Over one-third of homes in the United States have not recovered their pre-financial crisis values. That’s a pretty damning figure that shows not only how destructive the financial crisis was but also how widespread the housing bubble was in the mid-2000s. Because the subprime market was so important to the growth of the bubble, many houses owned by subprime borrowers were hit hard during the crisis and still have not recovered their value. That makes it especially worrisome that a new housing bubble seems to be on the horizon.
Housing Prices in Metro Areas Skyrocketing
The increase in housing prices in the past couple of years is well-known. Much of that increase is occurring in already-expensive metropolitan areas such as the Bay area in California, or Washington, DC and its suburbs. While rural areas and lower-cost housing that saw huge run-ups during the last housing bubble still have not recovered, higher-cost housing has really risen in cost. Stories of rundown shacks in the San Francisco area selling for over a million dollars are not uncommon.
It’s not surprising that housing prices are increasing since the Federal Reserve pumped trillions of dollars into the economy to try to boost housing prices. The thinking was that since a house was the largest source of wealth for most households, driving up the prices of houses would lead to increased wealth for all Americans. While the Fed may have been successful at boosting housing prices, at least in urban areas, it failed at increasing the wealth of homeowners.
Role of Speculative Investment
One effect of the housing crisis was that investors who invested in real estate saw many of their assets become worthless during the aftermath of the subprime crisis. Many larger and institutional investors became wary of investing in subprime assets or even of investing in securities backed by mortgages.
Instead, they sought to invest in actual real estate. They bought houses, apartments, and other real estate assets that they sought to hold as investment assets, hoping either for rental income or eventual price appreciation. Thanks to the trillions of dollars of cheap money pushed into the financial system by the Federal Reserve, those large investors were able to make those purchases cheaper than they otherwise would have been able to.
Because so much housing stock is now in the hands of institutional landlords, housing prices have risen. Those firms can bid higher prices for houses than individuals and families because they have deeper pockets and access to cheaper financing. That cuts down on the number of houses available to those who actually want to live in them, and forces them to bid higher prices than they otherwise might feel comfortable with. Of course, their mortgages are also cheaper than in the past, so all of this fuels a huge increase in housing prices.
Unlike the last housing bubble, which was felt throughout the housing sector, this newest bubble seems to be largely concentrated in expensive urban areas and among houses that are out of reach of all but the top 10 percent of earners.
That means that when the bubble bursts, all of these people who thought they were well-off will see the value of their houses decline significantly. They will experience severe economic harm, which will negatively impact the economy. The one-third of houses that haven’t regained their value means that the economic “recovery” was largely confined to higher-earning segments of society, so when those segments are affected, the result will be a plunge back into recession, and perhaps one whose effects will make the 2008 financial crisis look like a cakewalk. The bigger they come, the harder they fall, and the huge increase in housing prices will be met with just as large a decrease when the bubble finally bursts.