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Housing’s bubble bursts — again! What did we learn?

This is my last “Bubble Watch” column. Since May 2018, the trusty spreadsheet has dug into trends to see if any economic or housing market troubles lay ahead. With trouble officially here, a “watch” is no longer required.

Buzz: The bubble burst. Again.

Source: Home values face significant dips as rising mortgage rates and economic unease crush affordability and house hunters’ will to buy. Most notably, the California Association of Realtors forecasts a 9% drop in values statewide for 2023.

The dissection

Lessons can be learned in every cycle.

The pandemic played havoc with the broad economy, but surprisingly, it served as a boost for housing. A buying binge emerged as folks sought larger living quarters and real estate investments while mortgage rates hit record lows.

Let’s look at what the housing market taught us recently, noting some early warning signs you might have missed …

Price problems: When mortgage rates are lower than inflation, be scared.

April 2021 saw inflation — 4.2% and a 13-year high — top the average 30-year mortgage rate, which was at a near-record low of 3.1%.

This kind of inversion hadn’t been seen in 41 years. Mortgages, on average, run 4 percentage points above inflation.

This hinted inflation was a growing problem. Rates would rush higher as the Federal Reserve used pricier financing in a so-far failed attempt to chill an overheated economy.

Even in September 2022, the Consumer Price Index was surging by 8% a year. The 30-year mortgage rate had only surpassed 6%, effectively crushing homebuying affordability.

Not so funny? When homebuying becomes fodder for comedians, be nervous.

The housing market has a bad habit of getting too popular. In February 2022, a Saturday Night Live TV skit parodied the housing insanity with a fake ad for Zillow’s online home-search services.

The skit suggested online house-hunting was a new amorous thing. At the same time, two public opinion polls suggested searching for homes was more popular than sex.

I gave these developments six “stars” on my five-star bubble-warning scorecard.

Choice words: When somebody important says “bubble,” take it seriously.

In March 2022, researchers at the Federal Reserve Bank’s Dallas branch released a report saying ”house prices appear increasingly out of step with fundamentals.”

The warning was dismissed, shrugged off as overstating the market’s modest risks. Even the report said the “fear-of-missing-out wave of exuberance” wouldn’t be a repeat of the bubble-bursting crash of the 2000s.

But report author Enrique Martínez-García told Fortune magazine: “This might be a housing bubble. The evidence suggests it looks like a housing bubble. A little bit like a duck. It walks like a duck, it looks like a duck, it certainly might be a duck.”

Click power: Be careful what you wish for.

Nobody enjoyed running around town shopping for homes. Online home searches dramatically improved the house hunt.

Lockdowns forced home touring to go virtual. That change greatly enhanced a house hunter’s ability to screen ownership possibilities with a few clicks. So we now have a more efficient marketplace.

But efficiency cuts many ways, including pricing. So expect faster ups and downs. And that change is permanent change.

Slippery supply: Are speedy sales just buyer enthusiasm or business performing better?

The pandemic limited how many homes listed for sale were found in traditional listing databases.

Thanks to better technology, owners no longer need to put a home on the market to get pricing research. Computer-aided valuation models will give you a solid guess.

So supply is now dominated by serious sellers. Historical high levels of listings seen years ago won’t be easily replicated.

The resulting short time between a listing and a sale seems more about improved logistics than increased buyer desires.

Poor data: Let’s be honest. We’re all guessing.

The very first Bubble Watch in May 2018 dismissed worries that weak new-home sales data was a bad omen. Why? Those stats are a crummy estimate of the selling activity of builders.

Housing data is far from perfect. Most benchmarks track only slices of supply, demand, sales or pricing.

Who’s buying? Who’s selling? Are they homeowners, investors or second homes? We only have rough guesses.

And there’s another giant hole in knowledge — mom-and-pop landlords. We know almost nothing about that half of the rental market.

So digest any analysis — even from yours truly — by noting the statistical shortcomings.

The 5% barrier: The tipping point was in the rear-view mirror.

In 2018-19, mortgage rates neared 5%. Home purchases and price appreciation essentially stalled.

In 2018, the Fed worried about a hot economy and went into rate-hike mode. The next year, the Fed admitted to overreacting and reversed its rate policy.

This period foreshadowed the housing market’s struggles with rates at 5% or higher.

And that Fed flip-flop may have led some folks to believe the central bank wouldn’t aggressively fight 2022’s inflation woes.

Building blocks: Builders may be a small niche of sales, but they’re definitely worth watching.

In January 2022, a widely watched monthly survey of builder sentiment turned negative. It has since fallen every month in 2022.

CEOs see sales cancellations, declining foot traffic at projects and a need to discount. The builders’ trade group says we’re in a “housing recession.”

Fed follies: Don’t trust the central bank … but you can’t ignore it.

In 2005, then-Fed chairman Alan Greenspan told Congress it was only “froth” in bubbly housing markets. The ensuing housing debacle made “froth” a massive understatement.

In the pandemic era, the Fed clearly misread “transitory” price hikes that were actually serious inflation. Meanwhile, the central bank’s hope that historically cheap money would let housing be an economic foundation did work — for a while.

With that track record, who do you want stewarding the economy? Congress? The White House? Or simply the “free” market?

2008: “It’s different this time” is always true.

Industry gurus correctly say that 2022’s market is nothing like the mass stupidity of the mid-2000s, when the previous bubble burst.

Yes, mortgage approvals were of laughably poor quality in the early 2000s. When the market lost that boost, it cratered.

Yes, the pandemic era’s mortgages were high-quality loans. But they were made at “bargain basement” pricing, thanks to the Fed’s temporary generosity.

Housing’s new challenge is recalibrating to “full-priced” financing that’s deeply pruned a house hunter’s buying power.

What’s next?

The surprising housing swings of the pandemic era should teach humility to any prognosticator.

Let my trusty spreadsheet provide a few clues about the future using the California Realtors’ median home price, which.peaked at $900,000 in May.

When the burst bubble in the 2000s, the statewide median tumbled 59% from 2007’s $594,500 high. It took 11 years for a new record price to be set.

But the lesser-discussed bubble bursting of the 1990s cut prices by 20% from 1991’s $211,000 peak. A new high wasn’t seen for eight years.

With history stated, I’ll remind you that “it’s different this time” is always true.

Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at

Source: Orange County Register

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