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FROZEN: The Post-pandemic Real-Estate Crisis By Evan Anderson _____ Why Read: Real estate has long been one of the safest asset classes. Residential homes have also been one of the most important stores of wealth for the average American family. All of this is beginning to change. Read on for a description of how and why the US real-estate market, from residential to commercial, has frozen, and what else is contributing to the new, uncertain future in which the industry now finds itself. _____ Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world. - Franklin D. Roosevelt Landlords grow rich in their sleep. - John Stuart Mill Buy land; they're not making it anymore. - Mark Twain
In the early days of the 2008 Global Financial Collapse (GFC), a notable aspect of the housing-market crash was the sheer quantity of liquidity flying around the room. Banks were issuing loan deals that could best be described as "unhinged," then packaging them as fast as possible to resell and move off their books. The results were predictable: plentiful, effectively fraudulent NINJA ("no income, no job, no assets") loans that were never going to survive the life of the term, leading to massive and sudden surges in non-performing packages. Some of the collapsing banks had invested at the top of the system, with no clear tracking of who had been responsible for ensuring that packages did not contain such "poison pills." If anything, the experience of the 2008 financial crisis solidly challenged the kinds of exuberant philosophies quoted above: those men of yore lived in an economic and financial system far less defined by such financial product hijinks. The backlash from the GFC was, rather predictably, massive bailouts paid for by the public and a series of regulatory changes that attempted to prevent the same from occurring in the future. The pendulum had swung. Today, against the backdrop of a global pandemic that shocked all markets in various ways, and a huge amount of government spending in response under our belts, we sit on the precipice of a different kind of crisis. The housing market, rather than overheating, is beginning to freeze. What does a frozen market look like? In comparison to free money flowing everywhere, we now see an emerging dynamic that is as perturbing as that of 2008: prices are sky-high, demand is dropping fast, and interest rates are holding steady at a near 7% level. In today's US housing market, it's beginning to feel as if the adage about work -"No one wants to buy houses anymore" - is playing out. Rather than moving on with a shrug, however, we should be paying close attention. The main problem? In 2023 (the latest year we have numbers for from FRED), NAICS code 531 ("Real Estate") was worth almost US$3.45 trillion. That's roughly 12.45% of that year's US GDP. In other words, in macroeconomic terms, real estate matters. More important, it remains one of the largest stores of American wealth, particularly for the middle and upper classes.
As the above chart shows, real estate represents the largest share of wealth for the bottom 50%, but also for the 50%-90% of wealth holders. It is highly relevant in the 90%-99% group, along with equities - and tapers only at the top, where equities dominate. All of this means that for both housing and financial security, a significant proportion of the nation depends on the housing and real-estate markets functioning smoothly in order to be "wealthy." But that isn't what's happening. |
