In the last few years, home prices in America have skyrocketed. At no time in history homes were as expensive as they are now. Many analysts, buyers, and speculators say that the housing market will crash. However, it may not happen.
Home prices may never come down as many investors and buyers are hoping. This article explains a few of the reasons.
Investors claim that the current housing market has eerily similar vibes to 2008. In 2008, many buyers took out mortgages and bought homes that were almost out of their budget. After the stock market crash, many lost jobs and homes simultaneously.
However, in 2008 getting a home mortgage was easy, and house prices were reasonable. Thus, many overstretched their income willingly just to become a homeowner. The mortgage industry didn’t do due diligence and wrote subprime mortgages. When the Lehman Brothers went bankrupt, it sent a ripple effect throughout the financial institutions and crashed the housing market.
The income to home affordability ratio is currently at the same level as in 2008. Seeing the same ratio, many speculate that the housing market will crash. However, the reasons behind it are entirely different.
In 2008, the housing market was in a bubble due to lower interest rates and subprime mortgages — however, this time, the soaring home price is fueled by inflation and supply chain issues. In 2008, only housing was affected due to Wall Street speculation. However, price jumps are happening worldwide in every product category this time.
What goes up comes down. But if the force is severe, that object will never come down.
Due to low federal interest rates, big banks and financial institutions enjoyed almost free money to expand their businesses. However, due to the recent global shutdown, everything now costs more: gas, lumbers, transportation, food, housing, labor, clothing, medicine, heating, etc. Inflation is at a record high. Thus, the high home price isn’t an isolated incident. Therefore, it would be foolish to think that home prices would crash when everything remains expensive.
Nowadays, every home building material is exorbitantly expensive, such as lumber, insulation, appliances, drywalls, transportation, labor, etc. Thus, the cost of new homes and remodeling are also costly. Therefore, the hope that soaring house prices will decrease isn’t a reasonable expectation.
Many analysts point out that the current mortgage rates are high compared to previous decades. Therefore, many potential home buyers are not qualified for loans, and many are not interested in homes due to higher mortgage payments. As a result, the low demand for housing will lower home prices. However, it’s not accurate.
Due to the global crisis, home builders are making fewer homes. Moreover, in the current market, not only individual investors but also big financial institutions such as BlackRock are buying homes as an investment.
These financial institutions hold trillions of dollars in retirement funds. Previously, they only were in the lending, investing, and stock market business. However, this time, they started the real estate business. Instead of loaning out money for mortgages, they are actively buying homes throughout America. Over the years, these homes will appreciate, and these institutions will use these homes as rental properties.
An individual may pause buying a home in this housing market due to inflation, rising house prices, and mortgage rates. However, big financial institutions aren’t affected by any of these. Thus, even in this market, they are buying homes sometimes over the asking price.
Over the last decade, the minimum wage and salary throughout the USA have increased. But prices of clothing, groceries, gasoline, cars, etc. have also increased. It’s expected that the price will go up again over the next few years.
The housing market price jump is not a bubble or an isolated sector event. Industry-wide and globally, every product’s price has increased. Therefore, even though mortgage rates are going up, the home price will never decrease to earlier prices.
There was a time when individuals and small companies used to do all types of businesses — restaurants, groceries, home building, etc. However, over the decades, giant corporations have consolidated everything. Walmart, Target, and BJs dominate the grocery shopping and clothing business. Burger King, KFC, and McDonald’s dominate fast food. Clayton Homes dominate the manufactured housing business. This time, big financial institutions and corporations are consolidating the housing market.
There was a time when a single-earner family could afford housing, a child’s education, cars, and vacation. Even minimum wage earners could afford a home and raise a family. Over the years, it became tough for a single earner to support a family.
Even a two-earner family could support a family up until a few decades ago. However, rising costs now make it impossible for even two-earners families to buy a new home.
America is now heading towards a nation of renters. Previously, medical and education debt broke many. Still, people could buy a home with their income with a 30-year mortgage. Nowadays, the income and cost ratio is insanely high, and many no more can afford a house. Even if the housing market cools down, these big financial institutions will buy all these houses at a discount. Thus, home prices will remain high.
Over the decades, America has become a subscription-based nation. No one owns anything. The big corporations hold virtually all the powers. In reality, Apple, Tesla, John Deere, Medical products, etc., are owned by the company. A consumer is only paying for the privilege to use it. Soon, consumers will not even own homes. It’s the final subscription phase, where we will own nothing from home appliances and cars to home.
The current housing market isn’t similar to the 2008 housing market bubble. Currently, not only homes but everything costs more. Inflation, global supply chain issues, and pandemic fueled the recent price increase. Thus, it’s not an isolated incident, and the housing market will not crash. The price will remain high for the foreseeable future.
The big institutions are too big to fail. The government will go out of its way to help these institutions if anything happens in the housing market. It happened numerous times in the past, including in 2008.
In 2008, homeowners were most impacted. Millions of people lost jobs and homes. They were in dire need of help but got nothing. However, big corporations got all the bailout money. Many corporations even didn’t pay back what they promised during the bailout.
Even if the economy heads towards a downturn, the housing market will remain high priced. Because first, these institutions will not sell their assets; second, they will buy new houses at a discount.