While people are trying to figure out where the economy is going, we keep hearing from Jumpin' Jerome Powell how strong things are.
Throughout the last year, estimations of rate cuts in the near term proved wrong due to the fact that inflation is persisting. This is the outlook of The Fed.
While it is on its quest to crush the price increase bug, we see something else happening. There are often warning sings long before things turn. One of them is housing.
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Anyone who remembers the leadup to the Great Financial Crisis will recall how we saw a lot of homes underwater. This is a situation where the value of the home is worth less than the debt against the property. What this means is that, to sell, one will have to make up the difference in closing.
For the most part, this means that homeowners are locked in. Few have the ability to show up to closing with $10K or $20K. It also presents an option where, if things get bad enough, people have little incentive to keep making the payments.
During the GFC, this was a widespread problem. With prices dropping 40% in some areas, it is easy to see how the majority of the more recent sales were facing this issue.
Sometimes, history does repeat itself.
It is still early. However, there are some challenges arising.
The share of "seriously underwater" mortgages — defined as having a balance that's 25% more than the fair market value of the house — edged up from 2.6% to 2.7% nationally in early 2024. That translates to roughly one out of every in 37 homes, the real estate firm said in a report on Wednesday.
Read that again:
In the United States, 1 in 37 homes have an outstanding balance that is 25% more than the fair market value. This means that is the house is $400K, the debt will be $500K.
Here is a question: have you heard of a housing crash?
Me neither.
So far, we hear how good things year. Yet, somehow, 2.7% of the homes, nationally, are more than 25% underwater.
How can that be?
What happens is we do see prices starting to decline. As stated, these numbers are not bad. It is a level that is still below the COVID lockdowns. We are still a long way from a repeat of the 2006-2008 time period.
That does not mean things will remain that way.
There are a few videos already popping up on YouTube detailing how the crash in certain areas is starting. Certainly, this could be clickbait and meant to get views. These people learned from the new agencies, "when it bleeds, it leads".
Even if this is over-the-top sensationalism, there are some legitimate questions to ask about this. We are seeing softening on some areas. The economy is becoming a struggle for many people. The ability to refinance is not an option for the underwater homes and likely a challenge for those who have bought during the high interest rate period. Without rates going down, the payment, if it could be reworked, would likely go up.
What will it take to kick this over the edge?
Honestly, I have no idea. What I do know is that once it starts, things unravel quickly. The mortgage market dries up as applications vanish. lenders start to see their inventory of homes build due to foreclosures, resulting in short sales. The construction industry starts to feel the pinch due demand is drying up as more people are removed from the qualified market.
Are we getting close? Perhaps not.
However, this is a huge market and, as we saw 17 years ago, can sink the economy. If the US goes, it does not bode well for the rest of the world.
