Would We Be Smart to Ask These 3 Questions About the Housing Market?

The U.S. housing market has fundamentally changed. Should we change how we think about “the biggest asset most families will ever buy”…?

Question #1. Historically in the U.S. housing market, if it’s not a buyer’s market, then it’s a seller’s market.

And if it’s not a seller’s market, then it’s a buyer’s market.

But what about when it’s neither a buyer’s market nor a seller’s market?

What if this has become the “new normal” for the U.S. housing market?

Massive increases in BOTH housing prices and interest rates mean that substantial segments of potential buyers are priced out of the market.

They can’t afford the monthly mortgage rates, which means buyers are NOT buying. (Which might actually be for the best given how much they will get screwed over the long-term by the high interest rates and how much of their own long-term personal wealth those high interest rates would transfer to the banks.)

Change in interest rates have decreased the number of sellers,

because a large segment of owners can’t afford to sell and move someplace else. So sellers are NOT selling.

If both sides of the transaction are feeling pressured to NOT transact, then exactly what kind of functioning marketplace is this?

Question #2. The likelihood of “normal” housing price gains over the next 10–20 years has decreased.

It seems likely that the massive and rapid rise in home prices over the past 2.5 years has been “borrowing” from future gains.

The market appears to have just eaten up what normally would have been at least several years worth of demand and willingness to accept price increases in just 1–2 years.

Bottom line, be less optimistic than you would have been before the pandemic that home prices will rise substantially over the next 10 or 20 years.

There is a chance that this massive runup in prices that has just happened means that home prices will just tread water or even potentially come down some in order to get back to the long-term trendlines.

I’m not saying this is guaranteed, but objectively, this has to be considered as a possible way in which home prices will play out.

Question #3. If you can’t sell the asset easily — or at all in the timeframe in which you want to sell it — is your house still an asset in the way that we normally think about financial assets?

If transactional liquidity — the sheer number of transactions — dries up and takes a long time to recover, do we really still have a functioning housing market?

AND, if there really isn’t a liquid market for the “asset” you might want to sell in the future, how much do you trust the pricing info and signals you’re getting from a malfunctioning/non-functioning market?

Part 1. There is likely to be a huge amount of housing supply coming onto the market as Baby Boomers retire and and sell their assets to fund their retirements.

At the same time, there is certain to be far less demand — and ability to pay high prices en masse — from the generations underneath the Baby Boomers.

Remember that (1) the Baby Boomers are not only far more numerous than the generation coming up underneath them, but (2) Baby Boomers are per capita substantially wealthier than the generation following them. And it’s usually that “next generation” that would buy the assets of the retiring generation.

But what happens when the generation underneath doesn’t have the sheer volume of money and assets it would take to buy the assets of the retiring generation looking to sell assets to fund their retirement?

Hmm…too much supply of assets and not enough demand to buy those assets probably equals lower prices.

If this sounds crazy or like some brand-new concept that no serious financial expert would agree with . . . it’s neither crazy nor new.

Back in November 2003, I was at an event in San Francisco where Wharton Finance Prof. Jeremy Siegel gave a talk on “The Current Economy and Financial Trends.” Siegel is the author of the book “Stocks for the Long Run” and is considered by many to be the intellectual father of the 1990s bull market.

Setting aside the dry-sounding title of the talk, the part of that evening that caught everyone’s attention was where Prof. Siegel warned about the potential for asset prices to fall — a LOT — as Baby Boomers sold off those assets to fund their retirements.

The reason for this asset price drop?

“The sale of these assets will lead to a sharp fall in prices, because there are too few people in the smaller generations that followed the boomers to buy all of those assets at today’s prices.” according to an article from The Economist on Prof. Siegel’s writing on this precise topic. (Baby boom and bust, May 11, 2006)

Although Prof. Siegel was focusing mostly on stocks and bonds when he discussed “assets,” the category of housing falls squarely into his forecast of what seems likely to happen to asset pricing as Baby Boomers retire.

Part 2. Is the U.S. on track to have an illiquid, non-functioning housing market?

The financial hollowing out of what used to be the American middle class.

If they don’t have money for the basics of life — their own housing, education, healthcare, childcare, etc. — then Gen X, Millennials, and Gen Z sure as heck don’t have money to buy houses at prices that most Baby Boomers themselves couldn’t afford if they had to pay those prices today.

Bottom lines

Does the U.S. have a functioning housing market anymore?

Or are things just fundamentally shifting to a new equilibrium point or a qualitatively new kind of equilibrium?

Our housing market is rapidly evolving.

Numbers of transactions have decreased a lot, and this seems likely to continue and maybe even accelerate.

When transactional liquidity for housing dries up so much and so rapidly, does the housing market really still continue being a functioning marketplace?

Fewer and fewer people are able to afford to move. Being able to move by choice is going to become more and more of a luxury that only wealthy and high income people in America can afford.

Back in the late 70s/early 80s as mortgage interest rates increased, housing prices were still affordable in relation to people’s income.

Today, though, as interest rates vault higher, housing prices are already at extremely high levels on an absolute basis and also as compared to average incomes. People can’t afford nearly as easily to sell their house and then buy something new in a different location.

Further, people who bought houses or refinanced their existing mortgages while interest rates were still in the 2.7% to 3.3% range are effectively locked into those homes.

They won’t be participating in the housing market again anytime soon.

If they sell that home and buy a new house someplace else at a 7% interest rate, they will either take a big hit in the price of the new house that they can afford at their same monthly payment that they had had on the old house, or they will have to drastically increase their monthly payment in order to be able to afford the same house someplace else at 7% interest.

We should all be questioning whether the housing market assumptions we had 5 years ago as we approach 2023.

They may well NOT be valid.