Over the last 130 years or so homeownership has been the dream for most Americans.
From the earliest settlers, most of us desire the status of owning a home. As we feel and have been taught to feel that renting is simply throwing away our money, and now once again, and guys I do say once again because history for those of us who care to revisit can teach us some invaluable lessons.
Some of those valuable lessons that we learn from history have to do with our economy and our finances I think the importance of looking at history right now is because when our economy gets out of balance and believe me it’s way out of balance right now. Will the housing market crash be a big question now?
What usually follows is a major economic crash and depending the financial decisions that we’ve made leading up to that crash or correction will affect us all differently in one way or another.
Now that we’re in for a major economic correction and that also includes the industry called the housing market. In the last 30 years of the Housing Industry in one way or another, there has been seeing a more unaffordable housing market than we’re experiencing right now. Homeownership has evolved in many ways over the last 130 years however there are many similarities in every boom and bust where we can learn from history should we decide to do so
1. History before the Great Depression
Now prior to the Great Depression which began around September of 1929 like today home ownership Was Out Of Reach for most Americans.
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In 1900 less than half of the households owned their homes and this declined to even less homeownership over the next 20 years. And then from 1920 to 1929, the U.S. experienced a decade-long robust economy known as The Roaring Twenties.
This boom raised homeownership rates as businesses were thriving and Americans were making more money than ever. This enabled them to purchase a home instead of renting. And during the 1920s America’s economy grew 42 percent as mass production spread consumer goods throughout the entire United States.
In 1922 there were 60 radio stations broadcasting news weather music and talk shows, and by 1925 more than 25 percent of families owned a car. In 1923 the stock market began a six-year Bull Run and in 1926 the air Commerce Act authorized commercial airlines.
In 1928 stock prices rise to 39 and the FED responds to all of this out-of-control consumer spending by raising interest rates from 1.5 to 5 percent in the fed’s attempt to stop speculation.
And in 1929 the number of people flying around in commercial airplanes had increased from six thousand in 1926 to hundred and seventy-three thousand. In 1929 there were now 26 million cars registered and then guess what about a year after the FED raised a discount interest rate to five percent.
2. The Great Depression
Wham here comes the Great Depression, it began in August of 1929 and by October the stock market crashes. The Depression was said to be fueled by not just the stock market crash but a collapse of World Trade, government policies, bank failures, and the collapse of our money supply.
And during the decade-long grade depression, Americans struggled financially, and by 1940 homeownership rates had fallen to the lowest level of the century 43.6 percent. Then from 1930 through 1945, we had World War II.
And coming off the Great Depression and the war we had a massive housing shortage. Any available homes back then just like now were unaffordable.
3. Initiative by the Government to Increase Home Ownership
The federal government responded by building highways with critical infrastructure and then they cut red tape in order to create incentive programs for home builders and developers to build affordable housing spurring a time of much-needed housing development.
During this time the federal government also initiated loan programs to make home mortgages more affordable and more available to home buyers. And they did so by extending loan terms to 30 years and lowering down payment requirements. This allowed home ownership to rise but also by making monthly payments more affordable.
It allowed for higher profits for Builders and developers and guess what the government as well. And as the prices of homes increased this brought homeowner appreciation. Therefore the American dream of home ownership was now fueled.
4. Home Ownership Expansion
Homeownership Rose from the trough of 43.6 in 1940 to 64 percent in 1970. The federal government’s intervention and housing to increase homeownership had worked.
And in an attempt to keep housing demand high for homeowners, the federal government then created the Federal Housing Administration in 1934. This provided Insurance to mortgage lenders to help Safeguard the banks from a homeowner’s default.
This was very necessary because, at the creation of the FHA’s insured mortgages, 25 percent of homeowners were in default on their home loans. Reducing the bank’s risk on home loans increased the bank’s thirst to lend money to more home buyers.
Up until then commercial Banks only like to lend money to businesses. In 1938 mortgage lenders got yet another Federal boost. Congress created the Federal National Mortgage Association we now know as Fannie Mae.
This Association fueled the secondary mortgage market where mortgages are bought and sold. Allowing Banks to sell their loans frees up more cash to make additional loans. And what came later in 1981 was the creation of mortgage-backed Securities.
But wait before the government started buying and dealing in mortgage-backed Securities we had to get through the 1970s.
5. The 1970’s
In the 1970s, inflation averaged 7.1 percent annually and it topped out at 11 percent in 1979.
It just so happened to be the same rate as a 30-year fixed mortgage. The primary reason for the 1970s runaway inflation was the excessive printing of money. This caused home prices to soar sound familiar. Excessive money printing actually caused inflation and a housing bubble.
So, on money.com they headline an article in November of 2022 it said then and now 1980. This article is referring to a 1980 story headlined bottom dollar for a Tip-Top house. The writer was exploring a housing market that was in flux and bears more than a few similarities to what we’re experiencing today.
As I had mentioned in the late 1970s the economy was facing a tough time inflation was running at about 14 percent and that was thanks to two oil embargos in the previous years that had sent consumer prices skyrocketing including home prices. Nationally home values had increased by 14 percent in 1979.
Although many housing markets saw prices grow by more than 20 percent. It was a seller’s market back then for sure. And back then guys buyers were purchasing homes regardless of their conditions.
Okay stop, does that sound familiar?
By the time this story was written the Federal Reserve which started raising interest rates to bring inflation back under control caused mortgage rates to surge to 15 percent a huge jump given that rates averaged between eight and ten percent from 1973 to 1978. Guys many of the buyers back then couldn’t afford higher mortgage payments and this halted home sales as home prices fell.
6. 2000’s
Then from 1996 through 2006, the real estate bubble inflated once again and when it popped this time it created a housing crash like never before. From the peak in 2006 over the next several years the housing market and the overall economy collapsed and for almost a decade we experienced and struggled with what was now known as the Great Recession.
From 2007 to 2010 there were an estimated 3.8 million foreclosures. That’s almost 4 million households losing their American Dream due to not being able to afford their home.
7. Will the Housing Market Crash?
From 2011 we have watched median home prices increase a hundred and twelve percent from 221 thousand dollars to four hundred and sixty-eight thousand dollars in the third quarter of 2022.
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The shocking part of this is that 45 percent of that increase happened from 2020 to 2022. That’s just two short years and some markets, in the U.S. experience even higher housing price growth. So to all my industry friends and first-time buyers out there and to anyone that says that home prices will never go down in price can we learn anything from history as it pertains to our economy and the housing market?
I think that we should and it may not repeat itself exactly but if you look back at the facts that I just mentioned it sure Echoes it very well. Throughout the history of the United States, everything runs in Cycles especially booms and busts and three-piece suits. And as I mentioned at the beginning, the Housing Industry in 1989 has never witnessed the housing market will be this much unaffordable.
It was really unexpected to watch buyers get so emotionally charged about competing for buying a home waging all of their hard-earned money for their stake in the American dream of home ownership. Recently our wages have not kept up with inflation. As we know it has been a runaway train for almost three years now. The fed’s recent rate hikes have been more aggressive than any other time in our history and this is caused in a very short time a drastic decline in home sales.
In my opinion, the only thing that is holding this housing market on by a thread is our current job market and the tight supply of homes. We are now seeing an increase in the supply of home Inventory. And pretty soon this entire housing market will be solely dependent on our jobs market and the fed’s ability to not crash land this economy.
There is great uncertainty in this overheated and overinflated housing market.
8. Housing Markets
Now let’s turn to the store story with individual countries beginning with the UK…..
8.1. UK Housing Market
The latest forecast economic forecast from the bank of England is from their monetary policy report in February of 2023.
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The numbers in parentheses are their forecast from November which is their last monetary policy report and we can see that gradually the situation has improved in the Bank of England’s eyes. That’s because GDP growth isn’t as negative as they expected. So, we’re going to get a shallower recession but still, a recession and that’ll last some time.
And by the beginning of 2025, they’re now expecting us to very gradually come out of that recession. But the good news is that by the beginning of 2024 q1 they expect inflation to come down to three percent. Currently, it’s above 10. And furthermore, by the beginning of 2025, they expect to be below their two percent target they’re expecting one percent for CPI inflation.
The bad news is they expect that unemployment will be much higher so 4.4 percent at the beginning of 2024 and five percent at the beginning of 2025. And as we’ve said that’s going to be bad for the housing market. But if they do manage to get inflation down to three percent by the beginning of 2024, they can also start lowering their bank rate, and they think it’s going to be at 4.3 at that point, and then 3.6 at the beginning of 2025.
What they also show is Market expectations of their policy rate also for the US and for the Euro area. The market expectations are that we’re now close to how high these policy rates are going to go. There isn’t a lot more tightening to come, and then gradually there’s going to be easing by the end of 2023. That’s What markets now expect.
Now if we look at the actual fixed rates for the average UK mortgage and this is for a two-year fix but also varying the amount you borrow from sixty percent of the value of the house up to 95 percent those rates have also started to come down. But the key thing to understand is that those won’t fall to the levels they were at in 2020 say.
We’re going to have to live with this new world with higher interest rates. What’s the impact been on house prices well clearly negative. If we look at the annualized rate of house price growth for Q4 of 2022 essentially house price growth has stopped all gone into reverse, particularly for Northern Ireland, London, and generally regions in the South.
For the UK as a whole on average we’re getting year-on-year falls the Nationwide index also shows a similar pattern here we’re not seeing year-on-year falls yet. This is as of January 2023 we’ve still got a 1.1 percent year-on-year growth.
However, if we look at affordability we can see that the house price-to-earnings ratios are still close to all-time records. So, we’ve probably got some way to go before housing becomes more affordable now that interest rates are much higher and many houses are Out Of Reach for many people given how much they can buy or borrow.
So, is this an apocalypse?
No, is it slowing, yes how far will it go well it depends on what happens to inflation, and that in turn will affect interest rates, particularly if the bank of England has to hike rates. Further, my personal view is that right now it looks as if we’re going to have a period of year-on-year falls but it doesn’t look like it’s going to be a huge Market Route.
There’s still a huge demand for Supply and balance in the UK which will probably keep house prices fairly elevated. Affordability is going to be a problem and that’s certainly going to weigh on house prices until we get some normalization relative to where it’s been in the past.
8.2. Australian Housing Market
Now let’s look at Australia and here too we’re seeing inflation surge upwards here we’re not seeing disinflation we’re still seeing the rate of inflation increase.
However, the expectation would be that here too we’ll start to see that slow down and turn around over the next few months. But the Reserve Bank of Australia in its monetary policy report in February produces a beautiful graphic that is worthwhile thinking about. What this shows is for each Central Bank around the world in developed markets where they started out with their policy rates at the beginning of this cycle almost all of them were close to zero and that was to combat the effects of the pandemic.
The bank of Japan is just not playing it hasn’t raised interest rates it’s still at zero and it’s likely to stay there for some time but the European Central Bank has aggressively raised rates. It’s still got some way to go but it has come a long way in terms of restricting policy.
So is Sweden’s Rick’s bank, so is the Reserve Bank of Australia, the bank of England is almost at its terminal rate, and the Bank of Canada is already there. The Federal Reserve is also very close to its endpoint and The Reserve Bank of New Zealand still has some way to go.
But you can see what I mean when I say that the broad picture across all of these developed markets is quite similar except for Japan of course. What’s the effect been on Australian house prices well no surprises if we look at the three-month rolling change in the house prices, we’re seeing it turn negative.
These are the state capitals and only Perth is not falling by a significant amount. Brisbane is now falling by five percent on this three-month rolling estimate. If we look at the 12-month change the Australian Market as a whole is now down seven percent year on year with no signs of slowing over the three-month window or over the one-month window.
So, falling and not slowing down is the pattern we see in Australia right now. But remember they’ve been huge surges since the pandemic as we’ll see in a moment. The euphoric growth of the Australian housing market with prices in Sydney rising by almost 30 percent, Melbourne by almost 20 percent, Brisbane by over 40 percent, and Adelaide also by over 40 percent.
The decline from the recent peak is pretty small by comparison with a 14 fall in Sydney, nine percent in Melbourne, and 11 in Brisbane which would be very painful if you bought at the peak of the market but for those who bought before the Euphoria, they’re still sitting on pretty big gains.
But here as in the US, the Peaks happen in 2022 with Sydney peaking quite early but most of them peeking around the middle of last year. So, again still no signs of a huge blood bath but the markets which again the most are generally the ones that are selling off the most because their affordability will be the lowest.
8.3. Canadian Housing Market
Finally, let’s look at Canada starting again with inflation clearly there are signs of disinflation in Canada. The one-year rate of change of prices is slowing down still very high but going in the right direction.
We’ve moved from a situation where Energy prices, were pushing up CPI inflation to a situation in which services are now a Big Driver of inflation.
Now that’s likely to be more sticky because it’s based on wage growth but if unemployment increases due to higher interest rates then we would expect to see that moderate as well but it’ll probably take a while. So, the Bank of Canada expects that by the end of 2023, we’re going to see inflation come down to around four percent. So, still well above its target but still moving in the right direction.
How’s that affecting house prices well it’s certainly slowing them down, the average price has certainly fallen from its peak at the beginning of 2022. If we look at some measure is the frothiness of the housing market one of those might be the number of actual sales compared to new listings clearly got to very frothy levels during 2021 and then slowed down at the beginning of 2022.
A kind of opposite measure is the months of inventory which are relative to sales of course. That fell to very low levels during the frothy period as the amount of inventory was tiny because houses sold so quickly that’s now also normalizing. So, that’s coming up from two months of inventory up to about four months which is much more similar to the long-term average. And then if we look at the actual City by city year-on-year house price changes almost all of them are now negative. The only exception is here and that’s Calgary which is still positive on a year-on-year basis. But you can see that that also is a rate which is falling.
The Takeaway!
This was all about the housing market. You would probably get your answer from the article above if the housing market will crash or not. You can also check the different countries’ housing market situations. Nothing can be said in advance for sure, obviously, there is a range that we can accept when it comes to the housing market inflation. The housing market was seen to be a critical changing market in its history and that can be definitely seen in the future also so we should be ready for that.
If you want to go through investment knowledge then check this out.
Frequently Asked Questions
Some of the most asked questions related to the housing market are listed below:-
Q1. Is 2023 a good time to buy a house?
Yes, it can be a good time to buy a house but nothing can be said for sure. Housing Market has a changing nature and it can drop as well become really high also.
Q2. Should You wait for the recession to buy a house?
Yes, you can wait for the recession to buy the house in order to get a better deal and that can save you a lot of money. This will not give you a big dent in your wallet. However, there can be situations when rapid market value growth can be seen in the housing market.
Q3. How long does a recession last?
Recession can last from several weeks to several years also. As said before nothing can be said in advance because that is a quickly changing market. Housing prices will depend upon the recession.
Q4. Is it a good time to property now?
Well, it completely depends upon your country or the area in which you live. If the market is really down or if the home prices are really low there you can go for the property and can save a lot but if the case is the opposite it’s better to wait for some time.
Last Updated on by Himani Rawat
