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Higher for Longer Means More Housing Pain to Come

The headline from Bloomberg on Thursday, June 20th was depressing needless to say:

The Housing Squeeze Puts the American Dream at Risk

This excerpt from the article and a former Obama HUD Secretary says it all:

The man who served as secretary of Housing and Urban Development in the aftermath of the 2008 housing meltdown, Shaun Donovan, sees a new crisis unfolding. A key tenet of the American Dream — owning a home — has been put at risk.

“Moving up the economic ladder is harder and harder in the US,” he told the Big Take DC podcast. “More and more what’s happening is our mobility is being constrained by the inability to find affordable housing in the places where the jobs are.”

The problem is that the very government that former Secretary Donovan thinks should be assisting with further financial interference in markets to “assist” lower income individuals into single family homes that they can not afford.

The National Association of Realtors released the existing home sales report this week and it was not bullish by any stretch of the imagination.

The numbers were of course quite recessionary, and an indication that the pool of available buyers is diminished greatly, especially as the older population with lower mortgage rates have no interest in selling or buying until they are forced to due to extenuating circumstances.

The permit and starts numbers for single family homes were published this week and it was a mixed lot as to be expected. Permits indicated that builders and investors wanted to secure the ability to build if the market bounces back and does not collapse completely.

The supply of hopium in the finance community never ceases to amaze this writer.

Meanwhile, starts showed evidence of concern from builders that sales are indeed slowing.

The peak from the post-pandemic era has passed and many builders are finding out(again) that building thousands of spec homes to pile into the supply chain might not be such a hot idea as starts continue to stair step downwards.

Lastly, homes started under construction, regardless of stage of construction shows a huge rush to finish the properties and hope that some dumb investor(s) will buy at what they perceive to be the bottom of the market.

Pricing power will always supersede the “needs” of the masses and the ability to maintain an upwards trajectory on pricing due to the building costs and projected inflationary pressures will keep affordability from happening as long as the Fed and government is interfering.

Unfortunately government interference in free markets has been a trait of the United States leadership in Washington, DC and the Federal Reserve, especially since 1987. The following chart demonstrating the ratio of housing affordability to median household income should set off red flags for everyone involved in the industry.

The markets have achieved the unthinkable; in an era of ZIRP or near ZIRP, housing affordability relative to household income has achieved an all time high; dating not just back to 1987, the era of America’s purging of the old finance system, but to the 1960’s.

Yet since the Greenspan Era, the chart looks even worse:

Without the great Greenspan ZIRP experiment in the early 2000s, odds are the housing bubble would never happen. The losses experienced within the financial community due to the speculative fervor of the LTCM fiasco and dot com era required a new bubble so losses could be recovered rapidly to avoid a period of even more financial instability after 9/11.

As demonstrated by the graph above, either wages have to start hyperinflating or the housing industry faces the prospects of a collapse. This theory translates over to any large dollar purchase for consumers be it a boat, a recreational vehicle, or a car.

These data points are why the insanity of “zero down” mortgages have returned. From CNN on May 30, 2024:

Zero-down mortgages are making a comeback

The key excerpt:

“It could happen again”

That could be a problem if the homeowner needs to sell quickly, perhaps because they lose their job, face financial distress or need to relocate.

Suddenly, they’d be on the hook to pay back that second mortgage. And because they’re underwater, the home sale won’t generate enough cash to retire the debt.

“If the homeowner lacks the cash to make up the difference, then he or she will be in default on the second mortgage and at risk of foreclosure and damaged credit,” said Patricia McCoy, a professor at Boston College Law School.

That scenario is “exactly what happened during the subprime crisis, when millions of homeowners were underwater on their mortgage and went into default,” said McCoy, a former mortgage regulator at the Consumer Financial Protection Bureau (CFPB). “It happened before and it could happen again.”

(emphasis mine)

Thus we rotate back in a desperate effort to make homes affordable in parallel with higher prices for longer by reintroducing gimmicks rather than focusing on income and ability to pay for creating paper that only the government GSE’s will buy, not the private market unless the government guarantees it.

More from the article linked above from CNN:

Dennis Kelleher, CEO of Better Markets, a nonprofit that advocates for tougher financial regulation, told CNN he worries that a mortgage product like this will hurt some borrowers if the housing market stumbles.

“These mortgages are going to be ticking time bombs – just like subprime mortgages –unless home prices continue to increase very substantially,” Kelleher said. “This has the potential to turn the American dream of homeownership almost immediately into a nightmare.”

Kelleher noted that although home prices are rising sharply now, there is no guarantee that will continue.

Existing home prices jumped by another 6% last month year-over-year to $407,600 — the highest median price in April on record.

“We don’t know if we are in a bubble that is going to burst or if the trend lines are going to increase,” Kelleher said. “But pushing 100% mortgage products on low-income people when housing prices are at historic highs should cause everybody to be very concerned.”

(emphasis mine)

Note the portion I highlighted above. In 2009 they blamed the poor, the illegals, and the speculators for the Great Financial Crisis (GFC), not the banks nor government which engaged in or encouraged illegal speculative activity.

Why is this suddenly important?

Fast forward to the news today, courtesy of Melody Wright via X (formerly Twitter):

This is why the crisis is going to come full circle and this time quite possibly be even worse.

Imagine a program where a family or individual speculator decides to “qualify” for the 0% down mortgage on a $400,000 home. The home is estimated to be worth $350,000 so it has $50,000 in equity at time of purchase. The buyer could finance that per the UWM program, turn around and draw a second mortgage quite easily from a local bank that that the GSE’s will buy and now there is a second note on the property within a year of the original purchase.

One year later, housing prices continue to collapse, the value of the home is $265,000 and the buyer or speculator walks away leaving a legal and financial mess behind.

Who pays the difference, the bankrupt homeowner or LLC (speculator) that goes Chapter 7?

Uh, no ladies and gents, the American taxpayer does.

The Solution No one Wants to Hear

There is a solution to this housing crisis but no one wants to hear it.

The GSE’s (Government Sponsored Enterprises) have distorted both price and valuations of properties and homes by guaranteeing mortgages on homes that are realistically nor historically worth the prices that everyone likes to brag about, be it a homeowner or realtor.

The truth is that the only solution is to get the government OUT of the housing market completely, return to pre-1982 regulatory structures, and allow the banks to self-regulate the finance markets on housing. Housing bonds were a fantastic idea and provided more liquidity to the industry, but it was only possible because of the perceived lack of risk with the government guaranteeing a bailout every time some poor homeowner or bank fell on hard times.

It’s time for a period of severe deflation to fix this mess and return the price discovery functions to markets, not government.

It is also time for capitalists to rate, self-regulate, and bid and or accept profits and losses based on their own models, not on those of quasi-Eurosocialist idealists who think that government imposes equality on the population with their wisdom and bailouts.

Sadly, the odds of this happening are extremely low, so enjoy our Weimerican experiment my fellow Americans; this will not end well.

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