The last housing bubble and collapse is still in recent memory. Although, it hasn’t stopped home prices from hitting new highs.
Even after adjusting for inflation, home prices are still at all-time highs in the U.S. And when looking back at the last run up, it was largely built on unhealthy lending practices, as well as some financial trickery. But is this time around just as dangerous?
For the short answer, no… it’s not as dangerous for the same reasons. But there’s still a looming mortgage default and eviction crisis brewing. And if you’ve bought a home or are considering buying, the trends I’m going to show you can help you make better decisions.
Lending standards aren’t as easy as they used to be. Big lenders and banks haven’t originated and sold as much toxic debt. And overall, the big banks are much better capitalized and that’s part of the reason why I invested in Wells Fargo, and likely why Warren Buffett has put billions into Bank of America.
Still, the Fed’s new intervention is dangerous. They’ve warped free markets further to prevent some short-term pain. But they can only kick the can so far down the road.
Case in point, the Fed has pushed interest rates down to all-time-lows and rates can’t sustainably drop below zero – with the U.S. dollar being the world’s reserve currency.
This chart shows the 1-year and 10-year treasury rates, along with the 30-year fixed mortgage rate. They’ve dropped in tandem.
Now, with the right credit rating home buyers can lock in below 3% fixed mortage rates. That’s insane! And although home prices are at all-time highs, low rates have pushed down the average monthly mortgage payments.
This drop in monthly home payments helps to offsets the increase in home prices. So, if you have a stable job or other sources of income, it might make more sense to take out a mortgage at these rates.
The key caveat here is stable sources of income. With the forced economic shutdown, millions of people have realized their jobs aren’t as safe as they thought. And millions of Americans haven’t prepared for these possibilities.
Side Note: With history as a guide, we know recessions are inevitable, just as there are both high and low tides. And it’s easy to overlook in the short-term when things are good… but keeping history in mind helps me avoid lifestyle inflation and also live a frugal lifestyle. That’s helped me not only survive but thrive during this downturn.
Housing Bubble 2020 Full-Steam
Even with the huge spike in unemployment, the housing bubble is full-steam in 2020. And it won’t likely deflate until 2021. It all really depends on the government’s heavy hand and continued stimulus.
The Fed lowering interest rates is just the first of three big housing bubble pressures…
- Artificially Low Interest Rates
- Forced Shutdowns and Travel Restrictions
- Extending Unemployment Benefits and Stimulus
For the second point, people are spending more time at home. This has led to a spike in home improvement projects and home buying demand in general. With the shift to working from home, people are also leaving expensive cities and buying homes in other areas.
For the third point, Uncle Sam has sent more free money to unemployed Americans, as well as millions of those still employed like me. This extra money sloshing around has helped push up asset prices across the board. And it’s helped prevent some loan defaults. Although, it’s not enough…
Mortgage and Eviction Crisis
To prevent the looming eviction crisis, the government had put a moratorium on evictions. This has helped millions of Americans – estimated as high as 40 million – keep housing they can no longer afford. Although, starting August 24th, renters who were protected from eviction by the CARES Act will be no more.
I’m sure extensions will follow and certain cities and states have additional protections in place. But ultimately, renters that can’t meet payments will default. It’s a rude awakening for many people who have bought above their means and haven’t saved up big emergency funds.
Of course, some people were in dire situations to begin with and couldn’t have saved… but with plenty of anecdotal evidence, as well as understanding average consumer trends, more people could have prepared much better.
On the flip side of the eviction crisis, many of the landlords also depend on the rent income. They have mortgages to pay off as well. So, the delayed payments and coming defaults are already moving up the food chain. It’s a painful situation and as always, any crisis presents opportunity for those who have prepared.
I’m considering locking in the artificially-low interest rates. I wouldn’t necessarily buy a home. Instead, I might use it as cheap leverage to increase other investment returns. Also, depending on how the housing bubble unfolds, I might be able to pick some cheap real-estate hopefully in 2021. But only time will tell, along with government intervention. Stay tuned!