Some deny there is a housing bubble. I believe the bubble is obvious.
Chart Notes
- Case-Shiller is a measure of repeat sales of the same house. This is a far better measure than average or median prices that widely vary over time by home size and amenities.
- Disposable means after taxes
- Real means inflation adjusted using the BEA’s Personal Consumption Expenditures (PCE) inflation index, not the BLS Consumer Price Index (CPI).
- Both indexes are set to 2000=100.
- Case-Shiller is through May (reflective of March) while Real DPI is through June. There is a minor bit of skew that I did not factor in.
For at least 12 years, home prices followed extremely closely to real disposable personal income. In 2012 the indexes touched again at 133-134.
The BEA calculates REAL based on PCE. Adjusting for inflation by the CPI would make the current bubble look bigger and I believe more accurate.
The important point is the massive divergence between the measures noting that the bubble is a bit understated.
Percentage Difference Between Home Prices and Real DPI
- 2006: (185-120)/120 * 100 = 54.17 Percent
- 2023: (305-169)/169 * 100) = 80.47 percent
On a real DPI basis, home prices are roughly 80 percent above where they should be.
Some justify these home prices on the basis of mortgage rates and affordability. They are wrong.
The difference between home prices and income is really a measure of the Fed’s propensity to blow financial bubbles by keeping rates too low too long.
I will address alleged affordability in a following post.
The Fed Commits to a 2 Percent Inflation Target, Carefully
Meanwhile, please note The Fed Commits to a 2 Percent Inflation Target, Carefully
Powell’s Warnings
Here is the key thing Powell said today: “As is often the case, we are navigating by the stars under cloudy skies.”
And to that I would add, using tools like inflation expectations proven to be totally worthless.
For discussion of inflation expectations and Biden’s energy goals guaranteed to be inflationary, please see Should the Fed Declare Defeat and Move On?
The Fed wants inflation at 2 percent but is clueless how to measure it.
This creates bubbles of increasing amplitude over time. And the middle class shrinks as a result.
The home price index is nominal, while the income is real. That is the problem. You should be using nominal disposable income in your graph. If you do that, the bubble would be gone.
Reply
It’s the same damn home and income is adjusted. People have other expenses (food, insurance, medical). What does your income buy?
Home prices rose with Real income rose for over a decade. Then returned to the trendline. Then soared again, thanks to QE and stimulus.
You buy a nominally priced home with nominal disposable income. Comparing a nominally priced home with real disposable income is not logical.
excellent analysis. really drives it home. thanks mish. i’m seeing and hearing of big price drops from working class hoods in brooklyn to upper crust hamptons. same goes for working hoods in phoenix. now is the time to apply the time tested cap rate analysis for future purchases………
“On a real DPI basis, home prices are roughly 80 percent above where they should be.”
Wrong calculation: (305-169)/169 * 100) = 80.47 percent
Right calculation: (305-169)/305 * 100) = 44.59 percent
Home prices are roughly 45 percent above where they should be.
Actually, the math is correct.
The index is 305, it should be 169.
You are calculating how much it would have to drop to get back to 169
Simple example
If something is 2 and it should be 1 it is 100% too high.
It would have to decline by half (50%) to be where it should be.
I disagree that Case-Shiller a better measure than average or median prices. Case-Shiller over weights flips, houses in poor condition that a flipper than invests a substantial amount of money to rehab, with the hope of selling for a profit. Houses that people actually live in turn over very infrequently, which makes matching the same house a very small data set. My parents have lived in the same house for over 30 years, and pretty much every house on the block also has long term homeowners. While average and median prices are also flawed due to various changes in size/amenities in various houses, these measures are bigger aggregates and this is evened out.
that is a very insightful point. in places that have long term home owners, this is really true. versus the newer places in settlement terms. i believe inner burbs of northeastern old cities have the highest density of long term ownership in one family. sometimes 2 to 3 generations.
MPO45, thanks.
In the last 16+ years prices rose from 257,400 to 388,728 at a compounding rate of 2.5%/y, plus rent, before expenses.
388,728 : 257,400 = 1.51.
1.025 ^ 17 = 1.51.
Thanks,
The point is, ladies and gentleman, that math– for lack of a better word — is good.
Math is right.
Math works.
Math clarifies, cuts through, and captures the essence of the evolutionary (data) spirit.
Math, in all of its forms — math for life, for money, for love, knowledge — has marked the upward surge of mankind.
And Math — you mark my words — will not only save profits, but that other malfunctioning corporation called the USA.
With regards to Gordon Gecko.
Ooooh!
Maff is hard.
“… The Fed wants inflation at 2 percent but is clueless how to measure it. …”
The Fed’s problem isn’t just how to measure inflation – they fail to understand that counterfeiting trillions of dollars of currency and expansion of credit since 2008 is the root cause of its problem. Unless and until the Fed stops creating currency to solve the perceived problem du jour, inflation will persist, whether it shows up in asset markets, energy prices, etc. The root cause of inflation is currency printing and the attendant credit expansion, and the fact that the dollar and other fiat are tied to, and backed by, nothing other than the empty promises of the US Gubment and Central Banksters.
Conversely, when measured in grams of gold, the price of oil has actually declined since the 1950s, the price of the average vehicle has declined significantly, etc. To quote JP Morgan, “The only real money is gold. Everything else is credit.”
In January of 1980, gold peaked at $830/oz. I took that number and plugged it into the BLS.gov CPI calculator and got a number of $3,261.23 for July 2023 yet gold is at $1920 today. If gold is “real” money, it seems to be losing value in inflation adjusted money.
MPO45, thanks.
In Feb 2001 London fix was $256.
In 2011/2012 gold dealers should have sold 70% of their asset, but they didn’t. They imitated Warren Buffet B&H. They lent gold to mfg for dividends.
When their customers went bk they dragged the dealers to hell.
In 1980 gold traders spent their millions on real estate and whores.
Gold may be under- or over-valued against fiat at any particular point in time but in the long run is irrelevant. What matters is the number of ounces of gold/silver one owns.
A 1913 (the infamous date of the Income Tax and Fed’s creation) $20 Gold Eagle is worth $1900 and change today, but $20 is worth maybe a 20 cents, assuming that the dollar has lost 99% of its value since 1913.
“In January of 1980, gold peaked at $830/oz. I took that number and plugged it into the BLS.gov CPI calculator and got a number of $3,261.23 for July 2023 yet gold is at $1920 today.If gold is “real” money, it seems to be losing value in inflation adjusted money.”
Realist (papascam, mpo, jeffgreen, imgreen)
Cherry pick much?
link to goldprice.org
If instead one had invested that $830 in, say, a boring index fund like VTSAX, and then forgotten about the money for the last 43 years, one would now have somewhere in the ballpark of… wait for it…
$31,000.
People have been predicting a housing crash for the past 5 years – some even longer. I’m pretty sure it’s mostly folks who’ve missed the market and are still renting, so their WISHING for a market crash.
The fed raising rates 500% in 18 months, a war in Ukraine, a worldwide pandemic and out of control inflation haven’t been able to stop home prices from going higher. I believe it’s because people are fearful of the future and their investment in their home is one of the few places that feel safe, is a safe LONG TERM store of value, and a good inflation hedge.
Don’t expect a crash just because prices are high. It will take a major external event and a big recession to do that.
Some people have but not me. I predicted a housing crash, not a price crash and that is what we got. That said, I did not expect this recent rebound.
Mish, most bubbles don’t crash they decay in real and nominal terms.
AD = M*Vt in American Yale Professor Irving Fisher’s truistic “equation of exchange”. The price level is determined by monetary flows, the volume and velocity of money.
Bernanke was solely responsible for the GFC housing crash. Bernanke kept the means-of-payment money stock unchanged for 4 years. Powell has held money constant for 16 months. Powell will have to continue his tight money policy, QT, for a much longer period of time before we have another housing crash.
You’d think that at least one of the FED’s Ph.Ds. was smart. Not so. Milton Friedman’s monetary base is not at all a base for the expansion of money and credit. It contained 3/4 of currency. An increase in the currency component was contractionary, not expansionary. The truistic monetary base was required reserves (which the bankers were trying to get rid of).
Bernanke contracted required reserves, the monetary base, for 29 contiguous months prior to the 4th qtr. of 2008. The GFC was predicted.
C-19’s housing boom is nothing like the GFC’s.
People are flat out stupid. From the standpoint of the system, banks don’t lend deposits. So, all bank-held savings are un-used and un-spent. The cessation in the circuit income and transactions velocity of funds destroys the velocity of circulation reducing AD.
The monetary offset has been an enlargement of the money supply and the artificial suppression of interest rates which stokes asset prices and exacerbates income inequality. To compound the problem there’s been a shortage in the building of single residential housing. The FED’s technical staff is to blame.
spencer,
Since Oct 2008 bank deposits were very useful. Ben raided banks accounts to
save the large banks. Yelen liked it so much she asked for more. Bank deposits
were raided to suppress long duration, to reduce mortgage rates to 2.5%.
In 2020 US gov transferred wealth to poor and middle class people, small businesses… a tsunami. No printing. It was your money for a hollowed IOU, because the money was spent.
The global central banks ==> Delta Force.
Bernanke remunerated IBDDs, which inverted the short-end segment of the retail and wholesale money market funding yield curve. That destroyed the nonbanks, where the nonbanks shrank by $6.2 trillion and the banks remained unaffected, expanding by $3.6 trillion.
This whole mess started in 1965:
link to nationalinterest.org
According to the St. Louis Fed, in Q1 of 2007 the peak median price of a home was $257,400.
link to fred.stlouisfed.org
Using the BLS.gov CPI inflation calculator located at the front page, I plugged 257,400 into for July 2007 and pressed calculate and got a July 2023 number of $388,728.48
I then went back to St Louis Fed and see the median price of a home is now $416,100.
So by basic inflationary math, the median price of a home is in a “bubble” by about 7 percent. If anyone wants to use lower numbers the percent will only go up by a point or two so 9% max.
This doesn’t mean that houses in some areas are 30% over valued or 5% below value in others, it just says the median, based on inflation, is only 7 to 9 percent away from where it should be.
This fat-free, hysterics free, data analysis brought to you by MPO45v2.
Bonus: If inflation remains high then at some point, by sheer nature of currency devaluation, houses will be worth exactly what they should be based on inflation and value of the currency.
If I could give ten thumbs up, I would. Chicken Little gets the eyeballs. A crash is coming! A crash is coming!
Very good analysis. Thanks for posting that.
Now run that same calculation with the 2010 home prices. You cherry picked your data with the peak of the last housing bubble to make the current bubble look smaller.
Why a 2% Inflation target? Seems like Zero would be a better target.
Zero would require abolition of the Fed, therefore such a target will not be considered.
The 2% is the ‘buffer’ for the fed to bounce above and below. You never want negative, so 2% allows them the buffer to bounce within.
The Fed let their eye off the ball, fueled with helicopter 💰 and now they’re doing everything they can to get it under control.
Two facts
1) Mortgage rates 1970 – early 2000s have mainly been in the 6s and 7s, sometimes higher.
2) There is now a large single family rental industry which in essence is a floor bid on housing and also a sanity bid since they are driven by the numbers. INVH, AMH, etc.
Sky is not falling.
Housing is not like the public stock market with short selling and small dollar minority interests trading at marginal prices.
Selling homes under pressure, which would lower prices, is related to increasing cash costs that make paying the mortgage difficult or recession that costs people their jobs or speculators getting caught upside down. However, homeowners are generally locked in for 27 more years of low payments. There will be no rise in carrying cost and rush to sell. Jobs are plentiful. There will be no major loss of income to jeopardize mortgage payments. With a supply shortage, rents are not going to track significantly lower, so speculators can shift to an income strategy if flipping isn’t working out.
The corporate buyers could put inventory on the market to capture peak value, but they are too smart to flood the market and depress their own gains.
The patterns I have seen in the real estate market look like this. Small increases for a long time, then a big pop. Then back to small increase until a recession costs people their income. A 10% drop and then small increase until a large pop.
So how big is the bubble – at most 10% imo.
“However, homeowners are generally locked in for 27 more years of low payments. There will be no rise in carrying cost and rush to sell.”
This may be true of the mortgage. But it’s not true of taxes and insurance both of which are rising by double digits or more in many places. Your carrying costs also aren’t factoring in maintenance and repairs which are also rising (if you had to put in a roof or do some other repairs that required lumber in the last year or so you got quite a shock on costs).
I suspect many people will not be priced out immediately but will be in the next couple of years even if they can afford their 3% mortgage.
Hurricane headed to Florida, good luck with your insurance premiums….
Already locked mine in for next year. Roughly 8% increase over last year plus some minor adjustments in coverage that don’t affect me (no longer insuring bikes over $500 dollars so you need separate rider for those if you buy an expensive bike which I assume given how fat the population is, affects <1% of people).
Franklin not coming to Florida (turning north cause it's still too hot for one to come ashore). Idalia still just a tropical storm with only small chance to be a Cat 1 at the moment where it hopefully remains.
California is witnessing big rises in insurance premiums as well. Especially if you are in rural areas in the foothills and mountains. And the 4 largest insurance companies in the State stopped writing new policies.
Fair enough opinion, but people have to live somewhere. Renting has the same cost drivers and may be more expensive than rushing to sell a house you’ve owned for a while. It would be for me. Variable rate mortgages are the main risk of a price crash imo.
There are 17,000 small towns under the 25,000 population in the US.
Some might be big cities satellites, but most aren’t. C/S top ten is bs.
This comment will not get the attention it deserves.
Those mess reminds of the fact that … eventually one can more defy the economics than the laws of physics. Eventually it all comes home to roost.
Homes are very likely over valued but not 80%. At some point, the price will not go below replacement costs. The labor required to build a home is more expensive and the materials are also more expensive. Commodities may drop but labor costs almost never do. People are not going to decide that the no longer want a home. Everyone isn’t going to live in a tent.
Mish, didn’t you just build a new home? Did you pay 80% too much? I would guess you paid what you thought was a fair price for a place that you like in a location that you wanted. A willing buyer and a willing seller. A fair market price.
Ghost towns of the old west or current China ghost cities prove you wrong that housing cannot fall below replacement costs.
It is also possible that a house is a prosperous area is not maintained and falls below replacement costs.
And what if twice the number of houses are in an area due to over building. For the next few decades the value of the houses will be below replacement value. This happens all the time in areas with declining population.
Mark,
Seeing this now in my area. Nice large homes but many in disrepair. I did the math on one, what it would cost, even doing much of the of the work myself. The price would have to drop drastically, at least 80% IMO for a small profit. Many of these were sold during the height of the pandemic to large companies who absolutely overpaid and now they are stuck with these clunkers. They are dropping the prices but it’s not enough. It looks like they have them set on some price dropping algorithim but the algorithim is wrong and not setup to handle this situation of telling these companies it’s hopeless. Gonna take a big fat loss.
Our population is increasing. Up 4% this year with immigration and projected to continue increasing at 2+%
A 25% reduction would wipe out half of the most recent doubling in home values. 33% would be great which is about 7% more than the Great Recession. But if this happens which I don’t think it will anytime soon, mortgage rates need to stay at or above 5%. The problem is the Fed’s QE suppresses the 10YT. The Fed should be statutorily excluded from doing. They shouldn’t be allowed to manipulate longer dated maturities 10 years or longer. 7 years would be ideal which is about the average age of a home loan before it’s paid off via refi or sale.
Case Shiller is an absolute dollar index, it should be compared to absolute dollar disposable income.
That’s right. He is comparing apples and oranges.
I found inflation adjusted Case Shiller index is 176 (year 2000=100) as of April 2023. That is right inline with the real disposable income of 169.
There you are. Plotting real vs nominal time series is one of the oldest tricks in politics.
Most everyone has to pay taxes, right? This reduces your income. Sellers don’t reduce their home prices from absolute highest value down to something people can afford based on their income. That what we have recessions for. Unfortunately, we’re having to wait way too long for the next recession to arrive. And even then, rent & mortgage relief are going to be trotted out and will keep housing from tanking.
Shh. That doesn’t fit the narrative and hence we can’t whine about it.
Seriously, Mish, you gotta fix this one. Bad form.
What’s the effect of the mortgage market being almost nationalized by Fannie and Freddie? Don’t they hold around 50% of the mortgages, most of which are low-interest rate?
You bring up an interesting point that I thought about as well.
This basically means, they cannot and will not allow the housingmarket to correct.
It ties in with rolling over government debt.
It ties in with car loans based on overvalued and marked up carvalues.
Then there’s issues with studentloans and mortgage-forbearance.
Corporate debt and commercial real estate.
Basically everything is built on a lie, built on debt and artificially low and fraudulent interestrates. I’ve said it for a decade, the price of money CANNOT be zero.
And yet, here we are.
You are correct Harry.
The price of money CANNOT be zero.
However fake “money” CANNOT and does not pay interest.
Shhhhh youre.getting others spooked with the truth.
Let everyone keep drinking the kool.aide and think the government has it all under control.
re: “nationalized by Fannie and Freddie?”
That was predicted in May 1980: “: “One of the principal purposes of the Act was to provide the housing industry with a reliable source of funds. That may be achieved through various governmental and quasi-governmental corporations (according to Henry M. Paulson, eventually ½ of all residential mortgages were owned or guaranteed by the GSEs, FNMA and GNMA, or “a stunning $4.4 trillion worth at the time”). But the role of the S&Ls in housing finance will probably diminish significantly.”
Sources of mortgage funds shifted from the subsidized rates formally provided by the small saver to “bond-backed” sources which reflecting the interest rates prevailing in the longer-dated loan-funds markets.
Another reason home prices are elevated. I think the US is the only country with govt guaranted 30 year fixed rate mortgages.
I’ve said this many times in the last 12 months. The single most important question that will determine long-term housing prices in the next major recession is: Does Congress trot out rent & mortgage relief in the event of a significant recession? COVID-19 changed everything, including solidifying Modern Monetary Theory for managing the economy. If this happens, like I think it will, then prices will not decline like the did, 26%, during the Great Recession. They won’t even come close. A good estimate is 10-15% at most. What’s needed is a 30% downturn to wipe out 60% if the most recent 100% gain. There’s a house close by me that has increased in value from $150K to 600K in 12 years. That’s insane, but JPowell & Congress will do everything they can to keep housing from taking a big hit.
Had you bought it at 180k and rented it for profit over all of these years, would you be whining about equity appreciation now?
Why aren’t we whining about the demise of pensions, insolvency of social security, the loss of ‘manufacturing America’, America the home of service industy jobs, the brick wall of retirement reality that’s going to hit millions of.Americans, or should I say, is hitting?
Instead were over here on this shiny object.
Just a thought….
Just another thought about your 30% needed reduction.
With the drop in property tax receipts how are all of these states going to continue to bankroll their progressive agendas?
The only possible way – Federal loans from the place that “makes” the money.
I think they’re not clueless, Mitch.
They deliberately ‘cook’ the CPI numbers by manipulating the basket and such.
And of course by redefining what a recession is….all signs of dishonest politicians that should NOT be in positions of power.
Over here in Ireland things are beyond imagination. The reality of these current home prices is so absurdly disconnected from the economic reality, it makes you sick with nausea.
The UK, some EU countries, the US, Canada…all experience some kind of declining home prices (depending on the area of course)…but this hasn’t happened yet in Ireland.
Then again, something is deeply wrong with the Irish bankingcartel charging 22% on creditcard, 11% on loans, 5% on mortgages while rewarding savers with 0,01%.
And the politicians are landlords themselves, so don’t expect them to favour working class people that need houses.
This situation is so hopeless and demoralizing, people are just hoping for the whole damn thing to crash and burn. Something needs to break in order to rebuild this broken mess.
Those were thoughtful comments, Sir, From Ireland! I have slowly but surely begun to think that they make a lot of VOCAL noise about what they THINK they can do, but surely they cannot be THAT dense, right.
A personal note: we have Irish friends and Love them deeply and we miss seeing them when we are in Portugal. Most of them own homes in Southern Europe and they have connected with us in Music, song, dance and Food.
Thank you!
The issue with Ireland is the indoctrination of left-wing ideals by the media.
I’m not exaggerating…the sheer levels of propaganda I’ve witnessed here over the last 9 years has left me speechless.
The absolute insanity with the Trump administration, the Brexit-vote, the mindcontrol with the Covid-craze and the reporting on the Russian-Ukrainian war….it can only be described as propaganda.
This has an effect on a population, you have masses of people that are programmed on a daily basis by state-owned radion and television that are not reporting actual facts, but rather a tightly controlled narrative.
And it shows, people are misinformed and act like sheep.
And no, I don’t feel superior and I don’t feel special or enlightened.
Mostly, I feel disconnected, sad and depressed of seeing a society decline of epochal proportions.
* typing so fast, apologies for the typos.
*radion = radio
*society decline = societal decline
Thanks.
It’s not all doom. If one has cash the deals are there. Unfortunately not many are able to buy a house cash so that part is doom and doom for politicians trying to maintain power.
The Fed will try to make it through elections limping by keeping this bubble from popping. How they do that exactly? No idea. Cash buyers are going to sit on their discounted properties and wait the Fed out. Rates will have to come down or another round of stimie checks.
I’m assuming you would feel more comfortable being indoctrinated into Right-wing ideals! Am I right?
How about no indoctrination at all?
You’re already slightly better off since you escaped the slave plantation, and found alternative sources of news. But then, you only found alternative news because you are likely more curious, which in itself is a whip. I don’t torture myself by official media, and despise even watching sports, the new opium for the masses.
Indoctrination?? how and specifically what indoctrination. The left is not banning books and dictating what teachers can or can’t say. The right is accusing the left of what it is doing.
Something I learned about 15 years ago. What better to invest in than real estate?
All of the politicians, all of the wealthy are invested in, and all of the tax policy favors it.
Hence, we’ve been very blessed with our portfolios.of rental properties.
Like they say, “if you can’t beat them, join them”.
Couldn’t have said it better myself. It’s just as bad in California.