Southern California home prices hit a record in March amid sky-high mortgage interest rates, a combination that’s creating the most unaffordable housing market in a generation.
The average for the six-county region reached $869,082 in March, according to Zillow. That’s up 9% from a year earlier and 1% higher than the previous all-time high in June 2022.
With rates hovering in the upper 6% range, the mortgage payment on the average home now tops $5,500 — if you can put 20% down.
“It’s bananas,” Tommy Kotero, a 43-year-old refinery worker, said last weekend after touring a dated, $899,000 house in north Torrance with visible cracks in the ceiling and walls. “The asking prices for what we are getting is crazy.”
How home prices hit a record despite the high cost of borrowing is a tale of too few homes for sale, combined with a wealth gap that has equipped some buyers with reams of cash that negate the effect of high rates.
When interest rates first soared in 2022, buyers backed away en masse, inventory swelled and home prices dropped.
Then potential sellers all but went on strike, with many deciding they didn’t want to move and trade their sub-3% mortgages for a loan at more than double that rate.
Inventory plunged and enough buyers returned to send home prices back up. Many of these buyers are well-heeled first-timers who aren’t ditching a low-cost mortgage.
Others are holding on to their old home and buying another. Still more are selling their old home and turning their considerable equity into hefty down payments well over 20%.
“People who have cash are not paying too much attention to interest rates,” said Alin Glogovicean, a real estate agent with Redfin who specializes in northeast L.A.
He estimates that in about one-third of his deals a buyer is paying all cash. Another third put down at least 50%, with a mortgage on the rest.
At least two-thirds of the buyers with down payments of at least 30% aren’t investors but people who want to live in the home, he said. They are professionals such as architects and Hollywood types who have saved, liquidated stock portfolios, built up equity or received help from family.
Some are willing to dip into retirement savings — a strategy many financial experts advise against.
Nationally, similar trends are afoot, according to a Zillow survey, with the share of home buyers putting at least 20% rising, as well as those who received help from family and friends.
In all, 23% of L.A. County homes sold in February were bought with all cash, up from 16% in 2021, according to Redfin.
For those without access to a spare half-a-mill, times are tougher.
According to the California Assn. of Realtors, only 11% of households in Los Angeles and Orange counties could reasonably afford the median-priced house during the fourth quarter, the smallest number since the housing bubble of the mid-aughts.
At that time, risky lending practices allowed people to buy homes they couldn’t really pay for. Today, lending standards are far tighter, which economists say should prevent a similar collapse in prices if there’s another recession.
Across the region, home prices have now set records in Orange, San Bernardino, San Diego and Ventura counties. In Los Angeles and Riverside counties, prices are less than 1% from their all-time highs.
Agent Alicia Fombona of United Real Estate Pacific States works across the Southland — from the coast to the Inland Empire. Amid high rates and high prices, she said, one strategy that’s growing more popular is co-borrowing: family and friends coming together to buy a house or duplex to keep payments somewhat affordable.
“Everybody needs a place to live and there is not enough housing for everybody,” Fombona said.
More homes are starting to come onto the market, but inventory is still tight and expected to remain so, according to forecasters. Rates may drop somewhat but are expected to remain elevated.
That combination could create a scenario in which prices don’t soar but also don’t drop much — if at all, especially because incomes for many households are growing.
“We are going to continue to see robust price growth, but nothing near where we were in the pandemic,” said Orphe Divounguy, a senior economist with Zillow.
If rates fell considerably, it would immediately make homes more affordable, but a new crop of buyers probably would flood the market and could put even more upward pressure on prices.
To help housing truly become more affordable, Divounguy said, there must be continued income growth and more housing construction.
“The way out of this is not going to come from mortgage rates,” he said.
In California, construction headed in the wrong direction in 2023, with building permits falling from the previous year, though lately there are signs of a rebound in single-family construction, which is mostly for-sale homes.
Some Californians, however, are on a timeline.
Kotero, the buyer looking in Torrance, currently rents a house in the city with his wife, Rikah, and their four children. But he said they need to find a new place by summer because the landlord is moving back in.
They’d like to buy and stay in Torrance for the schools but so far have struck out — even though Kotero makes $160,000 as a manager at a local oil refinery.
He said he and his wife were recently outbid, despite stretching their budget to offer $1 million for a house listed for $900,000.
Unlike others, the Koteros don’t have hundreds of thousands in cash to meaningfully offset high rates. Instead, Rikah, who currently stays home with the children, is thinking of looking for a job.
“If we are realistically looking to buy a home in Torrance, there’s no way around it,” Kotero said.
Canadian home prices were flat in February after falling for five straight months, a potential sign that the country’s housing market may be rebounding after last year’s slump.
The national home price index, which excludes the highest priced properties, was $719,400 last month, which was the same as in January, according to the Canadian Real Estate Association or CREA.
The last time the home price index rose was from July to August last year, a month after the Bank of Canada shocked the market with back-to-back interest rate hikes. The surprise move had led to a slowdown in sales and a drop in home prices as many would-be homebuyers had a tougher time qualifying for a large enough mortgage to make a purchase.
But now that the central bank has kept its benchmark interest rate steady at 5 per cent for more than six months, would-be buyers are starting to gain confidence that borrowing costs will no longer continue to rise. Prospective buyers who delayed their purchases last year are starting to look again and make bids. The real estate industry said there is pent up demand after months of lacklustre activity.
“People are itching to get going,” said Samantha Villiard, regional vice president for RE/MAX real estate agency. “More people are slowly getting comfortable getting back into the market,” she said.
Realtors have reported an increase in showings and bids in areas that experienced heavy competition during the pandemic’s real estate boom. That includes the suburbs of Toronto and Chilliwack, inland of Vancouver. Over the past month, the home price index rose in Oakville, Milton, Hamilton and Burlington, as well as Chilliwack.
At the same time, the home price index continued to fall in other markets that overheated when interest rates were nearly zero. That includes some parts of Ontario’s cottage country and less populated cities like Guelph.
Across the country, home sales fell 3.1 per cent from January to February after removing seasonal influences. B.C. and Ontario, the country’s largest real estate markets, led the way down with homes sales declining 7 per cent month over month in both. That followed a flurry of sales in December and January. Last month’s volume of sales is still higher than in the fall when homebuyers were still adjusting to the higher interest rates.
TD economist Rishi Sondhi said that activity is still below pre-pandemic days due to lower sales in Ontario, B.C. and Quebec. “This suggests that significant pent-up demand remains in these markets,” he said in a research note.
New listings rose 1.6 per cent from January to February with more homeowners putting their properties up for sale in B.C. and Alberta.
Editor’s note: This article has been update to clarify that Chilliwack is located inland of Vancouver.
Nogales, AZ – In order to expand its national reach and influence, the Fresh Produce Association of the Americas BB #:144354 has added the services of industry veterans John Toner and Phil Gruszka as Business Development Directors.
“FPAA is the home for distributors of fresh fruits and vegetables from Mexico, no matter whether a company crosses its produce in Texas, New Mexico, Arizona, or California,” said FPAA President Lance Jungmeyer. “Food safety issues, USDA inspections and other market access issues occur at all ports of entry, and FPAA provides a national voice for all distributors of fresh produce from Mexico.”
While FPAA has maintained a strong focus in Nogales since it was founded in 1944, the FPAA in 2022 conducted a Strategic Review, in which FPAA members identified the value in being a national trade association. The members saw this move as aligning the FPAA with the high-level work they were already doing on behalf of the industry at large.
After the Strategic Review, FPAA’s new Mission is to: Ensure market access for imported fresh fruits and vegetables by informing and advocating with government and industry on behalf of Members, thereby providing consistent expertise and support.
To provide a stronger network of support, FPAA is working to expand the ranks of its membership from the Atlantic to the Pacific. Toner Insights and Gruszka Consulting will play key roles.
“In this endeavor, we are proud to work with John Toner and Phil Gruszka, accomplished industry veterans,” Jungmeyer said.
Toner made his industry mark at the United Fresh Produce Association, and later at the International Fresh Produce Association, where he was Vice President of Political Affairs. Now, he is founder and CEO of Toner Insights, LLC, a consulting firm that specializes in trade show management, exhibitor strategy, event marketing and relationship building.
He also acts as Vice President at Produce Business Magazine, where he works on the New York Produce Show and Conference. Toner may be reached at jtoner@freshfrommexico.com. Toner Insights will work with companies which have headquarters East of the Pacific Region, and which are international.
Founded in 2011 by Phil Gruszka, Gruszka Consulting is a California based full-service marketing and sales consultancy focusing on the food and beverage sectors. The consulting business was founded with the principles of helping produce companies tackle marketplace challenges, build successful teams, and improve their company’s consumer presence.
In his years in fresh produce, Gruszka has served in roles with Grimmway Farms, among others. Gruszka may be reached at philg@freshfrommexico.com. Gruszka Consulting will work with companies with headquarters in the Pacific Region, including California, Washington, Oregon, Nevada, Utah, Idaho, Hawaii, and Alaska.
Toner and Gruszka said they are eager to engage with the industry.
“I am looking forward to helping the Fresh Produce Association of the Americas expand a national footprint to service fresh produce industry members doing business on and through the border,” said Toner.?“Together working with the entire industry, we can advocate for better working conditions and transit/inspection times.”
For Western shippers and distributors, the growing importance of Mexican fresh produce in their supply chains highlights an opportunity, Gruszka said.
“California and other Western companies have made large investments in expanding their Mexican imports. Because of FPAA’s work in keeping the border running efficiently, joining the FPAA is a great way to safeguard that work,” said Gruszka.
Learn more about FPAA at www.freshfrommexico.com
About the Fresh Produce Association of Americas:
Founded in 1944 in Nogales, Arizona, the Fresh Produce Association of the Americas has grown to become one of the most influential agricultural groups in the United States. Today, the FPAA provides a powerful voice for improvement and sustainability by serving the needs of more than 100 North American companies involved in marketing, importing, and distributing fresh produce.
Contact: Lance Jungmeyer (lance@freshfrommexico.com) or Allison Moore (amoore@freshfrommexico.com)
HSBC’s global banking and markets unit jumped 8% last year as the UK lender increased fees from dealmaking and maintained trading revenue in most asset classes.
The UK lender posted revenue of $16.1bn for its global banking and markets unit last year, according to its annual accounts. Fees from capital markets and M&A work surged 36%, with HSBC’s investment bank benefiting from a resurgence in debt underwriting revenue.
HSBC’s pre-tax profit of $30.3bn for 2023 was a record for the bank and an increase of 78%, but still below the $34bn expected by analysts. In a statement, chief executive Noel Quinn said that the results “reflected four years of hard work and the strength of our balance sheet in a higher interest rate environment.”
HSBC finished 16th in the investment banking fee league tables last year, according to data provider Dealogic, with 1.3% share of the market. This is up from 17th a year earlier.
The UK lender’s markets and securities services business posted revenue of $9bn, which was largely in line with 2022. However, equity trading fees of $552m were nearly half of the $1bn it earned in the unit in 2022.
HSBC’s GBM business dipped 4% in the final quarter of the year to $3.7bn.
READ HSBC hikes bonuses to $771,700 for its top investment bankers
HSBC has bolstered its UK investment bank over the past year, hiring two senior dealmakers for corporate broking in July, but faces stiff competition from Barclays, which is aiming to consolidate its first place finish in the UK dealmaking fee league tables last year. In recent months, hires within its investment bank have focused on its core markets of China and the Middle East.
Investment banks have struggled against an ongoing drought in deals, with Wall Street banks and Europeans alike posting sharp declines in M&A fees in 2023. UK rival Barclays unveiled a 12% decline in investment banking fees for 2023, led by a 23% slump in revenue from M&A work.
Barclays also unveiled its first investor day since 2014, separating its business into five key units including separating its investment bank from its corporate bank. While the UK lender will look to reduce its reliance on its investment bank, it is not pulling back and within its dealmaking team intends to shift the balance away from debt underwriting to do more M&A and equity capital markets work.
Deutsche Bank’s origination and advisory business was up by 25% in 2023, buoyed by a rebound in debt capital markets activity as its M&A unit slipped 25%. A hiring spree of 50 managing directors at the German lender last year aims to shift the balance of its investment bank towards more M&A and equity capital markets work.
To contact the author of this story with feedback or news, email Paul Clarke
The biggest Wall Street banks cut 30,000 jobs last year, kicked off by Goldman Sachs who informed its staff of plans to make its deepest reductions since the 2008 financial crisis shortly after Christmas 2022.
Goldman’s 3,200 job cuts were swiftly followed by 3,500 at Morgan Stanley, and then 5,000 at Citigroup. Bank of America refrained from deep redundancies, but 4,000 employees departed regardless through its ‘natural attrition’ approach last year.
With the exception of Credit Suisse, which started cutting thousands of roles before being acquired by its biggest rival UBS in March, European banks refrained from deep redundancies last year.
Times have changed.
Whether it’s an attempt to revive a flagging share price, free up funds for buybacks, the march of technology, strategic overhauls or simply reining in costs, top European banks are cutting jobs and reducing bonuses for those that remain.
READ ‘Doughnuts’ loom: Bankers brace for brutal bonus season
“It’s a balancing act for a lot of European banks, particularly after two years of poor performance for investment banking. There’s only so long you can keep paying expensive talent in the hope that revenue will recover,” said Gary Greenwood, a bank analyst at Shore Capital.
Barclays is expected to unveil a strategic overhaul alongside its annual results on 20 February, with the UK lender looking to save £1.25bn in costs. So far, job cuts have mainly hit support functions. Deutsche Bank said that 3,500 jobs will go over the next year, largely in back office functions, as it looks to save €2.5bn after headcount swelled 6% in 2023.
Societe Generale is cutting 900 jobs within its Paris headquarters as part of new CEO Slawomir Krupa’s plans to pull back on costs, while UBS has earmarked around $6.5bn in employee expenses to be stripped out as it integrates Credit Suisse.
On a smaller scale, Rothschild cut around 10 investment banking jobs in January, with former Goldman dealmaker John Brennan departing.
“The US banks are much more reactive in terms of cutting headcount than their European counterparts,” said Stephane Rambosson, co-founder of headhunters Vici Advisory. “European banks are now focused on costs, but each case is specific to their circumstances rather than market conditions. Wall Street banks are also quicker to hire again when the tide turns.”
As well as job cuts, bankers are enduring another brutal bonus round. There is widespread disgruntlement at UBS as the bank spread an already small pool around its existing employees, the influx of Credit Suisse staff and a flurry of senior Barclays dealmakers brought in last year on guarantees, according to bankers.
Barclays has handed zero bonuses to up to a third of dealmakers in some units, bankers told Financial News, with Bloomberg previously reporting that “dozens” of employees were set for doughnuts this year. Deutsche Bank, which also has to digest an expensive hiring spree and its £410m acquisition of City broker Numis, is also set to reduce bonus payments.
READ Investment banks face talent crunch even after deep job cuts
“We have observed a similar, but even more aggressive, trend with the European banks regarding layoffs and bonus pool reductions,” said Chris Connors of Wall Street compensation consultants Johnson Associates. “The European banks have struggled to keep pace with their American counterparts on business results and compensation. From the employee perspective, we anticipate European bankers to be similarly disappointed to US bankers given the muted results in advisory and other units such as underwriting, which are still well below 2021 levels.”
While US banks cut dozens of dealmakers last year, some European players took advantage of the dislocation. Deutsche hired 50 senior bankers, while Santander picked up dealmakers from both the fallout from Credit Suisse’s takeover and from Goldman Sachs and Morgan Stanley.
Most cuts so far at European banks have focused on management or back office functions, and there’s little suggestion that deep investment banker redundancies are on the cards, particularly as banks prepare for a revival in dealmaking activity after a near two-year lull. However, headhunters told FN that many banks were taking a much more cautious approach about bringing in senior talent.
During its fourth quarter earnings call, Deutsche Bank chief executive, Christian Sewing said that the bank had “positioned ourselves for a recovery in origination and advisory” after its hiring spree. “Now, this is where we see considerable growth potential,” he added.
“Investment banking is a people business, so banks will be reluctant to let too much talent depart,” added Greenwood. “This could change — a recovery is possible, but there are still a lot of risks in the market.”
To contact the author of this story with feedback or news, email Paul Clarke
Almost as soon as home prices began their unprecedented climb in 2020, doomsayers began warning of a looming crisis. The housing market, they claimed, was a bubble destined to burst.
A litany of supposed catalysts was going to send prices into a tailspin: the “Airbnbust,” the sudden surge in mortgage rates, a flood of grifters and hucksters looking to make a quick buck in real estate. Bubble watchers forecast chaos, then sat back and waited. And waited. And waited.
I’ve spent the past few years asking experts a simple question: Has the housing market reached bubble territory? The answer remains a resounding no. More than three years after prices started to soar, the only thing that’s gone bust is the gloomy predictions. Despite some cooling in a handful of overheated markets such as Charlotte, North Carolina, and Austin, the median home-sale price increased by a respectable 4% nationwide in 2023, Redfin reported. The price for a typical home has risen by more than 47% since late 2019, according to the S&P CoreLogic Case-Shiller National Home Price Index, a closely watched measure of housing costs.
But maybe I’ve been posing the wrong question all along. The B-word implies an impending pop, a point when the combination of greedy speculation, unscrupulous behavior, and soaring prices brings everything crashing down. Barring a large-scale economic disaster, there’s no pop in sight.
The staggering jump in home prices is concerning, to be sure. But it’s a function of a severe lack of supply, not a byproduct of investors swarming the market or shady lenders artificially juicing demand. Those looking for parallels to 2008 are grasping at straws — homeowners are in far better financial shape than they were the last time prices cratered, and homebuilders, rather than flooding the market with new properties, aren’t keeping pace with the sheer volume of millennials suddenly consumed by dreams of backyards and picket fences.
So if you’ve been waiting — maybe even cheering — for prices to plummet: Don’t hold your breath.
Warning signs
A funny thing about bubbles is they don’t fall neatly into a single definition. Ask a dozen economists to sketch out their criteria, and you’ll probably get 12 different answers. But Mike Simonsen, the president of the housing research firm Altos Research, offered a useful way to think of a bubble’s life cycle in a post on X, formerly Twitter, late last year (which I’ve slightly paraphrased):
1. You got rich! Good for you! You did the hard work and got in early.
2. Hm. It seems like everyone is getting rich?
3. Wait. That asshole?! That guy is not smart, maybe even criminal.
4. Pop.
For a time, it seemed like the housing market was doing a speedrun through Simonsen’s checklist. There were the runaway prices: Before the pandemic, you could buy a median-price home in Las Vegas for about $281,300, according to Redfin. Good luck finding that kind of deal now — even with a dip from pandemic highs, the cost of a typical house there has swelled to $422,000, an eye-watering 50% increase. Similar stories have played out in Miami (70%), Boise, Idaho (40%), and Dallas (36%). The typical household would have to spend nearly 34% of its income to afford major homeownership expenses such as mortgage payments and property taxes, according to the data firm Attom, the highest percentage since 2007 and well beyond the 28% debt-to-income ratio that’s typically preferred by lenders.
Then there were the people getting rich. Speculators were using supercheap loans to buy homes, expecting to profit by selling to an even bigger fool; home flippers, aspiring megalandlords, and Airbnb owners flaunted their debt-funded miniempires on TikTok; and seemingly everyone was signing up to be a real-estate agent. Even usually buttoned-up real-estate professionals were giving off bubble vibes: High-flying mortgage companies threw lavish parties featuring bands such as Imagine Dragons, while Zillow, the ubiquitous home-search site, morphed into one of the country’s biggest homebuyers — even though its acquisition math didn’t add up.
All the signs seemed to point to a bubble, and there were plenty of people predicting the “pop” was coming: In late 2022, the prominent Wall Street economist Ian Shepherdson forecast home prices to fall by as much as 20% the following year. Goldman Sachs expected a more modest, but still significant, decline of up to 10% from the peak. Countless headlines wondered whether home values were set to crash. Even Federal Reserve Chair Jerome Powell, whose every word threatens to move markets, said at a Brookings Institution event in 2022 that housing was in a “bubble” during the pandemic, with “prices going up at very unsustainable levels.”
But there was no pop, no sudden collapse in home prices. Even with mortgage rates tripling and buyers retreating, values held up.
The gloomy oracles could even point to an instigator of the coming collapse. The Fed, led by Powell, began raising interest rates in spring 2022 to fight inflation, sending mortgage rates shooting upward. Mortgage rates kept rising through most of 2023, eventually reaching a 20-year high in October of nearly 8%, up from less than 3% during the depths of the pandemic in 2020 and 2021. Suddenly it wasn’t so cheap to borrow money, making it tougher for reckless investors to enter the market. Speculation is the oxygen for a market-frenzy fire, Rick Palacios Jr., the director of research and managing principal at John Burns Research and Consulting, told me. By hiking rates, the Fed cut off the air supply.
But there was no pop, no sudden collapse in home prices. Even with mortgage rates tripling and buyers retreating, values held up. To understand why, you have to look at the fundamentals — the deep-seated reasons all the “Bubble Boys,” doomsayers, and fear-mongering headlines are dead wrong.
Debunking the bubble
Rising prices, no matter how steep, aren’t enough to constitute a bubble. Prices also need to diverge from the fundamentals, or the basic components of supply and demand, that determine how much things cost. If the run-up in prices defies logical explanation or obscures sketchy business practices, watch out. In the years leading up to the global financial crisis, for instance, lenders came up with creative ways to boost demand: They devised predatory mortgages that left borrowers on the hook for impossibly high payments once their teaser rates expired and handed out so-called NINJA loans (no income, no job, and no assets). If you owned a home at that time, you might’ve felt like the only direction its value could go was up.
The recent housing-bubble theory was always going to age poorly because of one fact: The pandemic soaring prices were justified. Prices didn’t spiral out of control because we built too many homes or made it too easy to borrow money, like in 2008; they took off because there simply weren’t enough homes for all the creditworthy people who wanted to buy them.
It’s a savagely unhealthy housing market. But it’s also a market that just had too many people chasing too few homes.
For home prices to suddenly crash, there would have to be a pool of desperate sellers looking to offload their homes on the cheap — or, worse, losing them to the foreclosure process. Sure, speculators were loud and proud about their get-rich-quick schemes, but they were a vocal minority. And regular homeowners have “never looked this good” when it comes to their financial and credit health, Logan Mohtashami, the lead analyst at HousingWire and an outspoken critic of bubble alarmists, told me. Less than 4% of outstanding mortgages were delinquent at the end of the third quarter last year, according to the Mortgage Bankers Association, a near-record low. In the fourth quarter of 2023, the median credit score for people getting a new mortgage was a stellar 770, according to the Federal Reserve Bank of New York. (Lenders typically consider a score above 700 to be a marker of future success for a borrower.) Almost 79% of homeowners with a mortgage have locked in a rate below 5%, a Redfin analysis of data from the Federal Housing Finance Agency found. In the history of rates, that’s a pretty incredible deal. And nearly 40% of homeowners don’t even have to stress about mortgage payments at all, according to census data — they own their homes free and clear.
Rather than facing a housing bubble, we’re staring down an entirely different crisis: a supply shortage that has regular buyers fighting just to break into the market. US homebuilders spent the decade after the global financial crisis building at about half the rate of the three decades prior, contributing to the housing crunch. Various estimates have pegged the national housing shortage anywhere between 2 million and 6 million homes. The supply constraint hit right as millennials, the largest living generation in the US, reached their prime homebuying years. Add in people’s sudden desire for a bigger house or a place of their own in the heat of the pandemic, and the recent surge in home prices seems less bubbly and more logical. The lack of inventory is the reason prices didn’t suddenly drop, even when mortgage rates shot up. Sure, buyers pulled back. But sellers pulled back even more, leaving the supply-demand imbalance in place.
“It’s a savagely unhealthy housing market,” Mohtashami told me. “But it’s also a market that just had too many people chasing too few homes.”
Staying high
It’s tempting to look for echoes of 2008 in today’s housing market. You might even be inclined to cheer on a crash in prices — all the better for everyone who feels locked out of homeownership. But cycles rarely repeat in the same way, Selma Hepp, the chief economist at CoreLogic, told me. Anything that could incite a housing crash probably wouldn’t leave average consumers in a position to suddenly pounce on all that excess inventory.
Fannie Mae now projects a modest 3.2% increase in home prices this year and a jump in home sales, along with a decline in mortgage rates. Goldman Sachs predicts a 5% rise in home prices. John Burns Research and Consulting doesn’t publish an exact forecast of home prices, but Palacios told me the firm expected to see a similar increase in the “low single digits.”
Perhaps the biggest threat to the housing market at large is a severe economic slowdown, one in which many people lose their jobs and can’t pay their mortgages. It’s notoriously difficult to estimate where the economy is headed, but right now, it’s roaring along, especially compared with other rich countries. Things aren’t perfect, but the vibes are definitely up. And even if the economy does take a turn, a run-of-the-mill recession probably wouldn’t be enough to topple the housing market. Things would have to get so bad that banks would be forced to walk away from the mortgage-lending space almost entirely, as they did during the foreclosure crisis. If the market is cratering and nobody can get a mortgage to put a floor on prices, “that’s where you get pretty meaningful declines in asset prices,” Palacios said.
There’s a silver lining baked into all this: Prices aren’t poised to drop, but the days of skyrocketing valuations appear to be behind us, Mohtashami told me. The housing market is far from balanced, but we’re at least heading in that direction.
After the past few years, the lingering fears of a sudden fallout are just a distraction from the bigger issues at hand. The bubble debate was fun; now it’s time to put it to bed.
James Rodriguez is a senior reporter on Business Insider’s Discourse team.
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When the Federal Reserve began jacking up interest rates in 2022, home sales cratered almost overnight; inventory dried up; the housing market “froze.” People who have mortgages with interest rates below 4 percent—which is more than 60 percent of homeowners—aren’t going anywhere. They’re not selling their houses. They’re staying put.
The current availability of homes for sale is about 36 percent lower than before the pandemic; this past October, home sales dropped to their lowest level in more than 13 years, and in November, the share of homebuyers looking to relocate to a different metro area was at its lowest level in 18 months. People who own homes have become so reluctant to move that they’re likely to pass up job offers in other cities, one study found.
If swapping a low mortgage for a much higher one is plainly undesirable, the way out of the problem—and into a new space—seems plainly obvious: renting. Now is a terrible time to buy a home, but renting would allow more Americans to relocate without becoming “house poor” at a 7 percent interest rate. A rental home could help a growing family break free of a too-small starter house. A national renting trend, in which owners put up their homes for rent and become renters themselves, could unfreeze the whole market.
“Why not just rent?” is a question I’ve asked myself (and my husband, and our real-estate agent) many times over the past couple of years, as we’ve tried and failed to sell our house and buy a new one. After a long day of touring gross, overpriced homes that would require thousands of dollars of renovation, all for double the interest rate we have now, I’d mutter, Why don’t we just rent a house instead of buying one of these dumps? Every time, they reacted like I’d suggested we live on an ice floe in the middle of the North Sea. Rent?
It turns out that deep cultural, regulatory, and financial incentives prod Americans toward the “homeownership ladder” and, once they’re on it, discourage them from hopping off. Although renting is often not any financially or psychologically worse than owning—in fact, it might be quite the opposite—renting after owning is just not something most Americans want to do.
It’s not that nobody wants to rent, of course. Demand for rental homes is healthy: In fact, rentals are becoming the new starter homes, as many would-be first-time buyers, who can’t afford to buy at today’s interest rates, rent houses instead. “Instead of moving from apartment to ownership, you move from apartment to renting a house and later on to ownership,” says Nicole Bachaud, a senior economist at Zillow.
But about 70 percent of people who sold a house recently also bought a home, according to a report by Zillow. (That doesn’t mean the other 30 percent all rented—they might have moved in with family, moved into a retirement home, or moved into another home they also own.) “Very, very few people make that transition back into renting,” Lu Liu, a finance professor at the University of Pennsylvania, told me.
Say someone does currently own a home at a low mortgage rate and wants to move. The first question would be what to do with that home. Financially, the ideal is to hold on to that house—and rate—for as long as possible. “Giving up a 3 percent mortgage in a 6.5 percent interest-rate environment is the equivalent of giving up 15 or 20 percent of home value,” Chris Mayer, a real-estate professor at Columbia University, told me. Nevertheless, renting your home out can be expensive and annoying. “You get a call at 7 a.m.—the hot-water heater is broken,” Mayer said. “Being a landlord is not that much fun or that easy.”
What’s more, the federal government, through regulations and incentives, practically begs Americans to buy homes, not rent them: Homeowners benefit from a slew of tax deductions that aren’t available to renters. Rents can increase, but fixed-rate mortgages never do. “During the pandemic, house prices went up by a lot, and that was very painful for renters and people who are trying to get onto the housing ladder,” Liu said. “But it wasn’t necessarily a problem for people who were already owning a house.” That means homeowners are shielded from inflation, their house payments a relic of the year in which they bought their home. Even if a current homeowner did opt to rent instead, they might find that typical rents are now even higher than their mortgage payment.
It’s not just fixed rates that make homeownership feel more stable than renting. In most cities and circumstances, a renter can get kicked out by a landlord who wants to move back into their house, or who simply wants to charge more rent. If you have kids, that raises the stakes of renting: What if they’re in a school they love, and the landlord decides you need to vacate?
Finally, homeownership has a firm hold on the American psyche—a preference that isn’t entirely rational. Though owning a home is often a good way to build wealth in the long run, in the short term, owners are on the hook for any repairs the home needs, which can be extremely costly.
Homeowners aren’t necessarily any happier than renters—one study of women in Ohio even found that homeowners are more miserable because they spend less time with their friends. But along with parenthood and marathons, it seems like one of those things that doesn’t make us happy but that we do anyway. “Homeownership in America is an ideal,” Daryl Fairweather, the chief economist of Redfin, told me. “And the ideal is that you don’t have a landlord, and you are the king of your own castle.” People want to paint the walls whatever color they wish—even if we all end up painting them Mindful Gray. We just want the option.
Perhaps more Americans would rent if renting weren’t so precarious. In countries where protections for renters are stronger, more middle-class people see renting as a long-term option for their family rather than as a temporary solution in their 20s. Take Germany, where only about 45 percent of households own, compared with two-thirds in the United States. There, landlords can’t terminate a rental contract for just any reason, and it’s extremely difficult for landlords to raise the rent. As a landlord you might “like to have a long-term renter leave, but you can’t,” Leo Kaas, an economist at Goethe University Frankfurt, told me. Rental contracts are open-ended, Kaas said, and that “makes it much more attractive for individuals in the first place to rent.” Some Germans move into low-income housing and stay there for years, even as their incomes rise and they technically no longer qualify.
For now, my husband and I have reached a détente in which I stare at Zillow rentals and he stares at Redfin’s for-sale listings. Neither of us much likes what’s on offer. So far, we’ve been doing what other homeowners have been doing: not moving.