Is "work-from-home" why the housing market is tanking?

 

Karl Denninger offers an intriguing suggestion.  Emphasis in original.

The problem is that the dynamic of virus restrictions along with wildly ridiculous fiscal and monetary policy drove a dynamic that was utterly unsustainable and, fundamentally, stupid as a whole although for the people doing it the act looked smart at the time.  There were several elements of this:

• Work-from-home on a near-universal basis was forced by many employers.  This, in high-cost areas, drove employees to think they could arbitrage their higher salary (a result of the high cost of living where they were, such as in Chicago, New York, San Francisco and similar) and keep it while moving somewhere much cheaper, such as Tennessee or Florida.  For those who pulled this it was a massive windfall, provided they could sell their home in the high-cost place.
• Forced-low interest rates meant mortgages were extraordinarily cheap.  The brokers of same -- banks, independent shops and similar -- feasted on the fees, both for purchase money (see above for the flow on that!) and refinances.  Many of those refinances were strategically wise, being committed just a few years after origination and not materially-lengthening the amortization clock.  All of them wildly increased available consumer funds for spending, however, by reducing the monthly payment amount.

These two dynamics skyrocketed home prices.  The All-US index went from ~450 to 625, a roughly 40% increase in two years ... There were plenty of areas, including where I live, that prices of "real" (not AirBNB friendly) single-family homes roughly doubled...

All of this was ridiculously stupid.  The premise that employees operated on -- that they'd never have to set foot in an office again -- was crap.  As the pandemic ended so did the curtailment of occupying office space and the cities could not survive with all that office space empty; the tax revenue plus all the retail business activity associated with those people being in the buildings during the day is utterly essential to their fiscal survivability.

Those who thought they could arbitrage their cost of living while keeping their "bonused up" salary are now getting a rude shock: Come back to the office, which we have leased and have to pay for, or be fired.  Except..... those employees now live hundreds or even a couple thousand miles away!  Worse, they bought houses on <3% mortgages and spent the rest and, while their "price paid" is what it is nothing is moving.

. . .

The market is basically locked up and the reason is quite-clear: Those who bought at the top can't move; they have 3% mortgages and that $500,000 place has a $2,100 payment.  The same $500,000 house at 7% carries a payment of $3,326!

The net present value of that payment on their house today is $316,000, a $184,000 loss!

There's more at the link.  Mr. Denninger also considers elements such as increases in property rates and taxes, higher insurance premiums, etc. as factors restricting the sale of expensive properties.  Prospective buyers of property are looking at those expenses and deciding they can't afford them on top of higher-interest-rate mortgages.

I think he's probably correct.  Certainly, in our small town we've seen the market value of our property, and those of our friends' homes, more than double compared to what we paid just a few years ago.  Our rates and taxes have gone up in line with higher property values, although we're shielded to some extent because they can't legally be increased more than a certain percentage per year.  Nevertheless, it's not easy for some folks who live in properties they've owned for decades to find the money for their increased tax bill.  Those who are retired are often the hardest hit, because their income doesn't increase to cover those costs.

On the other hand, those who've been fiscally conservative have benefited from the rise in housing costs.  For example, through putting down a 20% deposit and paying extra to reduce the mortgage capital each month, Miss D. and I had already achieved a 45% equity stake in our home at the price we originally paid for it.  However, thanks to the rise in property prices, our equity stake today is probably of the order of 75%, because what we owe is so much less as a proportion of the current market value of our home.  This does our credit rating nothing but good.

The problem, of course, is that sooner or later inflated property prices are going to have to drop.  It's inevitable, because sales are drying up as homes (and mortgages) become unaffordable for the average buyer.  That means those who paid high for houses over the past few years, but need to move, are likely going to have to take a loss in order to sell them.  Some won't be able to afford that, and will end up much deeper in debt to pay off the difference.  Some banks and mortgage holders are probably going to go bankrupt as their loan "assets" turn out to be liabilities.

We noted over the past couple of years that builders erected houses nearby that were similar to ours in terms of size, amenities, etc., but priced at more than double what we paid for ours.  They marketed them almost exclusively to Californians and West Coast residents wanting to move, and sold them all very easily.  The West Coasters moved here after selling their (relatively expensive) houses there, bought the new houses, and still had a chunk of change left over (which they promptly spent on other consumer goods).  Some of them are now being called back to work at offices in the cities they left, but they can't afford to go back there, because they've spent all the profit they made on their West Coast houses and thus can no longer afford to buy or rent in those markets.  They can't find jobs here at similar salaries - ours still pay half to less than half of comparable jobs in, say, Los Angeles or San Francisco, and there aren't as many of them available, particularly in industries that are prevalent there, but not here.  Those people are well and truly stuck.

I hope and pray that most of my readers aren't in that position.

Peter