<![CDATA[Housing + Markets]]>https://www.housingandmarkets.comhttps://substackcdn.com/image/fetch/$s_!JSkt!,w_256,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F80a5e146-9eff-4750-83d3-a28284a84f62_512x512.pngHousing + Marketshttps://www.housingandmarkets.comSubstackSun, 19 Apr 2026 08:36:06 GMT<![CDATA[What Would It Take To Crash Home Prices?]]>https://www.housingandmarkets.com/p/what-would-it-take-to-crash-homehttps://www.housingandmarkets.com/p/what-would-it-take-to-crash-homeSat, 14 Feb 2026 17:01:25 GMT

The housing crash narrative has remarkable staying power. For three years running, prominent analysts have predicted double-digit price declines, arguing that affordability has become so stretched that the market must break. The bubble-watchers point to mortgage payments at multi-decade highs relative to income, collapsing first-time buyer participation and median households locked out of median homes in most major metros. The affordability numbers are genuinely ugly. The case for a correction sounds increasingly plausible.

In a previous article, I argued the housing market feels broken but isn’t breaking — because the mechanisms that would crash prices aren’t present.

So the obvious question deserves a serious answer: what would it take to crash home prices?

Start with the mechanics. There are only two ways to get a real housing correction on a national basis:

1. You get a material supply glut.

2. The consumer gets genuinely wrecked.

That's it. Supply glut or consumer destruction. Every crash in the historical record traces back to one or both of these conditions. In 2008, we got both simultaneously.

Real incomes dropped for four straight years.

And inventory skyrocketed and stayed high for years.

Neither is present today — at least not yet. But there are credible paths to each. Let's stress-test them.

The Supply Thesis

A wave of new construction that overwhelms demand. That’s the first path to a correction — and the argument housing bears keep circling back to.

It’s not happening.

And understanding why it’s not happening tells you something important about the structural floor under prices.

The national builders operate on a simple discipline. They monitor completed unsold inventory like a hawk. When completed homes for sale approach 120,000 units nationally, they pull back starts. When months of supply crosses above 6.5 months, they slow permits. This isn't ideology — it's margin management. Overbuilding destroys gross margins and the publicly traded builders answer to shareholders who care about profitability, not market share.

This discipline is post-GFC scar tissue, and it’s real. Before 2008, builders were running completions at 2.2 million units annually, fueled by exotic mortgage products that manufactured demand. When that demand evaporated, they were left holding inventory they couldn’t move. The industry consolidated. The survivors learned the lesson permanently: you build to orders, you protect margins and you never let completed inventory run.

Today, housing starts and permits are running well below replacement demand — even as the shortage narrative persists. The builders aren’t ignoring demand. They’re rationing it. Small local builders can still get overextended in specific markets (Austin, parts of Florida), but the nationals that deliver the majority of new product are far too disciplined to flood the market. Their risk aversion is actually one of the reasons the housing shortage persists.

The doomers point out — correctly — that active listings are recovering. January 2026 reached the highest active inventory level for the month since 2019. That’s real progress toward normalization.

But context matters. New listings data — the key early indicator of seller stress — is running at roughly 55,000–65,000 per week in early 2026. That’s normal for January. During the seasonal peak, 80,000–100,000 per week is typical. Distressed selling would look like 200,000 to 300,000 new listings per week. That’s a four-fold gap between where we are and what actual distress looks like — a vertical breakout that hasn’t come close to materializing. And since June, the rate of inventory growth has actually been slowing.

It would take a severe job-loss recession to generate the income destruction and foreclosures needed to push listings into distress range. Even then, the process is slow — foreclosures take 9–18 months in judicial states. If that wave were building, you'd already see it in the data. You don't.

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The Silver Tsunami That Isn’t

One supply thesis keeps circulating: the “silver tsunami.” The idea is that Baby Boomers will die or downsize en masse, flooding the market with inventory and crashing prices. For years, analysts have held out hope that demographic inevitability would do what policy couldn’t — unlock supply at scale.

The data says otherwise. The tsunami is arriving as a soft, rolling wave — and most of it never reaches the open market.

Cotality reports that a record 340,000 U.S. homes were transferred through inheritance in the 12 months ending August 2025 — 7% of all property transfers, the highest share ever recorded. That sounds like fresh inventory. It’s not. A property transfer just means the title moved. It doesn’t mean the home was listed. Most of these properties are being kept by heirs — as primary residences, as rentals, or as family assets that never see the open market.

Source: Cotality

The challenge starts with the Boomers themselves. They just aren’t leaving. Americans born in 1948 owned roughly 50% more homes at age 65 than those born just a decade earlier — the largest senior cohort in history sitting on the largest housing stockpile in history. And they’re staying put longer than any previous generation. Only 17% of homeowners born in 1946 moved between ages 65 and 75, down from 22% of those born in 1938. AARP surveys show 75% of older homeowners plan to age in place. When they do eventually pass, tax policy in states like California creates powerful incentives for heirs to keep rather than sell, effectively removing potential supply from the broader market.

Here’s the number that puts the tsunami to rest. Freddie Mac projects 9.2 million fewer boomer homeowner households by 2035 — down from 32 million in 2022 to roughly 23 million. That sounds like a flood of supply. But spread it over a decade and it’s approximately 250,000 net units per year. Meanwhile, the Urban Institute projects 8.5 million new households forming this decade alone. New demand absorbs the boomer release before it can accumulate into a glut.

And the geographic mismatch seals it. Zillow’s analysis shows empty-nest households are concentrated in affordable metros — Pittsburgh, Buffalo, Cleveland, Detroit — not in the expensive coastal job centers where supply is actually scarce. The silver tsunami, to the extent it arrives, delivers inventory where it’s least needed.

The Boomers aren’t selling. And when they die, their kids aren’t selling either.

Regional Corrections ≠ National Crash

But wait — aren’t prices already falling in some markets?

Yes. And this is where the bear case gets more nuanced. The argument isn’t that every market will crash simultaneously. It’s that regional corrections in Florida, Texas and the DC metro are the front edge of something larger — that the problems are starting in those markets and will spread from there.

The data is real. Six of the top ten metros with declining prices are in Florida. DC-area inventory is up 50% with prices down three years running. Austin, Phoenix and parts of the Mountain West have given back a meaningful chunk of their pandemic-era gains.

But the question isn’t whether individual markets can decline. They obviously can and are. The question is whether there’s a mechanism to make those declines contagious — to transmit regional pain into a national crash.

In 2008, that mechanism existed. When subprime borrowers defaulted in Phoenix, the losses hit nationally diversified MBS portfolios, which tightened credit everywhere, which created more defaults, which crashed prices nationally. That contagion had a financial transmission vector.

That chain doesn’t exist in anything like its 2008 form. The mortgage market has been fundamentally restructured. Over 70% of outstanding mortgages are now agency-backed (Fannie, Freddie, Ginnie) — meaning the credit risk sits with the government, not with private bank balance sheets. The private-label securitization market that amplified losses in 2008 has never recovered to anything close to pre-crisis scale. Banks aren’t holding concentrated portfolios of subprime MBS. Underwriting standards are materially tighter — median FICO scores for new originations have been running above 730 for years. And critically, most of these loans are 30-year fixed rate, which means there’s no payment-reset trigger sitting in the system.

Could a severe recession cause losses in the agency MBS market? Sure. But as it stands today those losses would be absorbed by the GSEs and ultimately the Treasury — not transmitted through bank balance sheets into a credit crunch that feeds back into housing. The plumbing is different. The feedback loop that turned regional defaults into a national credit crisis required specific conditions — private-label MBS, leveraged bank exposure, mark-to-market accounting and counterparty risk — that simply aren’t present at the same scale.

Regional pain stays regional because there’s no transmission mechanism.

The AirBNB Unwind

A related supply thesis argues that failing Airbnb and short-term rental operators will flood the market as revenues decline from their 2022 peaks. This narrative has been circulating since mid-2023 — and the wave of forced selling still hasn’t arrived. The math explains why. AirDNA identifies roughly 1.5 million active short-term rentals in the U.S. at any given time, against a total housing stock of 147 million units — that’s about 1.6%. Even a meaningful shakeout among amateur hosts adds a fraction of a percent to national inventory. And the properties most likely to convert are concentrated in the same leisure markets — Scottsdale, Sevierville, parts of Florida — already showing regional softness. The STR unwind is real in those pockets. But it’s not a mechanism for national price declines.

The Credit Stress Spillover

So if the correction isn’t going to come from a supply, it has to come from the household side.

The argument: credit stress is building in auto loans, credit cards, and student debt have been growing and will eventually spill into housing.

The stress is real. Auto loan delinquencies hit 5.2% at 90+ days in Q4 2025 — the highest since 2010. Credit card delinquencies reached 12.7% delinquent, the highest in 14 years. Student loan delinquencies spiked to 10.2% after forbearance ended.

There’s an important hierarchy here. When households get squeezed, they triage. Credit cards go delinquent first — they’re unsecured, the consequences are manageable and the issuer has no collateral to seize. Auto loans come next. The mortgage is the last bill to go, because losing your home means losing everything. This priority stack is why credit card delinquencies can spike without mortgage delinquencies following. It’s not that households aren’t stressed. It’s that the stress shows up in unsecured credit long before it threatens housing. And the data confirms it: credit card delinquencies at 14-year highs, mortgage delinquencies at 0.9%. The stress is real but it’s not in the right place to crash home prices.

Credit stress has to translate into forced selling to move prices. Not stress alone. Not tight budgets. Not unhappy households. Forced selling — specifically, homeowners who can’t make payments and have to sell. And that mechanism requires negative equity or severe income loss.

Foreclosure filings did rise 14% in 2025, totaling 367,460. That spooked people. But foreclosure filings represent just 0.26% of all housing units and that’s still 86% below the 2009 peak of over 2.1 million. These numbers are up from pandemic lows, but they’re not accelerating in the way that signals systemic stress.

The bears would argue that a 14% annual increase is what the early innings look like. Fair enough — so look at what the early innings actually looked like last time. In 2006 and 2007, foreclosure filings weren’t rising 14% annually. They were doubling and tripling quarter over quarter. The acceleration curve went vertical well before the housing market actually broke. What we’re seeing today is normalization from artificially suppressed pandemic levels, not the exponential ramp that precedes a crisis.

When you see a real correction coming, the foreclosure data goes vertical early. The credit reports start showing distress 6 to 18 months before the housing market actually breaks.

That process hasn’t even started.

The Slow Fade

If the housing market corrects — and it might — it won’t look like 2008. There’s no supply glut coming. There’s no ARM reset wave. There’s no leverage chain to transmit regional distress nationally. The mechanisms that crashed prices last time aren’t present, and the household balance sheet is strong enough to prevent forced selling at scale.

But a market that doesn’t crash can still erode.

The more likely path is a slow fade: real price declines of 0.5–3% annually, compounding over a decade, without ever triggering the crash indicators everyone is watching for. A market that grinds sideways or slightly up in nominal terms while bleeding in real terms. Prices that don't collapse because there's no forced selling — but that don't accelerate because affordability has restrained demand, mobility is frozen and credit is being rationed toward other priorities.

This is harder to see. And harder to trade. But from a policymaker’s chair, it might be exactly what you’d design if you could.

A nominal crash destroys Boomer retirement equity — the single largest voting bloc in America sitting on the single largest asset class. That’s politically unsurvivable. But flat nominal prices with 3% inflation deliver a 26% real price decline over a decade without a single headline about falling home values. Affordability gradually improves. Retirees see stable account balances. First-time buyers slowly gain ground. Nobody riots.

This is what financial repression looks like in housing. As I argued in a previous piece, we’ve entered a regime where government has both the tools and the political will to manage housing markets through jawboning, directed credit, GSE policy and Fed-Treasury coordination. The slow fade isn’t a market failure. It may be the policy working exactly as intended — improving affordability through real erosion while keeping nominal prices stable enough that no one’s retirement gets blown up.

The housing doomers are watching for the wrong signal. There is no crash coming — not because the market is healthy, but because the correction is taking a form that doesn’t show up in a headline. Those waiting for 2008 to repeat will wait forever. The correction isn't coming as a crash. It's coming as a decade of slow erosion that never triggers an alarm — because it was designed not to.

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Housing + Markets publishes analysis at the intersection of housing, capital markets, and financial history. No crash porn. No cheerleading. Just the data and the mechanisms underneath.

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Sources and Further Reading

Housing Supply & Inventory

Silver Tsunami

Regional Corrections

Credit Stress

Mortgage Market Structure

Household Balance Sheet

Analysis & Further Reading

Disclaimer

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]]><![CDATA[Solvent, Stuck and Squeezed]]>https://www.housingandmarkets.com/p/solvent-stuck-and-squeezedhttps://www.housingandmarkets.com/p/solvent-stuck-and-squeezedTue, 10 Feb 2026 13:45:22 GMTThe housing market should have cracked by now. Every affordability metric says so. Every sentiment survey says so. Every first-time buyer statistic says so. It hasn’t. Not because the stress isn’t real, but because the people who own homes can afford to keep them, the people who want to sell can’t afford to move, and the people who want to buy can’t afford to enter.

Solvent. Stuck. Squeezed.

These are the three forces holding the American housing market together in 2026 — and understanding each one is the only way to understand where the fracture lines actually are.

We’ve been hearing a lot about affordability. Housing is of course squarely at the center of this debate. The cost of homeownership is undeniably high on most historical metrics. There are very few taking the other side of that argument.

The more interesting question isn’t whether housing is expensive. It undeniably is. The question is how the market keeps clearing at these levels and whether “unaffordable” on its own is enough to break prices.

How have prices held up — and in many markets continue rising — even as mortgage rates doubled and monthly payments became 40-50% more expensive than they were in 2021?

Yet transactions continue. Albeit at lower levels than during and before the Pandemic. Many housing analysts predicted that prices would follow volume lower. But we know that’s not how markets actually work. Supply and demand dictate pricing, not volume. Pricing has largely held up for years even with materially lower aggregate sales.

The reality is buying these homes that are coming to market. Of the nation's nearly 46 million renters, only 6 million can afford the median-priced home. That's only 13%. Consumer sentiment is sitting at levels historically associated with recessions, not with 4-5% unemployment and continued GDP growth — lower, in fact, than during the bottom of the GFC.

Percentage of Renter Households That Can Afford a Median-Priced Home

Source: CBRE

This is where conversations about housing usually pivot to crash predictions. The affordability charts look dire. The sentiment data looks dire. So the obvious question follows: when do prices fall?

I’m not going to answer that question here. That’s a different piece. What I want to do is map the terrain underneath that question — because most crash predictions skip this part entirely. They look at the affordability charts, declare it unsustainable, and wait.

But “unaffordable” isn’t a catalyst. It’s a condition. And conditions can persist for a very long time when the underlying household balance sheet doesn’t actually break. So before we can talk about what would break it, we need to understand what’s holding it together — and where the real fracture lines are.

To make sense of it, separate households into three groups: Solvent. Stuck. Squeezed

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Solvent: The Structural Floor Under Prices

Start with the stabilizer most people miss: mortgage structure.

The typical homeowner is sitting on a fixed-rate mortgage. That alone changes the entire failure mode versus the last housing crisis, when adjustable-rate mortgages reset higher and forced homeowners into foreclosure. Yes, there’s been some recent ARM curiosity at the margin, especially for jumbo borrowers trying to arbitrage the rate curve. But the stock of outstanding mortgages that people are actually carrying remains overwhelmingly fixed-rate. When the Fed talks, the mortgage payment doesn’t move.

In 2007, homeowners were levered into adjustable-rate products, sitting on negative equity, and facing payment resets they couldn’t afford. The failure mode was mechanical: rates reset, payments jumped, defaults spiked, inventory flooded the market, prices collapsed.

That structure doesn’t exist today.

Household debt service payments as a share of disposable income are sitting in the low-11% range—elevated from the pandemic trough around 9%, but far below the 15%+ zone that defined the mid-2000s fragility.

Real median household income has climbed back above its pre-pandemic level—$83,730 in 2024 versus $83,260 in 2019—after several years where inflation ate any real gains. But as you can clearly see, median incomes are not going down.

The personal saving rate is somewhat low compared with the late 2010s, but it isn’t zero. It’s been running in the mid-4% range through late 2025. Not out of line with the average of the last 20 years. Not great, but not flashing red.

The aggregate dashboard says: households can service their debt. They can pay their bills. They can keep the lights on.

But solvency doesn’t imply mobility. And housing markets need mobility to function.

Stuck: The Frozen Ladder

Most homeowners can’t afford to move—even if they can afford to stay.

A household sitting on a 3% mortgage locked in during 2020-21 would face a payment that roughly doubles if they moved and financed at today’s rates. Even with significant equity gains, the monthly cash flow hit is brutal. So they stay. They renovate. They make do. They turn down job offers. They delay upsizing. They defer downsizing. They absorb longer commutes. They live with layouts that no longer fit their lives.

The Fed estimates that mortgage-rate lock-in explains a large share of the collapse in borrower mobility coming out of 2021. One study found that lock-in prevented 1.72 million transactions from 2022Q2 to 2024Q2. Another estimated it reduced mobility for mortgaged households by 16% in 2022-23 and increased home prices by 7-8% by reducing supply that would normally come to market.

But this lock-in effect is beginning to ease.

For the first time, there are now more homeowners with mortgage rates above 6% than those with rates below 3%—a milestone that suggests the “payment advantage” of staying put is weakening. As more households hold mortgages at today’s rates, the decision to move becomes less about preserving a historically low rate and more about normal life factors: job changes, growing families, downsizing, relocation.

But the more important catalyst isn’t math. It’s life.

The “Five Ds”—Diapers, Diamonds, Divorce, Death, Diplomas—don’t wait for the Fed. You can defer a move for a year. Maybe two. But a growing family will eventually burst out of a starter home. An empty nester will eventually tire of maintaining four bedrooms. The 2021 cohort that locked in at 3% is now four years into ownership, entering the window where life events historically trigger moves regardless of rate spreads.

The 2020-21 rate environment pulled transactions forward — people who would have bought in 2022 or 2023 moved up their timelines. Then the rate shock froze the other side. Existing homeowners stopped listing. The rate shock didn’t just slow the market. It broke the sequence. The move-up buyer who would have listed a starter home, freeing it for the first-time buyer, who would have vacated a rental, opening a unit for someone moving out of a roommate situation. The whole chain seized.

Mobility fell. Listings fell. Inventory stayed tight in key segments. The market cleared at lower volume. Prices became sticky. And critically, the housing ladder — the mechanism by which households trade up and first-time buyers trade in — lost rungs. Those rungs don’t come back quickly, even as lock-in fades.

That supply deferral has an expiration date. But the damage to the ladder is structural, not cyclical.

The Escrow Trap

Everyone focuses on the mortgage rate. But the real pressure point for 2026 is escrow—taxes and insurance. The 3% mortgage rate is fixed. The escrow account is not.

Consider a Florida retiree who paid off their mortgage in 2018. No monthly payment. Solvent by any measure. But their homeowners insurance has gone from $2,400 a year to $15,000. Their property tax assessment, delayed during COVID, just caught up to a 40% price gain in a single reassessment. Their monthly carrying cost — with no mortgage — went from roughly $600 to over $1,800. On a fixed income, that's a forced move waiting to happen. And it shows up in no distress metric.

Insurance premiums rose double digits in 2023 and 2024, and are projected up another 6-8% in 2025-26. In Florida and parts of California, the issue isn’t just cost—it’s availability. Insurers are withdrawing from markets entirely. State Farm, Allstate, and Farmers have all pulled back from California. Citizens Insurance, Florida’s insurer of last resort, now covers over 1.2 million policies. The average Florida homeowner pays $15,460 annually for insurance—the highest in the nation and roughly triple the national average.

Property tax assessments are catching up to pandemic-era appreciation. ATTOM data shows average single-family property taxes rose 5.8% nationally in 2024 — the largest year-over-year increase in the dataset — outpacing inflation by a wide margin. Reassessment cycles in Texas and Florida are producing double-digit increases for some homeowners. Many jurisdictions delayed reassessments during COVID. Those are now catching up to 30-50% home price gains in a single adjustment.

The Sunbelt states that attracted so much pandemic migration don’t have income taxes. Revenue has to come from somewhere. Property taxes are often the only source with enough horsepower to fund a state. And unlike your mortgage rate, your property tax bill reprices whether you want it to or not.

This changes the solvency picture. A retiree on a fixed income with a paid-off house isn’t “solvent” in any meaningful sense if their escrow doubles over five years. That’s the wedge that could force inventory from a population that doesn’t fit the standard distress profile—not underwater, not unemployed, just unable to absorb the carry costs.

The escrow trap matters because it creates a potential supply release mechanism that doesn’t require the traditional distress signals.

Squeezed: The Participation Trap

Now bring renters back into the picture.

The standard narrative is that rents are crushing renters. The reality is more complicated — and in some ways, more troubling.

Start with the headline data: rent growth has slowed dramatically since the 2021-22 spike. In many Sun Belt metros, rents have actually declined. The national median asking rent hit its lowest level since 2022 in early 2026, posting its sixth straight monthly decline — down 6.2% from peak levels. In Los Angeles, rents are at a four-year low. Denver renters are seeing the most affordable prices in at least nine years. Markets with the most new construction — Austin, Phoenix, parts of Florida — have seen outright decreases.

So if rents are flat or falling in real terms across much of the country, why are renters more stressed than ever?

Because 22.6 million renter households — a record 50% — are now cost-burdened, spending more than 30% of income on housing and utilities. That includes 12.1 million who are severely burdened, spending more than half their income on rent. For three consecutive years, both numbers have set new highs.

And the strain isn’t confined to the bottom of the income ladder. It’s creeping up. In 2001, 55% of renters earning $30,000 to $45,000 were cost-burdened. Today it’s 70%. For those earning $45,000 to $75,000 — solidly middle-income households who historically fed the first-time buyer pipeline — burden rates have doubled to 45%. Even 13% of renters earning $75,000 or more are now cost-burdened. These aren’t the working poor. These are households with two earners, steady jobs, and no path to ownership.

Source: The State of the Nation’s Housing 2025 - Joint Center For Housing Studies of Harvard University

Here’s the paradox: rents don’t need to be at record highs to break the buyer pipeline. They just need to absorb enough income that nothing is left over.

The Harvard Joint Center puts it starkly: renters with annual incomes under $30,000 now have a median of just $250 per month left after paying for housing — down 40% in real terms since 2001. Middle-income renters ($30,000-$75,000) saw residual incomes fall by double digits over the same period. That’s the money that was supposed to become down payment savings. It’s gone.

But the culprit isn’t rent alone. It’s the total cost of participation.

Michael Green’s analysis of the “participation budget” captures this perfectly. Consider a Basic Needs budget for a family of four — two earners, two kids, no vacations, no Netflix, no luxuries. Just the essentials required to hold a job and raise children in 2024: housing, healthcare, childcare, transportation, food, and the technology now required to function — smartphone plans, home broadband for bank authentication, work emails, school portals. After accounting for federal, state, and FICA taxes, the required gross income totals $136,500.

The official poverty line sits at $31,200.

That gap explains why the affordability crisis doesn’t show up cleanly in default statistics. You can be solvent by official measures — pay your bills, service your debt, avoid default — and still be unable to participate in the version of economic life that used to be considered normal.

The poverty line is anchored to a world where food was the primary household expense. Modern budgets get crushed by housing, healthcare, childcare, and transportation — the participation tickets required to function in today’s economy. Rent isn’t pushing people over the edge on its own. It’s everything else combined with rent that’s doing it.

Between 2013 and 2023, the stock of rental units priced below $1,000 per month dropped by over 30%, falling from 24.8 million to 17.2 million units. Meanwhile units renting for $2,000 or more nearly tripled, from 3.6 million to 9.1 million. The disappearance of affordable rental stock compresses the entire housing ladder: middle-income renters compete for fewer units in their price range, which delays their ability to save for homeownership while low-income renters have nowhere to go.

This friction shows up in behavior before it shows up in median-income charts.

People delay marriage. They delay children. They rent longer than planned. They double up. They move back home. They stop forming new households entirely. Pew’s analysis puts the share of adults ages 25-34 living in a parent’s home at 18% in 2023. That’s a pressure valve for rents in the short term — fewer independent households means less rental demand — but it’s also a signal that the life-cycle buyer is being pushed forward in time.

So who IS buying?

The National Association of Realtors’ 2025 Profile of Home Buyers and Sellers tells the story. First-time buyers made up just 24% of purchasers — near record lows. The typical first-time buyer is now 38 years old, a record high. The American “starter home” has become a midlife purchase.

Only 24% of recent buyers had children under 18 at home, down from 58% in 1985. The classic image of the marginal buyer — young couple, kids, stretching into ownership — is no longer the median reality.

The marginal buyer is older, higher-income, and more likely to be buying with equity, cash, or family help. NAR notes a rise in multigenerational logic inside the purchase decision. Buyers cite taking care of aging parents, cost savings, and adult children moving back home as key motivations. Median home prices are hovering around $420,000, roughly 5x median household income. Monthly mortgage payments on the median-priced home require an annual income of at least $126,700 under typical first-time buyer terms.

The buyer pipeline hasn’t disappeared. It’s been replaced. The household that used to drive first-time purchases — young, dual-income, saving from rental into ownership — has been pushed out by a combination of cost burden, disappearing affordable stock, and the rising price of simply participating in the economy. In its place: existing homeowners trading equity, families pooling resources across generations, and cash buyers who don’t need the mortgage market at all.

The path to homeownership used to run through income. Now it runs through equity, inheritance, or family money. That's a different system — and it doesn't scale.

The Homeownership Paradox

Here’s the question nobody asks: the homeownership rate sits at roughly 65%. If housing is so unaffordable, how is that number so high?

Because the 65% is a legacy number. It measures who already owns — not who could buy today.

The median homeowner is sitting on a home purchased years or decades ago at a much lower price point. Roughly 40% of owner-occupied homes are owned free and clear — no mortgage at all. The rate stays high because existing owners stay owners. They’re the Solvent and the Stuck. The system works for people who are already inside it.

But look at the inflow. Of the nation’s 46 million renter households, only about 13% could qualify to purchase a median-priced home today. That’s roughly 6 million households. In a country of 130 million.

The 65% homeownership rate isn’t evidence the system works. It’s a snapshot of who got in before the door narrowed. The 13% — that’s the real number. That’s the pipeline. And it tells you everything about where this is headed.

When household formation slows, everything downstream changes: starter-home absorption, rental demand mix, roommate dynamics, fertility decisions, and the political temperature around housing.

So What Breaks?

This isn’t a 2008 setup. There’s no ARM wave resetting. There’s no negative equity spiral. The household balance sheet, in aggregate, is solvent. The people who own homes can afford to keep them — mostly.

But “not crashing” isn’t the same as “working.”

What we have is a slow stratification. A market that functions perfectly well for the people already inside it — homeowners with locked-in rates, rising equity and manageable debt loads. And a market that is systematically excluding everyone trying to enter — through a combination of high prices, high rates, rising carrying costs and an economy where the cost of simply existing consumes the surplus that used to fund down payments.

The Solvent keep the floor under prices. The Stuck keep inventory off the market. The Squeezed keep getting priced out. And together, these three dynamics produce a market that looks “unaffordable” on every chart but refuses to correct — because the transmission mechanism that would force correction (distressed selling, rising inventory, defaulting borrowers) doesn’t exist in sufficient scale.

That doesn’t mean it can’t break. It means the break, if it comes, won’t look like 2008. It’ll look like something else — a slow erosion of mobility, a generational wealth divide that widens until it becomes politically intolerable, or an external shock (recession, unemployment spike, credit event) that hits the Stuck cohort hard enough to force listings.

The affordability charts are real. The stress is real. But this kind of stress isn’t a catalyst. What breaks housing markets is forced selling. And right now, almost nobody is forced to sell.

The question isn't whether this is sustainable. It probably isn't. The question is what, specifically, changes the math. That's next.

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Housing + Markets publishes analysis at the intersection of housing, capital markets, and financial history. No crash porn. No cheerleading. Just the data and the mechanisms underneath.

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Sources and Further Reading

Household Balance Sheet & Income

Housing Market & Transactions

Mortgage Structure & Lock-In

Carrying Costs: Insurance & Property Taxes

Renters & Affordability

Demographics & Household Formation

Analysis & Further Reading

Note: Some chart sources (Datawrapper visualizations, Trading Economics) are embedded in the article images and linked to their original platforms where applicable.

Disclaimer

Financial Disclosure and Disclaimer
The information provided in Housing + Markets or referred to in Housing + Markets is for informational purposes only and are not intended to constitute financial, investment, legal, tax, or other professional advice. The content is prepared without consideration of individual circumstances, financial objectives, or risk tolerances, and readers should not regard the information as a recommendation to buy, sell, or hold any specific securities, investments, or financial products.
Readers of Housing + Markets are solely responsible for their own independent analysis, due diligence, and investment decisions. We strongly advise consulting qualified financial professionals or other advisors before making investment decisions or acting on any information provided in our materials.
The information and opinions provided are based on sources believed to be reliable and accurate at the time of publication. However, Housing + Markets LLC does not make any representation or warranty, express or implied, as to the accuracy, completeness, or timeliness of the information. Markets, financial instruments, and macroeconomic conditions are inherently unpredictable, and past performance is not indicative of future results.
Housing + Markets, LLC does not accept liability for any losses, damages, or consequences arising from the use of its content or reliance on the information contained therein. Readers acknowledge that investment decisions carry inherent risks, including the risk of capital loss.
This disclaimer applies globally and shall be enforceable in jurisdictions where Housing + Market, LLC a limited liability company incorporated and based in the United States, operates. Readers in all jurisdictions, including but not limited to the United Kingdom, United States, Canada, European Union, Australia, Singapore, Japan, South Korea, and Taiwan, are responsible for ensuring compliance with local laws, rules, and regulations.
By accessing or using the information provided by Housing + Markets, users agree to the terms of this disclaimer.
]]><![CDATA[Fortress-Level Balance Sheet]]>https://www.housingandmarkets.com/p/fortress-level-balance-sheethttps://www.housingandmarkets.com/p/fortress-level-balance-sheetThu, 22 Jan 2026 17:06:51 GMT

Bill Ackman recently posted this, pitching one of Pershing Square’s (his hedge fund) longtime holdings.

Fannie Mae and Freddie Mac stock.

The pitch is simple: Fannie and Freddie have rebuilt their capital ratio to ~2.5%, which Ackman claims would have covered ‘nearly seven times their actual realized losses’ during the Global Financial Crisis. So they’re safe to release from conservatorship, relist on the NYSE and return to private ownership while at the same time generating $300 billion in profits for taxpayers and removing $8 trillion in liabilities from the government’s balance sheet.

It sounds compelling.

To boot, the GSEs are meaningfully stronger than they were in 2008. Underwriting standards tightened after the crisis. Documentation requirements are real, credit risk transfer deals now shift some first-loss exposure to private investors and the Agencies have accumulated roughly $173 billion in capital since Mnuchin ended the net worth sweep in 2019. These are legitimate improvements.

But here’s the problem.

If the government is going to preserve an implicit guarantee for Fannie and Freddie (and every administration official says it will) then “fortress” has to mean one thing: enough capital to survive a true housing crisis without calling on the taxpayer. Not losses tallied after the panic has passed. Capital you can actually draw on when funding markets freeze.

By that standard, the GSEs aren’t close.

We don’t need to guess what a tail event costs. We’ve lived it. In 2008, Treasury injected $191.5 billion to keep Fannie and Freddie standing on a $5 trillion book. That’s not a philosophical debate—it’s what it cost to fill the hole, in real time, when it was mission critical.

Today the book has grown to $7.7 trillion. The GSEs hold ~$173 billion in capital. And the regulator’s own stress test, using today’s improved credit profile, not 2006 underwriting, shows a combined CET1 deficit of -$115.7 billion under severely adverse conditions.

That’s not a fortress. That’s insolvency.

Ackman’s argument rests on three core claims:

(1) the math shows fortress-level capital adequacy,
(2) comparisons to private mortgage insurers validate that conclusion, and
(3) privatization would actually remove risk from taxpayers.

Each claim collapses under examination.

Stress Testing In Reverse

Here’s how Ackman arrives at “seven times actual realized losses.”

From 2008 to 2011, Treasury injected $191.5 billion to keep Fannie and Freddie solvent. That money covered credit losses, mark-to-market hits on securities portfolios, deferred tax asset writedowns and the simple fact that the GSEs couldn’t access private capital markets when they needed liquidity most. That’s what it cost to fill the hole—in real time, when it mattered.

But Ackman doesn’t compare today’s capital to the crisis-era loss number. He compares it to what he calls “actual realized losses”—and he says a 2.5% capital ratio would have covered “nearly seven times” that figure. In Pershing Square’s own deck, that “nearly seven” is 6.2x and based on an “adjusted” loss measure for 2007–2011 that uses estimated credit losses and strips out provisions and subprime/Alt-A exposure. That framing produces a much smaller loss number than what you needed to survive in the moment—before loss recoveries, accounting reversals and a healed housing market could do the work.

The distinction matters enormously. Capital doesn’t work in reverse. You can’t fill a hole retroactively. You need the buffer to exist when correlations go to one, when refinancing disappears, when the wholesale funding market seizes up—not after accountants have spent years netting out recoveries.

Treasury didn’t inject $191.5 billion because the GSEs’ long-run credit losses would eventually reach that level. It injected $191.5 billion because that’s what was required right then to cover immediate losses, restore market confidence, and provide liquidity when no private investor would. The fact that cumulative net credit losses eventually settled ~$28 billion is irrelevant to the question of how much capital you need on day one of a crisis.

Ackman’s “seven times” figure is an artifact of hindsight arithmetic. It tells you nothing about whether today’s capital would survive the next crisis without reinforcement.

What Regulators Actually Say

We don’t need to speculate about whether 2.5% is adequate. Fannie and Freddie’s regulator, the Federal Housing Finance Agency, already runs the test.

Every year since 2014, FHFA has conducted Dodd-Frank stress tests (DFAST) on Fannie and Freddie using the same “severely adverse” scenario the Fed applies to systemically important banks. The latest test assumes unemployment hitting 10%, home prices falling 33% from peak, commercial real estate down 30% and a global market shock that reprices mortgage-backed securities.

The results are public. Here’s what they show.

Under the severely adverse scenario, Fannie Mae ends the stress period with a CET1 capital deficit of -$77.9 billion. Freddie Mac ends with a deficit of -$37.8 billion. Combined: a -$115.7 billion hole.

That’s not a “fortress.” That’s insolvency.

And this is using the regulator’s own model, with today’s improved credit book, under a scenario that’s actually less severe than 2008 in some dimensions (home prices fell over 40% in the hardest-hit markets during the actual crisis).

The test also reveals why Ackman’s capital ratio looks better than it is. The GSEs report about ~$173 billion in “net worth”—retained earnings plus the original preferred stock. But CET1 capital under the regulatory framework is considerably lower. Deferred tax assets get haircut. Certain other adjustments apply. When you run the numbers correctly, the starting position is weaker and the stress losses are larger.

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The 2.5% Standard That Isn’t

Even setting aside the stress test results, FHFA doesn’t treat 2.5% as adequate.

The 2020 Enterprise Regulatory Capital Framework describes 2.5% as a “backstop leverage requirement”—a floor, not a target. The framework pairs it with a 1.5% prescribed leverage buffer, implying something closer to 4% when fully phased in. Later revisions softened some requirements, but the principle holds. The people paid to design the rule didn’t think 2.5% was sufficient for a conservatorship exit.

Mark Calabria, the first Trump administration’s head of FHFA who actually championed GSE release, wanted higher capital than what Ackman is now celebrating. Calabria pushed for the Enterprise Regulatory Capital Framework precisely because he believed the GSEs needed far more capital before any exit could be contemplated. The irony is that the regulator most sympathetic to privatization set requirements that today’s capital still doesn’t meet.

So when Ackman calls 2.5% “fortress level,” he’s describing a capital ratio that falls short of the regulator’s own minimum for release, that produces a ~$116 billion hole under the regulator’s own stress test, and that he arrived at by comparing current capital to losses measured with years of hindsight rather than what Treasury actually had to inject in real time.

The Systemic Comparison

“Fortress” is a comparative word. So let’s compare.

When regulators assess whether a financial institution can survive a crisis, they focus on CET1—Common Equity Tier 1 capital. This is the strictest measure. Common stock plus retained earnings, minus deductions for assets that might not actually be there when you need them (like certain tax benefits). It’s the capital that absorbs losses first and that’s unambiguously available when markets seize.

The Fed requires systemically important banks to hold a 4.5% minimum CET1 ratio, plus a stress capital buffer of at least 2.5%, plus an additional G-SIB surcharge of at least 1.0%. That’s 8%+ before institution-specific add-ons. JPMorgan’s total requirement is 11.5%, Citi’s is 11.6%, Goldman’s is 10.9%.

Now, a fair objection. Comparing capital requirements for systemically important global banks and the GSEs isn’t totally apples to apples.

Bank CET1 requirements are measured against risk-weighted assets, not total assets. The GSE leverage backstop—the 2.5% floor Ackman cites—is measured against Adjusted Total Assets, much closer to the full balance sheet. Since risk-weighting reduces the denominator, a bank’s “8% of RWA” might translate to something like 4-6% of total assets depending on business mix. The gap narrows once you translate to common terms.

There’s also a complexity argument. Banks face more risk channels: deposit runs, diversified loan books, trading desks, derivatives, prime brokerage, operational risk across sprawling global operations. The GSEs are essentially monoline mortgage credit businesses. FHFA’s capital framework is mortgage-tailored and includes a 20% risk-weight floor to prevent capital requirements from drifting too low in benign times.

Fair enough. But the complexity argument cuts both ways.

A diversified bank can have its commercial real estate book blow up while its credit card portfolio stays healthy. JPMorgan can lose money in London while making money in New York. Risk gets spread across asset classes, geographies, and business lines.

The GSEs don’t have that luxury.

When housing breaks, their entire $7.7 trillion book breaks simultaneously. Every loan, every guarantee, every exposure—all correlated to the same underlying asset class. This is the difference between concentrated and diversified risk. Banks may be more complex, but the GSEs face a purer, more correlated exposure to a single systemic risk factor. American home prices.

That correlation is precisely what makes housing crises so devastating and precisely why the GSEs needed $191.5 billion when the last one hit.

There’s another problem with the apples-to-oranges defense. FHFA’s capital framework doesn’t just include the 2.5% leverage backstop. It also includes risk-based requirements—4.5% CET1, 6.0% Tier 1, and 8.0% adjusted total capital, all measured against risk-weighted assets—plus buffers that mirror the bank framework. When you add it all up, the combined requirement under ERCF comes to roughly $234 billion in CET1 for both enterprises. Today the GSEs hold only ~$173 billion.

So even on the GSEs’ own tailored, mortgage-specific framework—designed to be less demanding than what banks face—they’re $61 billion short. Before any stress scenario is applied.

Ackman is pointing to the regulatory floor and calling it a fortress. The regulator designed that floor as a backstop to the binding constraint—and the GSEs don’t even meet the binding constraint yet.

The Mortgage Insurance Fallacy

Ackman’s other supporting argument for 2.5% is that it matches what private mortgage insurers hold—and they’re guaranteeing the riskier first-loss portion of loans while the GSEs only guarantee the senior piece.

This comparison misunderstands how the system works and why it matters.

Private mortgage insurers cover the first-loss slice on high-LTV loans, typically where borrowers put down less than 20%. On a loan with 5% down, the PMI covers roughly the first 15-20% of losses, the GSE guarantee covers the senior remainder.

But not all GSE loans have private mortgage insurance. Loans with 20% or more down (a substantial share of the book) have no PMI protection at all. On those loans, the GSE takes credit risk from dollar one.

Even where PMI exists, coverage comes with limits, exclusions, and counterparty risk. When mortgage insurers got stressed in 2008, several failed or stopped writing new business entirely.

There’s also the question of scale. Total private mortgage insurance risk-in-force is on the order of a few hundred billion dollars. The GSEs guarantee roughly $8 trillion. Even if per-dollar risk is lower on the senior slice, aggregate exposure is an order of magnitude larger.

But the real issue is what happens when things break.

Mortgage insurers are private companies. They can fail—and they have failed. Several went under or into runoff in 2008-2009. When a mortgage insurer fails, its losses stop at its capital. The system absorbs it and moves on.

The GSEs cannot be allowed to fail. When their capital runs out, the taxpayer is next in line. That’s not speculation—it’s exactly what happened in 2008.

When Triad Guaranty Insurance Corp (a private mortgage insurer) was forced into liquidation in 2008, the mortgage market kept functioning. When Fannie and Freddie collapsed, Treasury had to write a $191.5 billion check as the system broke or the financial system would have seized. That’s the difference between a containable failure and a systemic one.

Comparing GSE capital to PMI capital is like comparing a regional airport to air traffic control. One can shut down and flights get rerouted. The other goes down and every flight gets grounded.

The Guarantee That Never Leaves

This is where Pershing Square’s actual proposal gets more sophisticated than the social media pitch. And where it falls apart most completely.

The entire GSE business model depends on an implicit government backstop.

The GSEs borrow at rates 20-40 basis points lower than comparably-rated private financial institutions, a funding advantage that exists solely because investors believe the government stands behind them. That spread, applied across trillions of dollars in debt, is enormously valuable. It’s why the business model works. It’s why the guarantee fees are profitable. It’s why private capital can’t compete.

Ackman’s pitch is circular. The GSEs have a “fortress balance sheet” that makes them safe to privatize. But the only reason the balance sheet works at all is because everyone knows the government backstop remains.

The Pershing Square presentation actually makes this tension explicit, probably without meaning to. They propose relisting the GSEs on the NYSE while keeping them in conservatorship, with the PSPAs (the Treasury backstop agreements) remaining in place. Their argument is that this gives Treasury a “mark to market” on its ownership stake without the risks of actual privatization.

But this creates its own problems.

While in conservatorship, the GSE boards “owe their fiduciary duties of care and loyalty solely to the conservator and not to either the company or our stockholders.”

That’s from Fannie Mae’s own 10-K—a disclosure the company is legally required to make to warn investors about exactly this risk.

So Ackman is asking investors to buy shares in companies whose boards have no legal obligation to act in shareholders’ interests, hoping the government eventually decides to exit conservatorship and let the business model work. It’s Schrödinger’s privatization—simultaneously public and private, government-backed and independent, until someone opens the box and forces a choice.

What happens when someone opens the box? Answer: either the government formally guarantees them, killing the “privatization” narrative, or it doesn’t, and funding costs spike.

The administration’s own statements reveal the incoherence:

“We’re committed to making sure that there is no change in the spread of mortgages over Treasuries.” -Treasury Secretary Bessent in August 2025

“What we want to do is keep the price of a home mortgage as low as mathematically possible.” - Commerce Secretary Lutnick in September 2025

“…I am working on TAKING THESE COMPANIES PUBLIC, but I want be clear, the U.S. Government will keep its implicit GUARANTEES…” - President Donald Trump in May 2025

These commitments are in tension with each other. If you keep mortgage spreads unchanged, you’re keeping the implicit guarantee. If you keep the implicit guarantee, you’re not actually privatizing the risk. If you’re not privatizing the risk, you’re not removing liabilities from the government’s balance sheet.

The administration wants to book a one-time gain, keep mortgage rates low, maintain the implicit guarantee and call it “privatization.”

The $300 Billion “Profit” That Isn’t

Ackman promises taxpayers a $300 billion windfall from this transaction—on top of the $301 billion already collected in dividends.

The presentation elaborates. Treasury earned an 11.6% IRR on its investment through dividends, roughly $25 billion more than what would have been owed under the original 10% preferred stock terms. Therefore the Senior Preferred Stock should be deemed “repaid,” Treasury should exercise its warrants for 79.9% of the common stock, everyone should celebrate.

Let’s unpack what this actually means.

The IRR calculation treats all dividends as returns on the original investment. But the net worth sweep wasn’t a negotiated coupon—it was implemented in August 2012, just as the companies returned to profitability, requiring 100% of GSE earnings to be swept to Treasury. At the time, the broad consensus was that the GSEs would eventually be wound down. The dividend wasn’t a return on risk-taking. It was a policy decision to prevent capital accumulation while policymakers figured out what to do next.

More importantly, the IRR on past cash flows doesn’t address the value of the ongoing guarantee Treasury is providing.

The GSEs borrow at rates only slightly above Treasury yields because investors believe the government stands behind them. Without that implicit backing, funding costs would rise, the business model would strain, and as 2008 demonstrated, the whole edifice could collapse under stress.

A $300 billion one-time payment doesn’t come close to compensating taxpayers for unlimited tail risk the next time the housing market breaks. Put differently, Treasury would be selling a permanent put option on $8 trillion in housing exposure for a one-time premium—and calling it profit. The $301 billion already collected in dividends wasn’t a windfall. It was repayment for the $191.5 billion bailout plus compensation for the risk Treasury absorbed during the crisis. Calling anything beyond that “profit” ignores that the backstop is still in place.

So the “$300 billion profit” isn’t really profit. It’s the present value of selling the upside while keeping the downside.

Heads, shareholders make a fortune. Tails, taxpayers eat the next crisis.

The Stock Move That Tells You Everything

The fact that FNMA and FMCC shares move wildly based upon administration statements and perceived market probabilities of privatization tells you exactly what’s being priced here.

It’s not fundamentals. The companies haven’t become more profitable. The capital hasn’t grown faster. The credit quality hasn’t improved.

What’s changed is the perceived probability that the government will transfer value from taxpayers to shareholders—either by deeming the senior preferred “repaid” without actually removing the backstop, or by letting the GSEs exit conservatorship without adequate capital, or by maintaining the implicit guarantee while allowing private investors to capture the spread.

Every one of those outcomes is a wealth transfer. The stock price reflects the expected value of that transfer, not any improvement in the underlying business.

What This Is Actually About

None of this is an argument against owning FNMA or FMCC common. Markets can stay irrational for years, politics can be lucrative and the U.S. government has a long tradition of turning temporary structures into permanent ones. Holders of the stock prior to Trump’s election have paid off massively (although both stocks are now down about 50% from the September highs on concerns the IPO may be delayed).

Nor is this an argument that the GSEs should remain in conservatorship forever. Seventeen years is an anomaly. The conservatorship was designed as a temporary measure and there are legitimate reasons to want resolution.

But it is an argument against believing the story that’s being told.

A fortress holds without reinforcement.

In 2008, reinforcement cost $191.5 billion on a $5 trillion book. Today the book is $7.7 trillion. The regulator’s own stress test shows a -$115.7 billion capital hole under adverse conditions. The “seven times realized losses” number only works if you measure losses with hindsight instead of capital needs in real time. The mortgage insurer comparison ignores that mortgage insurers can fail and the GSEs cannot. The “privatization” being proposed keeps the government backstop in place while transferring the upside to shareholders.

And the $300 billion ‘profit’ is just what you collect when you sell catastrophic insurance priced as if the catastrophe will never come.

The administration wants to monetize these assets and resolve a conservatorship that was never meant to last seventeen years. That’s a legitimate policy goal. But let’s be honest about what’s actually happening. The government is being asked to keep providing unlimited tail risk protection while giving up its claim on the profits.

That’s not a fortress. It’s a future taxpayer-funded bailout disguised as an IPO.

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Sources and Further Reading

Regulatory Stress Testing (DFAST)

Enterprise Regulatory Capital Framework

Pershing Square Materials

GSE Company Filings (Fiduciary Duty Disclosure, Capital, Senior Preferred)

Conservatorship Structure / Senior Preferred Stock Purchase Agreements

Administration Statements on GSE Privatization

Bank Capital Requirements (G-SIB Comparison)

Historical Treasury Support / Crisis-Era Data

Academic / Policy Research

Disclaimer

Financial Disclosure and Disclaimer
The information provided in Housing + Markets or referred to in Housing + Markets is for informational purposes only and are not intended to constitute financial, investment, legal, tax, or other professional advice. The content is prepared without consideration of individual circumstances, financial objectives, or risk tolerances, and readers should not regard the information as a recommendation to buy, sell, or hold any specific securities, investments, or financial products.
Readers of Housing + Markets are solely responsible for their own independent analysis, due diligence, and investment decisions. We strongly advise consulting qualified financial professionals or other advisors before making investment decisions or acting on any information provided in our materials.
The information and opinions provided are based on sources believed to be reliable and accurate at the time of publication. However, Housing + Markets LLC does not make any representation or warranty, express or implied, as to the accuracy, completeness, or timeliness of the information. Markets, financial instruments, and macroeconomic conditions are inherently unpredictable, and past performance is not indicative of future results.
Housing + Markets, LLC does not accept liability for any losses, damages, or consequences arising from the use of its content or reliance on the information contained therein. Readers acknowledge that investment decisions carry inherent risks, including the risk of capital loss.
This disclaimer applies globally and shall be enforceable in jurisdictions where Housing + Market, LLC a limited liability company incorporated and based in the United States, operates. Readers in all jurisdictions, including but not limited to the United Kingdom, United States, Canada, European Union, Australia, Singapore, Japan, South Korea, and Taiwan, are responsible for ensuring compliance with local laws, rules, and regulations.
By accessing or using the information provided by Housing + Markets, users agree to the terms of this disclaimer.
]]><![CDATA[Subsidizing the Bid]]>https://www.housingandmarkets.com/p/subsidizing-the-bidhttps://www.housingandmarkets.com/p/subsidizing-the-bidSun, 11 Jan 2026 16:48:18 GMT

If you want to make something more affordable in America, there’s a standard playbook. Make the financing cheaper.

It works great for cars and couches. It works less great for anything that can’t be produced quickly.

That’s the trap hidden inside the “affordability” mission of Fannie Mae and Freddie Mac. The story is noble. The mechanism is mechanical. And the outcomes on price, on leverage and on who’s actually on the hook are not what the mission statement implies.

“They perform an important role…to provide liquidity, stability and affordability to the mortgage market.”

— Federal Housing Finance Agency (FHFA), "About Fannie Mae & Freddie Mac"

Liquidity. Stability. Affordability. Three words that sound like the same thing until you put them in a market where supply can’t move quickly.

Because “affordability,” in practice, doesn’t get delivered as a cheaper house. It gets delivered as a cheaper monthly payment. That subtle distinction is where the paradox lives.

The $200 Billion Question

This week, President Trump announced he’s directing his administration to purchase $200 billion in mortgage-backed securities to “lower rates” and help housing affordability.

There’s a lot in that post—Crime, Inflation, Afghanistan, Open Borders—but let’s focus on the housing piece. $200B in MBS purchases to “lower rates” and help affordability.

If you believe GSE subsidies create affordability, this should work. Lower rates → lower payments → more people can afford homes.

If you understand how subsidies work in supply-constrained markets, you know exactly what happens next: Lower rates → higher bids → same payment, higher price → sellers capture the benefit.

We’re about to run this experiment again. In real time. At $200 billion scale.

Let’s talk about why the result is already determined.

The Payment Society

Picture a couple at an open house. They’re not running discounted cash flow models. They’re converting their paycheck into the largest possible mortgage payment that won’t crater their lifestyle.

They aren’t thinking about asset prices. They’re thinking about monthly cashflow. What number keeps the checking account functional.

Their lender knows this too. So the pre-approval doesn’t start with the home price. It starts with the payment. Rate goes into the machine. Maximum loan comes out.

Lower the rate and the machine produces a bigger number.

The Payment Machine:

  • At 7% rate: $3,000/month payment = ~$450,000 loan

  • At 6% rate: $3,000/month payment = ~$500,000 loan

  • At 5% rate: $3,000/month payment = ~$560,000 loan

Lower the rate a full two percentage points. Same monthly outflow. But a 25% higher purchase price. Zero improvement in affordability.

That’s not theory; it’s the central operating system of American housing. We live in a payment society. The sticker price is just whatever clears the payment market.

So when policy makes mortgage credit cheaper or more plentiful, it doesn’t simply “help the buyer.” It expands the buyer’s bid (and the size of bid pool). In a supply-constrained market, expanded bids don’t sit politely on the sidelines. They get capitalized.

A Federal Reserve paper draws the uncomfortable conclusion plainly. Mortgage subsidies “reduce effective mortgage rates and increase house prices.” And when housing supply is inelastic, which it is in most desirable markets, the subsidy “may hurt borrowers” because prices rise enough to fully offset the payment benefit.

So the policy meant to help you buy a home can make you worse off because the price increase eats the interest savings.

That’s the paradox in one sentence. The tool meant to make homes cheaper can make them more expensive. Especially where building is slow, uncertain and politically throttled.

The Free Option

The payment society has another feature. It’s a one-way bet.

When rates fall, you refinance. You lock in the lower payment and pocket the savings. When rates rise, you stay put. Your payment doesn’t move.

That’s not how most markets work. In most markets, when the price of the underlying thing changes, you eat the change. But the 30-year fixed mortgage with free refinancing is different. It’s an option. Specifically, a prepayment option embedded in the loan.

And who writes that option? Who’s on the other side of that trade?

In a purely private market, the investor in the MBS would eat the duration risk—and price it accordingly. When rates fall and borrowers refi, they’re left holding securities that prepaid early. Reinvestment risk. When rates rise, they’re stuck with low-yielding paper. Extension risk.

But the GSE guarantee changes the math. Because the Enterprises absorb the credit risk and standardize the product, MBS investors can accept lower compensation for prepayment risk. The option becomes cheap.

So the subsidy isn’t just “cheaper credit.” It’s cheaper credit plus a free option to refinance when rates fall.

Here’s how the risk actually moves. The GSEs themselves hold massive duration-sensitive portfolios and guarantee pools whose prepayment behavior whipsaws with rates. When rate volatility hits, those mismatches show up on the Agencies’ books. And when losses exceed their capital buffer? Treasury steps in.

That’s not a static subsidy. That’s a ratchet. Every rate drop lets borrowers lock in gains. Every rate rise leaves them insulated. And across millions of borrowers, the accumulated risk has to go somewhere.

It goes to taxpayers.

Homeowners shed their interest rate risk. The GSEs absorb it into their duration book. And taxpayers ultimately backstop the GSEs when that risk materializes.

Call it what it is. Homeowners get cheap insurance against interest rate volatility and taxpayers write the policy.

The Self-Fulfilling Prophecy

Now zoom out from the open house and look at the machinery.

Fannie and Freddie were designed to make mortgages behave like a standardized product. A conforming loan is not just a loan, it’s a template. A widget that can be pooled, securitized and sold.

That’s not a minor detail. Standardization is the difference between a thin market that panics and a deep market that clears.

Congress's own language about Fannie's purpose—"Provide stability in the secondary market for residential mortgages..."—tells you what the system is actually for.

Stability is a euphemism for something very specific. Keeping the funding spigot from seizing up when private capital gets cold feet.

The implicit claim is without the GSEs, the mortgage market would freeze in a crisis, rates would spike and the economy would collapse.

Maybe. But that’s also a self-fulfilling prophecy. You’ve made the system dependent, then pointed to the dependency as proof the system is necessary.

That’s not the same as proving the system was necessary to begin with.

The Urban Institute’s Housing Finance Chartbook shows how dominant that machinery has become. In Q2 2025, agency MBS accounted for 64.8% ($9.4 trillion) of total mortgage debt outstanding.

Read that again. Not 6%. Not 16%. Roughly two-thirds.

This is not a niche corner of the market where policy can experiment without consequence. This is the market.

Which raises a question nobody likes asking out loud. When you call something “affordability policy,” but it’s implemented as a demand backstop across most of the mortgage system... what exactly are you subsidizing?

The honest answer? You’re subsidizing the bid.

The Subsidy Follows Dysfunction Upward

If the bid subsidy were static, the argument would be simpler. You could debate whether the benefit is worth it.

But the system is not static. The subsidy follows prices upward.

Every year, the conforming loan limit tells you what the machine is willing to absorb. It’s a boundary line between “normal mortgage” and “jumbo,” between the subsidized channel and the more purely private one.

On November 25, 2025, FHFA announced the 2026 baseline conforming loan limit for one-unit properties would be $832,750. That’s a 63% increase in six years. Median household income over the same period? Up about 20%.

Source: FHFA, FRED, Housing+Markets

But the conforming loan limit isn’t one number. It’s a schedule.

In “low-cost areas” (which is most of America), the baseline is $832,750 for 2026. But in “high-cost areas”—places like San Francisco, New York, parts of Southern California—the limit can go as high as 150% of the baseline.

Which means the system delivers bigger subsidies to expensive markets.

A borrower in Boise getting a $400K mortgage gets GSE liquidity and pricing. A borrower in San Francisco getting a $1.2 million mortgage? Same benefit. Bigger absolute subsidy.

This isn’t a bug in the system. It’s a feature baked into the statute. The GSEs are supposed to serve the whole country, so the limits adjust for local prices.

But notice what this means. As coastal housing markets become more expensive, often due to supply constraints that have nothing to do with credit markets, the conforming limit rises to accommodate them. Which expands the bid support in exactly the markets where supply is most constrained.

You end up with a self-reinforcing loop:

Restrictive zoning drives up prices → FHFA raises the local conforming limit → more buyers can bid higher with subsidized credit → prices rise further → repeat.

The subsidy follows dysfunction upward.

That’s the circularity in plain sight. As prices rise, the boundary expands. As the boundary expands, more high-dollar loans fit into the standard, liquid, government-backed channel. As more fit, demand support broadens.

None of this requires a conspiracy. It requires only incentives and arithmetic.

The Proof In the Distribution

If you want to see the subsidy in the data, don’t look at the aggregate price level. Look at the distribution.

Home prices don’t spread evenly across the market. They cluster. And one of the places they cluster most reliably is just under the conforming loan limit.

This isn’t subtle. When economists at the Federal Reserve studied mortgage bunching behavior, they found exactly what you'd expect. A sharp spike in loans precisely at the conforming limit, with a visible gap just above it. Borrowers bunch at the edge of the subsidy.

Source: The Federal Reserve, De Fusco et all

Sellers know this. So do realtors. The limit becomes an attractor. Homes get priced to clear at the highest subsidized bid.

And here’s the circularity again. As prices rise, FHFA raises the limit. As the limit rises, the attractor moves up. And the market learns that the subsidy zone is elastic, it expands to meet you.

This is proof of mechanism. It shows the subsidy isn’t just theoretical, it’s literally bending the price distribution.

If you want to understand why the “affordability” gains never seem to stick, start there.

What Gets Built

Subsidizing demand doesn’t create more houses. It creates more purchasing power aimed at the same houses.

In markets where supply can surge, more purchasing power can translate into more construction. In markets where supply can’t surge, more purchasing power mostly translates into higher land values and higher prices.

A payment society will use every basis point you give it to raise the clearing price.

But there’s a second-order effect that’s easy to miss. The subsidy doesn’t just affect buyers. It affects what gets built.

Homebuilders are profit-maximizing enterprises. They build to the price point where they maximize margins. And if GSE credit expansion makes it easier for buyers to afford higher prices, builders shift their product mix upward.

Why build a $300K starter home when your land costs and permitting risks are nearly the same as a $500K home and the buyer pool for the $500K home just expanded because they can now borrow more?

The subsidy doesn’t just capitalize into existing home prices. It tilts new construction toward higher price points.

Over time, you get fewer starter homes and more move-up homes. The market “upgrades” its offerings to capture the subsidy.

This is rational. It’s also why “affordability policy” delivered through credit can make entry-level housing scarcer, not more abundant.

Who’s Really Holds the Bag

At this point, defenders of the system will object. The Enterprises don’t “hand out free money.” They charge fees. They manage risk. They set underwriting standards.

All true. But that doesn’t change the economic incidence.

If the system makes credit cheaper in a supply-constrained market, the benefit gets competed into prices. The buyer thinks they’re being helped. The seller receives the help. And the next buyer inherits a new baseline.

Which brings us to the backstop.

In 2008, the answer became explicit. Treasury’s Senior Preferred Stock Purchase Agreements committed public capital to stabilize the Agencies. As of December 2025, Treasury’s liquidation preference stands at ~$367 billion—not the $191 billion they put in, but the amount Treasury gets paid first if the entities are ever wound down.

That’s not a resolved crisis. That’s a subordinated one.

Here’s the hierarchy. The GSEs’ capital buffer absorbs losses first. When it’s exhausted, Treasury (also known as taxpayers) covers the rest.

Under conservatorship, taxpayers at least get dividends for holding that risk. Under “reform and release”? Private shareholders get the dividends. The upside gets privatized. But when the next crisis hits and losses exceed the buffer, taxpayers are still on the hook—either through an explicit backstop or through the implicit guarantee the market would inevitably price in.

Heads, investors win. Tails, taxpayers lose.

So when someone says, “we can have low mortgage rates, high prices, a massive government footprint and no public risk,” you should hear it the same way you’d hear someone pitch a perpetual motion machine.

Thanks for reading Housing + Markets! Subscribe for free. No taxpayer backstop required!

What Everyone Gets Wrong

The housing affordability debate is dominated by three myths that keep getting repeated:

Myth #1: GSEs make housing affordable

Reality: They make borrowing affordable, which makes housing expensive. The subsidy gets competed into prices, not savings.

Myth #2: Without GSEs, the mortgage market would collapse

Reality: Canada has a 66-67% homeownership rate without Fannie and Freddie. Australia: 67%. Yes, they have different structures—Canada has CMHC, Australia has different banking dynamics—but the point stands: the 30-year fixed GSE model is not the only path to broad homeownership. The idea that American housing depends on GSEs is a hypothesis defended most vigorously by people who profit from them.

Myth #3: 30-year fixed mortgages are a public good

Reality: They’re a product whose cost is hidden, not eliminated. The GSE subsidy makes them artificially cheap by transferring duration risk to taxpayers. Other countries have mortgage markets and homeownership without this structure.

These myths persist because they serve institutional interests: politicians, the GSEs themselves, the mortgage industry that depends on them, realtors who benefit from liquidity and now—investors who want an exit.

The one group that doesn’t benefit? First-time buyers. The people the “affordability mission” is supposedly designed to help.

The Way Out

None of this is an argument for abolishing the system overnight. A housing-finance regime change would be messy—and “messy” is a euphemism for rates gap wider, credit tighter, transaction volume lower, politics louder.

It is an argument for calling the thing what it is.

The Agencies can make mortgage finance cheaper and smoother. That’s liquidity and stability.

But affordability is something else. Affordability means the ratio between shelter costs and household incomes improves in a durable way.

If you deliver “affordability” by increasing the amount buyers can borrow against fixed supply, you are not lowering the cost of shelter. You are shifting the timing and the form of the cost.

You get a short period of relief, then a longer period of higher prices.

The market doesn’t thank you for cheap credit. It capitalizes it.

And when the cycle finally bites hard enough that “stability” is threatened, you learn who was really holding the risk.

If you want a housing system where affordability improves without requiring permanent demand subsidies, you eventually end up at the same list of things that make supply easier.

Not “give developers a tax credit” easier. Physically, legally and procedurally easier. Faster entitlements. More by-right housing. Less litigation roulette. More infrastructure capacity. Less regulatory uncertainty. Fewer veto points.

It’s slow work. It doesn’t fit in a press release. It offends local power. It doesn’t goose prices.

Which is exactly why it’s the only kind of affordability policy that doesn’t eat itself.

The Bottom Line

You can subsidize the payment. You can standardize the credit. You can deepen the secondary market.

But if you don’t expand the number of homes, you’re mostly just financing the same scarcity at a higher price.

That is not affordability. Its bid support with a mission statement.

Next in this series: “Fortress Level Balance Sheet” - Why the math behind privatization doesn't add up.

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Sources and Further Reading

Academic / Research (credit subsidies, incidence, “bunching”)
Market Structure / Share of Mortgage Debt (agency footprint)
Conforming Loan Limits (baseline + high-cost ceiling mechanics)
Statute / Mission Language (what the system is “for”)
Conservatorship Plumbing (backstop, “protect the taxpayer,” capital retention framing)
Treasury Senior Preferred / Liquidation Preference (company filings)

Disclaimer

Financial Disclosure and Disclaimer
The information provided in Housing + Markets or referred to in Housing + Markets is for informational purposes only and are not intended to constitute financial, investment, legal, tax, or other professional advice. The content is prepared without consideration of individual circumstances, financial objectives, or risk tolerances, and readers should not regard the information as a recommendation to buy, sell, or hold any specific securities, investments, or financial products.
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The information and opinions provided are based on sources believed to be reliable and accurate at the time of publication. However, Housing + Markets LLC does not make any representation or warranty, express or implied, as to the accuracy, completeness, or timeliness of the information. Markets, financial instruments, and macroeconomic conditions are inherently unpredictable, and past performance is not indicative of future results.
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]]><![CDATA[Living It Up At Hotel Conservatorship]]>https://www.housingandmarkets.com/p/living-it-up-at-hotel-conservatorshiphttps://www.housingandmarkets.com/p/living-it-up-at-hotel-conservatorshipWed, 17 Dec 2025 19:05:05 GMT“On a dark desert highway, cool wind in my hair...” – The Eagles

In 2008, the US government rescued two mortgage giants—Fannie Mae and Freddie Mac—to the tune of $190 billion. Seventeen years later, those companies have sent the Treasury over $300 billion in dividends. The bailout has been repaid many times over.

And yet they’re still not allowed to leave government control.

The reason is almost too absurd to believe. Every dollar Fannie and Freddie retain to rebuild their capital—the cushion they need to survive without taxpayer help—increases what they owe the Treasury. Build your wall and watch the moat get wider.

That’s not a corporate turnaround. It’s a trap.

Understanding why the trap exists—and who benefits from springing it—tells you everything about what’s broken in American housing finance.

The basics. Fannie Mae and Freddie Mac don’t make mortgages. They buy them from banks, bundle them into securities and guarantee that investors get paid even if homeowners default. This guarantee is why you can get a 30-year fixed-rate mortgage at all. Without it, banks wouldn’t take the risk.

In 2008, housing prices collapsed, defaults spiked and the guarantees came due. The government placed both companies into “conservatorship”—a legal timeout while they stabilized. The deal was simple. Repay what you owe, rebuild your capital cushion and you can leave.

Simple, except for one thing. Washington kept changing the terms.

In 2012, Treasury got nervous. The rescued companies were starting to turn profits again, and nobody wanted to watch recently bailed-out institutions pile up cash while millions of Americans were still losing their homes. Bad politics.

So Treasury implemented what’s called the “net worth sweep.” Instead of letting Fannie and Freddie retain earnings to rebuild capital, every dollar of profit got vacuumed out and sent to the government. The companies couldn’t save. The timeout became indefinite.

The sweep ended in January 2021. What replaced it was not better.

Treasury rewrote the terms to let Fannie and Freddie finally keep their profits. The headline said they could rebuild capital. The fine print said something else. For every dollar retained, their outstanding obligation to Treasury would increase by the same amount.

Read that again. The companies can now save money. But saving money makes their debt larger.

This is the trap. It’s not an accident. It’s the structure.

Which brings us to the people who desperately want the trap to end. Investors currently holding Fannie and Freddie common stock.

When the companies entered conservatorship, their shares collapsed to nearly nothing. Speculators bought in cheap, betting that someday the government would release them and the stock would soar. For seventeen years, that bet has looked foolish.

Now it might pay off. In fact, if you bought in January, it already has.

Fannie Mae common stock has run from $2 to $11—a fivefold move built entirely on anticipation of a deal that hasn’t happened yet. If a deal is struck, it will run much higher.

The Trump administration has made ending the conservatorship a priority. Bill Pulte, the head of the Federal Housing Finance Agency, has floated Q1 2026 as a target date for an IPO. Trump himself has been posting AI-generated images of himself ringing the NYSE bell for “The Great American Mortgage Corporation”—a rebranded and privatized Fannie and Freddie.

The recap-and-release train appears to be leaving the station.

But here’s what the enthusiasts don’t want to discuss. “Release” isn’t a date you circle on a calendar. It’s a negotiation over that $190 billion-plus IOU sitting atop the capital structure. Until Treasury’s claim is reduced, converted, or written off, the common stock is worthless—watching value accrue above its head while shareholders wait for a restructuring that may never come.

The bull case isn’t really about housing policy. It’s a workout play. Treat past dividends as “enough,” negotiate down the liquidation preference, set a capital target the market can actually finance, and exit. Thread those needles and worthless shares become a windfall.

That’s not one needle. It’s three. And the last one is where the math gets uncomfortable.

The Trilemma Nobody Wants to Admit

How much capital does it take to make Fannie and Freddie strong enough to stand alone?

Some analysts—most recently Michael Burry, the Big Short investor now making GSE recapitalization his contrarian bet—argue the path is simple. Lower the capital requirement to 2.5% (from the roughly 4% regulators currently demand), clean up the Treasury stake, and suddenly an IPO becomes feasible.

But 2.5% is an old number. And not a reassuring one.

Before the financial crisis, that was the statutory minimum. The GSEs met it. Then they blew up anyway. The system didn’t fail because there were no rules. It failed because the rules assumed national home prices don’t fall and correlations don’t go to one.

We’ve already lived through the version of history where compliance was mistaken for resilience.

The deeper problem is what happens at scale. When your exposure base is measured in trillions, a 2.5% equity layer isn’t safety. It’s a buffer for calm seas. Sufficient for the days when everything is fine. Irrelevant for the days when everything isn’t.

Mortgage stress is pro-cyclical. When unemployment spikes and housing corrects, losses don’t arrive evenly—they concentrate. That’s precisely when Washington leans hardest on the same institutions already absorbing the hit. And you don’t need catastrophic defaults for trouble to start. If markets doubt whether the equity slice can absorb what’s coming, funding costs spike and liquidity vanishes before losses even materialize.

A buffer that only works in good times isn’t a buffer. It’s a bookmark holding the page until the next bailout.

This is where the conversation has to get honest.

Most everyone involved in housing finance claims to want three things:

  1. Enough capital for the GSEs to survive a serious crisis without taxpayer help

  2. Low mortgage rates (meaning subsidized, whether we admit it or not)

  3. Meaningful upside for private shareholders

The dirty secret is that you can have any two. You cannot have all three.

High capital requirements mean the guarantee gets priced honestly. Mortgage rates drift up. Credit tightens. Private shareholders can earn real returns because they’re actually bearing real risk.

Low capital requirements mean the system stays dependent on the government when stress arrives. The equity layer is window dressing. Private shareholders get upside, but taxpayers are still on the hook for the tail.

Or you can run these companies as an explicit public utility—low rates, government backstop, resilience over profits—and private shareholders become decorative. They exist, but they don’t matter.

Pick two.

The recap-and-release crowd is trying to pick three. They want cheap mortgages, private shareholder profits, and a straight-faced claim that taxpayers aren’t exposed. That’s not a policy. It’s a magic trick.

Why the Trap Never Opens

This trilemma is why conservatorship never ends.

Any real exit forces political leadership to choose what it wants the mortgage market to be.

A true private market means capital is priced, risk is borne by investors, mortgage rates can rise and access tightens when cycles turn. Most Americans would hate this.

A public utility means the backstop is explicit, the subsidy is acknowledged, and the rules prioritize resilience over pretend-privatization. Most politicians won’t admit this.

What we have instead is the third option. A hybrid that hides the tradeoffs until stress makes them visible.

The cap table might get cleaned up. An IPO might even happen. But if the “release” depends on a capital target that can’t credibly absorb a serious downturn without public support, then the release is a relabeling exercise.

The backstop stays. It just stops being called a backstop. Until the next time it’s needed.

You can check out any time you like. But you can never leave…

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]]><![CDATA[Decoding the State of Housing: Part I - The Quiet Correction]]>https://www.housingandmarkets.com/p/decoding-the-state-of-housing-parthttps://www.housingandmarkets.com/p/decoding-the-state-of-housing-partSat, 13 Dec 2025 20:57:44 GMT

As we come into the end of the year I thought it would be worthwhile to do a deep dive into what the data is telling us about the broader housing markets. The will be another multi-parter where we delve into everywhere housing and markets intersect including multifamily/rentals, capital markets and the consumer and households (this is Housing + Markets after all). For this first part we are going to start with what comes to mind for most folks when they think of housing. The for-sale market. And for a bottom-up analysis there is no better place to start than at the very bottom. In the dirt.

As I’ve written previously, land usually rings the bell early at cycle tops. But it’s messy to track. Every parcel is different on size, zoning, and topography, and there isn’t a clean (public), investable “land index” you can just plug into a dashboard.

Homebuilders are the biggest marginal buyers of land, so their behavior is the most logical place to look. The message from the public builders is clear. They’ve pushed hard into “land-light” models over the last two years. D.R. Horton finished fiscal 2024 controlling about 633,000 lots, only 24% owned and 76% held through land and lot purchase contracts, up from roughly two-thirds optioned a year earlier. Fitch reports that Lennar controlled around 585,000 lots as of early 2025, with only ~9% owned and ~91% controlled via options, up from ~70% optioned in early 2024. Pulte is on the same path: at year-end 2024 it controlled 234,600 lots, 56% under land-option agreements, and management now says options account for about 60% of the pipeline with a target of 70%. Smaller publics like Century Communities and DSLD explicitly describe “land-light” strategies that favor finished-lot option contracts to manage risk.

At the same time, builders have been quietly taking real charges on land and communities that no longer pencil. Pulte booked roughly $35 million of land-related charges in 2024 and $43 million in 2023, defined as land impairments, net realizable value write-downs on land held for sale and write-offs of deposits and pre-acquisition costs. D.R. Horton wrote off $65 million of earnest-money and pre-acquisition costs on terminated land purchase contracts in 2024, after similar $61 million and $67 million hits in 2023 and 2022; that figure jumped to $125 million in 2025. Toll Brothers recognized $15.6 million of land impairment charges in 2023 and another $12.9 million of land and other impairments in 2024, while Tri Pointe has repeatedly broken out “impairments and lot-option abandonments” in its margin bridges, including more than $14 million of charges in 2023 alone. In other words, management teams aren’t just talking about being cautious on land. They’re paying real money to walk away from deals and mark down dirt that no longer supports peak-cycle underwriting.

That posture shows up in sentiment. The NAHB/Wells Fargo Housing Market Index has spent most of 2025 stuck in the high-30s to low-40s, well below the 70+ readings of 2020–21 and below the 50 line that separates “good” from “bad.” Builders aren’t just moody. They’re behaving like people who think the easy part of the cycle is behind them.

And they’re walking away from real capital to do it.

Across the group, builders have been quietly taking charges on land and communities that no longer pencil. Pulte booked roughly $35 million of land-related charges in 2024 and $43 million in 2023 (impairments, NRV write-downs, deposits/pre-acquisition write-offs). D.R. Horton wrote off $65 million of earnest-money and pre-acquisition costs on terminated land purchase contracts in 2024, after similar $61 million and $67 million hits in 2023 and 2022; that figure jumped to $125 million in fiscal 2025. Toll Brothers recognized $15.6 million of land impairment charges in 2023 and another $12.9 million of land and other impairments in 2024, while Tri Pointe has repeatedly broken out “impairments and lot-option abandonments” in its margin bridges. In other words: management teams aren’t just saying they’re cautious on land. They are marking down dirt and walking away from deals.

The earnings calls tell the same story in a different language. Margins. During the COVID boom, large publics were printing mid-20s homebuilding gross margins. Lennar’s pre-impairment homebuilding margin was ~25% in Q4 2022, slipped to 24.2% in Q4 2023, and fell again to 22.1% in Q4 2024. By mid-2025, Lennar’s gross margin on home sales in some quarters had fallen into the high teens as incentives and rate buydowns chewed through pricing power. D.R. Horton tells a similar story: its home-sales gross margin has stepped down from around 24% in 2024 to roughly 21–22% in 2025, with management explicitly pointing to higher incentives and mortgage-rate buy downs.

The real story here is incentives, not list prices. Official average selling prices can look flat to slightly up, but net prices after buydowns and credits are under real pressure. Lennar disclosed incentives averaging about 13% of the sales price in Q1 2025 and 13.3% in Q2, more than double what management describes as “normal.” The result is straightforward: builders are holding the sticker, cutting the deal underneath it, and you see the cost show up in compressed margins.

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All of this is happening against the backdrop of more product that needs to move. New-home inventory has rebuilt meaningfully, and the stock of completed homes is back to levels last seen around the post-GFC period. For example, Census data shows to completed, ready-to-occupy inventory hitting the highest level since 2009 in mid-2025.

That of course doesn’t guarantee a crash, but it does mean builders have less room to “wait out” demand the way they could when inventory was razor-thin.

So it’s no surprise that single-family permits are down meaningfully from their 2021–22 peaks and have been choppy through 2025. They’re not collapsing, but they’re clearly decelerating. Exactly what you’d expect from an industry shifting from “expansion and scarcity pricing” to “cash-flow defense and asset-light.”

But the picture gets cloudier when you look at actual closings.

In August 2025, new single-family home sales jumped to an 800,000 SAAR. Up 20.5% month-over-month and 15.4% year-over-year, the strongest print in more than two years. That’s a real move, but it’s hard to read as a clean demand resurgence when builders are leaning so heavily on buy downs and incentives to manufacture affordability.

It also lines up with a key theme for this entire market. Rates still drive behavior, even for higher-end and equity-rich buyers. Mortgage rates eased during that window. Freddie Mac’s survey had the 30-year fixed at 6.63% in early August (down from the prior week). When financing costs fall even a little, it pulls marginal buyers off the fence, especially in move-up tiers where a “small” rate shift moves the payment by hundreds of dollars.

Existing-home sales tell a similar story. Lots of noise around the edges, but no durable break in the low-volume regime. NAR reported October existing-home sales at a 4.1 million SAAR, up 1.2% month-over-month and 1.7% year-over-year. That’s an improvement. But it’s still a depressed transaction environment by 2010s standards.

Inventory, however, is rebuilding. NAR has existing-home inventory at 1.52 million units and 4.4 months of supply. That’s a meaningful loosening from the pandemic lows, but still short of the classic 5–6 month “balanced” range.

And as Lance Lambert has highlighted, a growing number of states have now surpassed pre-pandemic inventory levels, masking a sharp geographic divide. The West and much of the Sunbelt are dealing with elevated inventory and softer pricing. The Northeast is still running a meaningful deficit.

Source: X.com,ResiClub

So what does that mean for prices?

On the surface, the national price data look benign. Case-Shiller is up about 1.3% year-over-year through September 2025.

Zillow’s national index is basically flat, up a tenth of a percent.

But new-construction is telling you something different. Census/HUD data show new-home prices clearly peaked in 2022 and have been slowly backsliding since. While builders defend contract prices with double-digit incentives and mortgage-rate buy downs that don’t show up in the headline median numbers.

Then Zillow dropped a different kind of bomb.

Zillow’s October analysis finds 53% of homes have a Zestimate lower than a year ago, up from 16% a year earlier and the highest share since 2012. That breadth metric is fundamentally different from median price indices. It’s asking, “How many individual homes are down?” not “what is the typical home worth?”

How do we reconcile all these apparently conflicting data points? Are prices going up or down?

The answer is that we’re measuring different things and averaging them in ways that hide what’s happening to the typical property.

Zillow’s breadth statistic is comparing each home’s estimated value to where it stood one year earlier and counting how many are down. Many of those moves are small, plus or minus 1–2%. If slightly more than half of homes are down a little and slightly fewer than half are up a bit more, national averages can still grind higher while most individual homes tick lower.

Meanwhile, the Census series is capturing a different universe altogether. New construction. Where builders can re-mix toward smaller product, shift geography and use incentives to hold sticker price while cutting the effective price and payment.

Once you look at the map the pattern gets even clearer. The broadest and deepest corrections are in the Sunbelt (and to a lesser extent the West), the pandemic darlings that went vertical in 2020–22. Austin, Phoenix, Boise and much of Florida. Prices are off the highs and concessions are back. A lot of the “53% of homes are down” story is really “the boomtowns are digesting their hangover.”

Source: X.com, ResiClub

At the same time, a very different story is playing out in affordable Midwest and Northeast “refuge markets.” These places never went parabolic, they still pencil against local incomes, and they’re picking up demand from buyers who have tapped out on coastal pricing. Zillow’s own October data shows some of the strongest year-over-year gains in places like Cleveland (~4.5%), Hartford (~4.4%), and Milwaukee (~4.0%).

There’s also a price-tier layer, but it’s more nuanced than the usual “luxury strong, entry-level weak” cliché. Lower and middle tiers are where buyers are most rate-sensitive and where the lock-in effect is strongest on the seller side. Entry-level owners are the most locked-in, sitting on 3% mortgages while any trade-up means 6–7% financing. The math simply doesn’t work, so they don’t list.

That combination produces a strange equilibrium. Very tight inventory in low and middle tiers because potential sellers are stuck and very weak sales in those same tiers because potential buyers are boxed out. Both the stock and the flow shrink. You can have low months-of-supply and still have transactions running far below a normal year. That mix effect props up the median price (because fewer cheap homes trade) even as a large share of individual entry-level properties quietly give back a bit of their pandemic gains.

The sharper dividing lines in this cycle really run by region and by where each market sits in the post-COVID arc, not simply by price tier. Pandemic boomtowns in the West and Sunbelt are cooling or correcting. Steady-eddy refuge markets in the Midwest and Northeast are still inching up. And within each, the lower tiers are jammed by affordability and lock-in, while the upper tiers largely trade on income and equity.

Put it all together and the for-sale housing market looks something like this:

  • Still a low-transaction environment. Existing-home sales have bounced off the absolute lows but remain well below 2010s norms; new-home sales have had a couple of strong prints (August’s 800k SAAR stands out), but we are not in a new boom.

  • Inventory rebuilding, but unevenly. Existing inventory is ~1.52M (4.4 months) as of October 2025 but 18 states are already above pre-pandemic inventory levels, masking a big regional split.

  • Builders behaving late-cycle. Land-light pipelines, real impairment/abandonment charges and margin compression as incentives do the heavy lifting against a backdrop of rebuilt new-home inventory (including completed homes back near post-GFC highs).

  • Rate-driven volume. The August sales pop coincided with easing mortgage rates, underscoring that even affluent, equity-rich buyers remain payment-sensitive.

  • Prices are “flat on average, softer underneath.” Case-Shiller: +1.3% YoY (Sep 2025); Zillow national: ~+0.1% YoY; but 53% of homes are down YoY at the property level.

  • The sharpest adjustment is where the boom was loudest. Western and Sunbelt markets that led the 2020–22 surge have moved the most; many Midwestern and Northeastern markets are still slowly grinding higher.

For-sale housing has shifted into a broad, slow-motion real price correction, more grind than crash, with the sharpest give-back in the same markets that led on the way up.

The natural next question is whether households are in good enough shape to absorb that adjustment and who still gets to participate in ownership at all. That takes us directly into the consumer/household side of the story.

Next in the series: We Take a Closer Look At The Consumer, Households and How They Are Holding Up…

“♡ Like” — if you’ve felt the correction… even when the averages say “flat.”

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Sources and Further Reading

Market Data and Public Indicators

  • NAR Existing-Home Sales (Oct 2025): https://www.nar.realtor/newsroom/existing-home-sales-slid-1-6-in-october

  • Census New Residential Sales (Aug 2025): https://www.census.gov/construction/nrs/pdf/newressales.pdf (or the “New Residential Sales” release page)

  • Freddie Mac PMMS (Aug 14, 2025 – includes the prior week’s 6.63%): https://www.globenewswire.com/news-release/2025/08/14/3133713/0/en/Mortgage-Rates-Continue-to-Decline.html

  • Zillow Oct 2025 market report: https://www.zillow.com/research/october-2025-market-report-35733/

  • Zillow “53% of homes lost value” research: https://www.zillow.com/research/home-value-decline-35724/

  • NAHB “226 metros down from peaks” note: https://www.nahb.org/blog/2025/12/third-quarter-house-price-appreciation

  • PNC Case-Shiller (Sep 2025) summary PDF: https://www.pnc.com/content/dam/pnc-com/pdf/aboutpnc/EconomicReports/EconomicUpdates/2025/PNC_Economics_Research_Case-Shiller_25_November_2025.pdf

  • ResiClub / Lance Lambert inventory-by-state mention: https://www.resiclubanalytics.com/ (and link the specific post/tweet you used)

Public Homebuilders and Land Strategy

  • D.R. Horton FY2024 10-K landing: https://www.sec.gov/ixviewer/documents/ (search: D.R. Horton 2024 10-k)

  • D.R. Horton lot portfolio (Business Wire): https://www.businesswire.com/news/home/20241112556347/en/D.R.-Horton-Reports-Fiscal-2024-Fourth-Quarter-and-Full-Year-Results

  • PulteGroup FY2024 annual report PDF: https://www.sec.gov/Archives/edgar/data/822416/000082241625000013/phm-20241231.htm

  • Lennar Q2 2025 earnings (incentives line): https://investors.lennar.com/ (earnings release / supplemental)

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]]><![CDATA[The 18-Year Land Cycle: Can We Forecast the Next Market Crash? Pt. II]]>https://www.housingandmarkets.com/p/the-18-year-land-cycle-can-we-forecast-367https://www.housingandmarkets.com/p/the-18-year-land-cycle-can-we-forecast-367Sun, 23 Nov 2025 18:32:28 GMT

The Great Interruption: What Actually Broke the Cycle (1929-1973)

In normal times, the land cycle runs as a feedback loop. Rising land values lead to more bank lending, which enables more construction, which creates an economic boom, which drives overvaluation, which eventually triggers a credit crisis, which leads to collapse, which clears the decks for the next cycle. The mechanism depends on one thing working. The ability to capitalize expected future rents into a present price through the extension of private credit.

By 1929, this loop had reached a kind of global crescendo. Land values in the U.S. and U.K. had been inflated to completely unsustainable levels, all fueled by speculative credit. Then the Depression hit and completely shattered the machinery.

Almost 9,000 banks failed in the U.S. between 1930 and 1933, erasing most of the monetary base that had been fueling land speculation. Foreclosure rates surged to unprecedented levels nationwide. Land stopped being a speculative asset and became a liability. Deflation gripped the economy from 1929 through 1933, with prices falling 27%. Households and firms spent the next decade and a half digging out from under the debt they’d accumulated in the 1920s. When credit evaporates and rent expectations collapse, you can’t turn location value into a tradeable asset price anymore. The engine just stops.

Then World War II turned every major economy into a command system. Rent controls were imposed across the U.S., U.K. and Commonwealth countries. Banks could only lend under state direction. Credit was rationed according to war priorities. Civilian construction was essentially banned. Any steel, concrete, or labor was going to the war effort. Land transfers were severely restricted or controlled administratively. The land cycle cannot operate without free-market rents and private credit creation. The war replaced both with bureaucratic allocation, making land speculation institutionally impossible.

After WWII, governments were determined to prevent a repeat of the 1930s. The Depression had taught them that unstable international capital flows could force countries into deflationary spirals. When money fled across borders, central banks had to raise interest rates to defend their currencies, deepening the crisis. The gold standard had transmitted America’s collapse worldwide through forced deflation. So policymakers built the Bretton Woods system around capital controls. They distinguished between “productive” capital for trade and investment versus “hot money” speculation. The goal was simple. Trap capital inside national borders so governments could pursue full employment and national industrial policy without worrying about destabilizing flows. Economists later termed these domestic policies ‘financial repression.’ The Fed and other central banks kept interest rates fixed at low levels, often below inflation. Capital controls restricted money from flowing across borders. Banks operated under credit quotas and rationing. They couldn’t just lend to whoever they wanted. Rent controls and planning acts limited how much landlords could charge. Public housing programs absorbed a big chunk of demand.

The below graph from Knoll, Schularick & Steger’s landmark study shows what happened to U.S. real home prices over this period:

US Real Home Prices 1870-2012
Source: American Economic Review, “No Prices Like Home: Global House Prices 1870-2012

The Depression devastated housing. Nominal prices crashed 25-35% nationally, with Manhattan dropping 67%. But in real terms, inflation-adjusted values fell only about 7% from 1929 to 1933. Why? The economy experienced 30% deflation. Nominal prices crashed, but purchasing power collapsed faster. By 1940, real housing prices had actually recovered above 1929 levels.

But World War II showed something different. Government could crash real housing prices instantly when it decided to redirect resources to strategic production. Government severely restricted civilian construction, rationed materials to war production, imposed rent controls nationally, and directed all steel, concrete, and labor to strategic priorities. Meanwhile, wartime spending created inflation. Rent controls kept nominal rents flat while inflation eroded their real value. Real housing prices fell off a cliff from 1940 to 1945.

Then came demobilization. Sixteen million servicemembers returned home between 1945 and 1947 to a housing stock that hadn’t expanded in fifteen years. The GI Bill offered zero-down mortgages at below-market rates. Household formation exploded. Real housing prices spiked from 1945 to 1950 as families competed for limited supply, the only sustained increase between 1930 and 1970.

But then comes the interesting part. From 1950 through 1970, twenty years, real housing prices gradually declined. This wasn’t market failure. This was financial repression working exactly as designed.

Interest rates stayed below inflation. Capital controls restricted credit. Government directed investment toward Cold War priorities from defense spending to highway systems and space programs. Rent controls persisted in major cities. Public housing absorbed demand. The Federal Reserve kept mortgage credit rationed.

The postwar system deliberately capped rents and contained prices, suppressing the cycle’s amplitude by design. For roughly 40 years, two full theoretical cycles, government controlled the key variables that enable land speculation.

Homeowners watched their primary asset depreciate in real terms for twenty years. They accepted it. Housing was shelter, not an investment vehicle. Nobody expected to get rich from rising home values. Americans didn’t just tolerate this. They demanded it. Making housing affordable was popular policy. Limiting speculation had broad support. Progressive reformers, New Deal Democrats, postwar leaders all ran on platforms of affordable housing and strategic capital allocation.

This addresses a crucial question about political feasibility.

Americans in the 1930s-1970s accepted housing as utility rather than investment because the political economy created conditions where that choice became not just viable but necessary. The United States faced existential competition with alternative economic systems that claimed to solve capitalism’s failures. A broad social consensus emerged that speculation was harmful and destabilizing. Political coalitions formed across the spectrum that prioritized housing affordability over asset appreciation. And critically, government maintained the legitimacy to direct capital allocation toward strategic national objectives rather than private wealth accumulation.

By the early 1970s, policy makers’ explicit attempts to moderate the economic cycle started to crack. Inflation surged, making Bretton Woods fixed interest rate policies unsustainable. Financial liberalization started in 1971 with Savings & Loan deregulation in the U.S. and “Competition and Credit Control” reforms in the U.K. Rent controls gradually eased. Mortgage finance expanded. Land became banks’ favored form of collateral again.

Once governments loosened the controls that had been suppressing land speculation and private credit creation, the boom-bust dynamics reemerged. Whether they returned on a precise 18-year schedule is hard to argue with a straight face. The pattern isn’t perfect, but it’s arguable the cycle resumed with relatively clean runs from 1973-1990 and 1990-2008.

China: When Government Chooses Strategic Industries Over Housing Wealth

If the ‘financial repression’ era proved governments can suppress the land cycle through direct control, China just demonstrated they can do it too. Deliberately, strategically and at scale that makes postwar America look timid.

China’s real estate bubble inflated from 2000 to 2021 (21 years, not 18). At its peak, property comprised 70% of household wealth. Developers were levered 50:1 or more.

The interesting part isn’t the bubble. It’s the controlled deflation.

Starting in 2017, Xi Jinping stated “houses are for living in, not for speculation.” This converted into a state mandate in 2020 when the “Three Red Lines” policy imposed hard leverage limits on developers. If you violated thresholds, you couldn’t borrow for new projects. The policy worked as intended. Evergrande defaulted in 2021 with $300B+ in liabilities. Country Garden followed. Dozens of smaller developers collapsed. Property values have been deflating since 2021.

The Chinese government absorbed losses through state-owned banks rather than letting the financial system collapse. No acute banking panic, just slow grinding deflation managed from the top. This wasn’t crisis management, it was deliberate policy.

As Louis Vincent-Gave argues in his analysis of US-China competition, the real estate deflation was a strategic choice. The Chinese government deliberately redirected capital away from property speculation and toward moving up the industrial value chain via semiconductors, electric vehicles, advanced manufacturing and artificial intelligence. The real estate bust was the cost of that strategic decision.

For two decades, Chinese households poured their savings into real estate because it was the only reliable wealth store available. Then the government decided that capital needed to go to strategic industries instead. So they engineered a deflation that’s actively destroying household wealth while channeling investment toward industrial competitiveness.

This is financial repression at a scale the West hasn’t attempted since the 1940s-60s. Deliberately suppressing one sector to fund another. Directing capital allocation through administrative fiat rather than market signals. Maintaining political stability while household wealth craters.

Vincent-Gave poses a crucial question. Would American voters today accept watching their home equity evaporate for the sake of national competitiveness?

His answer? No. American voters want industrial policy AND rising home values AND strong consumption. They won’t tolerate getting crushed financially while the government redirects capital to semiconductors and strategic industries. So the US would have to fund industrial policy through currency debasement instead—print money to pay for it all without forcing the pain onto households through deflation.

But that assumption deserves scrutiny. Because we have a precedent for American voters accepting exactly this kind of wealth destruction in housing. Real home prices were essentially flat or down for most of 1930’s/1940’s and declined for twenty straight years from 1950 to 1970. Homeowners watched their primary asset depreciate and accepted it. What made that politically viable then? And could similar conditions emerge now?

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The Great Interruption 2.0

In the 1930s, Western capitalism faced existential competition. Soviet communism claimed to have found a better way. Italian fascism offered a different model. German national socialism presented yet another alternative. Each promised to solve capitalism’s apparent failures: unemployment, inequality, instability, boom-bust cycles.

We’re back in that kind of moment.

Today, Chinese state capitalism is demonstrating that centralized control and strategic capital allocation can deliver sustained growth, infrastructure development, and technological advancement.

Viktor Shvets compiled this comparison in his recent book Twilight Before the Storm. When you score the 2020s against historical periods across institutional trust, geopolitical tensions, competition between alternative systems, wealth inequality, and government reach, we don’t look like the 1970s or 1990s or 2000s. We look like the 1930s.

Political polarization in the U.S. and Europe reflects genuine uncertainty about whether the post-1980 neoliberal consensus actually delivers for most people: rising populism on both left and right, declining faith in institutions, increasing social tensions, and growing wealth inequality. All of this echoes the 1930s directly.

The 1930s eventually resolved through depression and war, producing the Bretton Woods system and welfare-state capitalism that lasted until the 1970s. We don’t know yet what comes out of the 2020s. But the systemic competition creates conditions where governments might make choices that would have been politically impossible a decade ago.

Like intervening in markets and the economy for strategic objectives.

The political coalition already exists. A populist right worried about American decline and unaffordable housing plus a progressive left focused on inequality and financialization. Both see asset owners getting richer while everyone else suffers. What’s missing isn’t the political will. It’s a crisis severe enough to force the decision.

To address the series of rolling crises during 1930s and 1940’s, government didn’t just tweak policy around the edges. It took control. Not just of interest rates, but of production, employment, capital allocation, wages and prices.

And we have been slowly but steadily rebuilding that infrastructure of government control for almost 20 years.

Government as Credit Allocator

Post-financial crisis, the Fed’s mandate expanded to what are now recognized as “inherently political activities such as credit allocation and the selection of economic winners and losers.” Emergency programs blurred the line between monetary and fiscal power. The Fed wasn’t just managing money supply. It was backstopping specific markets and more controversially supporting specific institutions.

The 2010 Dodd-Frank Act codified a critical change. Fed emergency lending facilities would now require Treasury authorization. As observers noted, “the wall between independent central banking and government spending effectively crumbled.” The Fed can’t act unilaterally in crisis anymore. Every emergency intervention draws the executive branch deeper into monetary management. What was supposed to be separation between independent central banking and government became coordination by necessity.

The March 2020 market invention necessitated by the COVID pandemic took this to another level entirely. The Fed-Treasury coordination didn’t just support banks. It backstopped corporate debt, municipal bonds, even junk-rated securities. The Fed was buying assets it had never touched before, but only with Treasury backing and approval. Emergency became precedent. The lines that were supposed to separate monetary and fiscal policy disappeared in practice.

Fed-Treasury coordination became standard operating procedure under the Biden administration with the Treasury effectively acting as a shadow central bank. While the Fed was hiking interest rates aggressively through 2022-2023, the Treasury was actively loosening financial conditions through debt maturity management. They issued more short-term bills that functioned almost like cash while buying back long-term debt, lowering yields on longer maturities. This wasn’t subtle. Economists Stephen Miran and Nouriel Roubini calculated that Treasury policy had the same effect as a 100-basis-point reduction in the Fed’s policy rate, completely offsetting the 2023 interest rate hikes. This explains something that confused most economists. Why the fastest rate hike cycle in recent decades didn’t trigger a recession? Because as Miran and Roubini noted, “the Fed-Treasury balance sheet matters for markets and the economy, not either in isolation.” The Fed was tightening. Treasury was loosening. The net effect was neutral.

Stephen Miran joined the Federal Reserve Board in 2025. His public work before joining makes explicit what had been operating quietly for years. Monetary policy is now politics conducted by other means. His position isn’t to restore Fed independence. That ship has sailed. His position is to make Fed-Treasury coordination formal and accountable. As he writes, “If the Fed is already political, the answer is not to restore a lost neutrality. It is to make that power accountable. The only way out is through.” Success, he argues, “will likely depend on renewed cooperation between the Fed and the Treasury” with “public support from the President.” Bessent is continuing the activist Treasury approach (despite having criticized it before joining the administration) by still issuing heavy short-term debt to suppress long rates and conducting outright buybacks of long-term bonds if needed to cap yields. As one assessment puts it “The neoliberal order that kept markets and politics apart is gone.” This isn’t speculation about future policy. This is the stated framework of a sitting Fed Governor.

If Miran represents the intellectual architecture, Bill Pulte, the current director of the Federal Housing Finance Agency and the chairman of Fannie Mae and Freddie Mac represents operational deployment.

In October 2025 President Trump began publicly pressuring large homebuilders to “build more homes” and bring prices down.

Pulte amplified the message, accusing big builders of acting as a coordinated oligopoly that controls roughly 55% of new-home supply. Whether that characterization is fair matters less than the signal. The government is willing to use political pressure and regulatory leverage to force private companies to increase production.

In a blitzkrieg of mortgage-related announcements in November 2025, the Trump administration proposed 50-year mortgages (extending payment periods), portable mortgages (loans that transfer when you move), and assumable mortgages (buyers take over sellers’ existing rates), explicitly comparing the policies to FDR’s introduction of the 30-year mortgage in the 1930s. Each tool serves the same function. Use government-controlled credit to suppress monthly housing costs.

The more significant development is how far into the capital stack Fannie and Freddie are being directed to reach. Pulte has hinted in interviews that the GSEs could take equity stakes in private-sector housing companies or development vehicle. This is a significant shift from pure mortgage credit risk into direct capital participation. They could also provide quasi-construction financing structured as permanent loan commitments. Essentially funding development by guaranteeing the permanent financing upfront rather than waiting until construction completes. Policy discussions center on GSE support for build-to-rent, manufactured housing communities and direct development financing. The objective is clear. Use government-controlled mortgage finance to materially increase housing supply. None of these moves require new legislation. They’re all achievable through administrative action and executive pressure. The infrastructure for government control already exists. What’s changing is the willingness to use it explicitly.

The housing deployment sits within a broader framework. The CHIPS Act, Inflation Reduction Act, and Infrastructure Investment and Jobs Act together represent about $1.8 trillion in direct government capital allocation that picks winners in semiconductors, clean energy and infrastructure. Fed-Treasury explicit coordination and now established precedence of deeply intervening in capital markets. The government is taking direct equity stakes in strategic rare earth miners, semiconductor manufacturers, contemplating investments in defense contractors. Pulte is directing GSE capital toward housing supply, potentially taking equity stakes in development vehicles. Miran is making explicit what’s been implicit since 2008. Monetary policy has become a tool for industrial and social policy, not just price stability.

This isn’t industrial policy in the gentle sense. This is government becoming a direct participant in capital allocation decisions. Not crisis management but a deliberate policy with a coherent framework behind it.

Which brings us to the question: what happens next?

Three Scenarios for What Happens Next

The question isn’t whether we’re in late stages of the current cycle. We clearly are. The question is what happens from here. I see three possible scenarios:

Scenario 1: The Cycle Turns (2026-2027)

This is what the cycle theorists expect. Housing prices decline materially. Regional bank failures start emerging. Credit markets freeze up. Recession hits. The classic late-cycle sequence.

What would actually confirm this? National single-family home prices down 15% or more by end of 2027. Multiple regional bank failures driven specifically by real estate-related credit losses. CMBS market genuinely seizes up. Not just elevated delinquencies but an actual market freeze. NBER declares a recession with real estate and finance as the primary cause.

If this plays out, the investment implications are straightforward. Cash is king. You wait for the distress. You buy the bottom sometime in 2027-2028. This becomes the classic “be greedy when others are fearful” opportunity that value investors dream about.

Scenario 2: COVID Reset the Clock (2020-2038)

This was cycle proponent Fred Foldvary’s view before he died in 2021. He concluded that COVID was a “reset event” similar to the Great Depression. Forbearance kept failing borrowers afloat. Stimulus checks kept the economy humming. The whole system went into this weird suspended animation. All of that fundamentally broke the cycle’s normal progression.

In his view, the cycle essentially starts over from 2020, which means the next peak wouldn’t arrive until the late 2030s.

What would confirm this: Housing markets stabilize through 2027-2028 without any major crashes. Banks muddle through with manageable losses but no systemic failures. No major crisis materializes, just continued stagnation and slow recovery. Then another boom phase begins to develop in the early 2030s.

If this scenario is right, the investment implications are completely different. We’re actually in early-to-mid cycle right now, not late cycle. Current caution would be premature. You could deploy capital on 5-7 year hold periods expecting appreciation through the 2030s. Being defensive right now would mean missing the entire next expansion phase.

Scenario 3: Financial Repression (My Base Case)

This is what I actually think is happening. It’s also the most complex scenario to navigate.

The mechanism is real. Credit-fueled land speculation creates boom-bust dynamics. But we’re entering a new regime where governments and central banks have both the tools and the political will to intervene in ways that fundamentally alter the cycle’s trajectory.

Financial repression isn’t new. It’s what governments do when debt becomes unmanageable. Economists Carmen Reinhart and Belen Sbrancia documented how this worked from 1945-1980. Governments held interest rates below inflation, forcing pension funds, banks and insurance companies to buy government debt regardless of return. This quietly transferred wealth from savers to debtors at 3-5% of GDP annually. Financial historian Russell Napier argues we’ve entered a new 15-20 year cycle of financial repression. Similarly to the previous period, governments will direct credit toward politically favored uses (strategic industries, infrastructure, affordable housing) while starving “unproductive sectors”.

This is occurring in real time.

Treasury-Fed coordination to control rates has become explicit policy. The Fed now backstops corporate debt, municipal bonds and junk-rated securities. The government takes equity positions in strategic industries including rare earth miners, semiconductor manufacturers, even defense companies. It drives GSEs into unprecedented territory, construction lending, assumable mortgages, and developer equity stakes. All this isn’t a proposal, it’s the stated plan.

This is 21st century financial repression, negative real rates combined with explicit credit rationing and government capital allocation. It is well under way.

How to Position

The core insight is simple. Credit is being rationed and directed. Government will decides who gets it. Conventional market-rate multifamily faces harder terms and tighter credit access in an environment where government is actively rationing credit away from assets it deems unproductive. Fannie and Freddie over the years have steadily raised affordability incentives on multifamily loans for below-market rents, affordable housing set-asides and mission-driven lending targets. Their annual market share of total multifamily lending runs between 40-50%. This gives them an outsized ability to influence housing markets. As financial repression intensifies, expect these incentives to look more like requirements.

So what will work? Government in this era is intent on backstopping owner-occupied single-family homes, workforce and capital “A” Affordable (subsidized) multifamily housing. This is unlikely to change no matter what party controls Congress or the Presidency. Focusing on geographies and markets tied to strategic industries including advanced manufacturing, tech, semiconductors and defense will add alpha. Anything that delivers government affordability objectives will see credit flow freely.

What won’t work? Napier explicitly calls out commercial real estate as “unproductive,” and in a credit-rationed environment, that label determines who gets capital. Market-rate Class-A/luxury residential (outside of the high-end employment markets) will struggle to achieve rent growth above inflation and will receive lesser financing terms. The short duration buy-renovate-exit playbook that was so lucrative this cycle will carry more negative optics and political risk. Value-add will have to add real value (think adding additional units or bringing uninhabitable units online). Anything seen as investor speculation rather than housing provision will face headwinds.

This is a fork in the road for housing investors. Many of the most successful strategies of the last cycle won’t work going forward. Go back to as recently as the 1990s most of investment housing’s total returns came primarily from cash flow rather than appreciation. That’s the world we’re returning to. Average hold periods will need to extend substantially. There’s a reason every deal used to be underwritten as a 10-year DCF. Maybe we should think even longer term. Partnership structures will need to be updated to reflect this new reality. You will once again need to be a strong operator (or invest with one) once more. This last cycle saw many inexperienced housing investors ride massive rent growth and cap rate compression to great success. That is unlikely to repeat.

Ultimately many of these dynamics will bring more balance to housing markets. Housing is after all, where workers in the economy live. In the long run, housing values and rents cannot exceed economic growth without serious negative externalities. Real estate has always been a “get rich slow” strategy that got out of whack this last cycle.

The data now shows we’re returning to that reality. The investors who understand this shift early will compound wealth. Those waiting for 2019 to return will be left holding expensive, low-yielding assets in a world that’s moved on.

Next in this series: What the current housing data is actually telling us about where we are right now. Multifamily fundamentals. Single-family trends. Land prices. Credit conditions. Where the actual stress points are as we speak.

“♡ Like” — it won’t stop the next cycle, but it might help you see it coming.

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Primary Sources Cited:

  • Knoll, K., Schularick, M. & Steger, T. (2017). “No Price Like Home: Global House Prices, 1870-2012.” American Economic Review, 107(2), 331-353. [Graph data shown in text]

  • Shvets, V. (2024). Twilight Before the Storm. [Comparative framework graph shown in text]

  • Reinhart, C. & Sbrancia, M.B. (2011). “The Liquidation of Government Debt.” NBER Working Paper 16893. [Linked in text]

  • Napier, R. (2021). “We Are Entering a Time of Financial Repression.” Interview with Mark Dittli, The Market NZZ, July 14, 2021. [Linked in text]

  • Miran, S. & Roubini, N. (2024). “Activist Treasury Issuance and the Yield Curve.” Hudson Bay Capital Research. [Linked in text]

  • Miran, S. (2024). “A User’s Guide to Restructuring the Global Economy.” Hudson Bay Capital Research. [Linked in text]

  • “Stephen Miran’s Post-Neoliberal Economics.” (2025). Compact Magazine. [Linked in text]

  • Vincent-Gave, L. (2025). “The Wrong Question To Ask.” Gavekal Research. [Linked in text]

  • Foldvary, F. (2021). Various writings on real estate cycles and COVID as reset event. [Referenced in text]

Government Policy Documents & Statements:

  • Xi Jinping (2017). “Houses are for living in, not for speculation” policy directive. Chinese government statement.

  • China’s “Three Red Lines” Policy (2020). Developer leverage restrictions. Ministry of Housing and Urban-Rural Development.

  • CHIPS and Science Act (2022). Public Law 117-167.

  • Inflation Reduction Act (2022). Public Law 117-169.

  • Infrastructure Investment and Jobs Act (2021). Public Law 117-58.

  • Dodd-Frank Wall Street Reform and Consumer Protection Act (2010). Public Law 111-203.

  • Trump, D. (October 2025). Social media statements on homebuilder production. [Screenshot shown in text]

  • Pulte, B. (2025). Various statements and policy announcements as FHFA Director. Federal Housing Finance Agency.

Additional Background Sources:

These sources informed the analysis but are not directly cited in the text:

  • Cochrane, J. & Pawson, H. (2020). Australian residential price periodicity research.

  • Vincent-Gave, L. (2024). “Avoiding the Fate of the Ming Dynasty.” Gavekal Research.

  • McKinnon, R. (1973). Money and Capital in Economic Development. Brookings Institution.

  • Shaw, E. (1973). Financial Deepening in Economic Development. Oxford University Press.

  • Rogoff, K. & Yang, Y. (2021). “Peak China Housing.” NBER Working Paper 27697.

  • Chen, K. & Wen, Y. (2017). “The Great Housing Boom of China.” American Economic Journal: Macroeconomics, 9(2), 73-114.

  • Anderson, J. (2024). “China’s Property Sector: From Ponzi to Policy.” Emerging Advisors Group.

  • Jackson, K. (1985). Crabgrass Frontier: The Suburbanization of the United States. Oxford University Press.

  • Fetter, D. (2013). “How Do Mortgage Subsidies Affect Home Ownership?” American Economic Journal: Economic Policy, 5(2), 111-134.

  • Fishback, P. et al. (2011). “The Influence of the Home Owners’ Loan Corporation on Housing Markets During the 1930s.” Review of Financial Studies, 24(6), 1782-1813.

  • Friedman, M. & Schwartz, A. (1963). A Monetary History of the United States, 1867-1960. Princeton University Press.

  • Rockoff, H. (1984). Drastic Measures: A History of Wage and Price Controls in the United States. Cambridge University Press.

  • Mills, G. & Rockoff, H. (1987). “Compliance with Price Controls in the United States and the United Kingdom During World War II.” Journal of Economic History, 47(1), 197-213.

  • Krippner, G. (2011). Capitalizing on Crisis: The Political Origins of the Rise of Finance. Harvard University Press.

  • Helleiner, E. (1994). States and the Reemergence of Global Finance. Cornell University Press.

  • Napier, R. (2022). “The world will experience a capex boom.” Interview with The Market NZZ, October 14, 2022.

Disclaimer

Financial Disclosure and Disclaimer
The information provided in Housing + Markets or referred to in Housing + Markets is for informational purposes only and are not intended to constitute financial, investment, legal, tax, or other professional advice. The content is prepared without consideration of individual circumstances, financial objectives, or risk tolerances, and readers should not regard the information as a recommendation to buy, sell, or hold any specific securities, investments, or financial products.
Readers of Housing + Markets are solely responsible for their own independent analysis, due diligence, and investment decisions. We strongly advise consulting qualified financial professionals or other advisors before making investment decisions or acting on any information provided in our materials.
The information and opinions provided are based on sources believed to be reliable and accurate at the time of publication. However, Housing + Markets LLC does not make any representation or warranty, express or implied, as to the accuracy, completeness, or timeliness of the information. Markets, financial instruments, and macroeconomic conditions are inherently unpredictable, and past performance is not indicative of future results.
Housing + Markets, LLC does not accept liability for any losses, damages, or consequences arising from the use of its content or reliance on the information contained therein. Readers acknowledge that investment decisions carry inherent risks, including the risk of capital loss.
This disclaimer applies globally and shall be enforceable in jurisdictions where Housing + Market, LLC a limited liability company incorporated and based in the United States, operates. Readers in all jurisdictions, including but not limited to the United Kingdom, United States, Canada, European Union, Australia, Singapore, Japan, South Korea, and Taiwan, are responsible for ensuring compliance with local laws, rules, and regulations.
By accessing or using the information provided by Housing + Markets, users agree to the terms of this disclaimer.
]]><![CDATA[The 18-Year Land Cycle: Can We Forecast the Next Market Crash?]]>https://www.housingandmarkets.com/p/the-18-year-land-cycle-can-we-forecasthttps://www.housingandmarkets.com/p/the-18-year-land-cycle-can-we-forecastWed, 19 Nov 2025 03:00:42 GMT

The Prediction Everyone Missed

In 1997, while Alan Greenspan worried about “irrational exuberance” and the world was getting drunk on internet stocks, an economics professor at San Jose State University made what should have been an impossible prediction.

Fred Foldvary, writing in the American Journal of Economics and Sociology (a publication so obscure most economists haven’t heard of it), stated with remarkable specificity:

“The next major bust, 18 years after the 1990 downturn, will be around 2008.”

Think about that for a second. This was 1997. The Asian financial crisis hadn’t even peaked yet. The dot-com bubble had barely started inflating. Amazon was three years old and hemorrhaging money on every book sale. And here’s this guy saying with a straight face that he can predict a major economic crisis 11 years out.

He wasn’t alone. Fred Harrison, a British economist who’d spent decades studying land values, published a book in 2005 with the admirably direct title Boom Bust: House Prices, Banking and the Depression of 2010. Phillip Anderson, an Australian real estate analyst, made similar warnings about property markets peaking around 2007-2008.

We all know what happened next.

All three were working from the same playbook: an 18-year cycle in land values that Homer Hoyt first documented in 1933 when he published 100 Years of Land Values in Chicago. Hoyt found something that shouldn’t exist in efficient markets—a pattern of booms and busts that spaced themselves out with almost clockwork regularity.

After 2008 proved them right, Foldvary made another prediction in 2012:

The next peak would arrive in 2026. Exactly 18 years later.

On the surface, this looks pretty damn impressive. Three guys, working independently, using the same historical pattern, correctly called the timing and nature of the 2008 crisis years before it happened. That’s the kind of track record that gets people’s attention.

But here’s what makes me pause. We’re working with exactly 10 data points spanning 225 years, and one of those “cycles” lasted 48 years—longer than any two normal cycles combined.

That’s not enough data to prove anything. You need dozens or hundreds of observations to claim you’ve found a real pattern. With 10 noisy data points and one massive exception, you could be looking at signal or you could be looking at random clustering. Pattern-matching is what human brains do best, after all.

What I find more interesting than the 18-year number is the mechanism underneath it. Credit extended on land speculation. Central banks amplifying the cycle. Institutions systematically forgetting what happened last time. That mechanism is real, well-documented and operating right now as I write this in late 2025.

The question isn’t whether credit-fueled land bubbles eventually blow up. They always do. The question is whether they blow up on a predictable 18-year schedule, or whether that’s just a nice story we tell ourselves about coincidental timing.

We’re living through the test case right now. If the pattern holds, we should already be seeing warning signs. Land prices peaking. Credit tightening. Banks getting nervous. And we are seeing those things. But does that validate an 18-year cycle, or does it just confirm that late-stage credit bubbles tend to look similar regardless of when they happen?

Let me walk you through why I think the mechanism matters way more than the supposed periodicity.

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What We’re Actually Measuring

First, let’s be clear about what the cycle is supposed to track. The 18-year pattern is about peaks in land values, not market crashes. This is an important distinction that often gets lost.

According to the theory, land values peak roughly every 18 years. The financial crises that follow can happen immediately or years later. Sometimes you get a 1973 situation where the recession hits right at the peak. Other times you get a 1925 situation where Florida land crashes but the stock market keeps partying for another four years before everything implodes in 1929.

This variable lag is simultaneously the theory’s greatest strength and its fatal weakness. It explains why you can see the train coming (land peaks first) but can’t actually time when it hits you. You might identify the peak in hindsight, but good luck trading on it in real-time.

The Historical Pattern: Let’s Look at What We Actually Have

Here’s what the record shows according Foldvary (he published this in May 2007):

Source: The Depression of 2008, Fred Foldvary

Look at what we’re dealing with here. Five 18-year intervals. Two that came in at 17 years. One massive 48-year exception. And then this completely bizarre sequence in the 1970s where you get peaks in 1973 and 1979, only six years apart, followed by a 10-year cycle from 1979-1989.

Now let me point out the problems:

The sample size is tiny. Ten or eleven observations (depending on how you count the 1970s or if you think there was a cycle between 1800-1818) over 225 years doesn’t prove anything. To claim you’ve found a real pattern, you need dozens or hundreds of cycles. With this little data, you’re basically looking at noise and calling it signal.

The 48-year gap is a killer. If external events can “pause” the cycle for half a century, then it’s not really a cycle at all. It’s just a description of what happens when credit-fueled land speculation runs wild until it crashes. Which is... not exactly a groundbreaking insight.

The 1970s are a complete mess. After the 48-year interruption, you get a land peak in 1973, then another one in 1979, just six years later, then 1989 is ten years after that. The cycle theorists themselves can’t even agree on what happened here. Foldvary thought there was an interruption caused by the inflation shock of the 1970s—essentially another mini-reset within the larger cycle. Harrison and Anderson call it a “mid-cycle pause,” which is... let’s be honest, that’s pretty handwavy. When your theory’s leading proponents can’t agree on how to interpret a major chunk of your data, that’s a problem.

The early data is sketchy. For the 19th century, we don’t have actual land price indices. What we have are historians like Harrison and Anderson looking at federal land sales, building permits, and crisis timing to work backward and infer when land values peaked. That’s fine as historical research, but it’s inherently circular when you’re trying to prove a predictive theory. You’re identifying land peaks based partly on when crashes happened, then using those peaks to predict crashes. See the problem?

The 1973 peak doesn’t fit the mechanism. The 1973-75 recession was triggered by OPEC oil embargoes and the Yom Kippur War, not land speculation. Calling this a “land cycle peak” is really stretching things. Sure, you can argue that commodity inflation and land cycles are somehow related, but that’s post-hoc rationalization.

That said, if you squint at it the right way and ignore the 1970s weirdness, you do see a rough clustering in the 16-20 year range for most cycles. That’s not nothing. It’s just also not proof of an 18-year law.

What makes this worth taking seriously isn’t the precise timing. It’s the mechanism that supposedly drives it. So let’s dig into that.

The Mechanism: Credit, Land, and Central Bank Gasoline

If you want to understand why boom-bust cycles happen, you need to understand three things working together: how land gets turned into a financial asset, how credit amplifies speculation, and how central banks pour gasoline on the whole thing.

Land: Turning Location into Money

Land is weird. It’s the one thing you genuinely can’t make more of. You can train more workers. Build more factories. Develop new technology. Even print more money. But you can’t create more beachfront in Malibu or more blocks in Manhattan.

This fixed supply creates what economists call “economic rent”—the surplus that comes purely from location advantage, not from anything productive you’re actually doing.

Think about two identical coffee shops. One’s in Midtown Manhattan paying $50,000 a month in rent. The other’s in Kansas City paying $5,000. The Manhattan shop isn’t making better coffee. It’s not managed better. It just happens to sit where millions of people walk by every day. That $45,000 difference is pure location rent—value created by everyone else’s economic activity, captured by whoever owns the land.

Here’s the part most people don’t think about, property ownership is just a government-granted license to exclude everyone else from a specific location. That’s all it is. And property taxes? They’re not just some cost of doing business—they’re the ongoing price you pay to maintain that exclusion right. Stop paying and see how long you keep that “ownership.”

This structure does something important, it lets you turn economic rent from an income stream into a tradeable financial asset. Once that happens, land becomes subject to all the same speculation and leverage dynamics as any other financial asset.

And here’s the kicker. Residential land makes up 40-75% of total real estate value in advanced economies. That share has been rising since 2011. When researchers looked at house prices across 14 advanced economies over 140 years, they found something striking: nearly all the long-run price appreciation came from land, not structures. Buildings depreciate. Land appreciates.

This is why it’s fundamentally a land cycle, not a real estate cycle. When credit expands, it’s not financing better buildings. It’s financing higher land prices. The buildings are just the packaging.

Credit: The Reflexive Feedback Loop

If people could only buy land with cash they had sitting around, prices would be constrained by current incomes. Nothing too crazy could happen. But credit changes everything.

With leverage, buyers aren’t limited by what they earn today. They’re limited by what lenders think they might be able to pay tomorrow. And that creates a feedback loop that works beautifully until it doesn’t.

Here’s how it goes:

Land is worth $100,000. Bank lends $80,000 against it at 80% LTV. Then land appreciates to $150,000. Suddenly that $80,000 loan only represents 53% of the value. Bank looks at that and thinks “wow, this is really safe lending!” So they lend more. More credit availability brings more buyers into the market. More buyers push prices higher still. Higher prices make lending look even safer.

Each uptick validates the previous lending decisions and encourages more aggressive lending at higher valuations. And here’s where it differs from normal business lending: when a bank lends to a manufacturer, the loan’s viability depends on whether that business generates cash flow from operations. But when a bank lends against real estate, the loan’s apparent safety increasingly depends on continued price appreciation rather than the property’s ability to generate income.

The system works wonderfully on the way up. Everyone makes money. Everyone looks smart. Then prices stop rising.

Once that happens, the whole thing runs in reverse. Lending standards tighten. Fewer buyers can get financing. Demand falls. Prices drop. The same reflexivity that powered prices upward now drives them down. And because everyone borrowed against rising values, a lot of people who looked solvent at the peak suddenly look insolvent at the trough.

This isn’t new. This has been happening for centuries. But here’s what amplifies it in modern times.

Central Banks: Systematic Amplification

Economic cycles existed long before central banks. The U.S. had boom-bust cycles in 1819, 1837, 1857, 1873 and 1890. All of that was before the Federal Reserve even existed. So central banks didn’t invent the business cycle.

But what Austrian economists like Hayek and Mises figured out is that central banks make cycles way more violent by systematically distorting interest rates. Let me explain how.

Capital has a time structure. Some investments pay back quickly. Some take years or decades. The economics term for this is “higher-order” versus “lower-order” capital goods. Inventory that turns over every month is low-order. An office tower that takes five years to develop and then sits on your books for decades is high-order.

The higher-order capital goods are exponentially more sensitive to interest rates.

If you’re holding inventory that turns monthly, you don’t really care if interest rates are 3% or 6%. Your capital isn’t tied up long enough for it to matter much. But if you’re developing a high-rise that won’t generate returns for five years? The difference between 3% and 6% rates is the difference between the project working and the project bankrupting you.

Real estate sits at the highest order of capital goods. Enormous upfront investment. Long construction timelines. Extended holding periods. This makes real estate the sector most sensitive to interest rate changes and therefore most vulnerable to central bank manipulation.

Now here’s where it gets interesting. In a free market, interest rates reflect the time preferences of savers and borrowers or how much society collectively values consuming today versus consuming tomorrow. Low rates signal that people are saving a lot, capital is abundant, go ahead and invest in long-term projects. High rates signal that capital is scarce, people want to consume now, don’t tie up resources in decade-long investments.

But when the Fed manipulates rates administratively, it sends false signals throughout the economy. After 2008, the Fed held rates near zero for years. Not because Americans suddenly became more patient and future-oriented. Not because we were all saving like crazy. But because the Fed decided the economy needed stimulus.

Those artificially low rates act as if there’s abundant capital available for long-term investment. Banks, sitting on cheap funding from the Fed, lower their lending rates. At these suppressed rates, all kinds of investments suddenly look viable that wouldn’t make sense at actual market rates. Developers break ground on projects that only pencil with cheap permanent financing. Investors buy properties at cap rates that only work if you can get low-rate debt forever.

Real estate soaks up a disproportionate share of this artificially cheap credit for several reasons. It benefits most from rate suppression because it’s the longest-duration asset. It provides tangible collateral that banks and regulators consider “safe.” It generates ongoing cash flow that can service debt. And banks understand the underwriting models.

So when the Fed suppresses rates, real estate booms. Prices rise. Collateral values increase. Lending standards loosen. Everything gets turbocharged by cheap credit.

Then the bill comes due. Those new investments—the office towers, apartment buildings, data centers—they all compete with consumption for real resources. Steel, copper, concrete, labor, energy. This competition drives up costs. Eventually consumer price inflation appears, revealing that the investment boom wasn’t backed by real savings at all. Society didn’t actually choose to defer consumption. The central bank just made it look that way through rate manipulation.

The Fed, facing rising inflation and political pressure, has to respond. It lifts rates. The term structure adjusts. Suddenly projects that made sense with 4% money need to refinance at 6%. Properties purchased at 4.5% cap rates need to trade at 6.5% caps to attract buyers. The malinvestment becomes obvious. Sponsors default. Developers hand keys back to banks. Lenders, now worried about real estate exposure, tighten standards. The credit spigot that powered the boom shuts off completely.

Prices fall as buyers can’t get financing and sellers are forced to meet debt obligations. Then, facing recession and unemployment, the Fed cuts rates again. And the whole cycle starts over.

What’s Up With the 18 Years?

Source: Fred Harrison, The Daily Mail

Here’s where we need to get honest about what we actually know versus what makes a good story.

The cycle theorists point to three mechanisms that supposedly converge around 18 years. Let me show you why I’m skeptical of each:

Financial compounding. At 5% rates, credit doubles every fourteen years. Fine, but that gives us 14 years, not 18. And interest rates haven’t been consistently 5%—they’ve ranged from near-zero to double digits. So this “clock” ticks at wildly variable speeds depending on the era.

Physical and capital deployment lags. Research shows it takes about 15 years on average for land to go from farmer to investor to developer. Add construction time, and you get... 15-17 years, not 18. And that’s an average—individual projects vary from 8 to 25 years depending on complexity, regulation, and market conditions.

Institutional memory and generational turnover. This one I actually buy. Fifteen to twenty years is roughly how long it takes for people who lived through a crisis to retire and get replaced by people who only studied it. But this is the least precise of the three mechanisms—it’s not a clock, it’s a slow fade.

Look, none of these mechanisms naturally produce an 18-year cycle. They produce something in the 14-20 year range, which is... not the same thing. The theorists are reverse-engineering an explanation for a pattern they’ve already decided exists.

Here’s my take: There probably IS a natural rhythm to credit-fueled land bubbles based on leverage accumulation, construction lags, and institutional forgetting. But it’s not a metronome. It’s more like a drunken pendulum swinging somewhere between 15 and 25 years, occasionally getting knocked off course entirely by external shocks.

The 18-year number is suspect. But credit-fueled land bubbles keep blowing up with depressing regularity anyway.

The Half-Life of Financial Memory

You know what’s interesting about the institutional forgetting piece? It’s the only part of this theory that’s actually well-documented with hard data.

The standard warning goes “those who don’t learn from history are doomed to repeat it.” Nice sentiment. But it assumes we’re capable of learning from history. In finance, we’re not. Not because people are stupid, but because the structure of modern finance systematically filters out anyone who remembers.

Do the math. The average job tenure for financial professionals is eighteen months to two years. Over an 18-year cycle, that means the average institution cycles through its entire workforce nine times. Most of the people making decisions today have zero personal experience with the last crisis. They might have studied it in business school. Maybe wrote a case study about it. But they didn’t live through it. They weren’t the ones getting fired when everything blew up.

The Boston Fed actually studied this in 2023. Banks with senior management averaging over 55 years old maintained 23% more capital and posted 31% lower default rates than banks with management under 45. A separate Federal Reserve study from 2003 found something even more striking: for every year that passed since a bank’s last crisis, its commercial lending growth increased by half a percentage point annually. Ten years after a bust, banks were extending 5% more credit per year than right after the crisis. Not because loan demand increased, but because lending standards slowly eroded.

Now overlay typical career arcs. Start at 25. Reach senior decision-making roles around 40. Retire at 65. Over a forty-year career with 18-year cycles, you might experience two full cycles, but you’ll only hold real authority during one of them. Most financial professionals learn about crises from textbooks. A small minority learn from scar tissue.

Here’s an uncomfortable truth, forgetting isn’t just inevitable, it’s profitable. Think about who thrives during expansions. Is it the cautious veteran who keeps mumbling about risk controls and remembering what happened last time? Or is it the aggressive young trader who’s unburdened by all that historical baggage and just sees opportunity everywhere?

Rising markets systematically promote optimists and sideline pessimists. By the time markets peak, the industry has filtered itself for exactly the personality types most likely to drive the whole thing off a cliff.

Then the crash happens and everything reorganizes. The aggressive optimists blow up. Cautious veterans get their brief moment in the sun. Regulations get tightened. Investors swear “never again.” Politicians give speeches about how we’ve learned our lesson.

And then the forgetting starts all over again.

Cautious institutions find themselves losing market share to more aggressive competitors. That starts to look like a problem. Boards get antsy. Activists start circling. Executives who remember the last crisis retire or get pushed out. New management comes in promising to “modernize risk practices” and “unlock shareholder value.” Within a decade, all the lessons have been systematically unlearned.

The cycle doesn’t persist because we can’t learn. It persists because we’ve built institutions that ensure we forget.

The Basel Parable

You see the same dynamic in regulation. After the Latin American debt crisis and the S&L debacle in the 1980s, global regulators got together in 1988 and created Basel I. The framework was beautifully simple. Banks need to hold capital equal to 8% of their risk-weighted assets. You could fit the whole calculation on a napkin.

And it worked. Bank capital levels went up. The system got more stable.

But by the late 1990s, nobody working in finance had personally lived through the crises that created those rules. Basel I started feeling like this relic from another era. Too simple. Too rigid. Not “sophisticated” enough. Banks figured out they could game the system through regulatory arbitrage.

So in 2004 we got Basel II. Instead of keeping it simple, regulators decided to get fancy. Banks could now use their own internal models to calculate risk weights. The logic seemed reasonable: banks know their own portfolios better than regulators do, right?

What actually happened? Banks with shakier capital positions became more aggressive about reducing their reported risk weights. The same mortgage that required 8% capital under Basel I might suddenly only require 1.6% under the bank’s fancy new internal model. Not because the mortgage got safer. Because the model said so.

By 2008, all the major global banks looked well-capitalized under Basel II. Tier 1 ratios above 8%. Everything looked fine. Then Lehman Brothers (sporting an 11% Tier 1 ratio just before it collapsed) imploded overnight. The problem wasn’t that banks didn’t have enough capital. The problem was that risk-weighted assets had been systematically understated through all those sophisticated models.

After the crisis, we got Basel III. Even higher capital requirements. New liquidity ratios. A leverage ratio backstop that doesn’t rely on risk weights. The rulebook now runs to hundreds of pages instead of fitting on a napkin. Surely this time we learned the lesson, right?

Except the pattern’s already repeating itself. In 2023, U.S. regulators proposed the Basel III Endgame rules. The banking industry’s response was immediate and predictable: “These rules will hurt economic growth! They’ll reduce market liquidity! We need carve-outs for [insert special interest here]!” The rules are already being delayed. Watered down. Renegotiated.

Meanwhile, a whole generation of bankers who were in high school during 2008 are now in their mid-thirties and moving into senior positions. To them, Basel III looks like some ancient, bloated regulatory apparatus from a crisis they barely remember.

The cycle isn’t about regulators being incompetent or bankers being greedy—though there’s plenty of both. It’s about the fundamental structure: when institutions forget why rules exist, they don’t just repeal them. They grow around them. Every loophole, every reinterpretation, every “financial innovation” is an act of collective amnesia dressed up as progress.

Next in this series: the Great Interruption to the cycle, the international evidence and what comes next...

“♡ Like” this piece — one more reminder before the forgetting sets in.

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Sources and Further Reading

  • Foldvary, F. (1997). “The Business Cycle: A Georgist-Austrian Synthesis.” American Journal of Economics and Sociology

  • Foldvary, F.E. (2007). “The Depression of 2008.” The Gutenberg Press

  • Harrison, F. (1983). The Power in the Land. Shepheard-Walwyn

  • Anderson, P. (2009). The Secret Life of Real Estate and Banking

  • Hoyt, H. (1933). One Hundred Years of Land Values in Chicago

  • Smith & Cole (1935). Fluctuations in American Business, 1790-1860

  • Newman. The Building Industry and Building Cycles

  • Berger & Udell (2003). “The institutional memory hypothesis and procyclicality of bank lending.” Journal of Financial Intermediation

  • Boston Federal Reserve (2023). “Management Age and Bank Risk-Taking”

  • Ricardo, D. (1817). On the Principles of Political Economy and Taxation

  • George, H. (1879). Progress and Poverty

  • Hayek, F. A. (1931). Prices and Production

  • Mises, L. von (1912). The Theory of Money and Credit

  • Knoll, Schularick & Steger (2017). “No Price Like Home: Global House Prices, 1870-2012.” American Economic Review

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