Editor's Comments:
Below is another warning shot across the bow for realtors developers and real estate investors plus homeowners around the world.
I've been saying for months now that the rapid rise in real estate prices around the world has been primarily caused by two major unusual factors.
(1) First is during the a year and 1/2 of Covid - 19 crisis the supply of real estate has not been able to keep up with the demand.
(2) A large portion of that demand has been fuelled by ridiculously low interest rates as low as 1% to get a mortgage with little or no requirements for credit worthiness and ability to pay back the loan.
This is much like the scenario when the Sub Prime crisis reared its ugly head in 2007 and I gave a major sell signal for most real estate around the world.
Throughout my 50 years of real estate buying selling and brokering one thing is evident when interest rates begin to rise after being ridiculously low that is usually the end of the housing market.
So, in my professional opinion I believe the end is near for most real estate markets in the Western world Asia and even Australia and New Zealand.
When it dies the crash will be deadly as people will scramble to sell properties to avoid paying higher mortgages they can not afford.
First-time homebuyers will have to pass
because with higher interest rates they simply can't afford to qualify for the
mortgages .
You might ask why a fifty-year realtor is talking like this because few will.
The reason is simple one of the main reasons I love the real estate market in Bali is because most real estate here is purchased with cash so rising and falling interest rates have little effect.
When you factor in that the crisis has caused real estate prices in Bali to drop 20% to 50% this provides for the perfect scenario to follow the age-old advice of buying “when the blood is running the streets”.
So, I will go on the record right here and now as stating in the next year or two prices of most Western and Asian real estate markets will top and drop dramatically, and the complete reverse will be true of the Bali real estate market.
For the past 10 consecutive years, they were awarded the Certificate of Excellence and the Hall of Fame Award from the Worlds Largest Travel Site, Tripadvisor. This places them among the top 2 % of hotels and villas listed by Tripadvisor worldwide.
The End Of The Housing Boom Will Be When Mortgage Rates Rise In 2022
Bill Conerly
Senior Contributor
New construction in Richmond, CA. (Photo by Justin Sullivan/Getty Images) Getty Images
The current housing boom will flatten in 2022—or possibly early 2023—when mortgage interest rates rise. There is no bubble to burst, though prices may retreat from panic-buying highs.
The boom produced some frantic buying, bids in excess of asking prices, and plenty of worry among would-be homeowners. But this has not been a bubble. A bubble is not simply rising prices, but demand not justified by fundamental economic factors. The key to the buying boom has been low mortgage rates plus a shift in desired housing type.
Mortgage rates hit what was then an all-time low of four percent in 2011, and then remained in that neighborhood until the pandemic, when they hit three percent. The decline in mortgage rates in 2020 dropped the monthly payment on a house by 12 percent, enabling many people to buy houses now rather than later.
In addition to the low mortgage rates, some people saw a future of remote work and wanted more space, which often means moving out of an apartment into a single family house. Others found urban living less fun, so they headed into the suburbs where houses are more common than apartments.
The increased demand for houses drove prices up, quite predictably. Yet the supply could not adjust as fast as demand. Home builders ramped up production in the second half of 2020, but after a few months they ran into supply constraints. Ready-to-build lots were all bought up, labor for construction was hard to find and social distancing made workers less productive. Now rising materials prices and goods on back-order squeeze profit margins. That’s how we find ourselves in the current housing boom.
But this boom is not a bubble, because the rise in prices is easily explained by the fundamentals of cheap mortgages and supply limitations. Recent housing starts are below historical averages, though that is justified by lower population growth. But with the shift from multifamily to single family housing, recent construction levels make sense. There need be no sudden drop in new construction to maintain a reasonable equilibrium.
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When will the boom end? The two keys are satisfying the new demand and mortgage rates. Low mortgage rates allowed young families to buy houses earlier than they otherwise would have. It did not change the economics of buying for people who were never going to be homeowners. Instead, low mortgage rates enabled people to achieve their dreams earlier than they otherwise would have. In this sense, the strong housing market of 2020 and 2021 has been borrowing from the future. However, the shift in preferences from urban living to suburban living by people who previously could have bought houses is permanent new demand. At least, so long as they don’t become disillusioned about homeownership.
Mortgage rates are likely to rise when financial markets anticipate more inflation and action by the Federal Reserve to stem inflation. Although the Fed’s traditional tools impact short-term rates, with only small effect on mortgage rates, the new actions by the Fed impact mortgages directly. The Fed has been buying mortgages wholesale, depressing mortgage interest rates. The Fed has also been buying many treasury securities, which are often competitors to mortgages for institutional investors.
Mortgage rates are likely to rise a full percentage point by mid-2022, though this forecast exceeds the average prediction of my fellow economists. They doubt long-term interest rates will rise by a percentage point even out to December 2022. If they are right and I am wrong, then the housing market will remain strong longer.
Business leaders in the housing supply chain should enjoy their strong sales this year but not anticipate further growth in the coming years. Major capital projects must pencil out with sales back at 2019 levels.
Prospective home buyers should probably chill. It’s been a tough buying season. Although prices are unlikely to fall nationwide, there will probably be easier buying opportunities in 2023.
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Bill Conerly
I decided to become an economist at age 16, but I also started reading my grandmother’s used copies of Forbes. After degrees including a Ph.D. from Duke and three years…
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