state. Significant increases in federal spending are unlikely because different parties control each house of Congress.

To explain, the Democrats; who control the U.S. House of Representatives, do not want Senate Republicans to claim credit for popular new spending like a Social Security benefit increase. Likewise, Senate Republicans do not want Democrats taking responsibility for new spending.

What can Politicians do?

Voters and presidential candidates seem to realize the problem. Two popular Democratic presidential candidates U.S. Senator Bernie Sanders (I-Vermont) and U.S. Senator Liz Warren (D-Massachusetts) are promoting Social Security increases.

In detail, Sanders wants to raise the average Social Security payment by $1,342 a year and Warren wants raise Social Security by $200 a month. Dark Horse Andrew Yang (D-New York) goes further; Yang is promoting a $1,000 a month Freedom Dividend Basic Income for all Americans over 18.

I think these candidates are onto something here. To explain, I think the traditional U.S. housing market will shrink. Hence, traditional interest-rate stimulus will be less effective. Home sales will fall no matter how much the Fed lower interest rates.

Instead, interest-rate stimulus will make income inequality worse by enabling the wealthy accumulate more and more assets. Growing inequality will fuel social and political unrest and make our cities unlivable.

Why Housing Demand will Fall

I believe housing demand will fall because America is getting older. For instance, 10,000 Baby Boomers turn 65 each day, the American Association of Retirement People (AARP) estimates.

Older people have less money because they are less likely to work. Moreover, older people often save their money rather than spend it on housing.

For instance, 196,000 Americans had $1 million or more in their 401 (K) retirement accounts in 3rd Quarter 2019, Fidelity estimates. That number was up from 93,000 in 1st Quarter 2017 and 187,400 in 3rd Quarter 2018.

Thus instead of spending; and stimulating the economy; a growing number of Americans are stuffing cash in the mattress, because the prospect of old-age poverty frightens them. One reason for retirement savings growth is fears about Social Security’s future.

How Social Security will Wreck the Real Estate Market

Starting in 2020, Social Security will pay out more in benefits than it receives in taxes and interest, Barrons’ estimates. Hence Social Security’s costs will exceed its income for the first time since 1982. If that continues Social Security could run out of money as early as 2035, Social Security’s Trustees claim.

A related problem is the small amounts Social Security pays. The average monthly Social Security Old Age and Survivor benefit was $1,402.83 in September 2019, The Social Security Administration (SSA) estimates.

Obviously, a person making just $1,402.83 a month; or $16,833.96 a year, is in no position to buy a house. Furthermore, older people with nothing but Social Security to live on will have a strong incentive to sell their homes.

Many Americans will have nothing but Social Security because Business Insider estimates 26% of Americans have no retirement savings. Under those circumstances, I predict millions of Baby Boomers will soon sell their homes and flood the market with houses.

Meanwhile, younger Americans will not want; or cannot afford, those homes leading to vast amounts of new Zombie Real Estate. One reason those older homes will not sell is that many older people cannot maintain them; so those properties will need expensive repairs or remodeling to be marketable. Predictably, home sales are already falling in many markets, as I note above.

In the final analysis, I think American housing prices are heading for a fall. However, I think American housing will experience a slow-moving decline rather than a big crash. Hence, America will have a zombie real estate market for the foreseeable future.