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”).
Relative to GDP, the net international investment claim on the U.S. economy was 20% in 2003. It had swollen to 65% by 2023. Practically every type of American company, bond, or real estate asset now has some degree of foreign ownership.
But it’s even worse than that. As the federal deficit has pumped up the GDP figures, and made a larger share of the economy dependent on government spending, the quality and sustainability of GDP have deteriorated. So, foreigners, to the extent they are paying attention, are accumulating claims on an economy that has been eroded by inefficient, government-directed spending and “investments.” Why should foreign creditors maintain confidence in the integrity of these paper claims? Only to the extent that their economies are even worse off. And in the case of China, that’s probably true.
As global government interest expense climbed, gold quietly followed it higher. The IIF estimates that interest costs on government debt now run at nearly $4.9 trillion annually. Over the same span, gold prices have tracked that burden almost one-for-one.
Silver has recently gone along for the ride, with even more enthusiasm.
Since early 2023, Japan’s 10-year government bond yield has risen roughly 150 basis points, touching levels not seen since the 1990s.
Over that same period, gold prices have surged about 135%, while silver is up roughly 175%. Zoom out two years, and the divergence becomes starker still: gold up 114%, silver up 178%, while the S&P 500 gained 44%.
According to the American Association of Individual Investors, the average retail investor has about a 70% allocation to stocks. That’s well over the traditional 60/40 split between stocks and bonds. Even a 60/40 allocation ignores real estate, gold, collectibles, and private assets.
A pullback in the 10% range – which is likely in any given year – will prompt investors to scream as if it’s the end of the world.
Our “panic now, avoid the rush” strategy is simple.
Take tech profits off the table, raise some cash, and focus on industry-leading companies that pay dividends. Roll those dividends up and use compounding to your overall portfolio’s advantage.
In a healthy economy, production and consumption communicate constantly. If a company builds something useful, customers respond by buying it. If they overbuild, inventories pile up and prices fall, sending a signal to slow down.
AI infrastructure, by contrast, is being built largely on faith. Companies are scaling up compute power without clear signs of sustainable demand. Unlike oil and gas, where prices adjust second-by-second, AI companies operate in a fog. They release tools, collect usage stats, and hope that paid conversions will follow.
