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”).
Decline will be felt by the economy on a lag and could be what ends up torpedoing his second term, along with his tariffs and the greatest bubble in history way overdue to burst in the next few years.
I objectively expect the music to stop while Trump is still in office, and no president gets re-elected in a bad economy (or his VP Vance), and this should be the worst since 1930-33.
If this decline had occurred right after he entered office, he wouldn’t have been blamed for it, or not as much. But after a full year+ and his tariffs appearing as a trigger, he will very much end up being blamed.
Voters in New York City, New Jersey, and Virginia proved again that they don’t know much about economics — or history. Bad timing, given the precarious melt-up in AI stocks and the market’s collective sugar high.
It’s fitting, somehow, isn’t it? That today is Guy Fawkes Day — a day when rebellious Brits gather to light bonfires and celebrate the foiling of a plot to blow up Parliament in 1605.
Four centuries later, voters, central bankers, and mayors-in-waiting all light their own fuses. The political class no longer needs Guy Fawkes to torch the system; it’s doing just fine on its own.
The gold rally to over $4,400 this year has been driven by central bank buying and a supply crunch – not retail investors’ interest.
If AI stocks are, in fact, about to crash, as Harry Dent and Adam O’Dell will be making the case for today, gold’s sitting at a 10% discount to the market high.
However, our demographics plateau between 2007 and 2037 and then decline as far as the eye can see, and more sharply from 2054 into 2071, using recent 2024 immigration-adjusted births.
The important point here: This huge difference is not because of substantially higher birth rates among Australia’s native-born citizens. It’s due to higher immigration as a percent of its population. Unlike Japan and many European countries, they have a lot of space to fill, but so does the U.S.
We need more immigrants today and into the future, not less, if we are going to avert a major decline for our kids and grandkids as Japan has already seen since the mid-1990s.
