Why the Housing Crisis Keeps Getting Worse

Hello there, it's me, Stephen Thomas, Chief Economist at Reports on Housing. Thank you for joining us for another housing debrief. This week, we're going to talk about why the housing crisis just keeps getting worse. There just doesn't seem to be any relief out there. And this is kind of what we're hearing. There's so many people that think the housing market's going to go in a certain direction, but it's been more of the same for quite some time. And really where this all changed was back in 2022. It should have been earlier, but they waited all the way until March of 2022. After announcing it months ahead of time, the Federal Reserve started hiking rates in March of 2022. And they kept on going up 11 consecutive times with the federal funds rate. As a matter of fact, they went from a floor of their federal funds rate of being zero, which is basically easy money. They did that. You can see that all the way after the chart, all the way until that pink, which is COVID. And then COVID, they brought it down to zero again and threw lots and lots of money to Americans and Europeans. It's pretty much all around the world. Everybody's pockets were lined as people could no longer go to work, and they were told to stay at home, that type of thing. So when this was done, what happened was everybody had so much money that they were spending and there was not enough inventory and supplies. So we had this real problem with inflation. So as a result, they had to curb that. And we saw that with 11 consecutive federal fund rate hikes. So that was the Federal Reserve hiking at 11 consecutive times from March of 2022, all the way through July of 2023. And so that's what the Federal Reserve did. And as a result, this was January of 2022, started off the year with three and a quarter percent interest rates, and they bumped all the way up to 7.37% by the time we got to October of the same year. So that was going from three and a quarter all the way to 7.37%. That is just a gigantic sea change. And there was a lot of panic. There was some people thought it's going to be the Great Recession all over again. And people were selling their homes at less than the last comp. So prices were actually going down for a while, beginning of 2022 as a result. But nonetheless, this was the catalyst. We had the federal funds rate was changing at such a rapid rate that as a result, mortgage rates as well, because they keep up with the Federal Reserve, went from three and a quarter to 7.37%. And right there, I'm pointing to August of 2022. That was the last time that we were below 6% for longer than a day. And we were there for quite some time. We were in the fives, and it almost hit 5% in August of 2022. So that was the last time that we were there. That was four years ago this month. So that's how long we have been above 6%. And you can see it here. This is between August of 2022 to the present where I'm pointing, where mortgage rates are at right there. And the high was 8%. The low was 5.99% during all this time period. And this is with no points. This is since 2022. So really in a band between 6% and 8%. And it's kind of been averaging right around where we're at today at about six and three quarters percent. We'd actually have higher rates, but there's this other thing called the spread that's gotten better over time. And it is, it's much better than where it was in 2020, uh, at the end of 2022 and 2023. And in 2024, we're in a much better place here in 26. It just has been improving over time. And we would have had interest rates that are a full percentage point higher. If that spread was as bad as it was in 2023. So, uh, which would almost be an 8% interest rate. So this is much better, but it's still stuck between six and 8%. And as a result, housing has been absolutely frozen. There was a waterfall dive in, uh, in 2022, when rates went really high demand fell like a rock. And we went from selling a normal would be about 5.2 million. There was a lot more in 2021, but 5.2 would be million would be the normal number of houses that were sold on an annual basis. And right now we've been selling 4 million homes year in year out 23, 24, 25, 26, the same 4 million, which means that there are still buyers and sellers that are finding success in this marketplace, just not at the volume that would be considered normal. And that's where, uh, we were playing prior to COVID is more of a normal. You really can't look at during COVID as a normal or even recently as normal, but you'd have to go. And which is why so many people talk So, uh, as a result, uh, prices, they, they went up and then they came down a little bit, but there has not really lately been much of a change in prices and prices have not plunged. And that's what so many people were predicting with everything being so unaffordable that we'd have prices that actually come down. Instead, they were increasing. Now they've kind of plateaued, but they're not going to plunge. We've talked about, uh, many reasons why, but we have not realized a plunge. Like so many people have been talking about for the past, uh, four years that we've had rates that have gone up so high. And a lot of people have been pointing to this being a bubble and the bubbles about to burst. And this is a mega bubble. It'll be worse than the great recession. Of course, that's not materialized for a myriad of different reasons. We've done plenty of videos on that as well. And we're just not going to get that housing crash that people are talking about either. So they call it a bubble. They say prices will plunge. They call a housing crash, and that's just not what is going to materialize. And so, but there is a disconnect that is out there. The disconnect is really this. You have homeowners, you have homeowners that become sellers and they place their home on the market and, uh, they just think everything's all great. It's going to be like COVID. They're going to be able to sell their home really quick and, uh, they get to do what they want to do. And there's going to be a lot of activity. There could even be a bidding war on the property. That's where a lot of sellers mind frame is at even prior to listing. There's a big reality check once they place their home on the market. But there's also that same disconnect that comes from the, uh, buyers that are out there or people that are sitting on the sidelines waiting to purchase. And they think that the housing market will crash. And it's just the storm that is going to happen. And it's going to happen at some time that you can't, when values go way up, they have to come way down. We've heard that a million times before, but that really is not the reality of the way good economics actually works. There aren't, there aren't that many sellers out there that really must sell. So nobody's really willing to go where buyers want them to go. And that is less than the last comp. So it looks like, Hey, my gosh, I'm getting somewhat of a deal. That's just not how the market is participating today because they have plenty of equity. They don't really have to sell. They have low mortgage rates. So they're staying put. So you blend the two together and you have this, this is what we're dealing with. It's kind of what I referred to as a tug of war before, but this is the mindset between buyers and sellers. And that's kind of where we're at, where they're kind of at a little bit of a crossroads and there's a give and take that they both have to do. It's not hunky Dory or, and not a perfect market. Like a lot, a lot of sellers thought it was going to be, and we don't have a doom and gloom and crash. Like so many buyers think that, that, that it's going to be. And if you really want to know where the market's at today in many markets, in most markets, it's just slightly in favor of buyers. As far as negotiations is concerned of where we are. And that has a lot to do with interest rates being at six and three quarters percent, where last year we were making our way down below six and a half percent starting on September 3rd, which is not far away from September 3rd to March, September 3rd, last year to March, mid-March of this year, we were below six and a half percent for mortgage rates across the United States with no points got all the way down to 6%. The a week before the Iran conflict started. So that's put the, the, uh, the, uh, it's really slowed our marketplace, slower spring, slower summer could have had a much better spring and summer. Had we not had interest rates at six and three quarters percent, but closer to 60%. I mean, we're not having 5.2 million transactions, but we wouldn't have 4 million either. We'd have higher than 4 million is where we're able to come in at. If we had interest rates that were materially lower, like they were in February during the winter time, right. Prior to the spring. So, uh, you, you see a lot of prices that are very, very sticky and that is where the disconnect. So there's a lot of cancellations. There's a lot of people, uh, sellers that placed their homes on the market and they're just not really willing to come down. People say, well, we should just ignore that segment. Those people always exist in every kind of a marketplace. But if you look at this, I mean, the $1.25 million house is bolted and they're not going to change. And that's, that's been, that's a mentality that's out there. And I know this seems like a big, hefty, uh, asking price for a property. You live in, uh, orange County where I do. And that's almost, it's, it's just shy of the median price of a, of a house for detached here in orange County. So, uh, but it's like that across the United States, what you're seeing are sellers that really do not want to budge on price. And they have a really hard time doing that. And, and by the way, they wreck their first impression. They get one shot of a first impression, they wreck it by having too high of a price and sometimes not even willing to come down. Eventually they come down, but it doesn't have that, that, that same oomph that you, that it does when it first comes on the market. So there you go. It's kind of stuck. They felt like there was kind of light at the end of the tunnel where we were probably going to get into the fives earlier, right before the spring. But that, uh, light is no longer really there as far as the end of where we're at. So if you're wondering exactly, when is this market going to improve? And it just seems like, Oh my gosh, this housing crisis just keeps on going on and we call it a housing crisis because of the lack of transactions that are taking place. It's a recession in units, not necessarily in price. And you can see that by talking to anybody that's connected to the real estate market because they're doing far fewer transactions. So, uh, there's, there still is this affordability housing crisis that does exist. That doesn't mean that prices plunge because there is an affordability issue as we've seen. So where are we going to see it actually, uh, maybe change a little bit. There are three things that go into home affordability and it's housing income. It's a mortgage rates and it's home values. And a lot of people say, yeah, I've seen interest rates a lot higher, but you haven't seen values where they're at today. So when you plug today's mortgage rates with the home values, that's where you get this home on affordability that that is taking place. So this is how you calculate home affordability is one of these three things that has to give in order for home affordability to improve. And so far it hasn't been rates. Rates really haven't changed much. Uh, showed you the band it's averaged six and three quarters percent. That's right where we are today. The federal reserve is actually talking about, uh, increasing rates, uh, down the road. It could be as early as next month in September, or, uh, we think that there might be one in December, who knows, but, uh, that's why rates are higher because the fed rate hikes are already priced into where rates are at today. And that's how mortgage rates, uh, work rates go where the fed should be going down the road. So, uh, that's why we have rates that went from six to six and three quarters percent was priced in our several, uh, rate hikes. The federal reserve has been talking about doing so. Uh, so we're not going to get really much relief in, in raids. We're not going to get a lot of relief in prices. Prices have been very sticky. There are not enough sellers that must sell. So there, nobody's really willing to do what it takes in order to sell, uh, everybody in volume. So what you're having is you're having the properties that are the nicest, they sell, and they sell pretty close to the last asking price for the remainder of the year. We might get prices that come down a little bit, but overall for the United States, I were, we might see for 2027, a little bit of a negative on the number, but if it's like negative 0.5% for the United States as a whole, that's not a lot of a discount over a course of each month, each month, month in month out. So there's not, there's not enough pressure on pricing so that you're not going to get it in interest rates or in pricing, but so are we going to get it in income? And, um, you just, yeah, that's where, how can it be income? That's, that's what you might ask yourself. And really ultimately what we've seen over time, and this is the median national, uh, median household income across the United States. This actually comes out each September. This is through 2024. So it's going to come out mid September for 2025. And that's according to the census. And you can see that there was an elevation in, uh, median household income based upon what the projections are for where the income is going to come in. It's a, it's another improvement from it's about up 26% from 2019 to where, uh, it will be released in a couple of weeks up 26%. So, I mean, yeah, there's some improvement there, but man, that seems like a long time to wait. And as a result, it will improve over time. It's just the housing market is just going to be slow and methodical and run at a snail's pace as to any kind of improvement in affordability. And that's kind of how economics works because economics really is slow and boring. It's like watching paint dry and, uh, or watching the grass grow their economics. Doesn't all of a sudden change in an instant, like so many buyers or not buyers, but, uh, people on, uh, that, that have their different. Uh, YouTube channels or Tik TOK videos that talk about prices that are going to crash and they give these anecdotal evidence of one-off properties, which is just absolutely ridiculous because I can show you the opposite in all of those areas as well. But so economics really is slow and boring. It doesn't happen instantaneously. It's like we saw the great recession coming as early as the fall of 2005 knew it was coming. And it took a long time for it to materialize, but you could actually see it in all the numbers we're pointing towards it. We don't have that today. So economics is slow and boring. So this will change over time and it will improve over time, but really slowly. So the new normal is what we've experienced since the second half of 2022, 2022 started it in 23, 24, 25, 26. It's just each year seems to be the same. So that's the new normal that we're dealing with. So I forgot to ask you to like, and subscribe. So if you like this, please like the video and subscribe to our channel. It just helps in the YouTube algorithm. And we're just trying to bring the real honest truth, exactly what's really going on. We're not cheerleaders for the, uh, for the housing market, not perma bears, uh, like so many people out there, but we're not perma bulls either. So what we do is we try to bring the data, the stats, the facts, and the trend analysis. And I've been doing this since 1991 with a quantitative economics and decision sciences background. Totally enjoy this. This is all we do. We're housing analysts and we've been doing it for a long time and we get it right. And sometimes we get the light, like the minute details, uh, maybe didn't quite pan out the way it is. So then we recalibrate over time as well, but we can see all the trends and we come up with our, our prognostications and let people know exactly where we're going to go based upon all the facts. So go to reports on housing.com for more information. We have reports that dot all over SoCal, the Bay area of Vegas and Phoenix. And our most recent report that came out is called AI pricing and accuracies. We've even done a video on this kind of thing. And that's because you just need to know that AI is not accurate. And, uh, as far as relying on pricing of homes, they put it in ranges and where do they get their stuff to get it from a whole bunch of different places. And I've seen, uh, I've seen how it's done and it's just, uh, it, it, because it's AI, it makes it feel like it's the real deal because AI answered it. But let me tell you, AI does not always get it right. And, uh, we utilize it as a tool, but it's definitely not something that's going to replace everybody like everybody originally had thought. So if you'd like to subscribe to one of our many reports, you can utilize the coupon code housing for a free month. And, uh, I just wanted to say, thank you for joining us for another housing debrief. And, uh, I hope you enjoyed this, got a lot of information out of it. Also, you know what, take a look at our other series called Stevenomics where we're, I think we've done a third episode drops, uh, next week as well. And we're just bringing home real economic, uh, detailed information to help you understand why the economy works the way it does. It's not a, it's not really talking about what's going on in the economy today. It's talking about how does the federal reserve work? What is the seasonality to housing that type of thing? We're going to talk about the difference between days on market. And it is something that the true speed of the market that we capture called expected market time. And we'll go into recessions and different things, what lead up to it, the indicators that we look for. So, uh, tune into Stevenomics as well. Thank you so much for tuning in. Hope you got a lot out of this and hope you have a wonderful weekend. We will see you on the other side.