It didn’t take long for white-collar professionals in 2020 to realize that expanded work-from-home policies meant they could buy real estate pretty much anywhere. Vacation markets went gangbusters. Exurbs got red-hot, as did so-called “Zoom towns” like Boise. Even cities that were losing residents like New York City and San Francisco got overheated. decoupling roommates created a spillover effect From the rental market to the housing market
That Pandemic Housing Boom It was also a good idea to include a staggering 42% jump in U.S. home prices Between March 2020 and June 2022. At least 60% of this appreciation researchers at the Federal Reserve bank of San Francisco estimate, can be attributed to the elevated demand for “space” that occurred during the pandemic.
Of course, that demand boom hasn’t just fizzled out—it’s doing a 180: On a year-over-year basis, mortgage purchase applications are down 41%. There’s actually fewer purchase applications now than at the bottom of the 2008 crash.
This rapid pullback in demand has economists using the most fearful word in housing: Bubble.
“It was a pandemic-induced [housing] bubble, which was stoked by work from home migration trends: High wage workers going to lower second tier middle markets for more space,” said Diane Swonk, chief economist at KPMG. “We went to an extreme on WFH [spurred housing demand]It has ended abruptly, however. It is part of the reason I think you’re seeing housing prices fall as well. The local incomes don’t support a lot of these home values.”
We’ve already seen home price growth rollover on a national basis. Between June and August the Case-Shiller National Home Index The 1.3% decline in U.S. home prices was the first since 2012. This is the first decline in home prices since 2012.
“Once you start the process of prices falling nationally, there is a self-fulfilling momentum to it because no one wants to catch a falling knife,” Swonk says. “We’re easily going to see large double-digits declines. I think 15% next Year is very conservative. We’re already turning.”
When Fortune coined the term Pandemic Housing Boom, we did so knowing that if the boom concluded in a bust, we’d have to relabel it a Pandemic Housing Bubble. We even set a criteria for it: A market with a greater peak-to-trough decrease of more than 10% gets the Pandemic Housing Bully label. If KPMG’s prediction comes to fruition, the entire country would get our “bubble” label.
Here are the top four takeaways Fortune‘s chat with Swonk.
Spiked mortgage rates popped the “bubble”
If the Federal Reserve switches to rate hiking mode, it will. spell trouble for rate sensitive sectors like the U.S. housing market. When those rate hikes turn aggressive because the central bank fell behind on its inflation-fight, it’ll be that much more intense.
This is what we’ve seen in 2022. The Fed’s monetary tightening was seen the average 30-year fixed mortgage Rates rose from 2.98% up to 7.1% over the past 12 months. This is the biggest mortgage rate shock in history. Fed Chair Paul Volcker’s infamous tightening in 1981.
Two reasons are why the mortgage rate shock is important. First, historically low mortgage rates—which also helped to power the Pandemic Housing Boom—are gone. The spike has meant that many potential buyers have been priced out of their mortgages or lost their mortgage entirely.
Home prices are falling—but it isn’t the 2008 story
If U.S. house prices fall by 15%, it would mark a significant change. the second biggest home price correction of the post-World War II era. It would be impossible to beat the 27% correction between 2006-2012.
The Federal Reserve insists that this is not a repeat of 2008’s crisis.
“We didn’t see the same poor underwriting credit in this cycle from a financial stability perspective as we did before the Great Financial Crisis. Lenders were much more careful in managing housing credit. It’s a completely different situation. [in 2022], it doesn’t present potential, [well] it doesn’t appear to present financial stability issues. We do understand that [housing] This is where our policies have a huge impact.” Fed Chair Jerome Powell told reporters earlier this month.
Swonk agrees to Powell: “This crisis is not subprime.” [the fed] That’s exactly what I meant.”
Although tight supply and improved lending standards should prevent another 2008, they are not enough to stop a housing correction. Swonk thinks so.
Swonk says, “The most interesting thing to me about these markets is how quickly they are correcting with still very tight inventories.”
Phoenix is very bubbly—Chicago not so much
As Fortune has previously noted, the textbook definition of a housing bubble requires three things. First, you’d see exuberant demand—boosted by speculation—rush into the housing market. Second, the prices of homes go up much faster than incomes can support. They reach “overvaluation” levels. The housing bubble bursts, and home prices drop.
The Pandemic Housing Boom was a success “investor mania” The market is returning. Mom-and-pop landlords have been attracted to historically low mortgage rates. Airbnb Both hosts. Short-term home flippers were also attracted by record highs in home price appreciation. In fact, 114 706 homes were “flipped” during the first quarter of 2022. according to ATTOM Data. This is higher than any quarter in years prior to the 2008 bubble. Speculation? Check.
Every quarter, Moody’s Analytics calculates an “overvalued” or “undervalued” figure for around 400 markets. The firm will examine whether local fundamentals (including local income levels) could support local home price. It is only when a housing market becomes “overvalued” that it becomes troubling. The average market was “overvalued” in the second quarter of 2022 by 23%. This is an increase from 3% in Q2 2019, and more than the 14% in Q2 2006. Overvaluation? Check.
The pandemic saw the first two elements that made up the housing bubble return, but the third element has yet not arrived. Swonk claims that “burst”, though it’ll vary depending on the market, is already happening.
Swonk believes the bust will differ. Some markets were more bubbly that others.
Look at Phoenix and Chicago, for instance. Both markets experienced booms and busts the last time around. It’s easy for this to be explained, given that Chicago and Phoenix were “overvalued” in 2006 by 32% and 48% respectively. This time around Phoenix (which now has 54%) was flooded with out-of-town buyers and speculators, while Chicago (3%) is still relatively calm.
Housing economists predict that markets like Phoenix will be more vulnerable to sharper price drops in the future. Moody’s Analytics predicts a 18.7% decline in prices in bubbly Phoenix. The analytics firm predicts that Chicago home prices will fall by 3.6%. (You can find Moody’s forecasts for 322 markets. here).
Falling home prices help the Fed
Jerome Powell, Fed Chair has made it clear the U.S. housing markets are in a “difficult correction.” Once it’s done, buyers and sellers will both return to a “reset” market.
Some economists read between the lines and interpret “reset” as “home prices falling.”
Let’s face facts, where is the biggest push on inflation right now?” It’s in shelter cost. It’s in shelter costs. [the Fed] Swonk states that the most powerful people have the most power. “And so, yeah. It’s a remarkable rise in [home] prices. An unsustainable rise—some kind of correction is needed. The problem is that you can’t choose how large that correction should be.
Swonk claims that a slight correction in home price would help the Fed reduce shelter costs and overall inflation. In such a scenario, buyers may return to a marketplace with lower prices, higher inventory, and lower mortgage rates.
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