Darrell Berkheimer: Housing gurus issue warning to buyers
As housing prices continue to climb amid a nationwide shortage and mounting construction costs for materials and labor — prompting local and national bidding wars — some housing market gurus already are sounding the alarm about a potential market crash.
An Aug. 1 Business Insider article by Motley Fool writer Dana George asks, “How do we know that the meteoric rise in U.S. housing prices can’t be sustained?” And the article immediately gives the answer — “common sense and history.”
The article cites the history of housing crashes going back to the mid-1800s, and notes that market crashes have occurred approximately every 18 years — about once every generation. That indicates another housing bubble burst will occur during the next three to five years.
The article adds, however, that attempting to understand the ups and downs of the housing market is little more than a guessing game.
So why would market gurus be sounding an alarm this early about a flattening and possible drop in prices? As long as we continue to have high demand and a monumental shortage of supply, why wouldn’t prices continue to rise?
And they will continue to climb according to Zillow Economic Research, which is forecasting prices will rise another 10.5% above current levels by the end of the year.
So again, why the warning to buyers?
It appears to me the warnings are being targeted mostly at younger, first-time buyers and beginning investors in the rentals market. A tremendous pent-up anxiety is evident in first-time buyers while the availability of starter homes is almost non-existent.
Freddie Mac has reported starter homes on the market is at a 50-year low. That has created a rush to purchase land, and a growing shortage of rentals as those costs also rise.
But experts are cautioning against joining the buying frenzy. Warnings are directed specifically at buyers being forced to consider bigger homes than what they want or can afford. And beginning rental investors also are advised against biting off more than they can chew.
Turning to several examples of history, the experts foresee that many over-anxious buyers likely will find themselves under water when the prices do drop, and they owe more on their properties than the resale value.
In addition, artificial intelligence and other tech developments could produce unexpected changes that lower the incomes of current home buyers.
Other than the lessons gleaned from history, the experts give little in the way of reasons for their cautiousness. But I can think of several.
Many things are happening in the housing industry, and not all of it is bad.
The increasing high cost of construction materials and labor will provide the impetus for development of cheaper and better construction materials, and faster building methods. It’s only a matter of time.
The Boxabl company article noted in my commentary of two weeks ago is just one example of how others are searching for ways to develop cheaper materials and quicker construction.
In addition, elected officials in the cities and counties are feeling strong pressures to alter zoning and planning rules, reduce fees and provide for more high-density housing. The Legislature already has passed some laws forcing such changes. And more are on the horizon.
State Sen. Scott Weiner, D-San Francisco, already has introduced several bills to force changes in local zoning and housing laws that are hyper-restrictive, making it practically impossible to have high-density construction in areas already zoned to allow that.
And his bills are gaining some support, including from recently-formed and growing groups of YIMBYs — those who are saying, “Yes, in my back yard.”
Members of the YIMBYs include an increasing class of low-income and middle-class super-commuters unable to afford housing within several hours of their jobs. And they are being joined by parents and grandparents who desire to have their children and grandchildren locate housing near them.
The extremely low interest rates also could trend back upward to curtail the high spending that often produces inflation.
Another development that could help to burst the rising prices bubble is the anticipated decline in California’s population. Birth rates are down, and more people are leaving the state than moving into it.
In 2017, according to state figures, 1.7% of the state’s population moved elsewhere, while only 1.3% moved in. And in 2019, the gap grew bigger as 1.7% fled the state while only 1% moved in.
I expect this year’s figures will see that gap continue to grow, with those leaving probably doubling the numbers of those coming to California. And housing, along with high taxes and $4-plus gas, are cited as major reasons fueling that exodus.
In summary, the experts are telling us they know the rise in prices will come to an end, and that a drop likely with follow. They just can’t predict how soon or how steep the decline will be.
Darrell Berkheimer, who lives in Grass Valley, is a frequent contributor to The Union. He has eight books available through Amazon. His sixth, “Essays from The Golden Throne,” includes 60 columns published by The Union, plus a dozen western travel and photo essays. Contact him at email@example.com.
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