Home Price Synopsis
Home prices have peaked this cycle but the decline is certainly tiny compared to the run up.
Case-Shiller lags. July is the latest data and that represents sales primarily made in May and June so the declines shown are undoubtedly understated.
CS National ,Top 10 Metro, CPI, OER
Home Price Disconnect Notes
- National is the Case-Shiller national home price index.
- 10-City represents the weighted average of the cities in the first chart.
- CPI is the Consumer Price Index
- OER stands for Owner’s Equivalent Rent. It is the single largest component in the CPI with a current weight of 23.65% of the total CPI.
- Rent of Primary Residence is a CPI component with a weight of 7.25% of the CPI.
OER is the price the Bureau of Labor Statistics (BLS) says one would pay to rent one’s own house from oneself, unfurnished, without utilities.
Price Percent Change Since January 2020
- Case-Shiller National: 44.7 Percent
- Case-Shiller 10-City: 39.8 Percent
- OER: 8.9 Percent
- CPI: 14.8 Percent
The Fed fueled a speculative bubble in housing, purposely, by reckless QE and unreasonably low interest rates.
Slowing Dramatically
By slowing dramatically, I mean housing transactions, not price.
We have not seen downturns like this outside of recessions.
For discussion, please see Existing Home Sales Decline Every Month Since February, Down 0.4 Percent in August
Great Recession Comparison
Unlike the Great Recession, this housing bubble lacks liar loans and the intense speculation of 2005-2008.
Nor will people be waking away from debt because most have positive equity.
On the job front, I expect a minimal rise in unemployment.
Where to From Here?
Prices will slowly decline but 6 and 7 percent interest rates will kill affordability for years to come. Even 15 or 20 percent declines would be insufficient to stir up the massive surge in demand we saw from 2020 on.
If something goes up by 44 percent it would take a 31 percent decline just to get back to even. But factoring in the rise in interest rates, home prices would have to crash 50 percent or more.
Given the huge differences between now and the Great Recession, prices are far more likely to be sticky.
Many will become locked to their homes, unable or unwilling to move. Who wants to sell their house with a 2.5% mortgage to buy a home with a 7.0% percent mortgage?
Negative price pressure will come from downsizing or dying boomers and those who have no mortgage.
When children inherit a house, they will sell. There will be a big wave of forced selling in the future, but not now.
Expect a Long Period of Weak Growth, Whether or Not It’s Labeled Recession
Housing tends to lead the economy into and out of recessions. This slowdown is taking a toll on the economy now.
But unless the Fed comes to a quick rescue, housing will be in the doldrums for a long time.
Add it all up and you have a long period of slow economic growth that borders in and out of recession for years.
For discussion, please see Expect a Long Period of Weak Growth, Whether or Not It’s Labeled Recession
Cyclical Components of GDP, the Most Important Chart in Macro
If you missed it, please note Cyclical Components of GDP, the Most Important Chart in Macro
My follow-up article was A Big Housing Bust is the Key to Understanding This Recession
Housing leads recessions and recoveries and housing rates to be weak for a long time.
Add it all up and you have the opposite of the Covid-recession, a long period of economic weakness with minimal rise in unemployment.
It does not matter whether you label this a recession or not. Besides, the NBER might not even announce the recession until it’s over. That happened once already.
This post originated at MishTalk.Com
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In American Yale Professor Irving Fisher’s truistic: “equation
of exchange”, P*T = M*Vt. But M*Vt “≠” N-gDp.
the value of money (its purchasing power) is determined – like the value of
other goods – by supply and demand,
never by supply alone.”
where short-term funding was withdrawn, sharply reducing the supply of loan-funds
(savings collapsing back into the payment’s system), forcing a $6.2 trillion
contraction in the shadow banks.
–Danielle Dimartino Booth’s book: “Fed Up”, pg. 218
“Before the financial crisis, accounts were insured up to
the first $100,000 by the FDIC. That limit kept enormous sums in the shadow
banking system. After the crisis, the FDIC raised the insured account limit to
$250,000. But trillions of dollars still sate outside the traditional banking
system. The “safe” money had no place to go expect money market mutual funds
and government securities, leading to a shortage of T-Bills and a corresponding
drop in yield.”
intention is to consult experience first, and then with reasoning show why such
experience is bound to operate in such a way”…”Although nature begins with the
cause and ends with the experience, we must follow the opposite course, namely
being with the experience, and by means of it investigate the cause…“Before you
make a general rule of this case, test it two or three times and observe
whether the tests produce the same effects”.
Also in the mix. Cant get what you think your parents house is worth in the current market. Expect more Air b and b. Wonder about cash sales and wall street purchases this time around.
another Boomer Benefit
There will be many many homeowners wearing handcuffs in the future. The good side of this, of course, is that equity will rapidly increase as more and more homeowners stay longer in their home. That’s going to hit bank earnings however who make money from housing market turnover.
“Mortgage credit availability decreased in September according to the Mortgage Credit Availability Index (MCAI), a report from the Mortgage Bankers Association (MBA) that analyzes data from ICE Mortgage Technology.
The MCAI fell by 5.4 percent to 102.5 in September.”
I’m personally hoping for a large decrease in home prices. I have no idea what will happen but I’m building cash, as many of my friends are. If home prices decrease I don’t care what the interest rate is. If I can buy an 80k home for cash and rent it for 800 I’m earning another 6k a year after expenses per house.
Yeah, I’d make more with financing, but cash buyers are more than usual lately. There’s a lot of people with cash, more than most think.
It’s not the price that matters, its the rent ratio. If you can get 1% of purchase price in rents, that’s good and you should buy it, depending on interest rates. If you can get 1.2% a month in rents, then interest rates cease to matter to me at all.
IF housing falls 1.2% will become common, and I”ll lever up, even at 7% interest rates.
Wilson has grown by leaps and bounds due to their location on I-95 and being the first city you run into from the high tax states like VA, DC, and NJ. Lots of folks moving here.
Now, if you are in a gang your life expectancy goes down dramatically here and nearly every murder is a person in a gang.
And….don’t buy rental houses on the south side of town…bad idea.