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The Factors That Will Contribute to the Bursting of Housing Bubble 2

Wolf Street  ( Original )
FEB 22, 2018

The subprime housing bubble was marked by a number of outright absurdities; anyone living in Las Vegas at the time can tell you about the cab driver boasting about having just “bought” (via zero down and a mortgage obtained with fictitious income information and a more-than-willing mortgage broker seeking his fee no matter what) his sixth investment property.

And though there isn’t a single bubble-inflator as flagrant as there was back then, the data is striking:

So with home prices surging for years and with mortgage rates now spiking, what gives?

Today the National Association of Realtors reported that sales of existing homes fell 4.8% year-over-year in January – the “largest annual decline since August 2014,” it said – even as the median price rose 5.8% year-over-year to $240,000.

Homeowners have a number of financial and tax reasons for not wanting to sell, including:

  • They’d lose some or all of the tax benefits that they still enjoy with their existing mortgages that have been grandfathered into the new tax law.
  • Given the higher mortgage rates that they would have to deal with on a new mortgage (which might exceed their existing rate by a good margin after repeated refinancing on the way down), and given the high prices of homes on the market, they might not be able to afford to move to an equivalent home, and thus cannot afford to sell.

If the Fed raises rates four times this year, and if the yield curve steepens even a little to edge back toward a normal-ish range, as I expect it to, average interest rates for conforming mortgages may well be around 6% by year-end. And that, I think, would mark the real pain threshold for the housing market.

ORIGINAL SOURCE: What will Spiking Mortgage Rates, High Home Prices, & the New Tax Law Do to the Housing Market? by Wolf Richter at Wolf Street on 2/21/18