Looking back at affordability and market corrections over the years, we can see that a 6% interest rate on a 30-year mortgage is the norm. What’s changed, of course, is the price. Since WWII, prices have only dropped twice. 1990-91 and 2007-12. In looking for any common link between these corrections and the risk of a 2025-26 correction, I found one common thread: artificial demand. (Contact Tim Here.)
Consider 1990-91. This crash/correction was the result of new home speculation. Buyers would buy a new home and immediately sell it with a markup, and that person would do the same—all before the builder even finished. Like a house of cards, the market corrected. That daisy chain of escrows artificially created demand beyond what should have been, and prices followed, until they didn’t.
From 2007 to 2012, artificial demand was unquestionably fueled by easy no-credit, no-income-qualifying loans powered by stupidly low teaser rates. People who had no business buying a home, let alone several, drove up the values more than they would have normally. And like '90–'91 created artificial demand. Of course the derivatives and MBS’s sold by Wall Street exacerbated this and nearly broke the economy, but the catalyst was artificial demand. (Find Your Home Value Here)
Fast forward to today, and we have to ask, did 2-3% mortgage rates from 2020-2022 cause more people to stretch and buy more house than they normally would have been able to? Did it cause buyers to bid $100K, $200K, or even $300K over ask to win a property? Was this only possible because rates were so low that the payment buyers could afford was so low they could go way over asking? Answer: Yes. Millennial demographics, seniors aging in place, and a lack of building have certainly contributed to a shortage of homes for sale, but shortage alone doesn’t account for 40% appreciation in 4 years.
Artificial demand is the culprit for each correction in the past 40 years.
Does this mean we are destined to crash in 2025-26? Not necessarily. Demographics and lack of home building are still in play. Millennials are a huge population ready to buy should affordability return. Then there’s the “Silver Tsunami": $90T of Silent Generation and Baby Boomer wealth being passed down to younger generations. Might lower rates stave off a crash? Any one of these events could impact a 2025-26 correction.
A couple final thoughts, if no one buys US debt since we’ve alienated friend and foe alike, will rates actually come down even if the Fed lowers them? Answer: Maybe not. It’s a supply and demand equation, and we know there’s lots of supply, but will there be adequate demand at lower rates? There’s also the spread that banks are making between the 10Y Treasury and the 30-year mortgage. Historically it’s been 1.5%-1.8%. Today it is 2.3%+. Banks doing fewer loans are padding their margins. Thus, a 10-year T-Bill at 4.24%, with a normal 1.5% spread, should mean mortgage rates would be at 5.75%, but they aren't; they are at 6.75%. So, while it looks like we’re heading for a correction, it’s not yet a certainty.
