Most observers would agree that the U.S. real estate market is in the midst of a very dangerous bubble, or series of bubbles. A destructive mix of unrealistic prices and lack of demand makes the property market inherently unstable and scares off many investors.
The question to ask is not will the real-estate bubble burst, but when and how will it burst. There are many things that can pop the bubble, but 10 threats to the real estate market stand out.
Ten Forces that can burst the Real Estate Bubble include
- The Federal Reserve. The Fed is driving the real estate bubble with low-interest rates that make credit cheap. Effects of this include absurdly low mortgage rates and dirt-cheap financing for construction projects. The Fed is doing this in an effort to stimulate economic growth via Quantitative Easing. The danger is that the Fed can burst the bubble anytime by raising interest rates. Some observers think that might happen as early as next year.
- Voters and Congress. The Fed is keeping interest rates low because the Republican Congress has refused to stimulate the economy with increases in government spending or entitlements. That might change if Congress passes President Trump’s $1 trillion in infrastructure, which is unlikely, or if Democrats win control in 2018, (more probable than Republicans admit). Democrats are far more likely to pass big-ticket spending measures and Trump is likely to sign them. If either happens the Fed might raise interest rates and burst goes the real estate bubble (and the bubble in stocks like Tesla Motors (NASDAQ: TSLA)).
- Climate Change. Rising sea levels triggered levels triggered by global warming have the potential to flood up to $238 billion worth of property and destroy its value by 2050, The Economist reported. Real estate prices will go under faster if monster storms like Sandy, Irma, and Harvey keep wreaking havoc in major metropolitan areas. A far more widespread threat is drought and its effects like wildfires and air pollution.
- Baby Boomers. Around 74 million Boomers are entering their golden years and a large percentage of them have little or no savings. Many of them will end up selling their homes to pay for retirement. The Bipartisan Policy Center predicted that Boomers will put 26 million homes on the market by 2030. That is likely to create a glut of unsold homes, and drive property values into the toilet.
- Income Inequality. Income inequality distorts the real-estate market because the rich have more to spend on property, and everybody else. The Brookings Institute found that the top 5% of households in Greater New York City had an average income of $282,359 in 2014, which explains high housing in Brooklyn. The bottom 5% of households had a yearly income of $23,853. That is why realtors and developers only sell to the rich and ignore everybody else.
- Declining Incomes. The median incomes of American men declined by 10% to 19% between 1957 and 2013, the National Bureau of Economic Research calculated. The Bureau’s figures indicate that Millennial men (those under 350 will see $300,000 less in lifetime earnings than their Grandfathers – the Greatest Generation, CBS News claimed. A related figure is declining labor-force participation; it is now around 70% for men, compared to 86% in 1950. That means those most likely to buy houses, young people starting out simply lack the cash to do so.
- Rising real estate prices. Property prices are rising as incomes fall and inequality grows. The S&P/Case-Shillerseasonally-adjusted national home price index rose by 5.83% in 2016, 5.27% in 2015, and 4.52% in 2014, the Global Property Guide reported. The seasonally-adjusted purchase price for a home rose by 6.32% in 2016. Housing prices are increasing even as people have less money to pay for homes with. If that keeps we will soon reach a situation in which large numbers of homes will be unsellable because nobody can afford them.
- Social media. This is an underappreciated menace because it is new. Bubbles often burst because of hysteria, particularly rumors or reports of a sudden collapse. Think the bank runs and stock-market crash at the beginning of the Great Depression. Social media like Twitter, Facebook, and WhatsApp enable a report to instantly reach tens of millions of users. What happens to the real estate market if thousands of people suddenly start Tweeting that prices have dropped by 50%. The internet-driven real-estate crash of 2007 was bad, next time might be worse because of social media.
- During the next decade, Congress is going to need to come up with hundreds of billions or trillions of dollars to shore up and expand entitlement programs. An obvious way to raise that money is to simply end the mortgage tax deduction which benefits the rich. Another would be to tax properties worth over a certain amount say $500,000 or real-estate sales over a certain figure. Such moves would send property values tumbling. Yet, Congress is likely to take such action, because tens of millions of people are about to retire with no savings. Those people will vote for any politician that promises to increase Social Security – which will be all politicians Democrat and Republican.
- Taxes. Economies outside the United States. Foreign money, especially Chinese and European, is driving the U.S. real estate boom. If it stops for any reason, down goes the real estate market. Some of the highest priced cities like Los Angeles and San Francisco are highly exposed to foreign money. When it dries up the bubble bursts. Factors that can stop it include currency controls elsewhere or better deals back home for foreign buyers.
Many other factors can burst the U.S. real estate bubble including the stock market, civil unrest, rising crime, transportation woes, and energy costs to name just a few. Despite that, Bubbles can go on far longer than most people realize Australia’s real estate bubble; which is worse than ours, started in 2000 and shows no signs of slowing down.
The bottom line is that America’s real estate bubble is unsustainable, and it will burst, so get ready for it. Smart investors should stay away from real estate for the foreseeable future, the crash is coming.