Weirdest Housing Bubble Ever

It's not clear how this resolves

Real estate is cyclical, which means it has its booms and busts, each of which differs slightly from the last. But today’s US housing market is so outside the norm that its strangeness has become the story’s main theme. Consider:

Numerically speaking, housing used to be driven by young families buying starter houses. But today, the median age of homebuyers is 56.

That’s up from 31 as recently as 1981:

Homebuilding used to be a major part of the real estate market (and the overall economy), but current new home sales are at 1960s levels despite the US population rising by 100+ million in the subsequent six decades.

And even this anemic market requires ever-increasing government intervention. From a recent X post:

To sum up, the US housing market is dominated by aging, increasingly indebted people who are buying fewer houses and missing more payments.

And Now It’s Rolling Over

A growing number of houses listed at current prices aren’t selling, and are being pulled off the market (i.e., delisted). The monthly delisting rate is now moving into 2007 housing bust territory.

Homebuilders, meanwhile, are sitting on vast amounts of raw land, so they have to keep building even in the face of a weakening market. As a result, the supply of new homes for sale is spiking. Note the widening “under construction” category.

Even hot markets like Texas and Florida are being flooded with inventory.

So How Does This Resolve?

A normal housing boom ends with a bust in which prices are cut and mortgage interest rates fall sufficiently to make houses affordable again. But this is not a regular market, because young families don’t earn enough to get anywhere near today’s real estate. So something more extreme has to happen.

Not only do home prices and/or interest rates have to fall hard, but incomes on the lower rungs of the economic ladder have to rise dramatically. And it’s not clear how those two things can happen simultaneously. Like I said, very weird.

Charles Hugh Smith just posted a good overview of this subject. Here’s an excerpt.

Housing: The Foundations of the Middle Class Are Crumbling

Home ownership has been the foundation of middle-class stability and security for so long that it defines middle-class status as much as income. From the end of World War II in 1945 on, the deal was simple: buy a house and you'll build equity that's even better than a savings account because you get the tax break of deducting mortgage interest and you get a roof over your head at a cost that's equal to or even lower than renting a house. Once you've paid off the mortgage, the costs of ownership drop, enabling a secure retirement.

Every one of these assumptions has either crumbled or is now in doubt. A recent report in The Guardian sketches out the forces undermining housing as the source of security:

'I feel trapped': how home ownership has become a nightmare for many Americans Scores in the US say they're grappling with raised mortgage and loan interest rates and exploding insurance premiums.

"I've come to view home ownership and healthcare as destabilizing forces in my life," said Bernie, a 45-year-old network engineer from Minneapolis. To finance owning his and his wife's $300,000 home and saving for the future, the couple was foregoing medical and dental treatment of any kind and cutting back on expenses everywhere, he said, despite a pre-tax household income of more than $250,000.

Let's break down what's changed:

1. The non-mortgage costs of ownership are no longer predictable or affordable. For decades, the cost to insure one's home was modest and predictable, not changing much year to year. Now that insurers are losing billions of dollars as a result of increasingly extreme weather events, rates are rising even in places outside flood, fire and hurricane zones.

Insurance rates are doubling or tripling in a few years, and insurers are leaving markets entirely or increasing the deductible that must be paid by the owners before insurance kicks in, and reducing the coverage.

Property taxes are soaring in many locales. Property taxes were another cost that was relatively modest and predictable. Those conditions no longer apply in many locales: local governments are jacking up property taxes, and / or soaring home valuations are pushing taxes up to nosebleed levels. (I just looked up the annual property tax on a friend's house in California: north of $18,000 a year. And no, it's not a mansion in Malibu, and he bought it 20 years ago.)

The costs of home repairs and maintenance are also skyrocketing. The average age of homes in the U.S. is around 40 years, but closer to 50 years in slow-growth states. As the quality of materials and construction have slowly declined, even houses that are 25 years old or less may require costly repairs--especially if construction defects were undiscovered until major damage had been done.

Routine work such as trimming large trees that pose risks to houses now cost a small fortune. The Guardian article noted estimates for a new roof of $60,000, a sum that equals the construction cost of an entire new house two generations ago. Eye-watering costs of materials are now the norm.

Again, the major changes are not just in costs, but in the loss of predictability. What was modest in cost was not just modest, it was predictable. Now the costs are far higher and future costs cannot be assumed to be affordable.

Read the rest of Charles’ post here.