Retirement

Let’s Talk About the Current Housing Market

By Shane Barber

November 12, 2021

Let’s Talk About the Current Housing Market


Key Points – Let’s Talk About the Current Housing Market

  • The Red-Hot Housing Market
  • Trying to Make Sense of the Housing Bubble Headlines
  • Why People Worry About the Current Housing Market
  • Managing Risks and Making the Most of the Market’s Opportunities
  • The Two Generations Driving the Housing Market
  • 11 Minutes to Read

The Red-Hot Housing Market

It’s no secret that the current housing market has been red hot over the last two years. Houses have been selling in days, sometimes hours, from the time they hit the market. Many of those houses sell at prices well above the seller’s asking price, as bidding wars have become the norm again.

It’s all too familiar to anyone who remembers the housing boom in the early 2000s. That boom ultimately led to one of the biggest housing crashes in U.S. history. To be certain, today’s housing boom is not the same as the last one. But is it actually “different” this time? It’s a fair question, and one we’ll attempt to answer in this article. But first, a little history.

Providing a Unique Personal Perspective on the Housing Market

In the early 2000s, I was in the residential construction industry in Colorado. Some friends of mine were born with framing hammers in their hands and knew home building inside and out. I learned basic construction skills from my grandfather and always loved woodworking.

We lived about 45 minutes southwest of Denver in a small mountain community. Due to the volume of homes being built on the mountain, there was more framing work than there were crews available to do the work.

Fun and Frigid Framing

We saw an opportunity and started framing houses as a sub-contractor for some builders we knew in the area. It was the most fun and, at times, coldest work I’ve ever done. I remember framing a house in the winter at 10,000 feet above sea level. It was -10 degrees with a 20-30 mph wind. Brutal! But we were making good money.

It’s hard to believe now, but we were getting between $5 and $10 per square foot just to frame and sheet house. Framing a 3,000 square foot home would make us between $15,000 to $30,000. It was decent money for four young guys.

As will happen with young people, though, life changes and paths diverge. Such was the case with our little partnership. One of the guys moved to central Kansas, one moved to Iowa, and I wound up moving to Pueblo (it’s a long story). That’s where my story ties back into the current housing market.

Hole-y Moley: An Epic Housing Market Boom

When I arrived in Pueblo in early 2004, the housing market was absolutely booming. There were holes in the ground everywhere you looked, but they weren’t holes for long. A crew would show up on Monday morning. When they left on Friday afternoon, there was a completely framed, sided, and roofed home with the doors and windows installed. It was EPIC to watch, but impossible to compete with.

The builder(s) shall remain unnamed to protect us, but they literally gutted the construction process—and therefore the quality of the product—to the point where I would never buy one of their properties.  They were putting up homes that made the construction quality of a double wide trailer look impressive. I’m not kidding. It’s not surprising, though, when you realize what they were paying the crews who put them up.

Remember how I was getting between $5 and $10 per square foot on the mountain? These guys were getting $1.35 per square foot! That’s roughly 80% less per house! It’s no wonder they were in and out in a week. They couldn’t afford to be there longer than that. Fortunately for me, I found a few guys who had projects they were willing to pay more on, but it was still 30-50% less per square foot than on the mountain.

An Overload of Liar and NINJA Loans

Radio and television were filled with commercials by mortgage companies offering loans with little or no documentation required. These are now called liar loans or NINJA (no income, no job, approved) loans. They would loan up to 125% of the value of the property and closing took DAYS—not weeks or months.

Spec homes filled what was once barren landscape nationwide, as the next Timber Ridge, Fox Run, or Water’s Edge subdivisions filled with McMansions rose like the phoenix from the fire. The seemingly endless demand for homes needed to be filled, and there was no shortage of folks willing to put everything they had into filling it.

A Runaway Real Estate Gravy Train

There was also a thriving flipping industry because despite the speed with which the crews I spoke about earlier worked, they couldn’t build new houses fast enough to meet the demand. Mom and pop investors were buying distressed properties, putting a little lipstick on the pig, and flipping them to the ever-present next buyer for a profit. Home values were increasing at an unprecedented pace, sometimes more than 20% year over year, and people began to think that the real estate gravy train would never run out of track.

And then, it did. Just like watching a train wreck, you couldn’t look away.

Trying to Make Sense of the Housing Bubble Headlines

What’s interesting in retrospect and interests me about the current housing market are the opinions of the self-appointed or media-selected “experts” that make the headlines of major news outlets during times that we all intuitively sense aren’t normal. Such was the case in July 2005 when former Wall Street Journal real estate columnist turned hedge fund manager Neil Barsky penned an opinion column for his former employer titled, What Housing Bubble.

I encourage you to read it, as it is a history lesson unto itself and a cautionary tale about glass houses and stones—if you know what I mean. He comes out of the gate hard in the first paragraph:

“If you want to be scared out of your wits these days, you basically have two choices: go watch Steven Spielberg’s latest or listen to the hysterical warnings of economists and journalists about the imminent popping of our so-called housing bubble. Robert Shiller, the ubiquitous Yale economist, says home prices could fall 50% from their peak. Taking things a step further, The Economist recently went so far as to call the global housing boom ‘the biggest bubble in history.’”

Say Bye-Bye to Barsky’s Hedge Fund

I’ve been following Robert Shiller’s work for almost two decades and find him to be a lot of things—hysterical isn’t one of them. Shiller was correct. Barsky? He was wrong. Epically wrong. And his hedge fund? You could read how it epically crashed and burned in this WSJ article titled, Barksy to Shut Down His $3.5 Billion Fund.

Less than four years after calling Shiller hysterical, Barsky had lost $2.7 billion of the $3.5 billion in his fund. But there he was, front and center in 2005 telling you that one of the best minds in the real estate and financial world was off his rocker from the pages of The Wall Street Journal, one of the most respected publications in the world.

Could Barsky have been correct? Of course. In an alternate universe.  He went to great pains in the article to justify the then current housing market price surges as normal and sustainable. He also made sure to point out the fact that he is not an economist. That may explain why he closed his article with the following statement:

It’s time to stop being alarmist about home prices. To the extent policy makers want to modulate home-price appreciation, they would do well to relax zoning laws or stimulate development of low-income housing through tax subsidies. Since those things are not likely to happen overnight, housing prices are likely to cool off slowly, if at all.

What Goes Up, Must Come Down

Anyone with a cursory knowledge of markets knows that what goes up, will come down eventually. Probably not to zero, or even by half necessarily, but it will come down, if only for a time. It’s a fact that people ignore at their own peril, but one the last 20 years has confirmed repeatedly.

This time is NOT different. There are different drivers, demographics, circumstances, and players, but the end will be the same at some point.  In the famous words of Mark Twain, “History doesn’t repeat itself, but it often rhymes.” All we need to do is look at the recent headlines for proof that he was right.

Unsurprisingly, The Wall Street Journal is devoid of housing bubble articles at the present time. But that doesn’t mean there aren’t any. The following recent articles are proof of that.

Why People Worry About the Current Housing Market

A quick Google search for “housing bubble” turns up with 74 million results. Certainly, many of the results are for the last housing bubble, but there is no shortage of them directed at the current housing market conditions.

Let’s just say that more than a few people are beginning to get an uneasy feeling about the current housing market. Those people worry that a repeat of the last bubble bursting may be on the horizon. I believe that’s why we’re seeing the headlines like the ones I just mentioned. Remember that the financial media’s job is to be cheerleaders. If they sense pessimism, they make sure to get you pumped up again.

The $64,000 question is, “Who is right?” I can confidently tell you that my unequivocal answer is a definitive, unwavering, and solid…I don’t know.

Actually, that’s not true. I do know. Both sides are right. They’ll just be correct at different times—like a broken clock is right twice a day.

Technically, Barsky was right…for a few months. But Shiller was more accurate long term. Those saying that there’s no bubble today will be right for a time as well. They could be right for weeks, months, or maybe even a couple of years. But in the end, those who are worried that the market will correct lower will also be vindicated, as prices will undoubtedly mitigate and potentially fall at some point by 30 to 40%.

Managing Risks and Making the Most of the Market’s Opportunities

I believe the more important thing right now is to understand what risks exist, how to manage those risks, and what opportunities today’s market presents. At the end of the day, however this thing ends, we must deal with the current conditions as we go about our everyday lives.

Two Categories of Risks

First, let’s talk about the two categories of risk. The first set of risks are to those entering the market. The second set are to those looking to move up or down in the market.

The risks to those entering the market are beginning to look a lot like they did in ’04 and ’05. Those include interest rate risk, opportunity risk, and the risk of entering the market near a peak. I think it’s important for those entering the market to plan ahead.

You need to have a preapproval and get a rate locked in before you find that dream home. Otherwise, you’re going to lose your chance at owning that home to another buyer who was better prepared and more attractive to the seller. What’s more, the seller may be looking for a fast close. If you’re not prepared, you won’t win that battle no matter your bid. You also need to bring cash to the table for your own protection.

While you can get a loan with 3% to 5% down, that may not be a good idea at this point in the game, especially if you are purchasing a primary residence. Here’s my reasoning, as I saw this play itself out repeatedly from 2007-2010.

If you borrow money on a home and put up a 5% down payment, and the home subsequently loses 25% of its value, the bank is going to come knocking on your door looking for a big fat check for you to remain in the home. Why? You owe them 120% of the value of the property, and unlike 2005, banks are no longer in the 120% mortgage business.

Being Prepared is Paramount

If you don’t have the cash to get your loan ratio back to something the bank can live with, they will unceremoniously foreclose on you, leaving you with no place to live. This isn’t speculation; it happens. I know because I saw it happen to friends of mine. Just be prepared and everything will be fine.

The risks to those moving up or down in the market are a little different. Most people are aware of them, but they are worth mentioning here. Regardless of upsizing or downsizing, you need to be aware that the appreciation in your property has occurred in every potential replacement property you are considering. That means that you might have to reinvest all the gains from your current property to buy a smaller property that fits your downsizing goals.

It also means that you’re likely going to need to spend some cash if you plan to move into a bigger place unless you are relocating to a less expensive area than you currently live. A rising tide lifts all boats, and a rising housing market lifts all prices.

The Wealth of Opportunities

For those who already own a home, the market has also brought with it some real opportunities depending on your current stage of life and your willingness to wait it out or jump in with both feet. Many of you know my feelings about looking at your home as an investment rather than a place to live, raise your kids, and make memories. Most of the time it is the latter, but it can occasionally be the former.

For those lucky enough to be able to liquidate their primary residence and put that cash in their pocket for later, today’s prices make that an attractive option. Whether it’s moving to a lake/vacation home you already own full time or renting until your dream property comes along at the price you want, the opportunity to do so is certainly buoyed by today’s prices.

The Two Generations Driving the Housing Market

Whether you view the current housing market as an opportunity or an obstacle depends on the stage of life you’re in. That’s completely normal. What’s unusual about the current housing market, and what may well make the bubble doubters correct for longer than the bubble predictors, is that there are two distinct generations driving the market. Both those generations have held the title of largest generation in American history, and one still does. They are the baby boomers and the echo boomers (the millennial generation).

The echo boomers hold the title of largest generation, which they took from the original boomers. The echo boomers are in the middle of their family-formation and child-rearing years, which includes buying homes—lots of homes.

In case you are unaware, the baby boomers are now between 56 and 74 years old, while the echo boomers are between 26 and 42. The baby boomers are buying bigger, second, or retirement homes. Meanwhile, the echo boomers are buying their first or potentially a move-up home if they have several children already. You’ve got to have room for them to run!

The movement of these two segments of the population is a study unto itself. It’s something that has been accelerated by the pandemic we just lived through, which I wrote extensively about last year. That movement is likely to continue for the near future.

So why would anyone be worried about the housing market being in a bubble if that is the case? Good question. Look at the following charts.  They tell a story that is encouraging and cautionary.

Current Housing Market - Real S&P/Case-Shiller U.S. National Home Price Index

TABLE 1 | Source: Advisor Perspectives

Current Housing Market - Census Bureau: Homeownership Rate

TABLE 2 | Source: Advisor Perspectives

TABLE 3 | Source: Advisor Perspectives

Current Housing Market - Real S&P/Case Shiller Home Price Indexes Year-over-Year

TABLE 4 | Source: Advisor Perspectives

TABLE 5 | Source: Advisor Perspectives

Current Housing Market - House Price Index v Equivalent Rent Residence

TABLE 6 | Source: Advisor Perspectives

The Main Concern

Figure 6 is probably the one that causes the most concern. The Owners Equivalent of Rent divergence from the House Price Index shown here is substantially higher than the “bubble” that occurred in the housing market in 2006-2007 just before it burst. This series wasn’t started until 1991, so it’s unclear how far the two indicators can diverge before trouble starts. Only time will tell.

As I’ve said about the stock market many times before, and it’s applicable here, the market can remain overvalued for far longer than anyone thinks possible. It can also reach heights most thought to be impossible. While this chart is cautionary, it’s not meant to be an indicator that it’s over.

It All Starts with Having a Plan

It’s important than ever to have a plan, where your real estate is concerned, that considers all the possible outcomes of whatever you are thinking of doing. You won’t have to worry about things changing on you because you’ve already taken those possibilities into consideration before you made your decision. We’re here to help you think through all those possibilities, put a plan in place that fits what you’re trying to accomplish, and realize all the resources you have at your disposal. If you’re unsure, don’t go at it alone.

Have a great week, and I hope you have a happy Thanksgiving!

Shane Barber, Partner, RFC, AIF®


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The views expressed represent the opinion of Barber Financial Group an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Barber Financial Group does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.