Housing MarketReal Estate

What would it take to crash the housing market?

If you're saying 2008 all over again, you're already wrong

HW+ housing crash

Home prices are skyrocketing, housing inventory is at all-time lows and homebuyers have to contend with multiple bids. Can this last? No, it can’t. In time, markets always find balance and balance is a good thing. But, that doesn’t mean housing is going to crash.

One of the reasons that I moved into the “team higher mortgage rate” camp is that what I saw in January, February, and March of this year was so unhealthy that I labeled the housing market savagely unhealthy.

I set a specific home-price growth model for the years 2020-2024 that said if home prices only grew at 23% during this five-year period, the housing market would still be OK, given wage growth. Obviously, my home-price growth model got smashed! With where prices were heading when mortgage rates were under 4%, we were looking at 35%-40% cumulative home-price growth in just three years.

That isn’t a good thing, so I want to see a cool down in prices. However, a cool-down in prices is not the same thing as a housing crash. Let’s take a look at what it would take to crash homes prices in America.

A few things in life are constant: the sun rises, we will all die someday, and every year people say housing is going to crash. Also, people always say we are about to go into recession and that the dollar is going to collapse any day now! I believe in economic models and I’m not going to throw up a few charts without forecasting models, because I want to show the pathway for these things to occur. We have to take everything one day at a time and add new variables when appropriate.

After writing the America is Back recovery model on HousingWire, I wrote an article on my blog about what it would take to crash home prices on April 10, 2020. Economic vision is critical when forecasting what would happen back then, because those were some of the darkest economic days I can remember. Still, some of us had faith in our economic models.

COVID-19 happened right at the start of 2020; this is also the period in time when i had forecast a five-year once-in-a-lifetime period for housing to start. The years 2020-2024 were always going to be different from 2008-2019. As it turned out with COVID, we had the most significant housing demographic patch ever recorded in history, with the lowest mortgage rates ever recorded, and homeowners, on paper, have the best financials ever. 

With that said, let’s look at what needs to happen for home prices to to crash. Here’s a point-by-point comparison of what I said before April 10, 2020 and where we are today.

Inventory velocity

April 10, 2020: We needed a lot of inventory, fast

The velocity of inventory rising in the next three months is limited. It should increase with a longer duration time to sell a home. However, unlike in 2006 when demand was getting weaker and inventory was above six months, it’s the opposite now during the B.C. (before COVID) stage. However, for A.D. (after the disease), this is why lockdown protocols have to stay on for much longer. This will then mean that demand gets hit for a longer duration.

April 2022:
Inventory has not recovered.

Inventory collapsed in 2020, 2021 and 2022. We still have negative year-over-year inventory data, which is why I have labeled this is a savagely unhealthy housing market. My goal is for the total inventory to get back to 1.52 -1.93 million — once that happens, I can take the unhealthy label off the housing market.

We need prices to fall this year, next year, and in 2024 to ensure we are under 23% cumulative price growth for 2025. With inventory collapsing, we are in big trouble.

We are in the part of the year that inventory typically increases. We want the inventory to be positive year over year, not negative! If you’re looking for a housing crash, you need inventory to skyrocket with no demand bidding. Monthly supply data being at 1.7 months isn’t going to do that. As you can see above, the monthly supply in 2006, 2007, 2008, 2009, 2010, and 2011 was above 6 months on average, running at 8.71 months during this six-year period.

April 10, 2020: We had cycle highs in demand with the inventory at cycle lows.

Inventory levels during this time of lockdown protocols start from a much different spot than in 2006. Also, the demographics for housing look solid as the biggest age group in U.S. history are ages 26-32, and the first-time median home buyer age is now 33.

April 2022: If anything, demand is higher and inventory is lower.

We are currently at 1.7 months, so if you’re looking for housing to crash, you will need to see a lot more total inventory and monthly supply data to skyrocket in a short time.

April 10, 2020:
Many people predicted a crash in housing due to forbearance, which would require a lot of distressed sales.

Due to timing, this would have to be a 2021 story. Foreclosures are a long process. The government is going to try its best to prevent as many foreclosures as possible. Even if you see a noticeable rise in delinquencies, this doesn’t mean distress bulk foreclosure buying is about to happen in one to two months. Due to the forbearance factor in 2020, I would keep an eye on this in 2021 for sure. The legit high-level risk homeowners are 2018/2019 and 2020 FHA homebuyers because they lack selling equity, and they would make up that smaller portion of sub -60 FICO score home loans bought in this cycle.

April 2022: There was no forbearance crash.

The forbearance crash bros whiffed, not in a small way, but in the most prominent fashion ever recorded in history. Not only did the epic housing crash they called for not happen, home prices overheated in 2021 so much that the housing market became really unhealthy.

I warned about this on Bloomberg Financial in January of 2021. Over the years, a considerable portion of my economic work has revolved around housing credit. Having a dull housing debt market was the best thing for the U.S. housing market, and we should never ease lending standards to try to facilitate demand. Lending standards are already liberal enough, so we don’t need to go down that avenue. 

Late cycle lending is always a risk in the lending industry. People who buy a home late in an expansion, with a low down payment purchase, into a falling marketplace risk a short sale or foreclosure. Outside of that risk, everything else is fine.

Again, what happened in housing from 2002 to 2008? We had a credit boom. Credit worsened from 2005 to 2008. Then, after all that, the job loss recession started. Our market is much different than that 2002-2008 period.

The cash flow of Americans is better than ever right now: They have had a fixed low debt cost over the years, refinanced multiple times and all as their wages have been rising.

So, the bulk of the housing stock of owners is in great shape. You don’t have to worry about a mass foreclosure coming from them.

Since mortgage debt is the most significant debt in America, household debt data looks great; these two charts were updated this week.

On top of all that credit payment data which looks great, the nested equity position looks fantastic.

From the great Len Kiefer, deputy chief economist from Freddie Mac:

If we see credit stress in the data, we will be able to talk about it. However, if it doesn’t happen until the next recession, late-cycle lending is really your only risk. And who knows, maybe the government will run an abridged version of forbearance from now on to make sure families’ lives aren’t destroyed.

Time will tell on that. However, late-cycle lending is always a risk for short sales and foreclosures. This would be forced selling, unlike the unhealthy forced bidding we have now in the current housing market. Again, first-world problems for sure.

As someone who wants to see home prices fall, I am keeping an eye on all this. However, if you’re waiting for home prices to get back to 2012 levels like the Housing Bubble Boys 2.0 have been saying since 2012, the following is what you would need:

1. Inventory increases on a massive scale, over six months of housing supply with duration, and total inventory levels skyrocketing as we saw from 2006-2011.

As of right now, I am praying every day that inventory just gets back to 2019 levels

2. Demand to drop and drop fast, with no market bid for homes, allowing inventory to rise at a faster pace.

I haven’t seen too much difference in the year-to-date trend in purchase applications trends. After making some COVID-19 adjustments to this year’s data, which I believe ended in mid-February, I can come up with only a 2%-4% impact year over year so far from the start of the year.

For example, two weeks ago, purchase application data was up 1%, and this week it was down 3% week to week. The year-over-year data is down 9% this week, but remember, this data line has been negative since June of 2021 on a year-over-year basis.

Due to the rapid home-price growth in 2020-2022, I believe higher rates should cool down the housing market. Don’t forget the mortgage buyer is the most significant homebuyer out there; they matter the most. I believe some people who say that iBuyers and Wall Street investors are holding up the housing market don’t understand they’re making a super bullish thesis that housing can’t ever fade.

Higher rates have always created more days on the market and cooled down price growth; it should not be any different now working from some extreme home-price growth levels.

However, if you’re looking for home prices to crash, you need purchase application data to be down 20%-30% year over year for some time, with no recovery like we saw at the end of 2006 toward the bottom end trend between 2010-2012.

For housing to crash, you would also need rates to stay high, which means you don’t want the economy to go into recession and have bond yields head lower again. You would have to have housing to crash first, then have a job loss recession such as what we saw from 2006-2008. Good luck with that, by the way.

The sustainability of the housing market is critical, so home-price growth needs to cool down. Since I lost my five-year cumulative 23% home price growth model in two years, I hope the market takes a breather.

As I wrote in 2020:

These are dark times. But even in dark times, we are preternaturally prepared to see the light at the end of the tunnel. We learned in the human physiology class that the photoreceptors of the human eye could detect a single photon of light. While it may not be until nine or more photos hit the retina that we perceived light, we detect before we can perceive. Likewise, if we are diligent, we will be able to identify the return of hope and light coming back into the American economy before it is perceived by all those poor masked souls around us.

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