Housing market booming – just like it did before the 2008 crash

Consumer confidence numbers for August came out at a 6-year low, yet housing sales still blew away estimates. The new home sales for August came in at the best levels since 2006! And what happened in 2006? The housing bubble. 2005/06 was when house prices in America peaked, it was in 2007 when the market imploded and 2008 when this implosion turned into a financial crisis. There is a huge divergence between consumer confidence and new home sales.

The high level of housing sales isn’t because the economy is booming. It has nothing to do with a booming economy. One of the reasons why so many homes are being bought is because of the weak economy which is causing mortgage rates to stay at record lows.

It’s possible to get a 30-year fixed rate loan at 2.5%. That’s below current inflation levels and will be much lower than future inflation levels. This is a great deal for people who are borrowing money to buy a real asset like a house, but bad for lenders. By the time the debtors have finished paying off the mortgage the creditor will have a bunch of useless money.

What happens if house prices drop?

In real terms, the homeowner won’t make any money because the price of the asset will depreciate but the money you are using from the lender will depreciate even more! So, what is lost being a homeowner will be gained back more as a debtor. The real losers are banks who own the mortgages.

When interest rates start to rise, which they have to. The banks that are stuck with mortgages that are not even paying back a quarter of the annual inflation rate - will fail. Even with the governments guaranteeing that mortgages will be paid - if there’s hyperinflation that guarantee means nothing. The problem will be that the mortgages are worth nothing.

Why are people buying homes? Despite prices being at record highs for buying houses and the cost of building houses going up. People are buying because they need to move. The low interest rates are just enabling them. A lot of people need more space because they are working from home, kids are not in schools, taxes in cities are going up and crime is increasing.

This spike in home sales doesn’t mean there is a booming economy. The financial system is setting up for disaster with central banks keeping interest rates low and guaranteeing loans. With more and more job lay-offs consumer confidence continues to slide even though people are buying more homes.

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