The Rolling Question of a Housing Market Downturn

Another year has passed, with buyers and sellers asking whether the housing market could crash?

Would that be a good event for buyers, the homeless, and as a launch pad for a 2024 housing market resurgence?

There are economists and housing market experts who extoll the cleansing benefits of a market crash. They call it a correction or reset and with it comes a fresh new setting for buying and selling.

In another post, I discussed the housing market crash question and its likelihood. The verdict was that it’s unlikely. My own humble sentiment is positive, that the pain will last for the next 12 months, replaced with a new enthusiasm as the Fed can longer justify excessive interest rates.

But the US FED is only interested in its own interests, in preventing bank failures threatened by its own actions, and printing more funds for a government drunk on free money. The fact the Biden admin will still get to spend, spend, spend, means home prices are protected, and first buyers will need a tidy sum to put down on a home purchase.

In a sense, we’ve already seen a crash in demand in purchases, from those who need to finance.

Mortgage rates to 7% while mortgage applications disappear. Screenshot courtesy of Moodys Analytics.

In fact, last year, Moody’s Analytics revealed that homes in 183 of the 413 largest regional housing markets are “overvalued” by more than 25%. They say some cities are highly overvalued and primed to collapse, such as Boise (overvalued by 72%), Austin, Texas (overvalued by 61%) and Charlotte (overvalued by 66%).

Overvalued? It looks like they’re valued highly and justifiably and the analysts just don’t sympathize with why so many people want a place to live in. It’s not like the rental market is a haven, given the ultralow vacancy rate. There are plenty of reasons why people want to buy a home, from equity to safety to rental income streams.

The Soft Landing

Economists too, now in 2023, are still calling for a moderate, brief recession, and that the economy would roll once again in 2024. The problem with that prediction is that the central Fed rate could still hit 6% as an overreaction to this summer’s spend fest. The Fed rate was high just before the last market collapse.

The key to a collapse? Too high FED rates pushing a crippled economy to the brink. The lagging effects of the Fed rate hike is just now hitting, and employment will be impacted in the next 3 quarters. The FED (perhaps not competent) is focusing on a weak, accessible factor (consumers and their spending) because the Biden regime is unwilling to go after corporations and suppliers who refuse to drop their prices. So, it’s not consumers, it’s suppliers who refuse to drop prices. Most of these companies have monopolies and are foreign controlled (such as OPEC oil) and won’t comply.

And while knocking down oil prices via the SPR is a helper against inflation, that valve will be shut off when Europe decides to punish Russia, making China and India look like predators boosting their economies on the backs of dead Ukrainian soldiers.

That can’t continue, and those with an active conscience will speak up soon about China/India accessing cheap oil to give them an economic/trade advantage.

Persistent Inflation = Persistent High Rates

Experts believe inflation will persist and the FED won’t hit its 2% target, even though it dropped to 4.9% last week. Given the lagging effects are hitting, it will drop to 3% by year end. But that means pain and some serious events. And those events are the triggers for stupid actions by the government. Manipulating artificially inflated systems is risky.

Mortgage rates need to drop by mid 2024, so borrowers can refinance at affordable rates. Otherwise, homes will go on sale and be foreclosed and that will suppress the housing market.

Demand for homes is strong, however banks will not be willing to lend under the coming economic conditions. It’s very difficult to be positive about the housing market given how much it’s manipulated by various levels of government. The key struggle is between the have’s and have not’s. And there is more of them pouring across the southern border.

Deregulating the housing industry and assisting builders and freeing up land from NIMBY control is the right decision, but the Democrats love their crippling regulations and basically are controlled by the land barons.

What are the Housing Crash Signals to Watch?

mortgage rate rises (8% is still possible) and homeowners can’t qualify to buy
mortgage refinancing falls (it has dropped already)
Q4 2023/Q1 2024 recession – with falling GDP and risk of failing markets
too much inventory of new multifamily units
mortgage lenders get super cautious
home prices start falling making many owners nervous
buyers become cautious and actively wait for a crash (and hope for one)
unemployment rate rises
foreclosures start rising
inflation, taxes, cost of living, and energy prices unaffordable

Rapid Rises Invite the Inverse Later On?

Without further stimulus spending the housing market would have crashed. It came very close to a disaster on June 1st.

And this chart shows how much stimulus money poured into a housing market that most Americans love. Yet it’s inflated, and the new stimulus budget helps avoid a catastrophy for 2 years only. In the meantime, the US economy has to get rolling and that means lots of home building. The US government needs the tax revenue.

US house price index. Screenshot courtesy of Investing.com

Will the Rebound Happen in 2024?

if the FED rates begins to fall, investors will begin moving money into the stock market and into housing. Certainly builder stocks will benefit as the race to house America begins in earnest. The housing issue will become a Presidential election issue because it is a huge weakness for the Democrats. The Republicans will be all over that, certain to appeal to the 7 million new migrants from central America who want somewhere to live.

Pictures of growing hoards of homeless people in New York and California will add to the mix, making November 2024 a very stressful time for the hopeful candidate Joe Biden.