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Notes -
The Economist doesn't seem to know economics.
I was presented this article by Reddit as an ad. Though the ad used the subtitle about Trump as the title. This article packs more "wrong" in a coherently-written article than I've seen in a long time. The actual title is "America’s huge mortgage market is slowly dying".
Right out of the gate, we're told mortgage debt has dropped over 30 points as a percentage of the GDP since the housing crisis, and now is at its lowest level since 1999, before the bubble. Wait a minute? Isn't that a good thing? We've finally returned to normalcy after the bubble? In fact, the graph appears to show just that. Mortgage debt is still higher as a percent of GDP than any time other than the bubble.
We're then told "mortgage debt has shrunk to just 27% of the value of American household property—a 65-year low". Uh, yes, but those of us who are paying attention realize that this isn't because mortgage debt has shrunk, it's because the value of American property has increased. Which doesn't have much to do with any dying of the mortgage market.
Then we get this howler:
Uh, how exactly is lenders' appetite for risk a measure of mortgage availability?
The article then goes on to call this a "collapse in credit", because in 2003 (peak bubble), 35% of American mortgages went to people with credit scores below 720, whereas now that number is 22%. But the attached chart shows total originations are fairly close to immediately pre-COVID numbers. There's no real drying up in credit since the end of the bubble, just extension of the same credit to more creditworthy borrowers. Note that more than half of Americans with a credit score have one over 720. American's credit scores have increased, and lending less to people who are higher risk just makes sense. The bubble lending DIDN'T make sense, that's how we got the bubble!
Did I call the previous one a howler? No, that wasn't a howler. THIS is a howler:
Uh, bitch, prices are high. Time on market is low. There's LOTS of buyers. It's a seller's market. If developers aren't building (and indeed they aren't) it's not a lack of prospective buyers causing it.
This is heart of the problem with the article: if there is indeed a mortgage drought preventing people from buying houses, house prices should be falling, not rising. Basic Econ 101 stuff. The article completely ignores this right up until the very end, when it notes
I don't know what G-S means by that, but "any policies meant to make mortgages more widely available will only push house prices higher" makes more sense than anything else in the article, and it contradicts the whole thesis of the article.
The housing market has plenty of problems. Unavailability of credit is definitely not one of them.
Anecdotally, I think it's more than just valuation changes.
I know an awful lot of people who would like to move, but are sitting on 2% mortgages and are unwilling to give them up. Just by virtue of paying the monthly payment over a few years, that number is going to drop.
On the other side of the coin, I know quite a few people who would desperately like to buy a house, but can't afford the monthly payments anywhere near their jobs. Historically, those people might have found a fixer upper somewhere and taken on a lot of new debt that bumped up the average. These days though, they're not taking on that debt at all.
In January 2020 (to get a pre-COVID number), the National Case-Shiller index was at 215. In January of this year, it was 330. That's about a 53% increase in the value of property, which means all that older mortgage debt is now a considerably smaller percentage of the total. As for liquidity, housing sales have stalled (after increasing up until COVID, then a massive increase during it) but at a level similar to pre-bubble levels.
Someone's buying those fixer-uppers, but they're wealthier people who are paying a lot more for it.
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Outside of a crash, the one avenue I don't see discussed very often for how this can end is for contractors to start building smaller.
Where I live there are two main problems hindering this natural market development: Regulations and lot allocation. Smaller contractors can easily build small in theory. But due to lot allocation, high lot price and regulations, it's not economically viable. This leaves small contractors unable to meet market conditions since a lot of prospective home buyers are priced out of single family homes. Which places the ball in the hands of larger contractor operations that can deal with the situation more easily via multi story housing. So problem solved. Smaller contractors fade out of business.
The 'small' problem with this, and why I think this is the future, is that we are looking at a pretty obvious lowering of living standards. Your future is less idyllic and smaller in scale.
On a certain time scale there is nothing wrong with this. People should start small, build capital in their small home, sell it later and expand into something bigger that can more easily house a larger family. The real issue is more clear when you look at this in a modern context.
Most people don't have families until they are in their 30's. Of those that do, there will be many who had not entered the real estate market until their late 20's. Depending on income, your children will be raised in a small home for the majority of their lives. Any dreams of green grass, a white picket fence and children playing with a puppy will stay as dreams. You will not be giving your children the childhood your parents gave you.
This development, at least where I live in Scandinavia, is already underway. Being marketed as a conversation about how we should orient our lives and a challenge to critically confront our values. Forget about owning a car, a big dog or raising your children. You will see your family 4 hours a day in a mass produced concrete box, stacked on other concrete boxes. Everything will be shrinking. Everything is being outsourced. It may not be the future anyone wanted, but it's the future everyone has been voting for. The migrant who is delivering your half eaten UberEats order has to live somewhere, after all.
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This particular sentence is reasonable. Appetite for risk is the factor driving demand for all financial assets (with the arguable exclusion of treasuries). If lenders have more appetite for risk, then it is easier to find a lender for your risky mortgage.
What the article is trying to say is that the availability of mortgages to prospective buyers is low, and is using as evidence for this the fact that the lion's share of mortgages go to people with good credit. I don't think that's reasonable.
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Reminds me of this viral Substack series: Part 1, Part 2..
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The median age of first time homebuying has gone up from 28 in the 1990s to 40. First-time buyers now comprise just 21% of all home purchases.
Nothing about this seems sustainable to me. At least the younger generation will inherit the houses? Well, no. Usually inheritance passes down to the next generation, which currently owns their own homes. And many elderly are forced to sell their houses to pay for eldercare, meaning that all that home value goes to the health care system instead of anyone else.
Ok, but then who are the elderly selling to? People in their 40s able and willing to get into tons of debt. OK, but who buys when you exhaust that group? Property investment firms who are able to rent the houses out. Can that go on forever? Well, if they're buying houses at a certain price, they're hoping the rent will be more than the mortgage over the length of the life of the home. This happens when rents increase over time. Will we always have more people looking for homes than there are available?
To put a finer point on it, it seems like the system requires that there be perpetually fewer homes than desired, but this is not really desirable as a society because we like when everyone has a home and punish people who do not have a residence. And, regardless of what's good or bad or anyone's wishes, eventually the population will decrease as the boomers die off.
Home prices have to fall, right? And I wouldn't even be mad about it, though I'd be one of those holding the bag. I'd like for my kids to afford a home. I'd put me in a precarious financial position until the bulk of the principle is payed off. But I will pay the monthly amount I agreed to pay because I'm an adult, and I'll be happy to see my kids in a better position than me because I'm a normal human being.
But anyone who was hoping to trade their $800,000 home for 8 months in hospice care might be in for a rude awakening.
Don't forget about reverse mortgages! Basically, boomers sell their houses while continuing to live in them, use the money to go on cruises, then when they die the house goes to the bank and their kids get nothing. I see tons of ads for them whenever I watch OTA television.
They truly are the locust generation.
I mean, on the bright side, advertisements mean there is a significant oversupply- more people wanting to offer them than people wanting to take up those offers.
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I don't see how he gets his numbers.
Green:
Bureau of Labor Statistics (size of consumer unit by income before taxes: consumer unit of four people with income < 15 k$/a):
*I have submitted a pull request to fix this nonsensical CSS.
**Tax credit of 2 k$/(child⋅a) × 2 children overwhelms all federal income tax for a couple with taxable income < 37.2 $/a, which implies total income < 66.4 k$/a. I don't care enough to figure out the refundable "additional child tax credit" on top of that, let alone state income tax.
(Totals may not sum due to rounding.)
A lot of people complained about that, and it's really his fault but Part I is actually kind of Part 1.5. He wrote an article earlier about affording a home in Essex County, NJ, and used the numbers from MIT's Living Wage analysis for Essex County, New Jersey in his calculation. He wasn't expecting the article to go beyond his readership so he didn't really explain that part well until Part II.
That rather blatantly contradicts his statement in part 1 that he was using "conservative, national-average data".
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I think this statistic, plus this well-known one about Millennials being "behind" on homeownership, plus COVID, goes a long way to explaining the current run-up in real home prices. Compared to Boomers and Gen X, more Millennials preferred to remain renters. Then COVID hit, and that changed those attitudes, in a lasting way. So there's a fairly large group of older non-homeowners. Being older, they are wealthier than typical first-time homebuyers in years past, so they can outbid Gen Z (and younger Millennials) who are also in the market. That's the demand side. The supply side is also messed up, for various reasons including (but not limited to) the ideological success of anti-growth and anti-sprawl policies.
When the elders leave the houses (whether due to death, incapacity, or moving to a rental unit) they typically become available for another buyer, whether the money goes into healthcare or not. This will drive prices down. But it's going to be a while before the boomers start dying en masse; life expectancy for an 80-year-old (the oldest boomers as of 2026) is ~9 years, and for a 62 (youngest boomers) year old, 20 years. So yes, house prices will have to fall (barring a massive increase in immigration, which is definitely possible in that time frame if President AOC opens the floodgates)
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I heard this on the Odd Lots podcast and the host essentially says: "Everyone wants the real estate market to be low and cheap when they can afford it, then never low and cheap again, always increasing in price until the end of their lives". I think there are plenty of people like that now, hoping for some 2008-style crash where they can "deploy dry powder". Most people have wishful thinking on how they will successfully time the market twice (first time is not getting in the market before the crash; second is getting in the market at or right after it hits bottom). If we talk to New Yorkers, many can certainly tells you some hindsight-stories about Williamsburg in the 00s, or just anywhere in the city in general in the 80s, but that's the point, regret is powerful fuel for memories. If the tides actually goes out, companies are doing layoffs, banks are failing, societal services shutting down, buying a home would not seem like a good idea. And real estate is special because of how local it is, in case of a collapse, maybe you get 80s New York, or maybe you get 50s Detroit. Not to mention, others who are more well versed have pointed out that structurally things can be even worse and that even more can still be squeezed out of all of us. Personally, I don't bank on house prices being low over the long term, and that's even before talking about the cost of home ownership. If I can maintain and not have to liquidate my little parcel of the pale blue dot, I think that's enough to be considered as an astounding financial success.
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This is obviously false simply by glancing at the alternative.
Person A: No income but has a million dollar house
Person B: No income, and also no house.
Person A is a million dollars of value richer. If people B want a home too they have to give the people A a million (or build their own, which is becoming increasingly not allowed).
Nothing here is negated because A bought in early or because A wants their current situation of having a home instead of B's situation. They still have a million more dollars of value.
The value isn't increasing in the same way as other assets. He compares it to a painting:
Whereas, if you have a house increase in value, you can't sell it for that full value and pocket the proceeds. You need to live somewhere:
The fact that a person who doesn't own a house is in an even worse position does not negate that home inflation shouldn't really be considered the same as other assets.
Don't compare it from No home to Has home. Compare between a world where homes inflated 10x to one where homes only inflated 2x. Which world has generated more "wealth?"
It makes more sense if you switch from
No house == homeless
to
No house == renter
If your home goes up hugely in value, and you sell without buying another house, then yes in a manner of speaking you have only acquired the approximate equivalent of a few decades of rental value which you will now have to pay, making the transaction net zero.
But if you had been renting all that time, you would still have to pay the new inflated price but you would have no assets to set off against them.
EDIT: I apologise, I see some of this was in your original post.
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Are you denying that homeowners who have there house values massively increase aren't richer?
Sure the fact that you need to live somewhere does make that wealth harder to access, but HELOCs, reverse mortages, downsizing, purchasing a new house with a mortgage (rather than outright), etc are all options that are now available to you and give immediate access to that huge source of wealth, with many options both for where to live and how to structure your debt/asset mix.
My own parents, who bought their houses decades ago, leveraged housing price increases as collateral to purchase multiple rental and vacation properties. Sure the world didn't generate more wealth from this, but the point is my parents got much much wealthier at the expense of those who still need to purchase/rent, as they are the ones driving housing prices.
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If a painting goes from $1,000 to $1,000,000 at the same time general inflation goes up by a factor of 1000, you have gained nothing. If shelter inflation goes up more than general inflation, then if you own a home which goes up only by the value of shelter inflation, you have in fact gained (though not by as much as if your home went up and general shelter did not). It is true that to realize these gains you need to actually spend something, but that's just a matter of not being able to have your cake and eat it too -- if you want to realize the gain from the painting you won't have it after you sell it either.
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