Are we on the cusp of another major decline in housing prices?
As a result of historic low mortgage rates and weak (if not fraudulent) underwriting abetted by the Feds work in creating bubbles, home prices are almost 20% higher than they were in 2006 prior to the previous bubble bursting. According to the Case-Shiller home price index home prices declined approximately 35% between 2006 and 2009 nationwide.
As reminder Former Federal Reserve Chairman Ben Bernanke quote from 2005-06 when asked about a potential bubble in the housing sector, “We’ve never had a decline in house prices on a nationwide basis. I do think this is mostly a localized problem, and not something that’s going to affect the overall economy.” His models and forecasting severely missed what was obvious to many.
Since the Feds began to aggressively reduce the cost of borrowing around the turn of the century creating debt bubbles many home buyers have viewed purchases of a home the same as they have done for many decades in buying vehicles. Not considering how much the total costs are but what I can afford to pay monthly, many not even thinking about the costs outside of debt service such as HOA fees, Insurance, Maintenance and Property Taxes. With the sudden shut-down of the economy and tens of millions unemployed and many others with reduced income the financial burden is increasing quickly.
In a recent survey conducted 30% of home dwellers with mortgages reported having less than one month savings to cover one month of mortgage payments. Many are beginning the process of asking for some form of forbearance from their lenders. Due to the inflation in asset prices far exceeding any increase in working wages over the past decade there is an affordability issue and now a sudden change in demand. Once the forbearance periods cease there will likely be a flood of homes hitting the market coupled with the process of lenders foreclosing. Also adding to the supply will be investors of houses and condos with remaining equity looking to dispose of rental properties.
This anticipated supply of residential properties coming to the market along with a major slow down in demand and tightening of lending requirements will bring about a nationwide housing decline, possibly greater than the 35% decline a decade ago.