The decennial housing crisis

Welcome to the every-ten-years housing crisis.

It took five years to begin coming out of the ashes from the 2008 disaster. By 2013 upward price momentum was back in the market, and by 2019 prices had fully recovered and then some. The story of 2020 is that despite the pandemic and the political unrest across the country—or maybe because of it—the housing market took off to all-time highs. So here we are again, looking at a market that is either a scary bubble, or an equally scary New Normal. Where do we go from here: if prices seem astronomical now, is there still more room upwards, or are we headed for another crash?

The background for the previous crisis in 2008 was all about over-leveraging. Debt financing was easy to get and there was lots of inventory. Prices escalated because so many people could qualify for mortgages, often buying multiple properties. Once the market turned south, it took four years to absorb all the extra properties that were available. Homes were not worth the principal amount of the mortgage, and there was a huge glut of vacant land small acreages that looked like a ten year supply at then-current absorption rates. The painful deleveraging back then was necessary to let the air out of the balloon: sellers were forced to compete with sellers, many of whom were financial institutions unloading properties already stripped of the equity component, and therefore more affordable.

The background for this new crisis has its roots in the reverberations of the 2008 meltdown: many homebuilders were wiped out and construction crews disbanded. New home construction slowed down drastically, creating a backlog of supply that was needed just to keep up with birth-rate growth. So when demand really started to accelerate there wasn’t the large inventory of homes. The red-hot price appreciation has come at the expense of limited choices. It is the lack of inventory that has made everything so expensive, and the inventory problem cannot be solved quickly. The 2008 crisis was triggered by everything was affordable, and this time around it will be triggered by nothing is affordable.

Due to the pandemic blows to the economy, there is a significant group of homeowners who are in forbearance for their mortgage: nationally 10% of federally-insured mortgages are in some sort of arrears. The market has risen so far however, that these homeowners have built up equity. There are two ways to access that equity: a re-finance or home equity line of credit, or an outright sale. The former increases the debt load, and the latter creates more renters. Refi’s are at all-time high levels, which makes sense given the low interest rates. Many homeowners are staying put and renovating their homes with these proceeds. This reduces the number of homes for sale. But if those homeowners need the money to live on, there are a handful of Wall Street-backed companies that are focused on these homeowners: the play is to buy the home and rent it back to the homeowner. Of course the rental payments for that very same home will be more than the mortgage principal and interest the former homeowner was paying. Over the last twenty-five years, there was a federal target for homeownership of 65%. As Wall Street gobbles up thousands of homes for its rental pool, this creates a class of permanent renters. When other investments return barely above 1% the return on home rentals is so lucrative these properties will never return to the for-sale inventory.

How does the crisis this time around affect us here? For a handful of sellers, there is no crisis at all: it is definitely a windfall and they’re laughing all the way to the bank. For any first-time buyer, or a family making the Bonner County median household income, forget it though, this crisis is one of affordability. The situation is not limited to the ownership side of the market: one of the consequences of the price boom is that rents are also more expensive and the vacancy rate hovers close to zero: this is a Shelter Crisis. You can’t live with your parents forever, sooner or later you need to venture out, but if there is no way to own a home here in our community, where will the second generation Bonner County kids go? Or if they’ve been away at college or in far-flung jobs, how can they return home?

The factors that are driving this Low Inventory / Affordability Crisis are not going to radically weaken over the next six months (my concept of a foreseeable future. I refer to it as a “crisis” because to me it feels like it’s out of control.) But the awkward thing about bubbles is that they do not sound an alarm when the party is over, and a lot of the hype in the current market is emotionally driven (FOMO: Fear Of Missing Out). When the investment bank Bear Stearns began to falter in March thirteen years ago, that led to a confidence failure in the financial system, and things unraveled very quickly: all those collateral debt obligations which were essentially bets on the subprime mortgage market were revealed to be empty promises. Who knows what seemingly small random event will trigger the collapse this time?

Raphael Barta is an associate bbroker with an active practice in residential, vacant land, and commercial/investment properties. He can be reached at raphaelb@sandpoint.com .