2008-style housing market crash is coming, senior economist warns
- The housing market is starting to cool down with rising mortgage rates.
- José Torres of Interactive Brokers warns of sharp declines in home prices going forward.
- Torres expects the declines to continue over the next year.
For Jose Torres, the dynamics of supply and demand in the housing market are moving in such a way as to create the perfect recipe for lower house prices.
On the supply side, in order to catch up with the rising demand during the period of low interest rates since early 2020, home builders have started building homes across the country at a rapid pace.
Although housing starts (marked by the red line below) has started to decline, it is still at elevated levels.
The home inventory also rose 18.7% year-on-year in June, according to Realtor.com, and is up nearly 50% since the start of the year.
But as the free money environment has helped fuel 41-year high inflation at 9.1%, the Federal Reserve has shifted aggressively this year to a more hawkish stance, causing mortgage rates to nearly double. Additionally, average 30-year mortgage rates rose to about 5.8% after the start of the year at 3.1%, according to Freddie Mac data.
This is a killer request.
“There is a perfect storm brewing in the real estate market due to nearly a decade of high construction levels and declining demand,” Torres, chief economist at Interactive Brokers, said in a comment Tuesday.
“The homebuilders said, ‘Jeez, we’re making a lot of money, there’s a lot of demand, and everybody wants a home,'” Torres added in a phone call with Insider on Thursday. Let’s build like crazy.” “Now, the Fed is reversing all of that [stimulus] Because they basically admit, in their lectures and meetings, that they are very motivated. But all this construction that began, must end. So it is a time imbalance between supply and demand.”
The result will be a sharp decline in home prices, Torres said. He said he expects average home prices in the United States to fall 25% when all is said and done. That’s how much the US S&P/ Case-Shiller national home price index fell during the mid-2000 crisis.
“We will see something very similar to what we saw during the Great Financial Crisis” in terms of lower prices, he said.
He said he expects to see a double-digit drop in early 2023, and said the market will fall when the Fed switches to more accommodative policy, which he expects to happen in mid to late 2023.
Torres also said he thinks home prices will fall a lot because the Fed is just starting a campaign of quantitative tightening (the market has already priced this somewhat, although it remains uncertain how inflation will go and how hard the Fed will have to tighten). ). This means that they stop buying new mortgage-backed securities and can start selling them. Currently, they own about a third of the mortgage-backed securities market.
Buyers of mortgage-backed securities primarily lend their money to homebuyers. When there is less market demand for securities – and therefore less liquidity for borrowers – mortgage rates increase.
The central bank was buying assets at a pace of $40 billion per month.
Another reason for Torres’ drop in home prices is that housing affordability has been declining at an unsustainable pace. UBS highlighted this in a recent note, showing that housing affordability is at its lowest level since 2006.
“At this point, housing is not accessible when considering household income and individual income,” Torres said. “The percentage of median monthly payment of household income and individual income are at record levels – similar to levels seen during the 2008 financial crisis.”
The general tone of the industry appears to have shifted more to the downside in recent months as mortgage rates have soared. Redfin CEO Glenn Kellman said on CNBC Tuesday that he sees a rocky road ahead for home prices.
“62% of Boise homes fell in price. More than half did in Salt Lake City and Denver. So I don’t think it’s going to be a smooth landing. It’s going to be a very bumpy landing,” Kellman said. .
“The markets that were the hottest were the lowest,” he added.
Homebuilding sentiment recorded its second worst month in the past 37 years in June, when housing starts were their worst month since September. Existing home sales in June were also down 14.2% from June 2021.
The Mortgage Bankers Association said this week that it expects 30-year mortgage rates to remain above 5% during the first half of 2023, and existing home sales to decline 8% this year from 2021.
However, some do not see a sharp drop in prices – if any – in the future. Morgan Stanley said in a note Thursday that tight supply in the housing market will support prices.
“Overall, housing activity continues to weaken as affordability pressures, rising inflation and mortgage rates affect housing activity. Our economists have discussed how housing demand has begun to subside and is expected to continue weakening due to tight housing supply and rising foreclosure rates. Real estate. Despite the weak activity, a lack of supply should keep house prices high,” the bank said.
Redfin chief economist Daryl Fairweather told Insider earlier in July that she does not expect a drop of more than 4% in a recession scenario due to weak supply.
But the degree to which the dynamics of supply and demand are inputs to what home prices do in the coming months is under discussion. For example, the Federal Reserve published a research paper in June showing that price gains over the past two years have been driven by demand thanks to low interest rates.