Who’s left to buy overvalued houses? Too few to prop up bubble valuations
If as many posit the Federal Reserve has an unstated mandate to generate a “wealth effect” by propping up housing, they’ve managed to create a no-win situation. As longtime correspondent K.M. recently documented, roughly half of the 50+ million home mortgages in the US were refinanced in 2020 and 2021 to lock in historically low interest rates of less than 4%, with many around 3%.
Almost 25% of homeowners refinanced in 2021.
About half (51%) of homeowners have a rate under 4%.
As K.M. observed:
“That doesn’t include the millions who bought houses 2020 – 2021 at rates below 4%, who similarly are unlikely to sell unless rates drop well below 5%. Those who got rates below 3% or thereabouts, may be permanently off the market.
Think about it – why would I sell and surrender a 2.75%, 3.00% or 3.25% 30-year mortgage, only to move into another house with a loan at 5.5% – 6.5%? I’m locked into my house and loan for years if not decades.
And then there are reverse mortgages, which essentially lock the elderly in their houses for life. That’s been a housing stock reduction force for years now and may explain the increase in the number of houses in obvious disrepair.
I think you can see where I’m going with this. The artificially low rates of 2020 – 2021 have at least semi-permanently (and permanently in millions of cases) removed many millions of housing units from the market.”
We all know what happened to housing valuations as mortgage rates plummeted and post-pandemic panic-buying swept through the market: valuations skyrocketed, pushing housing affordability to near-record lows. (See chart below of the Case-Shiller Index which shot up from below 100 to 174 in the 2020-2022 bubble mania.)
This was not “market forces”–this was outright intervention by the Federal Reserve and federal housing agencies. As the chart below of mortgage-backed securities (MBS) held by Federal Reserve banks shows, the Fed went from owning zero MBS prior to the bursting of the first housing bubble in 2007-08 to owning roughly 20% ($2.6 trillion) of the entire US mortgage market for conventional single-family homes: ($13 trillion).
Federal agencies such as the Federal Housing Administration (FHA) and Veterans Administration (VA) offer low-down payment mortgages and other incentives. The mortgage-backed securities are guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae, quasi-governmental agencies. The entire state-central-bank financial machinery has worked together to inflate a housing bubble that makes those who bought long ago feel wealthy while making housing unaffordable to younger buyers who don’t have the luxury of getting help from wealthy parents.
