The Housing Market.
I don’t know that it will “crash” like everyone thinks it will. Maybe it will. But we can’t keep comparing it to the mortgage crisis a decade and a half ago. The 2007 mortgage crisis was a different beast. The mortgage crisis wasn’t just the end of a historically-cyclical market’s market cycle, it was the culmination of 10 or 12 different kinds of man-made sh*t that comprised the perfect sh*tstorm that ended up—nearly permanently—crippling the world economy.
Most people don’t know how truly bad it was. It was horrendous and it was systemic in nature. Almost everyone was affected by it.
We had lenders giving anyone who wanted a mortgage (or 5 or 12) a mortgage, no need to verify income, assets, etc. There were what’s called “subprime mortgages” in the form of “NINJA loans” (No Income, No Job, No Assets, No Problem). And “negative amortization” loans (where there is no payment and the principal increases because you could just refinance in a couple of years when the property’s value is 50% higher (because property values only go up, right?)), appraisers were just saying “yeah sure, it’s worth that much” without ever even stepping foot on the property and all kinds of other stuff that you would never see now.
But the investment banks were to blame, more than anyone. (Except maybe the ratings bureaus, but I’ll get to them later.) The investment banks are the secondary market behemoths buying all these piece of crap mortgages from the lenders. The lenders package all these doomed-to-fail mortgages up and sell them to the investment banks. Then the lenders go out and get more people in debt; wash-rinse-repeat.
A lot of people don’t know how the investment banks just keep buying mortgages. How do they not run out of money? With interest rates so low, they can’t make enough from a 30-year mortgage.
Well, here is where all of us normal people come in; anyone with a mutual fund, traditional Roth, Roth-IRA, or 401k, anyways. Back in the 70s, the finance gurus created what’s called mortgage-backed security (MBS). “Security” as in “stock” security. Something for people to buy and make a return on for simply owning that security. In its nature, it’s a genius product. It really is. It provides the income to the investment bank needed to continually purchase mortgages and it provides the general public a return on their own collective debts-turned-investments.
The relationship between the primary market and the secondary market is like the water cycle, in that it all recycles. But if the water vaporizing is tainted with poison, it’s going to kill everything on the land, eventually making all the water toxic. That’s what happened. We got rained on with poison water.
So these investment bankers package all these mortgages up into what is called tranches, and then they get a bond rating from the ratings bureaus relative to their collective level of risk. If the tranche is full of grade a, high credit, steady income mortgages, they get an Aaa rating. Then they are sold back to us, the general public, in the form of an MBS. For Aaa anything, whether it be bonds or MBSs, the risk is low, so therefore so is the return. Which means they are usually what is purchased by people who don’t have enough time left in life to be taking the risks required for higher returns.
Well, the ratings bureaus were rating these tranches of subprime mortgages as Aaa, for the price of whatever their honor costs. So, we have all these people buying these subprime mortgages, but they have no idea, they thought they were buying Aaa-rated securities, the most secure, risk-averse investment in American history, damn near. So, you see the problem? The investment banks didn’t look (or care), and the ratings bureaus straight up lied, and it was the biggest coordinated con in world history that resulted in millions of people losing their jobs and retirement and the world coming to a screeching halt.
Because of the Dodd-Frank act (2010) which created the Consumer Financial Protection Bureau (CFPB) and a crapload of other regulations, most of those kinds of things are no longer around, anymore. So now we’re just waiting on the normal cycle to shift. Which usually doesn’t come in the form of a crash, but a slow correction.
But the reason that is taking so long is because demand is higher than usual because inventory is far, far lower than usual. Our buyer pool is bigger than it’s ever been, which makes the hyper supply necessary for a correction much more difficult to reach.
We’ve got millennials who should’ve (and would’ve) bought a house ten years ago, but couldn’t because the world was on fire, just now buying for the first time (and at $250,000, they are at a MUCH higher price point than they would’ve been 10 years ago), boomers downsizing, zoomers just now of buying age and moving into the tiny market, and then all the normal gen x and gen y either upsizing or just now buying for the same delay reason as millennials.
This is a large buyer pool anyways, but now picture all of those different demos, think of how many people that would be, and then tell all of them the federal discount rate is zero, and they’re looking at historically low consumer rates of 2-2.5% for a fixed-rate, 30-year mortgage, and BOOM! You’ve got your catalyst that caused the compounding explosion of the buyer pool that no supply chain could ever satisfy.
And forbearance. Yeah, people have taken forbearance, and people will foreclose, but not nearly as much as people think/thought and those foreclosures will be thrown into the lackluster inventory that will be immediately consumed by the voracious buyer pool all desperate for a freakin house, any house, at whatever cost.
Because with that many people all with the same objective in mind, you’re no longer dealing with people. You’re dealing with a mob, with a mob’s mentality, and the decisions made are akin to the emotional thrashings of a rabid animal.
In summary, the current market is a very different creature compared to the situation in 2007. I can’t say I know what’s coming next, but I can say it won’t be history repeating itself.