Estate agents “Sold” and “For Sale” signs outside residential properties in the Maida Vale district of London, UK, on Thursday, June 30, 2022.
Bloomberg | Bloomberg | Getty Images
Demand for U.K. residential properties has nearly halved following September’s government budget that spooked financial markets and toppled the prime minister, research Monday showed.
The fiscal package, announced Sept. 23, caused a sell-off in bonds and led to predictions of a potential housing market crash as interest rate expectations rose sharply. In the wake of the budget, a record number of mortgage deals were pulled and many lenders paused offerings as they assessed the volatility.
Buyer demand fell 44% year-on-year in the four weeks to Nov. 20, according to property website Zoopla, while new property sales declined 28%. The stock of homes for sale was up 40% over the same period.
Zoopla said demand had fallen to levels usually seen over Christmas — among the quietest time for property markets — as buyers waited to assess the outlook for mortgages, along with their own jobs and wages.
Richard Donnell, Zoopla’s executive director for research, said the company expected house price falls of up to 5% in 2023.
“But the number of sales going through will remain buoyant for a range of structural, demographic and economic factors,” he said, including ongoing housing scarcity, with the average number of homes on offer per estate agency still a fifth lower than before the pandemic.
Although a fall in house prices is widely predicted, the company’s predictions are less bearish than others.
Economists at Pantheon Macroeconomics forecast a decline of 8% over the next year, while Nationwide, one of the U.K.’s largest mortgage providers, said earlier this month that house prices could collapse by up to 30% in its worst-case scenario.
In contrast, the U.K.’s Office for Budget Responsibility has said it expects house prices to drop 1.2% next year and by 5.7% in 2024.
It comes after a desire for different kinds of property during the pandemic, the suspension of a purchase tax on homes under $500,000 from July 2020 to July 2021 and ongoing supply shortages saw house prices rocket to record highs.
Zoopla said there was currently a “widespread” repricing of homes occurring, but that it was modest in size. It puts U.K. house price growth at 7.8% year-on-year.
Its report described market trends as a “shake-out rather than a pre-cursor to a housing crash” and said the mini budget had “delivered a shock” to sellers and buyers.
“All the leading supply and demand indicators we measure continue to point to a rapid slowdown from very strong market conditions. We do not see any evidence of forced sales or the need for a large, double digit reset in U.K. house prices in 2023,” its report said.
Meanwhile, private rental costs in Britain have risen to record highs amid intense competition for properties, according to separate data published by the website Rightmove last month.
It found rents in London were up 16.1% year-on-year, the highest growth of any region on record.
File – Work is performed on the roof of a home under construction in Folsom, Calif. Wednesday, Oct. … [+]
As much of a pain that a recession always is, usually more to some than others with income inequality a big factor, there have been people speculating that just maybe it would help cool down the cost of housing.
It’s a fair question, but unlike in 2009 and on, where the Great Recession that sat in part atop insane property valuations, conditions are different. Even with property values likely to fall some, it won’t set things back to whatever passed for normal before the pandemic. The millions who haven’t been able to approach a house purchase because of outrageous prices might at best find them “only” incredibly steep, and with higher mortgage rates, maybe as unreachable as they have been.
House prices rise over time. Not always in a straight line and sometimes with reversals, but they do tend to go up. In the last few years, you could have said that instead they hitched a ride on a rocket booster. Below is a graph from the Federal Reserve Bank of St. Louis showing median house prices from the Census Bureau and U.S. Department of Housing and Urban Development.
Median home prices over time.
The period from the start of the pandemic in 2020 to the present is unprecedented. At the end of the first quarter of 2020, the median house price was $322,600. The median price at the same point of time in 2022 was $449,300, an increase of 39.3% in two years. Unheard of.
When house prices drop, it’s usually not by a huge amount. The counter example of 2006, the height of the “trade-up-your-house” hype that resulted in a housing market meltdown, was median prices going from $257,400 at the end of 2006 to $208,400 at the end of 2008. That enormous crash—fueled by millions of people who lost their houses to foreclosure, frozen credit markets so money wasn’t available to most, and lenders straight-arming the entire mortgage market—was a drop of 19%.
If the same fall happened, that would bring the median house back to 363,933. That would still be almost 13% higher than the median price at the end of 2019.
Unlike after the Great Recession, lenders have been far more careful. There aren’t massive waves of foreclosures waiting to happen. No investment banks are sitting on worthless derivative financial instruments that will bring them down.
Instead, the current conditions will put a floor under housing valuations so that even though they will lose some value, it might not be all that much.
First, the country still has a chronic shortage of homes—a gap of millions of units—as not enough have been built in the last 15 years to keep up with needs. Homebuilders could try to address that, but they can’t sell off the homes they have now fast enough, so planning on construction of many more going into next year doesn’t make sense.
That puts a big damper on supply, which will help to keep prices from utterly crashing. So will the Federal Reserve’s actions to fight inflation because they involve quantitative tightening. The Fed looks to reduce its balance sheet holdings of bonds, which it had been buying to inject more money into the economic system. Those bonds include the ones backed by mortgages and put together by the so-called enterprise lenders, Fannie Mae
FNMA
When these bonds hit the markets, that drives down the price for them because there’s suddenly too much supply. When prices on bonds drop, investors want effective higher interest rates for them because they don’t want to buy something that’s losing overall value. The interest rates on the mortgage-backed securities, or MBSs, are signals to real estate lenders, who boost mortgage rates.
Even though rates dropped recently, they’re still at close to 6.6%, rates not regularly seen since 2008. That adds a lot to monthly payments, making the houses, which are still expensive, even harder to afford.
It’s a punishing set of facts that is likely to keep more people as renters rather than seeing newly formed families buying homes and beginning to build some personal wealth.
27 November 2022, 17:49 | Updated: 27 November 2022, 17:51
Picture:
Getty
A Conservative ex-minister has claimed that leafy Home Counties constituencies like her own are “under siege” from new housing developments.
Theresa Villiers told Sky News this morning: “I and many of our colleagues have felt that our constituencies are under siege.
‘Of course, we need new homes, but they need to be the right homes in the right places and they need to be supported by appropriate infrastructure.’
Mrs Villiers tabled an amendment to the government’s touted Levelling Up bill stipulating that local councils would be unable to consider housebuilding targets when they make planning decisions.
After the clause received support from around 40 Conservative MPs, Downing Street pulled the vote on the bill to consider the proposal.
Picture:
Getty
Some younger Conservative voters have insisted they’ll ditch the party if the amendment is voted through, claiming Villiers’ plan would further constrain the amount of new houses built in the UK.
PM Rishi Sunak has said that 300,000 homes should be built in Britain each year.
Theresa Villiers represents Chipping Barnet on the northern outskirts of London.
She also told Sophy Ridge: “To meet those targets in the south east, there’s a danger that we essentially risk making the same mistakes as in the 60s and 70s with high-rise, high-density blocks with green field development, all of which will be damaging to our environment and the quality of life of many people.”
Ex-chancellor Sajid Javid wrote in The Sunday Times today: “If we believe in the importance of a strong, stable family unit, and enter politics to help protect it, then we must also accept that homes should be made available.
“A lack of housing is the most significant barrier to social progress in our country today.”
Traditional financial advice typically tells savers to put retirement first — even before homeownership. That’s because over the long-term, the stock market tends to outpace real estate and there are tax advantages to putting money in a retirement account.
But retired homeowners are in a much better financial position than their peers who have rented. So it might make more sense to encourage younger savers to prioritize buying a home, despite the very real challenges of high home prices and interest rates.
Millennials have higher average 401(k) balances than Generation X did when they were the same age, but they’re not any better off financially, says Craig Copeland, director of wealth benefits research at the Employee Benefit Research Institute. A lot of that has to do with being less likely to own a home. That doesn’t bode well for later on.
“The benefits of homeownership can’t be overstated in retirement,” says Copeland.
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For older homeowners and older renters with similar incomes, there’s a significant gap in net wealth. A big portion of that is due to home equity, but homeowners also have more non-housing wealth, too. Homeowners age 65 and over in the highest income quartile had a net wealth of close to $1.3 million compared to $334,150 for renters, according to Harvard University’s Joint Center for Housing Studies (and this was based on 2016 data, before the big run-up in home prices).
For the majority of Americans who haven’t put enough money aside for retirement, a home has often been their saving grace. The elderly poverty rate is around 10%, but would be much higher without the robust rate of homeownership among older Americans, says Chris Mayer, a real estate professor at Columbia University’s Business School. A home gives you a roof over your head, and you can always sell it if you really need cash.
Then there’s the budgeting stress that can come with renting. Studies show that housing accounts for a much bigger chunk of total expenditures for older renters than for owners. This is even more apparent for low- and middle-income households. In turn, older renters tend to have more credit-card and health-care related debt, and less cash savings, than homeowners.
Plus, the unpredictability of rent increases can wreak havoc when retirees are on a fixed income. Sure, homeowners may have to deal with property taxes and maintenance, but those seem relatively minor considering the double-digit jump in rents during the past year. (Some cities, such as New York, offer rent stabilized apartments, but that isn’t the norm in much of the country.)
Even before the pandemic, about 55% of rental households headed by someone age 65 and over were cost-burdened, meaning more than 30% of their income went to housing costs, data from Harvard’s housing center shows.
No wonder retirees who rent report lower levels of retirement satisfaction.
Given the importance of homeownership to a secure retirement, it’s especially worrisome that the homeownership rate among older people has been declining, and even more precipitously among people of color. In 2004, 81.7% of households headed by 50-64 year-olds in the U.S. owned a home. That number was just 75% as of last year, setting this group up to enter retirement age with lower homeownership rates than those of the previous generation at the same age, according to Senate testimony by Harvard’s Jennifer Molinsky.
Still, there are some caveats. You need to save at least some money for retirement even while you’re prioritizing a down payment. If your employer offers a 401(k) match, make sure you contribute at least enough to take advantage of that free money.
It’s also important to remember that the benefits of homeownership in retirement are greatest for those who have paid off their loans. Homeowners who enter retirement still paying off a mortgage — something more retirees are doing than in previous years — tend to spend more each month on housing costs than renters. (At least it’s a fixed expense, provided it’s a traditional mortgage.) So trying to pay off your mortgage before retiring should still be the goal.
But that’s all the more reason to focus on saving that down payment. The typical age of a first-time homebuyer is now 36, the oldest on record, according to the National Association of Realtors. The older you are when you buy, the more years you’re missing out on those home equity gains.
For many prospective buyers, rising mortgage rates and high home prices are delaying homeownership. Given how crucial a home can be to a secure retirement, let’s hope today’s sidelined buyers don’t give up on it completely. Maybe that means buying a smaller home, or even borrowing from your 401(k) — but it’ll be worth it.
Alexis Leondis is a Bloomberg Opinion columnist covering personal finance. Previously, she oversaw tax coverage for Bloomberg News.
EL SEGUNDO, Calif. — With so many people unable to buy their own homes in this current market, real estate investors are capitalizing on a growing housing market segment: renters.
J.P. Morgan Global Alternatives is teaming up with El Segundo-based real estate developer Haven Realty Capital to acquire and develop more than $1 billion in new build-to-rent communities, the companies announced last week.
Joint venture officials said J.P. Morgan’s $415 million equity investment would “provide long-term capital for Haven to continue to execute its business plan in the BTR space, working with homebuilders.”
“The for-sale housing market has been significantly hampered by recession fears, inflation and rising interest rates, placing a burden on homebuilders and their ability to add to the housing stock,” said Sudha Reddy, the founder and managing principal at Haven.
Reddy said the partnership would allow them to continue working with homebuilders, many of whom will sell the newly built community to Haven to lease to residents.
The joint venture’s partnership and $1 billion target highlight the growth and high demand for build-to-rent communities across the U.S. The number of single family build-to-rent homes under construction has increased 106% year-over-year, according to Fixr.com, a home remodeling news site.
Citing data from RentCafe, there are more than 13,900 build-to-rent homes currently under construction in the U.S.
The coronavirus pandemic, historically low mortgage rates and low supply created an inflated housing market that shut out many first-time homebuyers and prospective buyers.
The red-hot housing market has dipped in recent months since mortgage rates have increased, but affordability remains a crucial issue for many prospective homebuyers, leaving many to renting.
RentCafe officials said some of the main reasons for renting single-family homes over apartments is that it provides more space and privacy. It’s ideal for families.
Based in El Segundo, Haven Realty has a $1.2 billion portfolio of 35 communities, totaling 3,500 units across nine states in various construction phases.
Haven Realty officials said they plan to leverage their existing relationships with homebuilders.
Officials said the joint venture would target 50 to 200 homes, ranging from 1,500 to 2,500 square feet, primarily with three- and four-bedroom and two- and three-bathroom floor plans, including two-car garages.
The joint venture has already targeted three communities, totaling approximately 250 homes in the Atlanta area. That acquisition expects to close within the next 90 days, officials said.
“We’re pleased to be able to partner with Haven to continue to provide the attractive, newly-built, larger single-family homes for rent that more and more American families seek,” said Ryan Holgan, executive director, Real Estate Americas, at J.P. Morgan Asset Management.
SAN JOSE — A big chunk of a retail center in San Jose has been bought in a deal that suggests investors still hunger for South Bay real estate despite economic uncertainties that the coronavirus unleashed.
A portion of Edenvale Shopping Center on Monterey Road in south San Jose has been bought by a group linked to Burlingame-based business executive Marc Korody, according to documents filed on Nov. 21 with the Santa Clara County Recorder’s Office.
A 2.2-acre section of the shopping center was bought for $11.1 million, the county records show.
The just-bought property has addresses ranging from 5302 through 5320 Monterey Highway in San Jose, according to public real estate documents.
It’s possible that the property could be redeveloped as a housing or mixed-use project at some point, according to David Taxin, a partner with Meacham/Oppenheimer, a commercial real estate firm.
Taxin noted that this section of Monterey Road is dotted with a hodgepodge of zoning designations.
Among the merchants in the retail section that was purchased: Mercado California, a grocery store; Number One Cleaner dry cleaners; Trine’s Cafe, a restaurant; My Cellular Plus cell phone store; Lauderland laundromat; Birrieria El Primo restaurant; and Delizias Bakery.
Notable enterprises whose properties were not bought and not included in the transaction: Christ the King Catholic church, AutoZone auto parts store and Taco Mania restaurant.
“San Jose shopping centers are always in demand,” Taxin said. “There’s always a lack of them on the market no matter what the economy is like.”
HOUSE PRICES in Finland will decline next year at a rate not seen since 1995, forecasts the Mortgage Society of Finland (Hypo).
Hypo on Friday revealed that it expects house prices to decrease in all parts of Finland in 2023. The prices are forecast to decrease by three per cent in the capital region and two per cent in other parts of the country as reservations among consumers slow down house sales to pre-pandemic levels.
The slowdown is attributable especially to the up-tick in housing costs stemming from the sharp, inflation-driven increase in interest rates. Consumer prices have recently been soaring at the fastest rate since the 1980s, pushing interest rates to the levels of early 2009, according to Helsingin Sanomat.
Juho Keskinen, an economist at Hypo, stated to the newspaper that the change is significant in light of the performance of the house market in the past decade – especially the culmination witnessed during the coronavirus pandemic.
“The house market is currently experiencing a kind of apathy we have not seen since the financial crisis,” he wrote in the market review.
He added, however, that the drop in house prices is expected to be fairly short lived. The prices are forecast to return to an upward trajectory as soon as in 2024 as interest rates stop rising and construction activity slows down.
“We aren’t forecasting a collapse of the house market or the kind of gloom seen in the 1990s,” he assured to Helsingin Sanomat, reminding that a decline in prices is understandable after a period of sustained growth. “Prices increasing sharply is by no means desirable. It’s normal that there’s a decline after the market has been on the rise for more than 10 years.”
Although the prices are forecast to drop especially in the capital region, home owners and mortgage borrowers there need not worry about the value of their home as the capital region, as well as other population centres, is expected to continue growing. With the economic uncertainty simultaneously slowing down construction, house prices are set to increase in the longer term.
The upward longer-term trend is supported also by employment growth and reasonably high business confidence.
“The economic support provided by record-high employment has never been this critical for the house market,” told Keskinen.
The prices of one-room houses have already started to drop sharply, after surging during the period of no interest rates and boom in real estate investment. With the number of one-room houses under construction high, their prices could continue to fall at a faster rate than those of larger houses.
“Powerful increases often translate to powerful decreases, and the decrease in small house prices is a sign of a healthy and even welcome development. New houses are being built for people who live alone and students, whose threshold to buy their first home will drop as the prices cool down,” said Keskinen.
“The winter hibernation of investors is offering good opportunities to negotiate prices for people on the market for small houses.”
No house type is immune to the price drops, however.
The current situation is dragging down particularly the prices of large single-family homes heated with electricity as the much-reported surge in energy prices has prompted many to pay closer attention to running costs. While the sales of single-family homes decreased by around 20 per cent year-on-year in the spring, the worst is yet to come, believes Keskinen.
“The saleability of large electricity-hungry homes is eroding and the price developments are a concern, whereas energy-efficient pioneers stand out favourably.”
Aleksi Teivainen – HT
SINGAPORE: Rent prices of Housing and Development Board (HDB) flats across Singapore have risen to record levels, with some increasing by nearly 50 per cent in the last two-and-a-half years.
Analysis of median rent prices of HDB flats shows that prices have reached record high in some neighbourhoods.
Rent prices had mostly stayed stagnant or fallen in the 10 quarters before COVID-19 hit at the start of 2020, but they have since soared in the 10 quarters after.
Earlier this month, CNA reported that people in Singapore are facing up to a 70 per cent increase in their rental payments.
Construction delays due to COVID-19, the reopening of borders amid the pandemic recovery and a tighter supply of flats are among the reasons for the increase in rent prices across the country, experts told CNA.
The current property boom has also seen HDB resale prices hitting record highs, with prices rising for 10 consecutive quarters since Q1 2020.
“A boom in HDB resale transactions would in a way reduce the supply of HDB flats available for lease. This tighter supply – when set against healthy demand – will put upward pressure on rents,” said PropNex’s head of research and content Wong Siew Ying.
CNA looks at how rent prices of HDB units have increased across most flat sizes in almost every town, and what might happen next.
FIVE-ROOM FLATS
Rent prices for HDB flats stayed mostly stagnant in the two-and-a-half years before the first quarter of 2020, when COVID-19 hit.
Some towns, mostly those in the heartlands, saw median monthly rent prices fall between the third quarter of 2017 and the first quarter of 2020. But since the start of the pandemic, rents have gone upwards and mostly in the heartlands rather than central regions.
Rent prices for flats in some of these towns hit new highs in the third quarter of this year, according to data released by HDB earlier this month.
Compared with the first quarter of 2020, the rental prices for five-room flats have increased by as high as 47.4 per cent.
The largest growth was seen in Punggol, where the median monthly rent hit S$2,800. The next largest was in Woodlands, where rents rose 44.4 per cent, with Sengkang coming third.
Suburban House And A Sold Sign. (Photo by H. Armstrong Roberts/Retrofile/Getty Images)
Our crazy, volatile house prices hurt first-home buyers who buy near the top of the market and last-home sellers who have to sell near the bottom of the market.
Millennial first-home buyers who bought at the top of the recent boom will be hurt the most by falling house prices but those aging Boomers who will have to sell their homes in the future near the bottom of the market in order to pay for unexpected expenses like medical, assisted living, nursing home or other living expenses, will also be hurt.
House prices are naturally prone to booms and busts because the demand for houses can rise and fall a lot faster than the total number of houses can rise and fall. The total supply of houses increases extremely slowly because it takes longer to make a house than anything else people buy.
Although house prices are prone to booms and busts, our government policies make the booms and busts much bigger than they would be naturally. Instead of smoothing out the natural instability in house prices, our government policies make housing booms and busts a lot worse.
First-Home Buyers: Millennials
Hopefully, the many Millennials who bought their first houses in the last two years don’t end up like the many Gen-Xers who bought their first houses in 2005, 2006 and 2007. Many of those Gen-Xers were set back a decade financially when the value of their first houses tanked and they were soon underwater owing a lot more money on their houses than their houses were worth.
Those Gen-Xers did nothing wrong. They just happened to hit the first-home buying stage of their lives at the wrong time. They just happened to fall in love, get married, start a family or otherwise get serious about buying their first house near the top of a real estate boom.
Many of those Gen-Xers lost their houses, especially if they lost their jobs in the Great Recession. Many other Gen-Xers made their mortgage payments on time despite being severely underwater for many years. As recently as a few years ago it wasn’t unusual to see houses selling for about what the sellers originally paid for their houses more than a decade earlier, and that’s not accounting for inflation. In real dollars, they were selling their houses for around 25% less than they paid more than a decade earlier. That hurt.
Some Baby Boomers had the same thing happen to them if they bought their first houses near the top of the Savings & Loan real estate boom in the late 1980s.
The Economy: Deadweight Loss
Current home owners often feel good about skyrocketing house price, that is, until they have to buy their next house. They may make a ton of money on the house they’re selling but they have to pay a ton of money for the house they’re buying. Crazy high prices don’t help you when you’re buying and selling at the same time.
And erratic house prices are bad for the economy. When house prices unexpectedly increase to unsustainably high levels, home owners tend to save less money and spend more money than they would otherwise. Those skyrocketing house prices are great for the economy, at least for a while.
But then when house prices fall, home owners tend to save more and spend less than they did before the boom. The economy shrinks more during the bust than it grew during the boom. The economy ratchets down and home owners end up with less wealth just because house prices jumped up and then down. Not all recessions have a real estate bust but all the worst recessions have real estate busts, for example, the Great Recession.
Last-Home Sellers: Baby Boomers
In addition to hurting the economy and first-home buyers who buy at the top of the market, unstable house prices hurt older home owners who have to sell at the bottom of the market.
It turns out older folks tend to view their homes like emergency savings accounts. Ideally, they’d like to live in their houses forever and then leave them to their kids or family when they pass on.
Those who sell toward the end of their lives do so primarily to pay for unexpected life emergencies like medical expenses and nursing home care, or because they lost their spouse and their spouse’s income (for example, they now only get one Social Security check a month), and they need to sell their house to get money to live on. Most retirees don’t have a $1,000,000 in IRAs and 401(k)s.
Home equity is the largest part of the typical 75+ year old’s net worth. The Federal Reserve’s last Survey of Consumer Finances was in 2019 and it found the median net worth of households headed by people 75 years old and older was only $255,000. Their median home equity was $118,000, or nearly half of their total net worth (46%).
If that life emergency happens at the top of a real estate boom, all that house price volatility works out great for them.
But if that life emergency happens at the bottom of a bust, it just makes things a lot worse for them during one of the most difficult times in their lives. Those last-home sellers have less discretion on when they sell than first-home buyers have on when they buy.
Those who have to sell their houses near the bottom of the market due to illness, or the death of their spouse, make far less money than they would if house prices had increased more sustainably over the years without such huge price booms and price busts. Their Gen-X and Millennial children may have to pitch in more time and money to help mom and/or dad replace the lost home equity.
The huge volatility of house prices devastates first-home buyers who buy at the top of the cycle but that huge price volatility also devastates older folks who have to sell their homes at the bottom of the cycle.
Takeaway
Boomers, Gen-Xers, Millennials and Gen-Zers should first work together to eliminate the many government policies that destabilize their house prices and family wealth.
More sustainable house price increases would mean if Boomers have to sell in their later years they aren’t punished as much financially for having a death or sickness in the family in the wrong year. Similarly, Millennials wouldn’t be punished as much financially for falling in love, getting married, or wanting to start a family, and buying a house in the wrong year.
And our overall economy would be much larger if we had more sustainable house price increases. The U.S. would be permanently richer because housing busts can reduce economic growth for years.
It’s true that home owners tend to like it when house prices increase crazy fast but Boomer home owners should realize they may have to sell during any bust that follows unsustainable house price increases. The older they are, the more likely they’ll have to sell during any bust that follows.
More stable house prices would lead to more stable American families of all ages.
It’s too late now to stop the recent boom in house prices but we can decide now that in the future we want more sustainable house price increases and more sustainable family wealth creation.
Suburban House And A Sold Sign. (Photo by H. Armstrong Roberts/Retrofile/Getty Images)
Our crazy, volatile house prices hurt first-home buyers who buy near the top of the market and last-home sellers who have to sell near the bottom of the market.
Millennial first-home buyers who bought at the top of the recent boom will be hurt the most by falling house prices but those aging Boomers who will have to sell their homes in the future near the bottom of the market in order to pay for unexpected expenses like medical, assisted living, nursing home or other living expenses, will also be hurt.
House prices are naturally prone to booms and busts because the demand for houses can rise and fall a lot faster than the total number of houses can rise and fall. The total supply of houses increases extremely slowly because it takes longer to make a house than anything else people buy.
Although house prices are prone to booms and busts, our government policies make the booms and busts much bigger than they would be naturally. Instead of smoothing out the natural instability in house prices, our government policies make housing booms and busts a lot worse.
First-Home Buyers: Millennials
Hopefully, the many Millennials who bought their first houses in the last two years don’t end up like the many Gen-Xers who bought their first houses in 2005, 2006 and 2007. Many of those Gen-Xers were set back a decade financially when the value of their first houses tanked and they were soon underwater owing a lot more money on their houses than their houses were worth.
Those Gen-Xers did nothing wrong. They just happened to hit the first-home buying stage of their lives at the wrong time. They just happened to fall in love, get married, start a family or otherwise get serious about buying their first house near the top of a real estate boom.
Many of those Gen-Xers lost their houses, especially if they lost their jobs in the Great Recession. Many other Gen-Xers made their mortgage payments on time despite being severely underwater for many years. As recently as a few years ago it wasn’t unusual to see houses selling for about what the sellers originally paid for their houses more than a decade earlier, and that’s not accounting for inflation. In real dollars, they were selling their houses for around 25% less than they paid more than a decade earlier. That hurt.
Some Baby Boomers had the same thing happen to them if they bought their first houses near the top of the Savings & Loan real estate boom in the late 1980s.
The Economy: Deadweight Loss
Current home owners often feel good about skyrocketing house price, that is, until they have to buy their next house. They may make a ton of money on the house they’re selling but they have to pay a ton of money for the house they’re buying. Crazy high prices don’t help you when you’re buying and selling at the same time.
And erratic house prices are bad for the economy. When house prices unexpectedly increase to unsustainably high levels, home owners tend to save less money and spend more money than they would otherwise. Those skyrocketing house prices are great for the economy, at least for a while.
But then when house prices fall, home owners tend to save more and spend less than they did before the boom. The economy shrinks more during the bust than it grew during the boom. The economy ratchets down and home owners end up with less wealth just because house prices jumped up and then down. Not all recessions have a real estate bust but all the worst recessions have real estate busts, for example, the Great Recession.
Last-Home Sellers: Baby Boomers
In addition to hurting the economy and first-home buyers who buy at the top of the market, unstable house prices hurt older home owners who have to sell at the bottom of the market.
It turns out older folks tend to view their homes like emergency savings accounts. Ideally, they’d like to live in their houses forever and then leave them to their kids or family when they pass on.
Those who sell toward the end of their lives do so primarily to pay for unexpected life emergencies like medical expenses and nursing home care, or because they lost their spouse and their spouse’s income (for example, they now only get one Social Security check a month), and they need to sell their house to get money to live on. Most retirees don’t have a $1,000,000 in IRAs and 401(k)s.
Home equity is the largest part of the typical 75+ year old’s net worth. The Federal Reserve’s last Survey of Consumer Finances was in 2019 and it found the median net worth of households headed by people 75 years old and older was only $255,000. Their median home equity was $118,000, or nearly half of their total net worth (46%).
If that life emergency happens at the top of a real estate boom, all that house price volatility works out great for them.
But if that life emergency happens at the bottom of a bust, it just makes things a lot worse for them during one of the most difficult times in their lives. Those last-home sellers have less discretion on when they sell than first-home buyers have on when they buy.
Those who have to sell their houses near the bottom of the market due to illness, or the death of their spouse, make far less money than they would if house prices had increased more sustainably over the years without such huge price booms and price busts. Their Gen-X and Millennial children may have to pitch in more time and money to help mom and/or dad replace the lost home equity.
The huge volatility of house prices devastates first-home buyers who buy at the top of the cycle but that huge price volatility also devastates older folks who have to sell their homes at the bottom of the cycle.
Takeaway
Boomers, Gen-Xers, Millennials and Gen-Zers should first work together to eliminate the many government policies that destabilize their house prices and family wealth.
More sustainable house price increases would mean if Boomers have to sell in their later years they aren’t punished as much financially for having a death or sickness in the family in the wrong year. Similarly, Millennials wouldn’t be punished as much financially for falling in love, getting married, or wanting to start a family, and buying a house in the wrong year.
And our overall economy would be much larger if we had more sustainable house price increases. The U.S. would be permanently richer because housing busts can reduce economic growth for years.
It’s true that home owners tend to like it when house prices increase crazy fast but Boomer home owners should realize they may have to sell during any bust that follows unsustainable house price increases. The older they are, the more likely they’ll have to sell during any bust that follows.
More stable house prices would lead to more stable American families of all ages.
It’s too late now to stop the recent boom in house prices but we can decide now that in the future we want more sustainable house price increases and more sustainable family wealth creation.