House sales are cratering but inventory is soaring
When I moved to the UK in the early 2000s, nearly everyone I met fancied themselves a real-estate investment genius. Young people all had plans to “get on the housing ladder.” Each of these schemes was more crackpot than the last — the most plausible involved buying minuscule flats, “doing them up,” and flipping them. The weirder ones involved buying unbuilt holiday homes in Spain or Croatia — places these people couldn’t afford to visit, especially not after assuming crushing debt to buy these homes — waiting for them to “go up in value,” and selling them.
No amount of debate or discussion could dissuade these young people from pursuing these highly speculative, highly leveraged bets. They had been subjected to a yearslong barrage of assurances of the inevitability of house prices rising, including no fewer than three public TV shows about house-flipping — that is, publicly funded propaganda to make risky, speculative financial bets look “safe as houses.”
But as weird as my conversations with young people were, they were nothing compared to my conversations with people of their parents’ generation. Without exception, every older person I talked to about the housing crisis — for that’s what it was! — was convinced that they were the second coming of Warren Buffet, a genetic sport born with the mutant power to unerringly spot underpriced homes.
Their evidence for this? They had bought homes in the 1970s and 1980s for less than £100k, and now those homes were worth £2m. For them, this was a sign that they had “bought well.” No amount of debate could convince them otherwise, not even discussions of how the surreal, high-risk bets their children were making were feeding a bubble that saw all homes soaring in price.
Buying into a bubble doesn’t make you a genius — it makes you a gambler in a rigged casino. Now, lots of people make money in a rigged casino, and not just the casino’s owners. Marks who luck out on their entry and exit can walk out with some of the loot, too. In fact, it’s to the casino’s advantage to have a pool of satisfied marks walking around in the world, boasting of the incredible (and fair) opportunities to be found at the casino’s tables.
This is especially visible in the world of crypto speculation. The multibillion-dollar “stablecoin” Tether has long been understood to be a scam — but enough people were able to profitably use it that every time someone pointed out the incoherence of Tether’s claims to reserve assets, a bleating chorus of Tether boosters appeared to drown them out.
The original “airdrop” actually took place in the UK housing market, when Margaret Thatcher killed the idea that shelter was a human right by selling council flats (public housing) to their residents. A generation later, those flats were mostly in speculators’ hands, the money from sales was long gone, and the children of those former council tenants had nowhere to live.
The people who bought and held onto their homes through the housing bubble considered themselves to be genius investors, even though their “strategy” consisted of “living somewhere, while forces they didn’t understand drove trillions into the housing market and inflated the price of every home.”
Housing is a uniquely dangerous form of speculation, because shelter is a primary human right, and being unsheltered is catastrophic. When a nation replaces labor rights and a social safety net with speculation on housing, it pits the living conditions of everyone who doesn’t have a home against everyone who does. A country whose residents’ dignified retirement depends on house prices going up is a country whose government is committing to making shelter more expensive.
Imagine if the only way people in your town could experience upward social mobility was if the price of food went up, and if your local, regional and national government committed itself to a policy of making food as expensive as possible. Life without food is harder than life without shelter — but a society that fails to provide stable housing to its people is still an abject failure.
Here in the USA, we’ve just been through yet another housing bubble, driven by a combination of offshore speculators, overall asset inflation from Trump’s quantitative easing, NIMBYism, and 15 years of failure to build new housing since the Great Financial Crisis. House prices have soared to levels that dwarfed the runup to the 2008 bust.
The entire asset bubble — stocks, crypto, baseball cards, art, wine — is bursting, and its taking the housing market with it. April saw the largest decrease in house sales in US history, a month-on-month drop of 16.6% and a year-on-year drop of 26.9%.
Even those shocking numbers don’t convey the true scale of the collapse, because they obscure variations by region and sale price. For example, the US south experienced an annual drop of 36.6%. Unsold inventory in the south rose by 59%. Sales of homes listed at $200–300k fell by 71%.
One of the defining characteristics of a bubble is leverage: when people have to borrow to place their bets. Leverage makes bubbles a lot bigger. Credit gives bidders access to more money, so the prices go up as they outbid one another.
But leverage also makes bubble burst a lot harder. The people who loan money into the bubble want to make sure they don’t lose everything if prices go down, so when things look bad, they call in their loans. The banks that provided the leverage for the 2008 crisis used unregulated financial products in a bid to contain their risk (most “financial innovation” consists of finding ways to market prohibited products by rebranding them as something else).
That risk-containment strategy was built on contracts where borrowers promised not to seek bankruptcy protection if they got into trouble. This meant that when prices went down and lots of gamblers found themselves needing to cover their bets, they were unable to renegotiate their debts in bankruptcy court — instead, they had to sell off their assets for whatever they could get (remember “short sales”?).
This meant that as soon as house prices dipped, lots of houses were forced into the market, which drove house prices down even further. Those falling prices triggered another wave of sell-offs, and another drop in prices, and more sell-offs. No wonder that regulators sifting through the ashes of the 2008 collapse called these unregulated risk-containment strategies “suicide notes”:
These price-annihilating “fire sales” are a feature of every bursting bubble, though they’re an especially grave risk in crypto, where smart contracts are designed to force instantaneous, automated loan liquidations when the value of the loans’ collateral drops:
Asset bubbles drive all kinds of risky behavior. As the current housing bubble has gotten bigger and bigger, house-buyers have held off on selling their old houses. In other words, if you buy a new house and move your family into it, you don’t sell the house you just left — you leave it empty for months, or even a year, borrowing to cover two mortgage payments.
Why would anyone do this? Because housing prices kept going up — and up — and up. By “hodling” onto that old house, you could ride that upward trend “to the Moon.”
Like the older Britons who were convinced that having a place to live made them financial geniuses, even though they had no theory to explain rising house prices and thus no way to predict when prices might fall, the people who hodl’ed their old houses mistook the dividends of a massive asset bubble for their own financial acumen.
That was a harmless delusion, so long as house prices kept going up. Once the market cooled, it was a disaster. As Barry Ritholtz describes, the people who held onto their former residences have run out of rope and can’t afford to keep up two homes anymore, and a flood of new listings is landing on the market, even as it collapses:
Last month, new house listings went up by 26% month-on-month, and 8% year-on-year, the first annual increase in listings since 2019. It’s worse than it looks: rising mortgage rates mean that buyers are leaving this market, reducing demand for the (increasing) supply. Closing sales have declined for nine consecutive months.
Prices are falling: 74% more homes were relisted at lower prices in May than in April. The collapse is (unsurprisingly) worst in the cities that inflated the most during the bubble: Austin, Phoenix, Sacramento, Riverside, Denver and Raleigh.
The original sin here is to conceive of homes as assets first, and human rights second. Asset bubbles are hugely destructive, but they don’t have to implicate shelter. That was a policy choice, and once again, we’re learning that it was the wrong one.
Tony Mariotti (modified)
Cory Doctorow (craphound.com) is a science fiction author, activist, and blogger. He has a podcast, a newsletter, a Twitter feed, a Mastodon feed, and a Tumblr feed. He was born in Canada, became a British citizen and now lives in Burbank, California. His latest nonfiction book is How to Destroy Surveillance Capitalism. His latest novel for adults is Attack Surface. His latest short story collection is Radicalized. His latest picture book is Poesy the Monster Slayer. His latest YA novel is Pirate Cinema. His latest graphic novel is In Real Life. His forthcoming books include Chokepoint Capitalism: How to Beat Big Tech, Tame Big Content, and Get Artists Paid (with Rebecca Giblin), a book about artistic labor market and excessive buyer power; Red Team Blues, a noir thriller about cryptocurrency, corruption and money-laundering (Tor, 2023); and The Lost Cause, a utopian post-GND novel about truth and reconciliation with white nationalist militias (Tor, 2023).