Housing Bust Update: It’s Not Just the Cost of Buying, It’s the Cost of Owning
Home prices are at all-time highs, and — amazingly — are still rising. Compare today’s average price to that of 2007, which is generally thought to be the peak of America’s biggest-ever housing bubble:
And mortgage rates, which were supposed to fall when the Fed started easing in September, are instead rising. 7%, here we come.
Life is clearly hard for those who have to buy a house these days. But for a lot of people who did, at some time in the past, manage to buy a house, there’s another problem: The cost of keeping that house is skyrocketing, putting homeowners in a bind. They can’t sell because no one can buy, but they can’t stay put because the costs of doing so are becoming ruinous. Here’s an excerpt from a recent Charles Hugh Smith post on this topic:
The soaring costs of home ownership are changing the metrics of unaffordability in important ways.
Traditionally, the primary cost of home ownership everyone tracks is the mortgage payment, the famous monthly nut of principal and interest, which of course goes up with the purchase price and the interest rate of the mortgage.
As we all know, both the purchase price and the interest rate have gone up significantly, pushing the mortgage payment as a percentage of median household income up to levels that exceed the previous peak in Housing Bubble #1 circa 2006-08.
But the mortgage payment isn’t the only cost of owning a home. All the other costs that were relatively affordable in decades past are now skyrocketing. Gordon Long lists the six basic categories of home ownership expenses: mortgage, property taxes, insurance, utilities, maintenance and repair and home-related services.
Anecdotally, we’re hearing accounts of basic home insurance jumping from $3,000 to $13,000 annually in high-risk regions. We’re also hearing of insurers abandoning high-risk areas and entire states, leaving homeowners with few options for insurance. In response, some homeowners are “self-insuring,” i.e. they have dropped insurance coverage.
The problem with this option is that should the worst-case scenario come to pass, as a general rule the federal disaster relief agencies will pony up a maximum of $40,000 to the uninsured–far from enough to rebuild or repair a severely damaged house.
Insurers are not in the charity business. Once their losses run into the billions of dollars, they jack up rates to restore profitability. Recall that insurance is a global enterprise, and so the cost of our insurance is partly based on the cost of the reinsurance the big carriers purchase globally. If reinsurance rates rise, everyone’s rates rise accordingly.
Unsurprisingly, homeowners are responding by raising the deductibles in their policy to lower the annual cost. This is a hybrid of “self-insurance,” as homeowners with high deductibles have to have the cash in hand to fund the cost of repairs up to the deductible ceiling.
If you think the rise in the price of groceries is eye-popping, check out property tax increases, which are pushing 30% nationally. Since local governments depend on property taxes for a significant percentage of their revenues, we can expect these taxes to remain “sticky” even if housing valuations decline.
The costs of maintenance and repair are soaring as well as the costs of construction materials and labor have increased, along with the other costs of doing business. Just as the cost of a sandwich or burger seems to be about $15 everywhere, the cost of any home project other than fixing a leaky faucet seems to be $10,000 or more now: tree pruning: $10K, roof repair, $10K, and so on.
The soaring costs of home ownership are changing the metrics of unaffordability in important ways. It’s not just the initial purchase price that defines what’s affordable and what isn’t; so too do the costs of owning the house after our name is on the property tax rolls.
Home Prices Have to Crash
This is clearly an unsustainable market where something has to give. Taxes and insurance premiums have to plunge (dream on), mortgage rates have to plunge (possible but only in some kind of crisis), or home prices have to fall by 30% or more (bordering on “sure thing”).
By then the receipts on my desk had arranged themselves into a sort of chorus. I heard, faintly, another refrain—one from Kentucky. In the first days of the shutdown, Senator Rand Paul stood alone among Republicans and voted against his party’s stopgap, telling interviewers that the numbers “don’t add up” and that he would not sign on to another year that piles $2 trillion onto the debt.
That, I realized, is what the tariff story shares with the broader budget theater: the habit of calling a tax something else, of shifting burdens into the fog and then celebrating the silhouette as victory. Even the vote tally made the point: he was the only Republican “no,” a lonely arithmetic lesson in a crowded room.
Senator Rand Paul, (R. KY), who was the sole Republican to vote against a continuing resolution, seems to care about the actual finances of the government. “I would never vote for a bill that added $2 trillion in national debt,” Paul said in various interviews over the weekend.
The $2 trillion he’s referring to is the lesser of two proposals made by the national parties… and would accrue during this next fiscal year.
Oy.
We liked what Liz Wolfe at Reason wrote on Friday, so we’ll repeat it here: “One of the dirty little secrets of every shutdown is that everything remains mostly fine. Private markets could easily replace many federal functions.”
It’s a strange kind of confidence — one where Wall Street soars while Washington goes dark.
The Liberal Democratic Party victory has sent Japanese stocks soaring, as party President Sanae Takaichi – now set to become Japan’s first female Prime Minister – is a proponent of stimulus spending, and a China hawk. The electoral win is a vote to keep the yen carry trade alive… and well.
The “yen carry trade” is a currency trading strategy. By borrowing Japanese yen at low interest rates and investing in higher-yielding assets, investors have profited from the interest rate differential. Yen carry trades have played a huge role in global liquidity for decades.
Frankly, we’re disappointed — not because of the carry trade but because the crowd got this one so wrong!
Back in the Global Financial Crisis (2008), we recall mass layoffs were driving desperation.
Today, unemployment is relatively low, if climbing.
Affordability is much more of an issue. Food, rent, healthcare, and childcare are all rising faster than wages. Households aren’t jobless; they’re stretched. Job “quits” are at crisis-level lows.
In addition to the top 10% of earners, consumer spending is still strong. Not necessarily because of prosperity, but because households are taking extra shifts, hustling gigs, working late into the night, and using credit cards. The trends hold up demand but hollow out savings.
It’s the quiet form of financial repression. In an era of fiscal dominance, savers see easy returns clipped, workers stretch hours just to stay even, and wealth slips upward into assets while daily life grows harder to afford.
