Take Five Minutes to Understand the Current Housing Crisis – Podcast

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In the shortcast today, I wanted to give you some inside knowledge of the current state of housing and mortgages in the US.

Hi, this is Steve Rhode, your Get Out of Debt Guy from GetOutOfDebt.org.

The last significant housing crisis in 2008 resulted in mass foreclosures and plunging home prices in many areas.

Don’t expect that to happen again, no matter your opinion about inflation. Here is why.

The 2008 subprime mortgage collapse led to large amounts of foreclosures and home loss and was triggered by a decline in housing prices, poor mortgage lending, and rampant housing speculation.

Housing today is not suffering from the same issues.

In 2022, while rents and home values shot way up, the underlying issues don’t mirror what we lived through in 2008.

The primary reason home values and rents rose quickly is not from the previous rampant real estate speculation but from a shortage of affordable housing.

Following the 2008 housing collapse, builders backed away from building new homes.

Homes that were built had a higher target price tag generating more profit per home. However, builders’ entry-level new homes have a lower profit level, so they’ve been built at lower rates than before.

It is estimated that the United States is about six million housing units short of where it needs to be. In addition, the increased housing demand and insufficient supply have increased housing costs even before you factor in inflation.

These factors have led to an affordability crisis, not a housing collapse. However, the shortage is so severe that it will take more than a decade to catch up if builders find lower-profit homes attractive to build again. So don’t hold your breath.

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In addition, large numbers of entry-level homes have been purchased by corporate owners and converted to rentals. The bad news is even if the corporate owners eventually sell those homes, there is serious doubt they will return to the market for individual homeowners. So this leaves the supply of dwellings suffering.

Sure, mortgage rates have crept up, but they will drop again. In the meantime, those increased interest rates have made it more difficult to afford a home.

Increased rents leave less and less cash to save each month for a downpayment on a mortgage. This leaves people trapped in renting.

Maybe you are hoping for a collapse in housing prices so you can afford a house? A price reduction is significant for people looking to buy but catastrophic for people who lose massive amounts of equity and retirement income with lower prices. With a sudden drop in house prices, millions of people might get their foot in the door, but millions of others will lose value in their most significant asset and trash their financial health.

Nobody wins unless someone else loses.

Do You Have a Question You'd Like Help With? Contact Debt Coach Damon Day. Click here to reach Damon.

If you live in the sun belt, you don’t need me to tell you this housing mess is worst in Phoenix, Austin, and Miami. Home prices exploded about 30% last year, and rents are up about 25%.

A worrisome factor is a byproduct of taming inflation is higher unemployment. So for some good people struggling to save, a surprise job loss could throw those plans in the trash.

To demonstrate how interconnected all the moving pieces are, for homes to get back to a reasonable level they were at just a couple of years ago, some combination of these factors would need to happen:

  • Your income would need to grow by 40%.
  • Interest rates would need to drop by 50%.
  • Housing prices would need to drop 30%.

Ultimately the fix for the current complex housing situation will be in the hands of Congress. And we know how well those adults on Capitol Hill hate to behave like responsible representatives.

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If the recent past indicates how things will go, lawmakers will bicker, bellow, and posture for their base while leaving you and others stranded.

If there was a magic wand to wave, it would be to wish incentives for a builder to construct lower-profit entry-level homes. But, of course, some will call that a government giveaway and stall the efforts to make progress.

President Biden suggested a Housing Supply Action Plan to close the affordability gap and ease housing costs. The idea is to boost the supply of affordable housing by enhancing existing federal financing and incentivizing areas to reform zoning and land use policies to build more lower-cost housing. It also calls for homebuilders to adopt more efficient construction methods.

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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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