There are three certainties in life: death, taxes, and ever-rising home prices. The last one is of course a bit more uncertain as there have been periods in American history when prices have fallen, but these are rare. In recent times, we can identify only two periods when home prices have fallen: the short recession of the early 1990s and the great financial crisis of the 2000s. Needless to say, this is unusual for homeowners and disastrous for those who don’t. Consider the dichotomy between the children of Baby Boomers and Millennials.
From the 1970s to the 1980s, the baby boom generation came of age and entered the housing industry, driving the boom and causing housing prices to rise across the board. Mortgage interest ratesA recession began in 1990. However, the recession was fairly mild: unemployment peaked in 1992, and home prices had already started to rise again.
Then came the big bad wolf, the financial crisis. You see house prices rising from late 1991 through the crisis of the early 2000s. At first it was a slow rise, but in the early 2000s house prices skyrocketed. In 2004 and 2005 house prices recorded double digit increases. But of course that came to an end, as housing became more and more unaffordable and lending increased like crazy. “Lying mortgages with no down payment” and “Poison Ivy” Zelman once told me. Zelman was one of the few analysts to predict the 2006 housing collapse before it developed and became the financial crisis.
Home prices plummeted and did not begin to recover until 2012. Still, several major financial institutions filed for bankruptcy. Millions of homes have been foreclosedyou might have thought it could be worse.
“By my count, the U.S. housing market has only had seven years of decline in the past 75 years,” says Ben Carlson, author of A Wealth of Common Sense, a popular wealth and finance blog. I recently wrote On why homes are everyone’s favorite investment: “Only 9% of people lose money. And 5 of those 7 years came after the housing bubble burst.”
Over a decade later, here we are. Home prices Home prices have continued to rise ever since, most notably during the pandemic. Interestingly, in this latest cycle, mortgage rates have skyrocketed in a way somewhat reminiscent of the 1980s, and home sales have plummeted similar to the financial crisis, but home prices have not actually fallen. Latest Reading Although home prices are showing signs of slowing, they rose 5.4% in June from a year earlier, hitting a record high again.
Either way, home prices are not likely to fall anytime soon, even if they no longer rise as dramatically as they did during the pandemic. Housing policy analysts, urban economists, general economists, and even real estate executives will cite only one reason for this: not enough housing. The country’s housing shortage did not happen suddenly. It is the result of years of housing shortages, and in some areas, decades of failed policies that meant little was built beyond single-family homes, thanks to zoning and land use regulations, all controlled by local governments. All of that was happening before the pandemic housing boom, which could only make things worse and help. A housing crisis that was somewhat limited to coastal Democratic states spread.
But what really put the brakes on the housing market were the sudden changes in mortgage rates, driven by the Federal Reserve’s efforts to tame inflation, which briefly pushed rates to their highest in two decades. People locked into mortgage rates around 3% aren’t selling unless they have to, and inventory is getting tighter. “Part of it is just a product of the 30-year mortgage,” Redfin CEO Glenn Kelman once told me. “It’s actually having the opposite effect of keeping home prices high.” He’s one of the executives who thinks the only way out of this is to build more homes.
Fortunately, mortgage rates have fallen and housing inventory has increased, so the situation is less dire for those who don’t have a home yet, but it’s still pretty tough. Meanwhile, for homeowners who are watching their home values rise, the situation is better, although they won’t get rich unless they sell their home, at which point they’ll probably need another home to live in. Not many people see home prices falling anytime soon, unless millions more homes miraculously appear. And while one presidential candidate has vowed to end the housing shortage and laid out a plan to build 3 million homes, it’s not entirely clear how she’ll do it, whether it will be enough, or if she’ll even get a chance to follow through on her plan.
