“a few thoughts about the current housing mess”

Guest post as taken from a recent reply (by JohnH) to a post (Housing Affordability), from which the content came from Econofact November 4, 2025, and placed on Angry Bear. At times the best comes from where you did not expect it to come. It is a sound commentary by “JohnH “and a good read.

“JohnH’s Reply”

Having worked in the mortgage industry for a few years, I have a few thoughts about the current housing mess.

1) Yes, supply is a problem but it’s not that simple. IMO the market is broken. The mix of housing on the market does not reflect the profile of buyers. Fact is, baby boomers are sitting on houses that vastly exceed their housing needs. They should be selling to families who should by now be trading up to boomers’ housing, thereby freeing up starter homes for first time buyers. It’s not happening at anywhere the rate needed.

Boomers need to move along to smaller homes suitable for the elderly. However, there little incentive and almost no supply. Builders are simply not building small, feature-rich housing close to transportation, medical care, and shopping, etc. When asked about this dearth of supply, realtors simply shrugged and said that builders prefer to build McMansions. Boomers literally have no place to go but senior independent living facilities. I know. My wife and I looked for such housing for more than a decade in several cities. The best on offer was starter housing, either old and convenient or brand-new, inconvenient, and priced at the same level as our existing unit. Eventually we found a great apartment in a continuing care facility and pay dearly for it.

Twenty years ago I even spoke before city council to advocate for zoning and land-use policies that would encourage elder housing comparable to a 1980 Honda Accord (compact, inexpensive and feature-rich). Nothing happened.

2) The piece above does a good job describing the likely future course of interest rates. But IMO it’s not interest rates that are the problem. Sure, they are high compared to the recent past. But I don’t believe that I ever held a mortgage at rates as low as today’s. And then there are the income tax deductions which bring the effective, real interest rate into the 3-4% range.

The real interest-rate problem is that 21st century monetary policy turned housing into a speculative asset market. Low long-term rates, driven by the Fed’s QE policies, led to booms in housing prices along with booms in stock prices. Then housing prices, unlike stock prices, didn’t drop when rates rose. Unfortunately, if mortgage rates do eventually drop, the boom/no-bust cycle will simply repeat. At the beginning of the next boom cycle, debt service will drop in response to lower rates but then quickly rise as the boom gains momentum. Increased housing prices rise require increased mortgage loan sizes will require increased debt service payments, decreasing if not totally offsetting increased affordability.

To respond to the boom/no-bust cycles, the Fed pushed rates lower with each cycle, even buying mortgage backed securities to drive their prices up and long interest rates down. 3% mortgages were great for economic stimulus, but that policy has reached a dead-end; the Fed simply can’t drive rates into negative territory. And the policy destroyed the liquidity of the market…what rational homeowner sells to trade up or move elsewhere when debt service on his next mortgage would include an interest rate necessarily much higher than the one he current holds?

3) Though I can’t assess their significance, there are other problems as well. Corporations have entered the housing market, competing largely with first time buyers and driving prices up. Airbnb has siphoned off units from housing supply. And Zillow has been implicated in price-suggesting (not price-setting), much to the delight of homeowners and realtors, who appreciate their often optimistic valuations. And finally, there are threats to FNMA, which was founded to offer 30 year mortgages to lower monthly debt service. IF FNMA 30-year mortgages become a thing of the past, shorter mortgage terms will be all that’s left, driving up debt service payments for all buyers.