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.
Housing boom and bust
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.
In 1993, the median home price in the United States was $127,000, according to federal data. Adjusted for inflation, that 1993 price is $254,600 in today’s dollars. The current median home price in the United States is $428,700, despite the bursting of the housing bubble just over a decade ago. This for an asset you got to live in, and you were able to deduct your mortgage interest and property taxes!
If you had the cash and the courage to buy when prices were depressed at the bottom of each cycle, your return was even more spectacular.
What’s next for housing?
Are we on the verge of another housing bust — with higher mortgage rates doing the job of making those monthly payments far less affordable? History says a repeat is inevitable — especially if the Fed keeps pushing mortgage rates up in its attempt to control inflation.
Compared to a year ago, not only has a house in Zillow‘s middle tier risen 20% in price but the mortgage interest rate has also doubled. So the monthly mortgage payment for that exact same home has jumped 77%!
Now consider the potential effect of a recession, in which some homeowners will lose jobs and be forced to sell, adding to downward pressure on home prices.
As with the stock market, no one can call the housing top or the bottom exactly. History says when the headlines are gloomiest is the time to buy. We’re not there yet with real estate — but the time will come.