Millennials about to get first (or second?) taste of “moral hazard” in the housing market?

In some ways, it’s not unlike what transpired a decade ago in the wake of the 2008 financial crisis – prospective homebuyers, let’s say, the more “prudent” among us (whether early millennials or otherwise), frustrated by the unsustainable and seemingly irresponsible run-up in prices during the prior “bubble” years (roughly from 2003-2007) felt their time had, perhaps, finally come.

The prudent savers would finally be rewarded with opportunities to buy homes at lower prices and and reap the rewards of their sacrifice and eschewing of the “buy now or be priced out forever” mindset that had previously dominated, with all its “no money down” mortgages and “stated income” (read: no job needed) loans that had kept the party going for too long.

Even if this “inevitable decline” came at the unfortunate misfortune of those who had been duped into jumping on the “housing prices never go down” mania at it’s peak (admittedly, for every knowing “speculator” there were some who genuinely had no idea what they were getting into), it’s the way markets are supposed to work, after all – buy low, sell high; responsible savers get rewarded while irresponsible debtors get punished; the good old laws of supply & demand, finally returning to earth. As far as moral hazard goes, there’s a little on both ends of the spectrum, to be sure, but if we’re all playing by the same rules, it’s hard to argue how this should all end up, right? What’s fair is fair, no? Not so fast.

Sure, we’ve all heard the stories of the unfortunate souls who did actually lose their homes during this post-crash period, and the resulting drop in prices that occurred in some markets more so than others. We feel for those people because we don’t advocate for people getting thrown out on the street under any circumstances, really. But, the post-crash story that gets less mainstream attention is how inconsistent that outcome really was – and how many more people, for better or worse, actually got to live “mortgage free” for years in their over-leveraged homes while banks held back on foreclosures to keep supply off the market, thereby keeping prices artificially inflated, and thereby denying those “prudent savers” their opportunity to get in the game, make good on their sacrifices, and help return the market to a more sound, stable footing. No, the Fed ensured that scenario would not have an opportunity to fully play out as it stepped in with the ensuing decade’s worth of #QE and #ZIRP to ensure markets would stay inflated, and only those existing owners of assets (and in the case of those over-levered housing speculators from the 2000s, whether they ever really had any right to own their assets in the first place) would be made whole, first and foremost, while the relative value of the savings of those who “sat on the sidelines” would be devalued.

Related reads:

Imagine if baseball worked like monetary policy? (from 2017)

10 things I might have done differently if I knew paying my mortgage would become optional (from 2017)

For some “prudent” millennials with sufficient savings, over the most recent decade of the 2010s, they finally had to bite the bullet and “buy in” at whatever price the “market” was being propped up at. Life goes on, and eventually, we all need a place to live, right? In this case, they at least had to bring a down payment to the table, and prove they had the income to support the debt. In this case, at least the math made some sense – at least according to the formulas of #QE #ZIRP era math. Whether these “prudent” buyers were actually getting a good deal for their years worth of hard work & sacrifice – well, that still remains to be seen.

Enter COVID-19 and the 2020 “everything” market crash. History will eventually tell us how this all plays out, but there’s bound to be moral hazard somewhere. Will the “first wave” of “prudent” millennial buyers be made to look like fools for having capitulated and bought homes during the 2010s era of Fed-driven asset inflation if the market is actually allowed to bottom out in the 2020s after all? Or will a “second wave” of millennial buyers experience the same lesson the first-wave buyers did – that saving & waiting is its own kind of fool’s game?

Either way, it’s bound to be lesson in not-so-market economics. Exactly who the winners & losers will be in this case remains to be seen, but if we had to venture a guess, we assume no one will be playing by the rules.

In the meantime, some sentiment from a certain cadre of millennials for whom, we assume, homeownership is not yet a thing:

CCN: Housing Market Supply Shock Blindsides Crash-Crazed Millennials

CCN: These Entitled Millennials Are Cheering for a Housing Market Crash

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