I always appreciate a good discussion. It's a lost art these days!
This is what's so interesting/terrifying about our current predicament. I actually agree with much of what you said. The housing market in a vacuum, other than rising interest rates,
doesn't really look bad. In fact, most statistics look pretty normal or even good, particularly when compared to 2008.
Here's a very important distinction that I didn't expand on enough in my first post: I don't think the housing market will be the catalyst for the next recession. That doesn't mean that it's not in a bubble.
When it comes down to it, it's all about interest rates. A retail buyer, when purchasing a home, doesn't think in terms of I owe X dollars for this home; rather, they think in terms of I owe Y dollars per month for this home. In periods of full employment where wages aren't growing as quickly as prices (what we are in now!), affordability will get stretched to its maximum.
The problem is, when the Fed raises interest rates, it increases the cost of that loan. Therefore, unless most retail buyers can cough up the extra money on the down payment to keep those monthly payments affordable (hint, they can't), then prices have no choice but to drop.
Should there be something that hits household finances (and therefore home affordability), such as a
stock market correction, or imploding
credit card or
auto debt (these articles are a bit sensational, I know, but the data is still good), demand will suffer much more.
Clear as mud, right? In my opinion, we are looking at a minor price correction at best, fueled by weakening household finances. Who knows what the worst could be. The reality is that we are in uncharted fiscal waters right now. Interest rates have never been this low and we have never been in so much debt, both as individuals and as a country. I simply don't see any way this ends well.
