The National Association of Realtors will not like this post, but home prices need to come down, and they will.
Even before the Covid-19 pandemic, home prices were on a trend that was unlikely to continue for long.
Median Home Price vs Median Household Income
Median home price vs median household income is another measure that tells the same story.
Median household income series only dates to 1984 and is on an annual basis. The most recent data is for the end of 2018.
Both charts show very stretched valuations.
Home prices have outstripped hourly earnings, household income, and rent.
Massive Drop in Homebuyer Interest
On May 3, I commented Massive Drop in Homebuyer Interest.
That was not unexpected as Over 20 Million Jobs Lost As Unemployment Rises Most In History.
Job Losses Understated
Unfortunately, the unemployment are and job losses are hugely understated.
For details, please see A 6.4 Million Discrepancy Between Employment and Unemployment
From restaurants to hotels to home buying, Don’t Expect a Return to Normal This Year
So, if you are thinking of buying a home, there’s no reason to rush. Better prices are around the corner.
Mish
It will take awhile for this to play out to see if prices fall significantly. Supply was still short prior to covid19 and this drove prices up in many metro areas. I dont expect to see housing capitulate this time because a lot of purchases especially in high cost areas over the last decade were all cash buyers. Spdload provides services related to marketing startups they know how”=””>https://spdload.com/blog/startup-marketing/“>how to market a startup business.it helps to enhance your business and find out the best fit market for the product
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Mish, i agree. People who lose their jobs won’t be buying and the subset that lives paycheck-to-paycheck will have to sell if they own. Nevertheless, it will be interesting to see what happens in an environment where interest rates are zero or negative. The absence of positive interest rates mean title holders aren’t penalized as much (as in 2008-9) for sitting on vacant property (as I wish they were).
Speaking of which, a nearby retail development owned by a national RE firm has been 50% empty for years because the owner kept jacking up the lease rates. I suspect higher interest rates would motivate them to either sell the property (to avoid paying actual interest on the loan) or put the property to better use (to afford paying actual interest on the loan). As it stands now, maybe a lazy or obstinate corporate lease officer makes less money off the property but doesn’t risk bankrupting the firm. Also, by showing ridiculous lease payments and extrapolating to the entire complex, the firm can perhaps sell the “asset” to the taxpayer at inflated prices. Maybe this combination of factors explains why they let half the development sit empty.
That’s what The Fed is for: To make sure there is no pressure on members of the unproductive leeching classes, to employ any of the economic resources The Fed bought for them, for any productive purpose. That way, the leeches can simply sit on them forever, while productive people go homeless and starve in the streets. It’s America, after all.
Well, by this same logic, stocks have also gone up a lot in recent years but are only down a measly 10% from their all time highs. If they haven’t crashed (and they tend to move much more quickly than housing) then I am not sure why we should expect housing to.
That was great information provided. I think this is something helpful for those who are planning to sell their plot. Here they provided the graph which is data for the information that due to the pandemic the value of the lands and properties have come down and it is not the best time to sell properties more here
I think places like Phoenix will benefit by the desire to leave cities because of the virus scare. Maricopa county being #1 price increase champ will keep its reign, even if it does dip, will be best in US.
Bad time because inventory is so low bidding wars are breaking out. Here is a story about it at CNBC today:
The point is inventory was already low prior to the CV shutdown and something like 39% of total inventory has been pulled from the market. Even as pent up demand is seen, and in this case it literally was PENT UP for months. People have and are spending months and feeling cooped up, seeing up close the flaws in the present living conditions. If there were no forebearance we would see millions of homes hit the market overnight as people try to sell at any price to avoid foreclosure, but as long as we have forebearance we will not see a huge rush to sell.
I think this is going to lead to a huge spike in prices that people will rationalize as worth it because of low interest rates. But, I also think the actions of the Fed and government are grossly inflationary and in spite of a deflationary impulse in some areas of the economy I think consumer prices are about to go ballistic, to the point where a whole lot of goods and services will meet tremendous price resistance. That will lead to a depression. This will ot be a V shaped recovery.
flippers will be shut out of the market due to more stringent lending standards. thus they have to fall.
Interest rates are much much lower, you never take that into account. Any analysis that leaves that out you can safely ignore.
“Interest rates are much much lower”
…
Than when? For years now have been hovering around record low … and really can’t go much, if any, lower (Servicers need to be compensated).
PITI
On the other hand, P _ TI have been on a rocket ship upward … more than makes up for a few pennies saved on interest.
I’m pretty sure mortgage rates never went below 7% in the 80’s and 90’s and at times were around 15%. They didn’t really go under 5% until after the housing bubble burst 13 or so years ago.
I was kinda thinking the same thing. Maybe should be looking at the median monthly payment on the median priced house with a 30-yr mortgage, and compare that to the median income?
It is a good time to buy a house. “Suzanne researched this”.
Awesome. Suzanne got her commission.
Isn’t it pretty obvious, Mish? I mean housing demand was outstripping supply for a while. Now that there’s a demand shortfall, the prices will come down.
Consumers are super bullish on the stock market. They know now where the game’s at.
ALLEGED CPI Mish, LOL. Funny!
I think we will see a wave of refinances as people plow back into 30 year loans to make up for income and job losses in hopes of things coming back. It will take awhile for this to play out to see if prices fall significantly. Supply was still short prior to covid19 and this drove prices up in many metro areas. I dont expect to see housing capitulate this time because a lot of purchases especially in high cost areas over the last decade were all cash buyers. That is what they are in my area.
Refinance? Only the lucky ones who have a job. Otherwise, forget about it.
Unemployment will come down. And rates will stay low. Perfect recipe for refi boom. People wont move unless forced. Just like the last crisis.
I’d raise one issue that Mish seems to omit from his posts about house prices. Interest rates. Since most purchases are financed, the interest rate has a huge effect on the price of the house. Lower rates mean higher home price.
So long term house price charts like the ones in this post that do not account for interest rates can miss the full picture. It’d be really interesting to see a line that represents the average mortgage payment over time on the first chart in this article.
I bought my first house for $177k in 2001 and had a payment of $1600/month and a rate of 7.375%. I’m about to buy one for $530k at a rate of 3.25%.
Sure, house prices may drop significantly due to an upcoming foreclosure crisis caused by unemployment……assuming that government funded forebearance on a massive scale does not happen. That’s a big assumption.
But housing (in my area), when measured in mortgage payment, is very much in line with income when compared to 20 years ago.
Do you really think this administration is going to do anything that really helps the homeowners?
Absolutely! This administration will do whatever they think will help get them elected. Such as delaying a foreclosure crisis for another year or two.
There is no stomach for economic pain on either side of the aisle right now.
I would differ in that Senate republicans will attempt to block any new relief for actual people, trillions and TRILLIONS for corporations and shareholders, but for the 90%, nada.
They’ll try. Just as they always have. All at the expense of prospective homeowners, and businesses, of course.
And since the latter are the future…… bye-bye future.
All in order to ensure incompetents idly sitting in decaying shacks, get to, without doing anything to earn it, avail themselves of the value created by their productive betters. Which always was, always will be, the sole reason for maintaining the kind of financialized dystopia which “helps homeowners.”
ANYONE considering buying a home now needs to take property tax into consideration.
Local government budgets (big revenue source is property tax) are getting hammered by covid.
What will they do? Slash budgets or raise property tax?
It generally is easier to rob someone once they are tied down.
Thank God 4 Prop 13
The impact of AirBNB investors in hot markets will be revealed–they will be the first sellers in the decline.
Also the jingle mail underwater mortgagees. Millions of them.
Nothing is just around the corner, prices havent started dropping yet.
Around the corner means 4-5 years from now. Housing moves slowly. Look at the start of crash to bottom last time.
It “seems” things move faster now. This may be confirmation bias, though.
Depends on the market. I am also an agent in OH and in our market as the lockdowns are being tapered more and more people are coming back to search for homes in the mid-range price wise. I expect a price decline as well but think it may be late fall when the stuff hits the fan.
People may not wait to buy a cheaper TV, they may not wait to buy 80% of things as Mish says……but they will wait to buy a house if they think the price will be going down. (Which anyone with any sense thinks in most markets) And they will definitely wait if they are unsure about their job. (How many can be completely confident?) The question is not will prices go down, but rather how far. The question is not whether to wait, but rather how long.
But it’s like the stock market, will prices drop or will expected Fed inflation of the money supply make the nominal price of a house go up? We’ll see. NIMBY types in most big cities are keeping the supply of houses limited. – RL
News story:
Got inflation? Restaurant closures is the key…and supply shut down too.
5/8/2020
To get an idea of what the beef processors are bringing in on the other side of the supply chain, I looked at pricing data for the USDA. The “choice cutout price” is shorthand in the beef industry for the cost of processed beef. It’s the average cost of hundred pounds of processed Choice grade beef. The all-time record for choice cutout before this year was set at $265.59 on May 19, 2015. On April 24, 2020, it reached $293.37, and beef buyers gasped. It launched to $458.54 on May 7. Because it’s an average price, every cut of beef isn’t treated equally, but brisket buyers will not be spared. The weekly average cost for whole Choice briskets went from $2.80 per pound two weeks ago to $4.06 this past week, and the daily price on May 7 was between $5.46 and $6.50 per pound.
I’m not worried about the Fed’s inflation for a few years still. But I am worried about unprecedented Government intervention creating an artificial floor, and huge corporations sweeping in at the 20% discount mark and turning two entire generations into perma-renters.
I am a real estate agent and agree. I have been asking my clients to ask themselves the following questions:
Is it reasonable to expect the price of the home to rise 7-10% in the time I expect to hold it? (Or, am I in position to hold on to the home “forever”?)
If not, am I ready to be a landlord?
If I am ready to be a landlord, does the house cash flow?
These are the absolute minimum questions to ask.
You are an honest Realtor, a refreshing comment.
Agree that prices will drop but sellers are stubborn and won’t sell unless they have to so it may take a while for reality to set in. Unemployed people will have to sell but they will wait until their savings are depleted. If I were someone who thought I might have to sell then I would hop on it now and discount appropriately to avoid what will surely be a bigger decline later. Also the high end will be impacted by the stock market so multi million dollar sales should drop like a rock.
Good analysis. I agree.
B-b-but what happens to those co-ops and condos in NYC? Taxes will be going up. Maintenance always goes up.
Surely, investors will have an insatiable demand for those units as #cancelrent take root.
“Home are priced for perfection and few can afford them. I expect prices to decline.”
…
Absolutely.
The two markets I follow closely “sticky prices” still rule. The SAME listings sit … and sit. No price cuts (yet). Slow sales.
The only question will be how far prices drop, not “if”.
Those sellers still have a choice.
The houses will stop sitting when they no longer have the luxury of waiting.
Only question is will the banks who take ownership sit on their new properties or put them back out at market price. In 2008, the banks let them sit off-market for a while.
The Fed exists for the explicit purpose of ensuring that no “have” is ever pressured has to give up anything he has. With the costs of that protection, being forever borne entirely by “have nots” working under the whip.
Mortgage Credit tightening:
WASHINGTON, D.C. (May 7, 2020) – Mortgage credit availability decreased in April according to the Mortgage Credit Availability Index (MCAI), a report from the Mortgage Bankers Association (MBA) that analyzes data from Ellie Mae’s AllRegs® Market Clarity® business information tool.
The MCAI fell by 12.2 percent to 133.5 in April. A decline in the MCAI indicates that lending standards are tightening, while increases in the index are indicative of loosening credit. The index was benchmarked to 100 in March 2012. The Conventional MCAI decreased 15.2 percent, while the Government MCAI decreased by 9.5 percent. Of the component indices of the Conventional MCAI, the Jumbo MCAI decreased by 22.6 percent, and the Conforming MCAI fell by 7.1 percent.
“The abrupt weakening of the economy and job market – and the uncertainty in the outlook – drove credit availability down in April for the second consecutive month,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “The overall index fell to its lowest level since December 2014, and the sub-indexes pointed to tightened credit supply for all loan types. The decline was largely driven by lenders dropping many low credit score and high-LTV programs, as well as further reduction in jumbo and non-QM products.”
Added Kan, “There was also a large decline in loan offerings pertaining to cash-out refinances, given the GSEs’ constraints in purchasing cash-outs that have fallen into forbearance.”
May 8 – Bloomberg (Joe Light): “Mortgage rates are at record lows, but borrowers hoping to take advantage are running into the toughest loan-approval standards in years. Over the past month, lenders have put in place higher credit-score and down payment requirements, and in some cases stopped issuing certain types of loans altogether, in effect shutting down a large swath of the mortgage market. The triggers, industry executives say, include lenders becoming risk-averse during the coronavirus crisis, knock-on effects of Congress allowing millions of borrowers to delay their monthly payments, and policies implemented amid the pandemic by mortgage giants Fannie Mae and Freddie Mac. The impact has been dramatic, with one model showing mortgage credit availability has plunged by more than 25% since the U.S. outbreak of the virus.”
Thanks for posting this. As always, adjustments are being made too late to make a difference.
sell or hold or buy that prime location in a seasonal resort area now mike?
Do not fight the fed.
(If you do, the consequence is getting priced out.)
Why isn’t your first rectangle on the first chart extended to the left? Seems like any time before 2000 was a great time to buy a home based on your first chart, and based on the 2nd chart, there hasn’t been a recent great time to buy a home.
The boxes represent buying opportunities right before prices soared
But yes, prior to 2000 was a “good” time – steady ratios
thanks for clarification
Completely agree that prices have to fall. I’ve talked to people about this recently in different parts of the country and the consensus is that while they haven’t seen declines in asking prices, sales velocity seems to have slowed to a crawl.
Sellers may be in denial after this 11 year mania, but reality will set in before long. Unemployed people don’t buy homes without NINJA loans and frightened people will be reluctant to buy regardless of circumstances, and the ranks of both groups are growing rapidly.