Abacus: A Tight Housing Market—Crash Or Float?

“Those who cannot remember the past are condemned to repeat it.” This quote by Santayana speaks to many situations: the housing market is one of them. Perhaps you have been speaking to people lately and hearing the word, ‘flipping’ more often than usual. Think of the last conversation you had about the housing market; prices are high and peaking, now is not a good time to buy, affordability is low, interest rates are rising, etc. It’s difficult not to ask the question, are we in for another crisis?

Arch Mortgage Insurance released a Housing and Mortgage Market Review Spring 2018 Report that revealed that housing affordability was set to decline 5 percent this year, with chances of declining to 10-15 percent due to increases in required mortgages. According to National Mortgage News, home prices in half of 112 metropolitan areas are at an all-time high. Interest rates have been rising alongside house prices, making the market for housing increasingly limited for buyers, particularly first-timers who are looking to get on the property ladder. According to the Mortgage Bankers Association, mortgage applications fell by 3 percent from the first week of August and 17 percent from a year ago. National Mortgage News also listed 10 counties in which wages have been outpaced by house prices by the biggest margins, year-over-year: Williamson County (TN), Washington County (UT), Kings County (NY), Jackson County (OR), Contra Costa County (CA), Snohomish County (WA), El Dorado County (CA), Yamhill County (OR), King County (WA) and Comal County (TX).

Furthermore, there is an apparent shortage of housing, relative to the population. High prices and short supply make an uncomfortable situation for potential buyers—consisting of mostly millennials—as owners are seemingly unwilling to sell. According to Business Insider, the two main reasons behind this are that many homeowners have low mortgage rates locked-in on their houses and that the market is undergoing a non-cooperative ‘prisoner’s dilemma’. For the first, many current homeowners purchased their houses when mortgage rates were notably low, and a significant amount of these mortgages were locked-in, meaning that they would not fluctuate as much. Currently mortgage rates are rising, making selling one’s own home and purchasing a new one very unattractive. Hence, homeowners are clinging to their homes despite the market’s climbing prices. As for the second reason for a tight market, there is a dilemma of non-cooperation. Should homeowners choose to all sell, not only will they alleviate part of the present shortage in the market, but they will also find new houses for themselves. The problem is that very few homeowners are looking to do this, as there is no sign that others will follow suit.

It is worth considering, also, that the housing market is a unique one, in that the buyer is almost always also the seller. No house is the same, and homeowners are less likely to look at their houses as simple, identical goods with easily tradable values. They will be looking for ones better than their own, but with high prices and an ongoing shortage, they are less likely to release their own into the market.

A hopeful sign is that housing construction is on a rise. This means that long term arrangements will be made for an increasing population. Just to keep things realistic and not all-too-rosy, it is worth considering that construction is currently dependent on speculation about the economy’s health. Also, ‘long-term’ means that this is not a present solution.

This is not an attempt at fear-mongering, but rather a canary singing in a coal mine. We aren’t necessarily in a housing bubble, which is when the market undergoes a large hike in prices due to speculation and excessive activity. The truth is that during crises and market shocks there has been a particular common factor that spoke for itself: individuals who did not have any business in a certain market were taking part in transactions for an easy profit. This should send a signal to experts that the market is now filling up with “dumb money.” In the Great Depression, it was the shoe-shine boys giving out stock tips. In the Great Recession, it was middle-class home-flippers trying to make an extra buck on subprime mortgages, which has in fact, been shown in a study to be a significant reason for defaults in the 2008 crisis. Right now, we don’t seem to have a similar situation. However, a strong technology sector with well-paid workers gives reason for bidding up prices in metropolitan areas, which speaks to the ongoing shortage issue. Hence, even areas outside of these tech hubs see a surge in their prices as potential buyers engage in bidding wars.

All of that said, it is not necessary that the whole nation will feel the impacts at once. The West Coast is more likely to feel the housing market’s tightness and a potential crash first. Seattle is currently undergoing a dry spell as Chinese investors are steering away from the area due to currency controls. Manhattan’s real estate is the most expensive city in the U.S. per foot, almost twice the cost in any other city (surprise, surprise). It isn’t just the U.S. that is facing a tight housing market. Increasing globalization means that buyers have homes in other nations, meaning that if one area feels tightness, others will too.

Overall, most metropolitan areas are reaching a point of peak tightness, making this a bad time to buy. A crash may not be imminent but waiting off for some market correction may be worthwhile.