Our Washington politicians never learn from their mistakes. Never. They’re like Alzheimer’s patients; they have no short-term memories and too easily forget.
During the last financial crisis, trillions of dollars of lifetime savings and wealth just simply evaporated. Central billion-dollar banks and investment houses once considered “too big to fail” were swept away like straw huts by a raging tsunami.
That calamity resulted directly from government policies which intentionally inflated a housing market bubble year after year. Very few saw the bursting of the bubble coming and were caught off guard. When it finally popped, the carnage was widespread and felt from coast to coast.
Now there are many of the same signals flashing in the housing market warning of another over-inflated bubble; and once again, no one seems to be paying attention.
A well-respected housing affordability index fell last month to almost the lowest levels ever as home prices surged. New home buyers coming into the market also fell to a record low level.
Mortgage interest rates now exceed 5.2 percent—up solidly from 3.6 percent only two years ago. In some markets, mortgage rates are closing in on 6 percent. And the Fed is raising rates again to battle inflation, as it should, but this too will likely serve to further inflate mortgage rates.
The average national mortgage payment is now $1,800 a month—70 percent higher than before the COVID-19 pandemic started. Many people are living paycheck to paycheck and further financially squeezed due to inflation rising faster than wages. The only other time home payments were as high as they are today was in 2007; on the eve of the Great Financial Crisis.
A popular mortgage monitor called Black Knight shows home prices are up 19.9 percent over a year ago. Of course, that’s good news for homeowners as their home equity value surges. However, these gravity-defying home prices & higher mortgage interest rates are deal killers for new homebuyers; especially the young, first-time buyers looking to enter the ownership market.
Loan-to-income levels are also on the rise, which make defaults much more likely. Should housing prices suddenly fall, borrowers could start to be pushed underwater & left holding unpaid loan amounts worth more than their house value. Millions of them will then just simply walk away; as they did in 2008 and 2009.
If this current housing run-up were as simple as only the a result of natural supply and demand market forces, there wouldn’t be too great a cause for concern. But that’s not the case.
Alas, Congress, the Fed, and housing agencies such as Fannie Mae are pumping even more air into the bubble to further expand it. The Fed has artificially held interest rates too low for too long as part of its “stimulus” strategy. Meanwhile, the Fed has encouraged home loans by purchasing $2.7 trillion of mortgage-backed securities which are held on the central bank’s balance sheet. That’s precisely the same failed strategy they followed during the early 2000s.
Congress is also guilty of artificially propping up the housing market by passing out hundreds of billions of dollars of taxpayer-funded rental and mortgage subsidy assistance.
Meanwhile, Fannie Mae, the federal guarantor of trillions of dollars of mortgages, is now insuring mortgages of more than $1 million. This program was originally supposed to only help lower-income and first-time homebuyers. However, millionaires now are also qualifying for subsidized loans thanks to the tremendous lobbying power of the housing industry made up of realtors, mortgage bankers, and homebuilders.
If and when the bubble bursts again, everyone will feel the pain and national homeownership rates will also crash again; which happens to be the complete opposite of the supposed intended result of all these all of these irresponsible government programs.
These are the laws of unintended consequences that our Congress never seem to learn. ✪