We are now in the midst of a modest housing recession which started in March 2018 and probably has another year or two to run. We got the latest bad news yesterday when March Existing Home Sales showed at a heart-stopping decline of -4.5%.
Not to worry though. There will be an excellent chance to sell your residence at an insane vastly inflated price at the next bubble top sometime around say…. 2030.
Let’s back up for a second and review where the great housing bull market of 1950-2007 came from. That’s when a mere 50 million members of the “greatest generation”, those born from 1920 to 1945, were chased by 80 million baby boomers born from 1946-1962.
There was a chronic shortage of housing, with the extra 30 million buyers never hesitating to borrow more to pay higher prices. When my parents got married in 1949, there was such a severe housing shortage that they were only able to land a dingy apartment in a crummy Los Angeles neighborhood because he was a Marine.
Since 2005, the tables have turned. There are now 80 million baby boomers attempting to unload dwellings on 65 million Generation Xers who earn less than their parents, marking down prices as fast as they can.
As a result, the Federal Reserve estimated that 35% of American homeowners either had negative equity, or less than 10% equity at the last market bottom in 2011. This amounted to zero after you take out sales commissions and closing costs.
That dismal figure reached a high of 42 million homes eight years ago. Don’t count on selling your house to your kids at a premium price, especially if they are still living rent-free in the basement.
The good news is that the next bull market in housing started in 2012. That’s when 85 million Millennials, those born from 1988 to 2012, start competing to buy homes from only 65 million Gen Xers. By then, house prices were a lot cheaper than they were five years earlier, in many cases by half or more.
Also exacerbating matters was that the 50% of homebuilders that went under during the 2008-2009 crash never came back, creating a long term structural shortage of homes.
Going forward, the residential real estate market will be facing major challenges.
Fannie Mae and Freddie Mac will eventually disappear, meaning that the 30-year conventional fixed rate mortgage will cease to exist. All future home purchases will be financed with adjustable rate mortgages, forcing homebuyers to assume interest rate risk as they already do in most of the developed world. In an endlessly deflationary world, this could be good news.
With the US budget deficits exploding to record levels, the home mortgage interest deduction now capped at loans of only $500,000, and local taxes no longer deductible, we now have a new drag on home prices.
This is why the rate of price appreciation in the S&P Case Shiller CoreLogic National Home Price Index peaked on virtually the day the last tax bill was passed in 2018. Clearly, the administration thinks your home is too valuable and has taken action to address that mispricing.
For Millennials just graduating from college now, this is a best-case scenario. It gives them years to save up the substantial down payment banks will require. They can then swoop in to cherry pick the best neighborhoods at the bottom of the next recession.
People will no doubt tell you that you are crazy, that renting is the only safe thing to do, and that home ownership is for suckers. That’s what people told me when I bought my first New York coop in 1982 at one-tenth its current market price.
Just remember to sell by 2030, because that’s when the next intergenerational residential real estate collapse is expected to ensue. That will leave “generation Z”, holding the bag, as your grandparents are now.
Rate of Home Price Appreciation Since the Tax Bill