Bubble, Bubble, Housing Market Toil and Trouble – Part 2

A historic rally in home prices launched in mid-2020 when the COVID pandemic encouraged folks to move out of megalopolis neighborhoods and blessed suburban and rural homeowners with a record amount of home equity that peaked at $17.6 trillion. Since May 2022, roughly $1.5 trillion of that windfall disappeared as the average borrower’s dropped $30,000. Interest rates on 30-year fixed mortgage loans are currently at the highest level in 20 years, eroding affordability to 37-year lows, and 3Q22’s decline in equity value was the largest quarterly decline on record. Home prices began weakening after the Federal Reserve embarked upon its quantitative tightening (QT) agenda that commenced hiking interest rates in March to fight the highest inflation seen in 40 years. Here is an excerpt from Part 1:

“The spring and summer downturn in the U.S. housing market did not conform to the seasonal pattern following President’s Day, which is normally the busiest and most profitable time of year for real estate brokers and home builders. There are innumerable reports since publishing ‘The Illusion Next Door to Housing Bubble Happiness’ in April 2022… Following unprecedented loose monetary and fiscal policy that coincided with the pandemic’s influence on an explosive phase of housing price appreciation, the Federal Reserve implemented an anti-inflation hawkish monetary policy in March 2022 by raising interest rates into a weakening economy. Worsening matters is the economic backlash in energy markets and supply chain disruptions… expectations within the University of Michigan’s survey of consumer sentiment, confidence in the ability to purchase houses, vehicles, and large household durables is in recessionary territory and at lows last seen in the 1980s… Sellers are still trying to lock in bubble territory pricing for their homes, but a majority of buyers are saying to take a hike as inventory soars at record rates and prices drop. Housing values will continue to plunge until sellers figure out where the buyers are, and they’re going a lot lower.” – TraderStef, Aug. 17

Mortgage Rates as of Nov. 10, 2022 – Bankrate

Mortgage Rates Nov. 10, 2022 - Bankrate

30-Year Fixed Mortgage Rates 1971 to Nov. 2022 – FRED

30-Year Fixed Mortgage Rates 1971 to Nov. 2022 - FRED


According to Black Knight, the proportion of mortgage holders who are underwater is steadily increasing and “more than doubled alongside the equity pullback.” A large portion of those underwater mortgages originated in 2021 and 2022 at elevated price points, while the overall percentage of underwater owners was historically low. There is also a higher delinquency rate with homeowners who lost everything in Hurricane Ian’s path of destruction, which skewed recent data.

The bubblicious housing party was not oblivious to mortgage rates and monthly payments that spiked this summer as personal savings fell to 2009 levels and half of Americans gave up saving for retirement because of inflation. After persistently low inventory cushioned sellers from making inevitable price cuts, some local housing markets are now seeing the percentage of inventory skyrocket into triple-digit territory.

Housing inventory spikes as homes remain on market longer – CNBC, Nov.4


In a report from Fannie Mae, consumer confidence in housing hit a new all-time low in October when the Home Purchase Sentiment Index (HPSI) fell 4.1 points to 56.7, which is its eighth consecutive monthly decline and its lowest reading since the index was created in 2011.

Consumers are increasingly pessimistic about both homebuying and home-selling conditions. Amid persistently high home prices and unfavorable mortgage rates, the ‘bad time to buy’ component increased to a new survey high this month, while the ‘good time to sell’ component continued its downward trend. Consumers also remain concerned about the movement of home prices – expectations that prices will decrease reached a new survey high, particularly among homeowners – offering further support to our forecast of home price declines in 2023. As continued affordability constraints reduce homebuyer demand, and homeowners become reluctant to sell at potentially reduced prices, we expect home sales to slow even further in the coming months, consistent with our forecast.”

Consumer sentiment measured by the University of Michigan survey was released last Friday and printed 59.9 for October. That was 2.2% better than September but still 16.5% below the same period a year ago, and it remains at the lowest level in four decades. The CEO Business Confidence index via a Goldman Sachs survey is trending in record-low territory for the next six months.

CEO Business Confidence 6 Months Ahead

Consumer Sentiment Oct. 2022


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DoubleLine CEO Jeffrey Gundlach spoke at a Schwab Impact event last week and shared a similar sentiment when he stated that housing prices are doomed and the economy could lose several million jobs.” He also stated that the mortgage refinancing industry is “completely dead.” JPMorgan Chase and Wells Fargo are two of the largest mortgage lenders in the U.S., and they reported that 3Q22 revenues were hammered by record-high mortgage interest rates, record-low levels of mortgage applications, and ongoing market volatility. YoY, new mortgage lending was down nearly 60% for Wells Fargo and 67% for JPMorgan. Rocket Mortgage lost its title as America’s largest mortgage originator in 3Q22 after reporting a YoY 70% plunge in volume.

Wells Fargo mortgage staff brace for layoffs as U.S. loan volumes collapse… “The bank had about 18,000 loans in its retail origination pipeline in the early weeks of the fourth quarter, according to people with knowledge of the company’s figures. That is down as much as 90% from a year earlier… Among the six biggest U.S. banks, Wells Fargo has historically been the most reliant on mortgages… CFO Mike Santomassimo told analysts Oct. 14. ‘It’s possible that we have a further decline in mortgage banking revenue in the Q4 when originations are seasonally slower’… Many salespeople haven’t closed a single loan in recent weeks, this person said…. The bank said last month that its total workforce shrank by about 14,000 people in the third quarter.” – CNBC, Nov. 2

According to the National Association of Realtors (NAR), sky-high home prices and rising mortgage rates have pushed the share of first-time homebuyers to an all-time low. A growing lack of affordability is forcing prospective first-time buyers to wait longer, and concerns grow that they’ll never be able to afford a place they can call home and attain the “American Dream.” The NAR reported in late October that existing home sales plunged for the eighth consecutive month and were down 23.8% YoY. The home building industry is severely impacted by a lack of buyers and is expecting a sharper downturn in 2023. New home cancellation rates doubled or tripled in 3Q22 compared to 2021, housing starts for single-family homes fell nearly 19% YoY, and one homebuilder in Denver is quoted as saying it is definitely a hard landing for housing.” There’s no doubt that similar sentiment rings true for a hedge fund manager in Philadelphia that sold a mansion for $9.26 million that cost $35 million to build.

Homebuilder Cancellation Rates 3Q22

Cancellation Rates Courtesy of CalculatedRISK – Nov. 9

Housing Price Reductions via WolfStreet

Housing Price Reductions Courtesy of WolfStreet – Oct. 20

Existing Home Sales via Wolfstreet

Existing Home Sales Courtesy of WolfStreet – Oct. 20

A popular pastime for real estate investors in housing bubble cycles is the flipping business. Redfin jumped into that game and announced this week that it’s shutting down the “iBuyers” homebuying program and will lay off 13% of its workforce.

These bubbly housing markets look like busts—and they just sank Redfin’s flipping business… “What’s going on? While the ongoing housing correction has hit the entire country, it’s particularly sharp in bubbly housing markets like Phoenix and Las Vegas. Those markets have gone straight from Pandemic Housing Boom to Pandemic Housing Bust. They’re also the places where iBuyers like Redfin and Opendoor have significant exposure. These so-called iBuyer programs don’t operate like normal flippers. Instead of creating value through renovating homes, they instead use algorithms to make speedy offers directly to sellers, the service being that it reduces the hassle for sellers. As long as iBuyers can quickly resell the home, things should go smoothly. However, if home prices begin to fall, things can go south very fast. That downside scenario, of course, is here.” – Fortune, Nov. 10

iBuyers Boom to Bust Graphic 2020-2022

iBuyers Boom to Bust Graphic 2020-2022 – Fortune

There is one bright spot in real estate if you have the means and desire to explore the opportunity. Despite rising interest rates and higher input costs, the farmland market across the Midwest is strong and is expected to remain that way in 2023.

Cropland Values in Selected States in 2022

Farmland Values Set Records… “Paul Schadegg, senior vice president of real estate for Farmers National Company in Omaha, concurred. ‘About the time we say we’ve seen our last record sale, another one pops up,’ said Schadegg… ‘While farmers continue to buy most of the farmland, we’re seeing more investor involvement,’ said Nate Franzen, president of the ag banking division at First Dakota National Bank in Yankton, South Dakota. ‘As people worry about a coming recession, farmland is seen as a safe haven.’” – DTN, Nov. 7

Luke Bryan – Here’s To The Farmer


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Headline Collage Art by TraderStef

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Bubble, Bubble, Housing Market Toil and Trouble – Part 2

Bubble, Bubble, Housing Market Toil and Trouble – Part 2