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”).
This enormous, drawn-out insurrection, composed of serial felony crimes, amounts to the greatest insult against the republic — the res publica, in Latin, the public thing — in the nation’s history. And now it is coming apart as an overwhelming majority of citizens, including now many Democrats, can’t avoid discovering what has happened in the country. Because lies are weak and the truth is sturdy and eventually truth prevails, even after an arduous struggle.
The old news media complex, the networks and the papers, are not reporting the recent disclosures by the Directors of the CIA, the FBI, and National Intel. What will it take to get their attention? Arrests and perp-walks of formerly important officials? And then, do they acknowledge and atone for their disgraceful participation in the events? Or pretend they couldn’t figure any of it out for years and years? Poor us, we didn’t know! Suddenly, it looks like many of these “legacy” news outfits are going out-of-business. They’re throwing their performers over the side like sinking ships casting off so much useless ballast.
For now, the contribution of AI to the economy is still a fraction of overall consumer spending.
If this trend continues, it’s a sign that the market may further concentrate into the big tech names, which already trade at rich and lofty valuations.
Yesterday, President Trump nixed speculation that Treasury Secretary Scott Bessent would be the next Fed Chair. “He wants to stay where he is,” Trump told CNBC yesterday, adding Fed Governor Christopher Waller and NEC Director Kevin Hassett are now in the running.
Powell’s still at the podium, despite ongoing threats and the occasional Truth Social tantrum over interest rate policy.
Whoever’s in control of writing the script for the ongoing dream has dropped teasers in social media for next week’s episode: Will Trump leave Powell at the helm of the Fed and create “The Shadow Fed”… (cue dramatic music and video close-up of Powell’s bespectacled visage).
Now cometh AI, adding to the too-much-info problem. Already, it generates news and reports that fill our in-boxes and waste our time. And an Israeli company just announced that it can twist and turn (distort) the news in real time.
Which leaves, at least for now, AI and the Mag 7 in an old-fashioned financial bubble. Stock prices are far higher than actual sales and profits can account for. So one way or another price and value will have to come back together. While it is not impossible that some breakthrough will lead to a big burst of productivity gains and growth, it is more likely that stock prices will fall.
