Haven’t We Learned Our Lesson?
Lesson Learned or Lessons Lost?
Many have heard me say that we should expect a large market correction around 2019-2020. Some agree, some think it will be sooner, and I am sure there are some that don’t think it will happen again because we learned our lesson. There are a ton of factors that drive it so it’s not an easy thing to predict. The good news is most agree that there will be one, we just don’t know when. We have not learned our lesson and the lesson will be repeated. I’ll share my 2 cents on this and why we have not learned our lesson.
Historically the housing market has seen annual appreciation in the range of 3% to 6% but that all changed by the end of 1999. Between 2000 and the end of 2006 that annual appreciate rate moved to just over 13%. Then the bottom fell out. What we were seeing was an irrational market with irrational value increased fueled by a myriad of items. If you watch the movie Big Short, it will show you some of what happened. What’s not talked about in that movie is the overall monetary policy and how the repeal of Glass–Steagall and the administrations push for homeownership to increase, has changed the overall dynamics of housing in general. And it hasn’t been a healthy change.
The repeal of Glass-Steagall allowed the banks to get footloose and fancy with their money. Once that happened it caused mortgage backed securities to explode with everyone wanting their hands in the money and profit. Adding the push for more homeownership it set the market on a course of self destruction. Homeownership became the new investment vehicle for people to make money much like the stock market. Homeownership as we used to know it, ceased to exist. It was no longer a place to call home, it was turned to a way to make money. Not much has changed since the collapse. Yes we treat them as homes but we expect to make a killing on the sale.
Yes, we have Dodd-Frank. And yes, we have the new consumer protection bureau. But for the most part they are smoke and mirrors so people think they are “fixing the problem”. Many of the planned laws in Dodd-Frank were never put into effect and some were even re-written by the big bankers on Wall Street so they could go back to doing what they did before. The biggest were approved by our congress in late 2014 and signed by the president. So, there isn’t a big fix and Glass-Steagall was never replaced so history will repeat.
Since the market started to recover in 2012, the average annual appreciation has jumped back to just over 10% and we all see it jumping more with the lack of inventory forcing people to pay out their nose for a piece of the pie. Keep in mind the values we saw in 2006 were an aberration. And we all knew that once it collapsed. Have we learned? Not at all. We have many markets that have exceeded their pre-collapse values by 30% or more with no letup in sight. The markets being run up now are the very markets that didn’t see the huge collapse before. Compared to the markets that saw huge losses they saw a minor loss. They are being looked at as safe havens for investors and the speculative market, low inventory, and a demand to live there is driving values higher than what should be seen. And yes, many appraisers are supporting whatever they offer.
The question we all must ask is this. If income levels have remained mostly flat with nominal increases, at the same time lending is much tighter with harder standards to qualify for a loan, how are values rising at a rate of 10% a year on average since the recovery started? All this while over 5 million previous homeowners sit on the sideline and can’t qualify for a loan. Those numbers do not match up.
So why 2019-2020? We are 4 years into the recovery and values are rising at an average rate of 10% a year. We have also seen the longest stretch of job growth in nearly 50 years yet mostly flat wages. The ramp-up is already happening. Give it another 3 years. And once something changes in the economy to cause it to turn the tumble will start. Hold on because it will indeed be a bumpy ride.
P.S. And when that happens the residential real estate profession as we know it today dies. That’s another post.