The housing market may be headed for another crash. According to James Stack, the money manager who predicted the housing market crash of 2005, the current U.S. housing market is beginning to bubble.
“It is 2005 all over again in terms of the valuation extreme, the psychological excess, and the denial,” Stack said to Bloomberg. “People don’t believe housing is in a bubble and don’t want to hear talk about prices being a little bit bubblish.”
According to Bloomberg, the U.S. housing market has made optimistic gains over the last six years. In fact, the homebuilder stocks outperformed all other stock groups in 2017.
Stable employment rates could mean housing will be in demand for years to come what with baby boomers reaching retirement age and millennials beginning to house hunt. In fact, Americans over 65 had the highest homeownership rate in 2016.
In December 2017, the National Association of Home Builders/Wells Fargo gauge of confidence rose to its highest peak in 18 years. What’s more, according to John Burns Real Estate Consulting, sales in master-planned communities reached an all-time record in 2017.
“As soon as homes are finished, they’re flying off the shelf,” said U.S. property economist of Capital Economic Ltd., Matthew Pointon.
Even areas affected by 2017’s natural disasters have begun to bounce back on the housing market. Popular areas such as Houston and Austin, Texas as well as the Florida Keys are still booming with potential buyers.
However, these fortunate circumstances belie the rot in the undergrowth according to Stack. The housing market’s high prices and low-interest rates display the same market pattern as the 2005 crash. To Stack, this means the housing market will most likely drop in the next recession.
“If we see mortgage rates at more historical levels,” said Stack, “house prices can’t stay where they are.”
To add to the potential problem, according to Business Insider, the newest tax law could have a detrimental impact on the housing market. The Tax Cuts and Jobs Act of 2017 limits real estate property tax deductions to $10,000 yearly, eliminates local and state income tax deductions, and eliminates interest deductions on home equity loans.
Home equity loans are one of the most popular reasons Americans purchase lower-value homes. They enable homeowners to borrow against their property to pay for potential renovations.
For instance, up to 76% of homeowners will change their kitchen’s style during a renovation. Senior homeowners may also choose to renovate for a home elevator installation, which is 20 times safer than an escalator and even safer than stairs.
The tax law could, therefore, make home ownership less appealing, especially with potentially inflated housing prices. Yet Calculated Risk writer Bill McBride, who also predicted the 2005 crash, says home prices aren’t inflated like Stack says they are.
Compared to the 2005 housing market where mortgage lenders helped forge what would become the nation’s mortgage crisis, McBride says lenders are behaving responsibly. “Lending standards are still pretty good,” said McBride.
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