Housing Theory vs. Reality: Where are Home Prices Headed?
Here’s a Tweet thread that caught my eye.
The typical narrative is that Fed hikes will materially slow the housing market. It may not all ‘be different’ this time, but three factors will make the housing market more robust to higher rates this cycle 🧵
— Jessica Nutt (@JessicaNutt96) April 17, 2022
Robust Balance Sheets
Housing is a scarce asset with a demographic tailwind. Due to the underbuilding of the post-GFC era, there are simply not enough houses to go around. At the same time millennials are reaching their prime household formation years. This contrasts with the overbuilding of the 2000s pic.twitter.com/ZIwMHBV5BL
— Jessica Nutt (@JessicaNutt96) April 17, 2022
Overall, this mix of a stronger consumer balance sheet, rising demand for housing, and rate insensitive buyers implies that the Fed will need to hike more this cycle to have the same effect on economic activity.
— Jessica Nutt (@JessicaNutt96) April 17, 2022
I agree with some of these ideas and strongly disagree with others. Some are a mixed bag of plusses and minuses.
Consumer Balance Sheets
The Tweet chart shows mortgage debt payments as a percent of disposable income.
That reflects the past, not the present. Housing affordability has plunged, and the Fed has barely started hiking.
The tweet did not really address overall balance sheets of the marginal buyer. Many people have recently been priced out.
Demographic Winds
The winds are not all in one direction.
Millennials want to buy, but a huge wave of pending boomer deaths is on the horizon. That will add to housing supply.
Fed Impact
The biggest mistake is the belief Fed rate hikes have no effect on housing demand if the property is not financed but bought in cash.
Wrong!
Rate hikes will reduce demand across the board. And across the board means just that. There is no magic set of buyers or sellers who will not be impacted by the overall trends.
Asking prices are already headed lower.
Demand Slips, Pushing More Sellers to Drop Asking Prices
Redfin reports Housing Market Update: Demand Slips, Pushing More Sellers to Drop Asking Prices
Redfin notes “price drops are climbing at its fastest spring pace since at least 2015, another sign that demand is not meeting sellers’ expectations.“
“There really is a limit to homebuyer demand, even though the market over the past few years has made it seem endless,” said Redfin Chief Economist Daryl Fairweather. “The sharp increase in mortgage rates is pushing more homebuyers out of the market, but it also appears to be discouraging some homeowners from selling. With demand and supply both slipping, the market isn’t likely to flip from a seller’s market to a buyer’s market anytime soon.”
Jessica Nutt appears to have a spotlight on the last sentence in the preceding paragraph.
I would emphasize the first sentence.
Downtrends Start Then Accelerate
In every cycle, prices remain sticky for a while.
This cycle was certainly not as speculative as the last and the downturn will likely not be as steep.
However, Real Estate Investors Are Buying a Record Share of U.S. Homes.
Jessica Nutt believes this supports home prices. I believe it certainly “did” support home prices.
Looking ahead, such speculation will need to increase to support home prices.
Redfin reports “Investors who ‘flip’ homes see potential to turn a big profit as home prices soar.”
What happens when prices decline?
Some of this housing demand, including demand for second homes, stems from huge stock market gains.
What happens to demand, across the board for all assets, not just houses, in a recession?
To find some additional agreement with Jessica Nutt, I do not expect the same housing price collapse as happened 2007-2010, but there is a bubble in assets, and it will pop.
Problem for the Fed
One huge problem for the Fed stems from their own ignorance. The Fed does not view home prices or asset prices in general as part of inflation.
It’s true that homes are not a consumer expense. But resales of the same identical home are certainly a measure of inflation.
The Fed ignored this from 2002-2007 then we had a crash. The Fed ignored this again from 2016-2022.
To expect such price action to continue is crazy. But that is what second home buyers and flippers expect.
The problem for the Fed is they ignored the housing bubbles and if they stick to the same methodology ignoring home prices with a focus on rent, they will keep hiking in the midst of huge demand destruction.
Asset prices will fall, but rents may remain stubbornly high and that’s how the Fed mistakenly views inflation.
Let’s put a spotlight on one statement by Nutt: “The Fed will need to hike more this cycle to have the same effect on economic activity“.
That sentence may or may not be true. I suspect it’s false. But, if we replace the words “economic activity” with “the CPI“, then most likely it is true.
And that’s a huge problem for the Fed who pretends to be a group of inflation fighters.
Economic Wizards vs Reality
Reality is the Fed is a bunch of good ole boy groupthink economists who are clueless about inflation.
These pretend wizards highlight my statement every recession cycle by not recognizing huge economic bubbles as being the key measure of inflation.
This is why we have boom-bust cycles with increasing amplitude over time. Bubble-wise, this is the biggest one yet.
This post originated at MishTalk.Com.
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Redfin reports “Investors who ‘flip’ homes see potential to turn a big profit as home prices soar.”
“What happens when prices decline?”
housing demand if the property is not financed but bought in cash.”