Stay informed about your money. We have a newsletter from personal finance columnist Rob Carrick. Sign up today. Follow Rob Carrick on Twitter: rcarrick Opens in a new window. Report an error. Editorial code of conduct. Rob Carrick has been writing about personal finance, business and economics for 30 years. He joined The Globe and Mail in late and shortly afterward suggested the paper offer more coverage of personal finance. Rob also produces occasional videos and a twice-weekly e-mail newsletter called Carrick on Money.
Season four is produced by Amy Chyan with chase production from Zahra Khozema and audio post-production by Kyle Fulton. The show's executive producer is Kiran Rana. Art was created by Jeanine Brito. Have a question? Email the show at podcasts globeandmail. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.
If you would like to write a letter to the editor, please forward it to letters globeandmail. Readers can also interact with The Globe on Facebook and Twitter. If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.
We have closed comments on this story for legal reasons or for abuse. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions. Skip to main content. Rob Carrick Personal Finance Columnist. Bookmark Please log in to bookmark this story. Log In Create Free Account. Winner of 13 Michener and National Newspaper Awards. Spring ahead with best-in-class financial tools.
Access Watchlist and Portfolio for smarter investment decisions. The Urban Institute estimates that compared to normal housing markets going back to , before the boom, millions fewer quality mortgages, primarily to lower credit borrowers, have been made since the crisis. In this case, it was a drag on the overall economic recovery.
The market for more modestly priced starter homes for first-time homebuyers is especially tight. One factor aggravating this scarcity of modest homes is the distressed asset sales begun by FHA and the GSEs during the crisis.
These entities accrued large numbers of loans facing foreclosure. Rather than selling them individually as a local bank would do, they auctioned them off in large pools. While this helped FHA and the GSEs increase their reserves and capital more quickly, hedge funds — the largest buyers of these pools —converted many of the ultimately foreclosed loans into rental properties.
This reduced the supply of modest homes for purchase by individuals and altered the character of neighborhoods where the percentage of homeowners declined. The sale of these distressed pools has continued, and hedge funds have announced plans to expand their conversion programs. Affordable rental housing faces a similar crisis.
Since , the shortage of affordable housing has grown, the percentage of families burdened by the cost of rent remains high, and the problem is remaining dire today. Even in the housing boom years, many families were struggling with unaffordable rent. Even more troubling, vulnerable households are often severely rent burdened, paying over half of their income just for rent. Overall, the stock of affordable housing has declined since the crisis, with more units becoming unavailable or being priced unaffordably.
Federal support for affordable housing has been far below needed levels for many years, and it is falling further behind. Available housing subsidies only reach a small portion of families who are rent burdened. Looking forward, the major funding source for affordable housing, the Low Income Housing Tax Credit, faces challenges resulting from the recent tax changes.
The reduction in the corporate tax rate has reduced the value of the housing tax credit. In order to start making progress, support for affordable rental housing must dramatically increase. There is a Catch problem here that must be broken. Low-wealth families today face a crisis in both affordable homeownership and rental housing, but access to these assets is essential to building wealth and financial stability for renting or buying.
This is largely due to still historically low mortgage interest rates. Moreover, housing costs of homeownership are often lower than rental costs for a family. However, the strain of high rents hampers many families from qualifying for mortgages, especially the ability to save for substantial down payments. Numerous housing issues are being reviewed today or were not resolved in the aftermath of the crisis.
How these are decided will greatly determine the future of housing for American families. First, many of the regulatory provisions put in place after the crisis are under review, with the Administration seeking to reduce regulations. Mortgage lending rules are among these. The ability to repay provisions and fair lending rules, put in place after the crash, are fundamental in making the housing market safer and more equitable and should not be repealed.
Second, the shortage of affordable homes for sale must be addressed. Finally, for housing finance, two additional issues were not resolved after the housing crisis and are now up for determination: False Claims Act liability, and the federal support for the secondary home mortgage market, including the GSEs.
How these four issues are decided will profoundly affect the future of housing in the country and will also have broad impacts on the overall economy and society. As discussed above, home loans with unaffordable payments were the driving force of the crisis.
This provision protects borrowers, who rely heavily on lenders and brokers for advice on what they can afford for a monthly mortgage payment. Equally important, it restores the essential check on housing bubbles with unsustainable house price increases, as resulting increasing mortgage payments will dampen demand and bring the market back into a sustainable price trend.
The current period of housing price growth has been long and steep, fueled in large part by historically low mortgage interest rates. Recent data, though, indicate that rising mortgage rates and higher house prices are starting to dampen demand, which should occur in a properly functioning market. There are efforts, including some already implemented, to weaken this essential protection. But these arguments ignore the history of the crisis and the nature of the mortgage market.
First, lenders do not set standards in isolation. In order to stay competitive, lenders must meet the offers of other companies and borrowers still focus heavily on initial monthly payments to decide on a mortgage. This can result in a race to the bottom — as occurred in the run-up to the crisis; lenders competed to provide the lowest initial monthly payments, sacrificing longer-term sustainability.
Second, loan originators in the mortgage market often sell the loan without bearing the risk of its loss. This encourages pushing the envelope to qualify borrowers. Finally, many loans are refinances with substantial borrower equity. While, like all rules, refinements can be made as experience is developed, the Ability to Repay rule has performed well, and it is the foundation of a sustainable home market.
Studies repeatedly show that loans meeting QM standards performed far better in the crisis, reducing losses by half or more. The second pillar of a strong housing market — inclusiveness — depends on efforts to overcome the history of racism in America. Housing in America reflects many decades of unequal access and segregation. At the same time, black borrowers and neighborhoods were literally redlined out of these loans, with FHA manuals and maps designating these communities as ineligible for FHA loans.
Also, housing remains extremely segregated. These circumstances called for the Department of Housing and Urban Development HUD to issue its long overdue, and statutorily established, Affirmatively Furthering Fair Housing Rule, requiring local communities to develop plans to alleviate segregation. The rule was issued in after years of development and review. In August HUD announced that it is revisiting this rule, and there are even calls to repeal it. Similarly, there are calls to hobble or even repeal the use of disparate impact analysis and enforcement in lending.
Continuing this approach is especially important given the exponential growth occurring in the use of artificial intelligence in decision making, including loan eligibility. Machine learning holds much promise, but it also can bring in discriminatory and unnecessary factors. Disparate impact analysis encourages creative approaches that both increase effectiveness and inclusiveness.
This process and the value of disparate impact analysis was recently pointed out, and endorsed by, the largest personal loan company in the country, Lending Club, in its responses to requests for input by the CFPB. And it is a false choice that inclusiveness is incompatible with growth and efficiency.
Providing sustainable credit for home lending is only half of the equation of a healthy housing market: there also must be an adequate supply of housing to be financed. In the starter home market, as discussed above, there has been a major shortage of homes. Structural obstacles prevent the shortage from being corrected, particularly in growing markets, and several factors depress the number of affordable modest homes. The largest factor is the unmet need for additional new homes to keep up with the growing number of households and the natural obsolescence of homes no longer being usable.
Overall, the housing construction market recovered very slowly from the recession, with volumes only now approaching normal levels that predated the housing boom and crisis. Builders are focusing, though, on larger homes that are more profitable.
Indeed, average new home sizes continue to grow to record levels. First, this reflects the substantial fixed costs in developing and building a new house, which proportionately are a greater burden on smaller homes. This has led California to enact new limits on the power of local communities to block additional housing. Further efforts are needed to encourage and facilitate new construction to meet the increasing demand for affordable houses.
Most of this reform must occur at the state and local level. A second factor, discussed above that reduces the supply of modest homes for sale is the substantial number of — often modest — homes pulled out of the ownership market through bulk distressed loan sales by FHA and the GSEs. While crisis era pressures may have justified these measures to more quickly restore the financial stability of these entities, today these public interest entities should recycle ownership properties back into the ownership market to both preserve that market and the communities where the houses are located.
The False Claims Act FCA , a Civil War-era statute, provides treble penalties for those who submit fraudulent claims to the government for payment, including payment for claims on government-provided insurance. Following the crisis, investigations showed that many mortgages that were sold or guaranteed in the secondary market were poorly underwritten. Legally, they failed to meet the representations and warranties provided when the loans were sold or guaranteed. To be clear, there were many negligent, reckless and even fraudulent loans originated and passed on to others, and these actions deprived private and governmental parties of their legal right to receive loans that met the promises of the seller.
Recoveries are appropriate to those injured by these practices. In the case of the FHA and the False Claims Act, however, an overly broad scope of liability and potentially catastrophic damages have chased many large lenders largely or completely out of the FHA market.
Reform is crucial to restoring proportionality and balance to this enforcement mechanism. These include statements that the loan complies with the FHA eligibility standards, which are quite extensive and leave little room for even clerical mistakes. The FCA does not require an intent to defraud, so these errors generate potential liability, even when they have little or no impact on the safety of the loan. And that potential liability is huge. When this is applied to lenders who submit thousands of loans each year to FHA, the potential liability with even a low error rate is catastrophic.
Lenders have paid billions of dollars to settle these claims brought by the Justice Department. As a result, lenders have taken several steps to avoid this liability. Some major lenders have exited FHA lending entirely. Others have added additional fees to the loans to try to offset the cost of this liability.
The underlying problem is that FHA badly needs additional resources to update antiquated technology and add key staffing. This targeted quality control is more effective for providing high-quality loans than the FCA catastrophic penalty, which is an all or nothing approach. Fortunately, the authority to correct this problem lies with FHA, which can change the certification and implement a rational set of remedies. This should be paired with additional congressionally approved funding for FHA, potentially recouped through a modest fee per loan that has been proposed for FHA loans, so that an effective and fair quality control system can be operated.
Finally, the issue that will have the largest impact on the housing market is the future design of the federal support for housing finance through its purchases and guarantees of loans in the secondary mortgage market. The two GSEs are nearing the tenth anniversary of their placement in conservatorship, an interim status that none intended or expected to last this long.
There are substantial efforts underway to resolve this status, through administrative action, legislative action, or a combination of the two. Key issues include whether the GSEs should continue and if so, in what form and role. Through the crisis and in milder downturns, private secondary market funds have become scarce and expensive.
The GSEs and FHA provided essential funding in the last crisis when it was largely unavailable or unaffordable from the private label securities market. This countercyclical role is critical for the housing market and for overall economic stability.
At the same time, there are concerns that the GSEs have in the past, and may in the future, look to increase their business by expanding into areas that are well served by private entities. For these reasons, many, including the Center for Responsible Lending, have called for the GSEs to continue, but with substantial reform, including structuring them as public utilities, with a regulated rate of return and the required approval of new products and services.
This preserves the efficiencies and the key countercyclical role they play while protecting private entities from unfair competition. It also builds on the substantial GSE reform that has occurred through the passage of a strong oversight statute, the Housing and Economic Recovery Act, enacted in , and subsequent administrative reforms that have eliminated past risky practices. One of the most challenging issues in the housing finance debate has been how to ensure that the GSEs support a broad housing market, and not just serve the wealthiest and most profitable borrowers.
This is done presently through several mechanisms, including more level pricing of the guarantee fee the GSEs charge, an explicit duty to serve underserved markets, and affordable housing metrics and goals.
As shown by the current market, more modest home loans are harder to serve because they come with substantial fixed costs and less wealthy borrowers that may require additional work to underwrite. Looking forward, the housing market is increasingly comprised of more families without as much intergenerational wealth.
Households of color — especially Latino families — account for the largest growth in households today, making it increasingly important that they are served. Another key role of the GSEs is financing affordable rental housing. They are the largest provider of funding for multi-family housing, and this support is particularly vital in the current rental housing crisis.
If this negative wealth and income effect is compounded by inflationary pressures from energy, food, and other shortages, we will have serious economic problems. Current Census data on median household incomes and median home sale prices suggest a price to income ratio of about 5. If this ratio returns to 4. In a nutshell, Grantham says, based on historic indicators, that if a recession should happen and asset values are pushed back to historic norms , it will be disastrous.
There is no doubt this is a bubble all built on Fed debt, but if demand for housing is high and Americans have wealth, how far could prices collapse? The jobs reports have been great and wages are rising. A potential housing market crash is more likely to occur in , after the midterms where the other administration gets control.
This is because the whole system becomes unstable and under contention, perhaps in a stale mate. US homeowner debt is low we might not be looking at foreclosures, but rather just a big drop in prices. It might be a matter of watching the various pieces of the puzzle move and settle into place. A potential war action and embargo response against China and Russia seem inevitable.
The bad news is piling up for for the current administration and their popularity at an all time low. Doomsayers are gaining credibility. Much of our optimism stems from the end of Covid which should rev up world markets in the late spring. Turnaround in government policy is unlikely. The midterms are not far away and investors are always looking ahead. In the last two years, Covid stimulus actually boosted house prices and increased demand.
Now at the end of the plague, more workers will be drawn back to the cities which is already seeing more sales of condos. Prices of condos will be supported and the pressure on house prices will be eased. If interest rates rise substantially, then these buyers may face big trouble with rising mortgage payments in the coming years. If the Fed raises interest rates too quickly, many overleveraged homeowners, apartment landlords, and others will be in trouble.
Landlords are doing better now but it will take years for them to recover their losses from the rent default pandemic era, and rent default is still high. Could they survive another financial blow? Because when residents are uprooted in any manner, they need a new living situation.
That uprooting movement from parents home or shared living spaces causes new housing demand, which raises prices. There is still plenty of demand from Millennials, and from those who have left their old jobs for better new jobs. For , we have lots of demand. Below are 34 major housing crash factors that could play into falling home prices in US banks are solid, interest rates are low, demand is huge, and Americans do have money.
A drop in prices would only provide opportunities for those sitting on the sidelines due to the price. Nevertheless, mortgage holders are fearful, and buyers are wishful. See the 34 housing crash factors now. The home price chart shows almost no letdown even through the pandemic crisis.
Economic and lending circumstances today are different. There are no mortgages to zero income zero down payment people, fewer mortgage holders are underwater, homeowners have more savings and stock market portfolios are hefty. Technical financial factors are often spoken about by economists and brokerage companies and bankers. But in each case, the issue is dissolved when the government prints money and vaporizes the problem. Like someone in Vegas with a credit card, the consequences are waiting for them back home later on.
The US administration as mentioned, could take a hard line to crash the economy, but it would cost the election. Crushing the economy would take demand way down to ease inflation, home prices, and more. Yet inflation is likely not to fall so fast. Please do share this post generously with your friends! Should you sell your house fast this summer? Well, you should hire a Realtor with a solid real estate marketing capability to help you get what the market will bear. As things slow, speculators may give up on real estate.
Construction may pick up and interest rates could rise thus easing the competition for houses for sale. This scary looking roller-coaster timeline of market corrections and crashes indicates that when the next does happen, it could be horrific. We have to consider what keeps the cart on the track and what will send it plunging. Right now, 2. Those who wish to refinance will be looking at big hikes, and a good portion of mortgage holders are deeply indebted.
Crash forecasts are revolving around interest rates and government bankruptcy, but the real threat this time is government meddling. And many businesses are buried in huge debt going into the economic recovery. Some would call this a high speed wobble, where there is no control. Once the governments get really scared will New York City go bankrupt?
What if the US dollar was suddenly devalued in international finance? When house prices reach ridiculous heights as they will this summer, the government will face pressure to do something about it. The Canadian governments made moves like this 4 years ago and the housing market there collapsed.
The Democrats will need to be master magicians to keep the Jenga pile from tipping over. And buyers keep spending big with bubble cash. An event or series of small uncontrollable financial events can cause housing purchase demand to retreat as people withdraw from big-ticket purchases. A stock market crash could coincide with the housing event and stock prices are highly inflated, not supported by real earnings. This could be all about hyperinflation, political mistakes, and baffling complexity.
This situation is novel, just like Covid 19, which means fear and misunderstanding will sweep in like a cold winter wind. The fact is, most Americans cannot protect themselves. They are at the full mercy of the economic machine. Actually, the elections alone might be the catalyst for a housing and stock market bubble catastrophe.
The Democrats have called for drastic changes, based on ideology and their political preferences. Democrats and many Americans simply refuse to see the danger. By printing trillions of hand out money, inflation is the result. Home prices are already rocketing and stock prices are grossly overvalued 54 x price earning ratio for Tesla stock.
The issue of money printing is only one factor. The out of control spending now taking place, was well beyond the imagination of financial experts when they warned about spending. The US is maxxing out its credit cards. What happens now? The cities of New York, Chicago, and San Francisco are in a poor financial state so floating these cities will drain state and federal funding.
What would a timeline for a housing crash look like? Buyers look sometimes to the past to see if there are corollaries to guide them on when housing prices might take big drop. Given stimulus money and a recovery, we might not see a drop until major political conflict, change, or interest rates are pushed up too fast.
The debt crisis is a major crash factor that few are talking. When demand increases or supply decreases, prices go up. In the absence of some natural disaster, which can decrease the immediate supply of homes, prices rise when demand tends to outpace supply trends. The supply of housing can also be slow to react to increases in demand because it takes a long time to build or fix up a house, and in highly developed areas there simply isn't any more land to build on.
So, if there is a sudden or prolonged increase in demand, prices are sure to rise. Once it is established that an above-average rise in housing prices is initially driven by a demand shock, we must ask what the causes of that increase in demand are. There are several possibilities:. Each of these variables can combine with one another to cause a housing market bubble to take off. Indeed, these factors tend to feed off of each other.
A detailed discussion of each is out of the scope of this article. We simply point out that in general, like all bubbles, an uptick in activity and prices precedes excessive risk-taking and speculative behavior by all market participants—buyers, borrowers, lenders, builders, and investors. The bubble finally bursts when excessive risk-taking becomes pervasive throughout the housing system and prices no longer reflect anything close to fundamentals.
This will happen while the supply of housing is still increasing in response to the prior demand spike. In other words, demand decreases while supply still increases, resulting in a sharp fall in prices as nobody is left to pay for even more homes and even higher prices. This realization of risk throughout the system is triggered by losses suffered by homeowners, mortgage lenders, mortgage investors, and property investors.
Those realizations could be precipitated by a number of things:. The bottom line is that when losses mount, credit standards are tightened, easy mortgage borrowing is no longer available, demand decreases, supply increases, speculators leave the market, and prices fall.
In the mids, the U. Following the dotcom bubble , values in real estate began to creep up, fueling a rise in homeownership among speculative buyers, investors, and other consumers. Low-interest rates, relaxed lending standards—including extremely low down payment requirements—allowed people who would otherwise never have been able to purchase a home to become homeowners. This drove home prices up even more. But many speculative investors stopped buying because the risk was getting too high, leading other buyers to get out of the market.
Indeed, it turned out that when the economy took a turn for the worse, a whole lot of subprime borrowers found themselves unable to pay their monthly mortgages. This, in turn, caused prices to drop. Mortgage-backed securities were sold off in massive quantities, while mortgage defaults and foreclosures rose to unprecedented levels.
Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. Too often, homeowners make the damaging error of assuming recent price performance will continue into the future without first considering the long-term rates of price appreciation and the potential for mean reversion.
The laws of physics state that when any object—which has a density greater than air—is propelled upward, it eventually returns to earth because the forces of gravity act upon it. The laws of finance similarly state that markets that go through periods of rapid price appreciation or depreciation will, in time, revert to a price point that puts them in line with where their long-term average rates of appreciation indicate they should be.
This is known as reversion to the mean. Prices in the housing market follow this tendency for mean reversion, too. After periods of rapid price appreciation, or in some cases, depreciation, they revert to where their long-term average rates of appreciation indicate they should be. Home prices mean reversion can be either rapid or gradual. Home prices may move quickly to a point that puts them back in line with the long-term average, or they may stay constant until the long-term average catches up with them.
The theoretical value shown above has been derived by calculating the average quarterly percentage increase in the Housing Price Index from the first quarter of through the fourth quarter of —the approximate point at which home prices began to rise rapidly above the long-term trend.
The calculated average quarterly percentage increase was then applied to the starting value shown in the graph and each subsequent value to derive the theoretical Housing Price Index value. Too many home buyers use only recent price performance as benchmarks for what they expect over the next several years. Based on their unrealistic estimates, they take excessive risks.
This excessive risk-taking is usually associated with the choice of a mortgage, and the size or cost of the home the consumer purchases. There are several mortgage products that are heavily marketed to consumers and designed to be relatively short-term loans. Borrowers choose these mortgages based on the expectation they will be able to refinance out of that mortgage within a certain number of years, and they will be able to do so because of the equity they will have in their homes at that point.
Recent home price performance is not, however, generally a good prediction of future home price performance. Homebuyers should look to long-term rates of home price appreciation and consider the financial principle of mean reversion when making important financing decisions. Speculators should do the same. While taking risks is not inherently bad and, in fact, taking risks is sometimes necessary and advisable, the key to making a good risk-based decision is to understand and measure the risks by making financially sound estimates.
This is especially applicable to the largest and most important financial decision most people make—the purchase and financing of a home. A simple and important principle of finance is mean reversion. While housing markets are not as subject to bubbles as some markets, housing bubbles do exist. Long-term averages provide a good indication of where housing prices will eventually end up during periods of rapid appreciation followed by stagnant or falling prices. The same is true for periods of below- average price appreciation.
International Monetary Fund. The White House. Board of Governors of the Federal Reserve System. Accessed Jan.