Is housing heading for trouble?
The stock market has tumbled, and bitcoin has stumbled. But the one financial asset that has held up — so far — is the price of the family home. In fact, in the last year the Zillow Home Index, which measures the price of the middle tier of U.S. homes, has risen 20.7%. Plus, you got to live in your home while it appreciated.
Of course, the housing market was subsidized by very low fixed interest rates for many years, far lower than the rate of inflation. And now that rates have spiked upward, it's not clear how home values will hold up.
I remember counseling readers not to just “walk away” from homes they couldn’t afford during the foreclosure crisis a decade ago. I warned they would ruin their credit and never get back in the game, but many gave up on home ownership and just wanted to rent.
It’s difficult to remember that a dozen years ago America was so “oversupplied” with houses that new homes in some parts of the country were being demolished!
Here’s a quote from a prominent real estate blog in 2009 describing the situation in California:
“The homes were once owned by developer Mathews Homes and picked up by Guaranty Bank in Irvine via foreclosure. Guaranty Bank in Irvine is paying for the destruction of them. (Four) model homes and 12 almost finished homes are being demolished. ... Banks are looking at their huge shadow inventory of homes and the huge wave of REOs (real estate owned) they are working on right now and concluding that the value of these unfinished homes is too low to bother selling.”
Today you can’t get a contractor to install new windows — assuming you can find the windows — but back then construction workers were scrambling to find jobs. The same blog commented, “So many contractors are out of work right now that they are bidding jobs at (half) the rates of 2006."
For those with longer memories, there was another historic housing crunch in the early 1980s. Mortgage rates as high as 15% caused home prices to fall dramatically since borrowers could no longer afford the monthly payment. Realtors protested Federal Reserve Chair Paul Volcker’s high rates, sending keys to Washington to dramatize their plight. But those who could step into the market at that point were able to buy bargains.
That 1982 crunch was a repeat of the 1972-74 housing bust, when rising oil prices triggered inflation and higher mortgage rates. The Nixon administration's wage and price controls, instituted in 1971, failed to stop inflation or higher mortgage rates, leading to a real estate bust. That housing crisis led to the 1974 “Whip Inflation Now” buttons issued under President Gerald Ford.
That’s the housing cycle: historically, boom follows bust follows boom follows bust. Over the long run — if you could ride it out and keep making mortgage payments — the family home has been a spectacular investment, even adjusted for inflation.