I love acronyms. While most know FOMO as Fear of Missing Out which has been one of the catalysts of the present housing market the term FOOP, Fear of Overpaying may soon be coming into our lexicon. 

As readers of my blog know I look at real estate markets around the world as while we here in the United States may feel insulated and truly believe when the US sneezes the rest of the world catches a cold the reality is trends in other parts of the world can offer guidance and warnings to our markets.

Picture the following:

After years of ever-increasing housing prices, a credit tightening and rising interest rates have led to some economists predicting a 10% decrease in prices for 2022.

  • The country enjoyed one the hottest housing markets in the word.
  • Had record low borrowing costs i.e. mortgage rates.
  • Limited for-sale inventory.
  • Annual gains close to 30%.

The above description can easily be applied to many housing markets in the United States yet recently in this particular market:

  • Their central bank has started to raise interest rates to rein in the fastest inflation in more than 30 years. 
  • Their Consumer Watch agency recently implemented rules requiring lenders to undertake an affordability assessment on all credit applications including home loans similar to what happened in the United States post foreclosure crisis during The Great Recession.

In this particular market most economists forecast that house prices will fall, but the pace is a matter of debate among them:

  • One firm projecting a 9% decrease in the two years through December 2023
  • Another firm suggesting a 5% decline this year
  • While a third predicts a 10% drop in 2022. 

Yet consider the following:  a 10% retreat would only take the market back to levels seen in mid-2021. The country is New Zealand.

While we consider ourselves insulated in the United States as we do have the largest economy/GDP in the world the reality is the New Zealand example should be a warning. 

  • Many of our markets have become unaffordable.
  • Our Federal Reserve just raised rates and plans to continue.
  • Mortgage Interest rates have just broken through 4%, still low but above the historic lows in our recent past.

There are parallels yet also New Zealand went further concerning qualifications for mortgage loans. Granted in the United States the fraudulent lending practices from the early to mid 2000's are now in the history books. However we would be deluding ourselves to actually believe recent inflation coupled with existing leverage concerning housing costs are not going to have an impact. 

Many buyers in recent years have basically purchased a payment i.e. a fixed mortgage and thus securing a static Principal and Interest payment. However Taxes and Insurance generally go up over time. Add to this inflation which is at its highest rate in four decades and is does not seem to show signs of abatement anytime soon; apart from the affluent many average home purchasers who may have been stretching to purchase now have inflation to contend with.

With the Fed raising rates to combat inflation the trickle down will be an increase in mortgage interest rates (as mentioned 5%+ ). Higher interest rates have an inverse relationship with housing prices i.e. go down. While the impacts may not be witnessed immediately there are many who continue to advise we are NOT in a housing bubble and stability and even higher prices are forecast for 2022.

Maybe it's just me but it's starting to look like the years 2005 and 2006 when housing was in a boom cycle. Then Lehman imploded and we all witnessed the results. While I am not suggesting we are going back to mass short-sales and foreclosures if one really believes all is hunky-dory in the housing market, I will ask then why did Zillow unwind their IBuyer program and take massive losses in selling those residences? If the market is so strong and forecast prices will only increase do the economists at Zillow know something the rest of us do not?