If you were alive and an adult in 2008 you remember it vividly. For just about everyone alive at that time and even today it was our 1929. Since then people keep wondering if it will happen again or something like it. The good news is, there were significant protections put in lending through Dodd Frank so something that mirrors that crash is probably unlikely.. That being said over time a crash could happen in the housing market but not in the way it happened in 2008 and likely not soon. Let’s discuss why.
Simple economics: the demand is incredibly high, and the supply is incredibly low. I forget what the updated numbers are, but it’s like we have less than a one-month supply of inventory. In a healthy market, you need a year’s supply. We have a one-month supply, so there are more buyers than there are sellers essentially.
This is on top of having a rising interest rate environment. Obviously, rates have come down a bit from their highs but they are still quite a bit higher than they were just a few years ago. You’ve got a high interest rate environment, but you still have more buyers than sellers. Imagine what’s going to happen if rates drop a couple points. You’ll have millions more people flood the market wanting to buy. That’s what I mean when I talk about residential real estate.
For commercial real estate, you have the inverse situation. Because of COVID, a lot of businesses, like ours, have moved to a virtual model. We’re mainly a virtual business, but we have a commercial space where we create content and do other work. These buildings, though, are suffering. We just moved mid 2024, and our previous building was at 50% occupancy. This new building is, at best, 50% occupied. The parking lots are half full. It’s gotten better, but it’s still pretty bare.
There’s a lot of paper held by banks in the mortgage space, but there are trillions held in the commercial space. Many owners of these buildings took three-year adjustable-rate mortgages (ARMs), which is typical for financing commercial real estate. What were the rates three years ago compared to now? A lot lower. When those rates adjust, and they are adjusting now, they’re adjusting big time. These owners can’t offload the paper fast enough, so there’s going to be massive defaults in the commercial sector. This will obviously affect banks.
In a typical year, about 25 banks fail. When you hear about Silicon Valley Bank and Republic Bank, that’s normal. Even Silicon Valley Bank didn’t technically fail. They’re still operating as a subsidiary under First Citizens Bank, which bought their paper. On average, 25 banks fail annually.
When banks fail what happens is that the debt and assets of these smaller banks get transferred to larger banks like Chase, U.S. Bank, Citi, or PNC. These big banks will just get even bigger. For example, First Citizens, which was substantially larger than Silicon Valley Bank, bought their assets, including their deposits and loans. Deposits and loans are assets for a bank. So, the big banks will continue to grow as they absorb the smaller ones.
The biggest piece of the equation is how much money has been printed in the past 4 years. With the money spigot turned on full blast, housing and asset values have increased considerably year over year. It doesn’t appear this will get shut off anytime soon and even if it slows some that money has already done its job. Unless they shut it off completely which I can’t predict for certain but my guess is they’d never do then housing values should stay up. The value of the dollar has diminished quite a bit as a result of the money printing so we need more of them to buy property.
With demand still high, rates still high, inventory low, and the money printing stays turned on, it’s unlikely housing will take a serious dip anytime soon.
