U.S. Housing Market Decline?

[Paul Rojas]

I came across this article today and I would like to get your thoughts on it. As I’m sure most of you are aware, the housing market has been recovering since the financial crisis in 2008. Since then, there has been a steady increase in home values. This past year due to COVID-19, there has been a significant increase in real estate sales. Many real estate experts believe the market will continue to increase with no apparent slowdown in the near future. Mark Zandi from CNN Business wrote this article saying otherwise. In his article, he provided reasons why he believes there are signs that the housing demand is set to decline. Here are the key highlights from his article:

• * Zandi believes that surging prices with homes being overvalued is set to hurt the housing market.
• * Home building has been too slow to meet the demand of the market. This is causing Homes to be bought over the asking price.
• * The new remote work option being used nationally has also allowed people to move to different locations without the need to live in major cities. This allowed buyers with bigger pockets to overpay for homes in smaller income based areas.
• * The house price increase is also due to the all time low fixed mortgage rates.
• * Government actions to forestall distressed home sales will begin to fade when the economy returns to full health.

He makes some interesting points in his article, but I’m not sure I fully agree. There is still a lot of liquidity in the market and investor purchasing power seems to be strong as well. What do you all think about this? Is the U.S. housing market headed for a decline? https://www.cnn.com/2021/06/29/perspectives/housing-market-pandemic-economy/index.html

[Russell Brazil]

Let's address his points one by one

• "* Zandi believes that surging prices with homes being overvalued is set to hurt the housing market."
• Typical Causal Logical Fallacy
• "* Home building has been too slow to meet the demand of the market. This is causing Homes to be bought over the asking price."
• This would mean the total opposite of what he is suggesting. Not enough building, a decade of it, has lead to a dire national inventory crisis, that will probably take a decade or more to work itself out. This is simple supply and demand economics. Not enough supply coupled with high demand, pushes prices higher, not lower.
• "* The new remote work option being used nationally has also allowed people to move to different locations without the need to live in major cities. This allowed buyers with bigger pockets to overpay for homes in smaller income based areas."
• Classical Post Hoc Fallacy.  You could literally state the same cause for the completely opposite outcome and state prices should fall in cities due to this. Guess what, prices did not fall in cities or expensive metro areas, they went up as well.
• "* The house price increase is also due to the all time low fixed mortgage rates."
• Contrary to popular believe, there is no correlation between interest rates and housing prices. From 1940 to 1985, we were in a rising interest rate environment. Using the logic of interest rates driving housing prices, prices should have been free falling for those 45 years. They did not. Housing drives rates, not the other way around. The tail doesnt wag the dog.
• "* Government actions to forestall distressed home sales will begin to fade when the economy returns to full health."

There simply isnt a large number of distressed home owners contrary to popular belief. Per the Mortgage Bankers Association, the vast majority of people who claimed forbearance, actually continued to pay their mortgages.  People thought they would need it, so they filed for it, but ended up not needing it, so they paid their bills. Mortgage delinquencies barely moved during covid, and have already reverted to their continuosuly dropping rate we have seen for a decade. See chart below from the St Louis Fed.