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Problems Ahead in Housing?

I just noticed this article which covers some issues the mortgage market is currently having—rates have moved sharply higher in the last week.

Here is my observation in this area of Minnesota. Many, many houses are sold with FHA or USDA loans—mostly with little to no money put down on a down payment. Realtors were many times telling folks that ‘yes rates are high’, but ‘when rates come down to normal rates you can refinance and lower your payment’ – implying 3-4% rates were normal.

Us ‘old folks’ know that 3-4% were abnormal rates–the exception, not the rule. When you have a giant sized portion of FHA and USDA loans you are in dangerous territory–when you have no ‘skin in the game’ so to speak just walking away is pretty darned easy.

We’ll obviously have to see where rates go, but the higher they go not only will we see a slower housing market, but the level of foreclosures will begin to rise. High rates for a few months–no big deal. High rates for a year or two–trouble.

31 thoughts on “Problems Ahead in Housing?”

  1. Reading about housing affordability I came across this article. In part provides a good explanation:
    “The fact is that people simply aren’t buying the same houses in 2023 that they were buying in 1955. The houses are bigger. In 1950, the average new home sold for $82,000 in today’s dollars. It had 938 square feet. Again, that’s 938. That’s a single story that is 30 feet long and 30 feet wide. We’re talking about the size of a single-wide trailer home here. I think my garage is larger than that, and there are two houses within a stone’s throw of mine that have larger garages.

    In 2023, the median home size in Utah is 2,800 square feet. (It’s 2,014 overall in the US). That’s 2-3 times the size of what a home used to be back in 1955. We live in bigger houses because we have bigger families now, right? Nope. The average family size in 1955 was 3.6. Now, it’s 3.1. Sure, we’re a little fatter, but that doesn’t account for needing 2 1/2 times as much space per person.

    In addition to size inflation, there is a massive difference in quality inflation. Homes are simply much better built now with far nicer amenities. We have hardwood floors and tile where there used to be linoleum. We have higher quality carpet. We have higher quality paint. We have baseboards and light fixtures and granite countertops and stainless steel kitchen appliances. It all adds up. A television was a prestige item at the end of World War II. By 1960, nine out of 10 homes had one and most of them were a foot wide. How many are in your home? We’ve got three, ranging from 4-10 feet wide. I bet your house has air conditioning, central heating, a dishwasher or two, and a washer and dryer that you actually keep inside, doesn’t it?

    My point is that houses are bigger and nicer than they used to be. No wonder most people can’t afford them.”

    1. I tend to think that most Americans under 45 do not know much history and on top of that do not even know what life was like before the 1970s. There are always exceptions but for the most part they think of the USA after WWII until the 1970s as some mystical place where everyone did well and was solidly middle class. They fail to realize that poverty during the 1950s was higher than compared to today. 1960s higher than today. I suppose it is convenient to ignore the problems minorities had, female led households, and dirt poor white people in rural areas. Should we even mention what life was like leading up to the great depression and after?

      It is almost like they got their whole education about the past via Hollywood. That everyone was a Howard Cunningham from Happy Days. Conveniently forgetting that Howard owned a hardware store, hit financial problems, and had to rent the place above his garage to Fonzie.

      I have no idea what to think anymore. The lack of perspective is crazy. That is why it is so refreshing to see immigrants from poor countries make it here in the USA. They truly understand what poverty is as they have lived it. In full technicolor.

      As for houses. I just went to zillow and searched for Boston, MA. Yup. You can buy those 1940-1960s small houses right now for approx 500K. You too can live in a Boston neighborhood but they are too good for those small houses in the lesser areas of the city. They want MORE but cannot afford it and then complain. Where is my 3000 sq ft modern home in a major city everyone else wants to live in? That same house for 500K costs about 75-100K in fly over parts of the country. But that is the city for you.

      1. FC, So true. In my childhood we would drive thru rural TN and KY and I recall shacks everywhere. Newspapers were used as insulation. No indoor plumbing, water was from a well then carried to the house. Bathrooms were holes dug in the ground with a bench with a hole for human waste to fall. This was in the 60’s. The rural south was unbelievable. I try to explain this to my sons but I don’t think they comprehend.
        It seems facts no longer matter.

        1. My grandfather lived in a three room dirt floored shack which had no electricity or insulation with his wife and 5 kids. This was during the Great Depression and he made $1/day breaking mustangs if it was a good day.

          My mother remembers how the kids had to be kept away from him when he was doing that lest they learn a bunch of new words!

          Most days he would leave the house and look for work to try to scrounge up what he could. If there was nothing that paid then he would often work for free to help out neighbors. Most of what they had then my grandfather made, including the table and woven chairs.

          What a life! They eventually moved to the city and he ended up working for what became ORNL during the war effort. It is hard to believe how far the family has come in just two generations since then. Here’s hoping the next two see equal progress and they marvel at how rough we had it!

    2. TN,
      Absolutely true here. Drive through some of the older areas with small 1000-1200 sq ft houses and many are being enlarged and some just get demolished and replaced with 2500-3000 sq ft houses.
      The news keeps publishing articles about houses not being affordable but don’t mention how large they are. It’s been a long time since I’ve seen “starter” homes being built.

    3. The foundation for so much of this can be found in debt and financing.

      FNMA, FHLMC and private lenders over the years created an evolving path to homeownership by weaponizing potential buyers with more and more creative ways to execute a transaction – with debt. This created an enormous bounty to be absorbed by the housing industry – driving prices higher and higher.

      Down payments became smaller, two-earner households became a competitive necessity for many, variable rate loans were introduced to get folks in the door, negative amortization loans to lower the qualifying payment, then home equity lines of credit so people could buy the things they “deserved.” All flash/no cash became more common, and not able to afford to go out anymore, instead many sat at home on weekends staring at their upgrades.

  2. Dang – I toyed with the idea awhile – then dove in back in 2021, to take my nearly paid off house and do a cash-out mortgage at 3.000% on it. I am rural but in a golf course community in eastern MD so houses here go for the $400K range. I took enough where my mortgage is $1180/month which is about half what I could get in rent.

    Rent here, even in run-down places cost more than my mortgage! I took all that cash and invested and am getting 6-7% yields. I did the exact OPPOSITE of what most people ready to retire do – that is, pay off their house. LOL – for me, the best business decision was to take advantage of that generationally-low mortgage rate. Of course, I go a bit lucky that very soon after, rates rose and I could roll into some nice income situations. I always have the option to take that cash and pay it off but, why would I at this point?

    It is going to be interesting what happens now that rate on mortgages are staying around 8%.

  3. A problem if housing prices drop sharply like they did in 2008. Until prices drop defaulters won’t cause as much damage there is some equity in the houses due to housing price increases.

    1. I have a home renovation business, the foreclosures have picked up significantly. Almost a 75 percent jump… i operate in Tennessee, North Carolina and New Hampshire…. I don’t remember this many in 2008…. I pulled my bonds from SACH and will steer clear of the commercial and residential real estate common stocks for the time being….

      1. Really? I’m in Hartford county CT and low quality 600k homes are flying off the market. Two years ago these homes were in the low 400 range. They say Boston and New Yorkers are coming this way….

        It’s frustrating as someone who is looking to buy

      2. Troy, Just a month or two ago home builder stocks such as GRBK, HOV, PHM and DHI were hitting 52 week highs in anticipation of the feds cutting rates. Things are gearing up for the spring and summer building rush and buyers lining up. If rates stay high you will see builders trying to sell existing inventory and only building as a home is sold. Buyers will see the slowdown and say if I wait the prices may come down some more.
        I had forgotten one of the subtle indicators of a slow down. You just got me to thinking and I realized this past week more and more of my customers sales people had been asking if we are busy, of course I ask them in return how busy have they been.
        Here is something to think about, the last couple pull backs in residential building there was still commercial building going on that supported building suppliers. Will it be the same this time around?

        1. Construction should continue as there are multiple years of funding from the bipartisan bills for infrastructure and chips.

          Should be shifts in what material will be needed though.

  4. What is the real effect of increasing rates? Investors like it; most homeowners have fixed mortgages; most businesses borrow money based on rolling over existing debt (no choice on rates) or new business borrowing for anticipated business activity ( not rates). So increasing rates affects credit card borrowers and new home buyers, a relatively small share of the economy. No wonder I am still waiting for those long term lag effects to constrain the existing boom.

    Our economy has changed a lot in the last 40 years and it’s not as interest rate sensitive. Meanwhile, Congress and the White House are stimulating the economy with record deficits.

    1. Willis and Cao (2015) argue that the economy has become less sensitive to monetary policy. https://www.kansascityfed.org/documents/604/2015-Has%20the%20U.S.%20Economy%20Become%20Less%20Interest%20Rate%20Sensitive%3F.pdf
      Here’s the lead paragraph:
      “Over the past three decades, the U.S. economy seems to have
      become less responsive to monetary policy. Slow recoveries
      followed recessions in 1990-91, 2001, and 2007-09, a contrast to the much more rapid recoveries that followed pre-1990 recessions. These slow recoveries occurred despite sizeable monetary accommodation from the Federal Reserve, primarily through reductions in short-term interest rates.”

      Note that this isn’t exactly the same thing as “the economy is less sensitive to interest rates” (despite the title of the article) because the Fed can only directly control one end of the yield curve. In particular, the article is about the impact of cutting short term rates, not the impact of raising short term rates.

      A more recent article partially addresses the impact of increased long term rates. Sinha and Smolyansky (2022) https://www.federalreserve.gov/econres/feds/how-sensitive-is-the-economy-to-large-interest-rate-increases.htm examined the “taper tantrum” of 2013 and concluded that a 100 basis point spike in long-term interest rates had no observable effects on the overall economy. However, this doesn’t compare the 2013 event to earlier periods, nor does it provide much insight to what would happen with a larger increase in long-term rates.

      If you’re aware of research that addresses this point quantitatively, please link to it. I’m guessing there are a lot of readers at this site who would be very interested in learning more about this. I certainly am.

      “So increasing rates affects credit card borrowers and new home buyers, a relatively small share of the economy.” It’s worth thinking about the downstream impacts. When consumers can’t buy as much due to maxed out credit cards, growth slows. Similarly, when people aren’t buying as many new homes, builders stop developing new sites and just finish the ones that were already started. That ripples its way through the economy.

      Note: although I took some economics and finance classes last century, I don’t pretend to be an economist. It’s always interesting to read different points of view.

      1. Thank you. I have no academic cites but I have been listening to recordings from Michael Howell ( I haven’t started his Capital Wars yet) and various speakers on Fiscal Dominance. Howell emphasizes his quantification of liquidity flows and his own notion of a liquidity/ business cycle. He makes the strong point that until recently, the Fed has been stimulating the economy by shedding repo liabilities in a greater amount than QT. He asserts that changes in interest rates have little effect on business activity especially as the economy has gotten larger and percentage growth declined. I do remember research on the Street from George Salem who showed that business loan demand is a function of economic expectations and not interest rates.

        Howell’s recordings seem like a lot to swallow but warrant some attention.

        The Fiscal Dominance approach seems more interesting and applicable. See Fiscal Dominance and the Return of Zero Interest Bank Reserve Requirements by Calomiris (published in the 4th quarter of 23 at the St Louis Fed) This approach proves that the current huge deficits have effects that swamp the effects of monetary policy. (His solution, however, strikes me as an extreme measure to reduce the deficit by reducing interest on the debt.)

        In the meantime, the Fed’s efforts with interest rates seem to affect only a fraction of the economy and at a disproportionate level.

        1. Repo action was due to low issuance of short term. (less than 180 day t-bills from US Treasury) While people where removing money from bank accounts and going all in with money market funds (comprised of 100% short term treasuries).

          Removal of debt sealing has enabled treasury to run short term printer 24hours a day to correct this imbalance.

          1. Right, it was a bipass of the debt ceiling. However, undoing that facility, redeeming the Fed’s liabilities has unleashed a wave of $2T of cash which counteracts QT. So much for restrictive conditions. In fact, Jamie Dimon is starting to complain now about restrictive conditions now that the unwinding of the repo’s is over. QT is starting to bite a little?

            1. Brent Johnson authored the dollar milkshake theory. It’s not as dramatic as he has predicted.

              Essentially US dollar has strengthened versus other currencies of the world. Trade/Debts are denominated in US dollars (Eurodollar system). Countries throughout the world are chasing dollars at ever higher cost while their reserves (Treasuries) are getting liquidated at 20-40% losses. Meanwhile US Fed is removing dollar liquidity by performing QT (removing dollars). While foreign governments have started an easing cycle. Essentially their liquidity injections and sales of treasuries at gift (20-40% losses) are easily filling what QT is removing. QT has no effect in a high interest environment.

              Second idea. If you look at the average North American consumer savings rate pre-pandemic hovered around 5-7%. post pandemic this dropped to 3-4%. Consumers in North America have gone YOLO (You only live once). While every other major economy on planet earth has increased its savings rate. Leading to an outperformance in North America.

              Believe it or not North America right now is pounding on all 8 cylinders vs the world.

  5. Not sure if its related but I’ve started getting auction notices regarding residential properties in California, Oregon, and Washington. What stands out is the same lender (Umpqua Bank) is involved in all of them. Umpqua merged with Columbia Banking (COLB) last year and the combined regional bank has struggled somewhat since then. Colb reports Q1 earnings in about two weeks and I’ll be interested to see how well they do.

    1. Citadel, I had several people on that other site talking up COLB raving about a 6% yield on a bank stock common.
      Tim, nothing changes. Just a new generation,, being talked into something by a mortgage sales person who gets their commission and isn’t concerned about whether the borrower can afford the house or the loan. Same with car sales and the banks still doing those loans.

      1. Charles…believe it or not one of the REO properties going to auction next month is in Marin County, albeit with a 500K+ reserve. I’ll be interested to see if that one sells.

        1. Citadel is it still Umqua or maybe RWT ? I believe RWT offers jumbo loans and keeps some but packages the rest for resale.

          1. Yes, the Marin County REO is with Umpqua…it looks like COLB put a tranche of their residential REOs up for auction on May 15th. There’s one at the north end of Clear Lake, and another in the Redding/Shasta area also. This auction company mostly handles larger commercial properties, incomplete residential development projects and timber tracts, so it was a bit surprising to see this many residential REOs going to auction at one time . My guess is COLB decided to spring clean its residential loan portfolio after the merger.

  6. I am in a HCOL state of MA. I also wonder how families will handle these current home purchases even with 20% down if either spouse loses their high paying job for any length of time. Pretend each person earns 125K. They buy a 850K home with 20% down. That means they are borrowing 680K at 7-8%. That is almost 6K per month once you add in taxes and insurance. 72,000 per year just to pay for that home. That is with zero other debts, car payments, etc..

    Not sure what to think as I sit here and type this in my more modest home bought several years ago and completely paid off. It is a very risky move to make that decision without a huge cushion for emergencies.

    1. fc,
      That’s exactly right. I know young families who are doing just that, borrow a ton of money with even less than 20% down. The thing is that available inventory is very limited in the area ( Chicago suburb in this case) and they feel happy to be able to pay whatever price because they see prices rising continuously and want to grab something before it get even more expensive.

      1. Depending on the location, property taxes and home insurance are a huge additional burden. Home buyers need two substantial incomes to make it work.

        Usually doing a refi when rates drop is a great move, but it doesn’t work with negative equity. Buyers shouldn’t assume their home purchase ongoing costs will magically lighten.

        Some seniors are getting priced out of their homes by rising property taxes. California is an expensive state, but when you factor in Prop 13, the picture looks a lot better.

  7. Yep ~ Mortgage rates at YTD highs as posted on RIA yesterday, 8% 30yr fixed may get retested soon.

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