Panic-Staying vs. Panic-Selling
Is Today's Housing Market Similar to the Mid-2000's?
There’s been a lot of hype on social media about the current housing market, how it’s so imbalanced, and a huge disastrous crash is inevitable, with people “running for the exits”. This is incorrect, at least based on data that we currently have available to us.
There are many people on social media whose shtick is to perpetually proclaim doom is imminent, and I do get it…we are in “interesting” times, and it’s hard to feel that things are going swimmingly and will continue that way indefinitely. Some kind of adjustment or correction does seem inevitable.
But there is no need for class-warfare hysteria, at least at this moment in time on this current matter. Yes, the wealthy do screw the middle-class and poor regularly in countless ways and then get bailed out, but this happens to not be one of those examples. This is not 2005-2007, when the housing and mortgage markets essentially operated like law and order in the wild west. Back then, fraud and greed were rampant and moving along unchecked until the meltdown hit. The current markets are much more normal and driven by natural economic forces than the impetuous greed from the era from 20 years ago. Impetuous greed still exists, of course, but is not currently the main driver of today’s housing market.
First, let’s revisit the housing situation in 2005-2007. First of all, using the recent high of 822,000 home sales in 2020 per the US Census as a reference, the overall trend leading up to 2005-2007 was basically ridiculous amounts of home sales. Starting in 1998, the total sales of 886,000 were higher than 2020’s total, and every year from then through 2006 was still significantly higher than 2020. This culminated in an incredible run from 2003-2006 of sales of 1.086 mil, 1.203 mil, 1.283 mil, and 1.051 mil, respectively. 2020’s total is the highest since the 2006 total.
We all know what happened soon after: The Great Recession, likely initiated by the mortgage meltdown. But what caused the mortgage meltdown? It wasn’t just the bubble-like gross number of home sales. It was a combination of lots of factors which include total home sales, but also included the following: occupancy type, mortgage loan terms, mortgage loan and real estate fraud, unforgivable overconfidence and negligence by bank loan originators and executives, etc.
But let’s focus on occupancy type, because that would compare favorably to the recent idea of wealthy people speculating in today’s market, driving up prices and panic selling when the bubble finally bursts. We can intuitively guess that people that buy non-owner-occupant homes, such as investors and those buying vacation homes, tend to be what we would call “wealthy”, meaning they have high levels of money in the bank and a better credit profile than the average person. In 2010 the Federal Reserve Bank of Richmond did an exhaustive study titled “The Role of Non-Owner-Occupied Homes in the Current Housing and Foreclosure Cycle”. In this study, they confirm this intuition with data.
In this study they also show that leading up the mid-aught’s from 2003-2005, during the massive increase in overall home sales, non-owner-occupants’ share of home sales grew significantly faster than owner-occupants’ share, and that the investors’ share alone (not including vacation home buyers) accounted for over 60% of the overall increase. In 2004-2005, when you include vacation home buyers, all non-owner-occupants accounted for 75% of the growth.
This clearly indicates that this was a time of large amounts of “wealthy” people buying up homes, because it was simple and easy, and considered a great easy-money investment at the time. In hindsight, it is now obvious it was a market bubble and real estate speculation was rampant. I do recall some real estate gurus at the time declaring that real estate is a great investment because it never goes down, a very telling sign that it would inevitably, in fact, go down.
Why is this important compared to today’s real estate market? Let’s look at today’s data. According to the US Census Bureau, the rate of homeownership, defined as households that are owner-occupied, has been increasing at a significantly fast rate since 2016. The Q2 2016 figure is 62.9%, this shot up quickly to a peak of 67.9% in Q2 2020, an increase of five percentage points of share in four years. If we look at a comparable time frame in the bubble days, we can start at Q2 2000 and go exactly four years from then to the all-time peak in Q2 2004. The share was 67.2% and 69.2%, respectively…a two-percentage point increase.
This shows that the recent increase in the share of owner-occupied homes is 2.5 times faster than the wild west days leading up to the mortgage meltdown. Of course the inverse of this would be that the share of the increase of non-owner occupied homes were much more substantial then than it is now. If non-owner-occupied buyers were buying up homes at alarming rates now, we would expect to see a much slower growth of owner-occupied share than we have.
But there can be wealthy owner-occupant buyers that are driving the market, right? Well, Freddie Mac did a study of basically this question in June of 2023, that focused on the types of owner-occupants. What they found was somewhat unexpected to them, although if you really think about it, it makes a lot of sense. They found that below-median family income household homeownership increased sharply from 2016 through 2023 (the increase is even sharper if you stop at the Q2 2020), and that it increased at a rate significantly higher than above-median family household income homeownership.
This indicates that the people that have really been driving the market over the last decade have been in the lower tier of income, many of whom tend to be first-time homebuyers. This makes sense, because rates were so low, largely due to the aftermath of the mortgage meltdown, which made homeownership very affordable during this time. It’s only been for about the last year that homeownership became very unaffordable.
Therefore, the concept of a coming huge housing crash caused by people panic-selling is not fathomable. Real estate is not easily bought and sold like stocks or bonds, and this is not 2007. Due to high interest rates and historically low housing affordability, people are not nearly as motivated to buy or sell. Panic selling on a large scale simply cannot be a thing in today’s market. Sellers don’t want to sell and then buy a new home at unaffordable prices and mortgage payments, and buyers simply don’t want to buy in such conditions. Plus, many buyers are currently renters, and renting used to be obviously more expensive than buying on a monthly payment basis. This has now evened out, so tenants are not nearly as motivated as they recently have been for over a decade.
Also, walking away from homes and letting them go to foreclosure won’t be a thing, as most people’s current housing situation is much better than the alternative. Even if they’re struggling owner-occupants, their housing payments are much lower than what they would be if they had to buy a home with a mortgage. And if they are landlords, why would they walk away from large equity positions and record low interest rates, with housing shortages causing rents to go up? It’s a similar situation with vacation homeowners, large amounts of equity and low rates means you have a hell of an asset on your hands. In 2005-2007, when everyone’s interest-only adjustable-rate 120% loan-to-value mortgage started coming due on collateral that was dropping in value, it made a lot of cold financial sense to just walk away and pretend you never were floating to the edge of the waterfall in an air-tight bubble.
In 2007, conditions were more favorable to panic selling and mass property abandonment, which resulted in historic rates of foreclosures, and the subsequent historical mortgage meltdown. There were just more non-owner-occupant owners that could easily walk away from their homes and mortgages. Today, in 2023, it’s just the opposite. Everyone is panic staying put, because the other option is too burdensome for them to take on.