If you are looking to buy your first home and need to finance, good luck. 
Matthew Graham at Mortgage News Daily writes Mortgage Rates Jump up to 23-Year Highs
Coupled with home prices back at record highs, housing affordability hit a new record low.
Case-Shiller Home Price Vs Hourly Earnings, the CPI, and Rent
Chart Notes
- The latest Case-Shiller home price indexes is for June. It represents repeat sales of the same house in roughly a April-May timeframe.
- OER stands for Owners’ Equivalent rent. It’s the price one would pay to rent one’s own home, unfurnished, without utilities.
- CPI is the consumer price index.
- Rent of primary resident is just what it sounds.
- CPI, OER, and Rent as as measured by the Bureau of Labor Statistics (BLS).
Home prices wildly disconnected from the CPI in 2000 and in 2013. The disconnect accelerated in 2020.
After a two-month decline in most markets, prices are again on the rise.
Case-Shiller Home Price 1988=$150,000
The same home that cost $150,000 in 1988, now costs $667,964.
Mortgage Payment and Wage Adjusted Mortgage Payment
The monthly payment on that home has soared to $3,725. But wages have gone up as well. On a wage-adjusted basis, the monthly mortgage payment at 7.47 percent is $1,777.
It’s worse than it looks however because that is just the mortgage payment. It does not include property taxes, insurance, or association dues.
On January of 2021, the wage-adjusted mortgage payment for this house was $904 and now it’s $1,777, nearly double in approximately 2.5 years.
How Much are Homes Overpriced?
For at least 12 years, rent, wages, and home prices all rose in sync (second chart).
If that relationship held, we can compare the index of hourly earnings to the index of home prices.
The Case-Shiller home price index is 308 but should be 211. Thus, home prices are 46 percent higher than if both indexes were 211.
Alternatively, an immediate 31.5 percent decline in home prices would bring houses in line with wages.
I believe this is a better way of looking at things than alleged affordability based on mortgage rates which can fluctuate wildly over time.
Existing-Home Sales Decline 17 of Last 19 Months – Yes, This is a Crash
Yesterday, I commented Existing-Home Sales Decline 17 of Last 19 Months – Yes, This is a Crash
Yes, This is a Crash
- Existing-home sales are down 35.8 percent in 2.5 years.
- Existing home sales are back to a level seen in the mid 1970s.
- If there is a decline next month, and that is highly likely, existing-home sales will drop to a 12-year low.
Real estate tooters keep telling me there is no crash.
What the heck are the above stats? Chopped liver? An egg salad sandwich?
Prices have not crashed but transactions have. Crashes are rare, but we are in one now, from a transaction perspective.
Fed’s Tightrope Dilemma
Please note Fed Rate Interest Rate Hike Expectations Are Still Higher for Even Longer
The dot plot of FOMC participants is for tighter policy through all of next year.
The longer the Fed holds rates high, the longer the housing crash lasts. But cutting rates will further expand the housing bubble, asset bubbles in general. And bubbles are destabilizing.
That is the Fed’s tightrope dilemma, of its own making. If you have any confidence in the Fed you have seriously misplaced confidence. The Fed is a pack of group-think economic illiterate wizards, not the inflation fighters they pretend to be.
Great Post Mish!
Prices on housing will crash indeed. Fundamentals eventually always win out when the free money runs out.
Mish,
What would be your reaction to the complete idiotic crybabies calling for Soft Landing/ZIRP/NIRP/QE?
The WSJ went full r-word about boohoohoo -rates are too high…
People like that make my blood boil, because of these policies, we are where we are.
Interestpayments at a trillion, bubbles in just about everything and inflation still double of what it should be. (well, ideally it would be 0)
They just don’t care about the inequality, the majority of people not able to buy a house or a car for that matter.
No, as long as THEY get their fix, the cheap money, more more more, regardless of the implications for others and future generations.
It makes me sick, angry and quite frankly hostile.
Mish I don’t know if you’ll see this, but what about Fannie and Freddie? Could they get pinched again? They bought billions in low-rate mortgages. I would think the value of those investments is tanking.
Shawn Fain special op, not a war, cont. He struck the distribution centers that
supply spare parts to dealers. UAW one week strike might last months.
Interest rates will remain higher for longer simply because QE ended. QE suppressed interest rates.
“Mortgage Rates Jump to the Highest Level in 23 Years”
I read the other day that the national debt added a trillion in the last 3 months.
1) Prof Bernanke Financial Regulatory Act of 2006 was applied in Oct 2008.
The Fed raided bank deposits to save the primary banks.
2) The Fed became powerful. They legally cont to raid bank deposits to suppress
saving rates, mortgage rates and LT rates.
3) In 2020, when the US econ was comatose, the raids cont in repetition, in a
system control with a positive feedback loop.
4) Deposits leaped from $6,8T in Q2 2008 to $17.3T today. No printing.
Deposits tripled as results of the stealthy raids, not bank loans.
I bet if you took an average mortgage rate for the past 15 years, it would still be scraping the bottom for ever since mortgages were invented.
What is criminal and deliberate is that house price inflation is not included in CPI calculation. If it was our inflation rate would print much higher and interest rates would be much higher. I wonder who benefits from the economic politburo’s false propaganda numbers.? The govt number one by decreasing COLA adjustments to entitlements, decreasing interest on govt debt and of course the crony capitalist bankers lining the pockets of our elite political class. Check out the book Plunder. Outlines the systematic pillaging of our economy by the crony capitalists. Don’t get me wrong I have conservative ideology but our system is currently FUBB. Fourth turning is here.
Under capitalism 80% of the wealth is controlled by 20% of the population, despite promises meritocracy.
Under socialism 80% of the wealth is controlled by 20% of the population, despite promises shared prosperity.
Under communism 80% of the wealth is controlled by 20% of the population, despite promises of equality.
Under monarchy 80% of the wealth is controlled by 20% of the population, despite promises of divinity.
Under feudalism 80% of the wealth is controlled by 20% of the population, it’s designed that way.
I could go on but you will find the answer is always the same.
In the 1980s there was a movie called “War Games” where, at the climax, the AI computer is going to destroy the world thinking its playing a game but the hero, played by Matthew Broderick, asks the AI computer to play the game against itself. Through endless simulations, the computer learns that no matter how many times the game is played and the starting change, the results are always the same.
The AI computer’s final response, “A strange game, the only winning move is not to play. How about a nice game of chess?”
You can throw in political parties, religions, or any other social-economic variables and the result will always be the same: 80% of the wealth will be controlled by 20% of the population.
The only question that needs asking is how do I get to be part of the 20 percent?
Even if the 80/20 figure is accurate, the playing field must be fair. A constitutional republic based on democractic principles is one of the best forms of govt other than a benevolent dictatorship(never has and never will happen), If the laws that govern are optimized to minimize the corruption were currently have, the system could function under ideal conditions with a highly functional and productive economy. Our current system prevents that as its not in our corrupt incompetent political class’ best interest. That is what is needed to stop us from circling the drain.
owners and serfs. the age old truth. your comments regarding 20/80 rule is right. great post mish, keep up the good work. lots of good comments. i’ve been a landlord in 3 big cycles since savings and loan crisis due to 87 tax act change. the trick in r/e is patience. both in bull cycle and bear cycle. sometimes doing nothing for years is best, until the cap rates and prices make sense.
Very true.
And with these depressing demographics, eventually the tide will turn.
Sure, supply and demand matter, but if 75% of buyers currently cannot afford your house at your price and these mortgage-rates AND with the prospect of older generations fading away and passing on properties, the paradigm will shift.
Right now, it’s still insane. Allthough every single realtor I talk to says the number of transactions is down, the volume of calls/emails/viewings is down and overbidding is pretty much over.
Which is a good thing, because properties going up 60 to 100% in 4 years isn’t healthy or sustainable.
Even if you keep bringing up supply and demand….these number simply don’t make sense anymore (if they ever did).
Everyone is focused on one number, the interest rate. Interest rates aren’t even above average in comparison to the last 100 years. No one talks about why it costs so much to even start building a house. No one talks about how zoning keeps housing unaffordable. Can you imagine creating a subdivision of 750 square foot houses like our blue collar grandparents bought and happily raised families in? No even in the realm of possibilities.
It’s all relative to the recent past not the past 100 years. In the 90’s, a 5% fed funds rate was considered cheap considering fed funds exceeded 10% in the 80’s. 5% today is extremely expensive relative to 0% just a few years ago.
“Interest rates aren’t even above average in comparison to the last 100 years.”
True. The first house I bought in 1997 was $125,000 for a three bedroom house on an acre. The interest rate was about 7.5%. But a half-million dollar modern house at 7.5% is a whole different matter.
I lost money on that house when I had to sell in 2001 due to the job going away. The new house (20 years older that the first one) was $130,000 on two acres. The interest rate on that was 6.35%.
Interest rates on houses have merely returned to normal, but people have forgotten what normal is.
Exactly.
I remember my parents being absolutely panicked in the 1980s with mortgagerates at 12-14%. Or even higher!
Compared to that 7,5% seems like a party with balloonanimals and funny hats!
Wait until real estate taxes catch up with valuations, then we can revisit prices. Towns need to raise cash somehow, and without those transaction fees, they will be looking elsewhere.
These interest rates are not a problem if you have one person or two together making decent money. People did it in the past and you can do it now.
I’m a landlord in Sacramento, CA area and houses are still selling especially to those that make decent income. The only problem that I can see is if people start losing jobs and that is not in the equation right now. Everywhere is help wanted.
The biggest enemy is Congress and President that are spending money like drunken sailors on MIC, Ukraine, welfare, illegals, etc. Beware the financial pundit that blames social security and medicare. These people are not to be trusted and blind or purposefully insincere (evil).
So, with jobs plentiful, I don’t see a problem. Work, work, work and survive. Nothing new. Just hope your leaders (ha,ha) get their shit together which is not looking good for America. Got gold?
Those that blame SS and medicare/medicaid alone are hilarious. It’s like they “conveniently” forget the rest of the problem.
I agree that you can definitely afford the mortgage payments if you are making decent money. The biggest hurdle is not the on going payments but the down payment. As Mish pointed out, a $150,000 house in 1998 is now costs $668,000. So 20% down went from $30,000 25 years ago to over $133,000 now.
“Prices have not crashed but transactions have. Crashes are rare, but we are in one now, from a transaction perspective.”
This is an interesting conundrum. For markets (and capitalism) to work, you need to have functioning transactions otherwise there is no way to do price discovery.
How does a home builder know how many and what kind of houses to build if no one knows what people are willing (or able) to pay?
How does a bank lend out money for a mortgage without knowing if a house is a fair value?
How does a home buyer know if they are getting ripped off?
My personal fear is that as soon as the Fed announces a change in policy toward cutting, it will simply re-ignite the housing bubble. Pent up demand will explode and people will just “buy now and refinance later.” If this cycle continues then inflation will roar back up again. Knowing the bubble is back on, I expect rents to go up too.
The home builders have been buying down mortgages to 4.5% which is what’s kept some transactions going but that can only last so long.
Ultimately, if anyone *needs* to buy a house to live for the next 30 years they should just do it if they can afford it because the other risk is inflation keeps going up and interest rates go even higher making 7.5% look great against a 12% mortgage.
How do you ever know if you are getting ripped off? No one ever knows exactly when the top or bottom is in and so there is always a chance you buy at exactly the wrong time.
Transactions may have crashed but they aren’t zero. At the moment buyers and sellers are still matching up (albeit in lower numbers) so prices haven’t dramatically moved downward.
The only way prices are significantly going down is if there is a huge sudden increase in available supply. The most likely event that could spur that is massive job losses. But as we’ve discussed ad infinitum on here, with retirements increasing, there are plenty of jobs available for those wanting and willing to work. So the job loss event is unlikely at this time and so a big change in prices is not happening.
“How do you ever know if you are getting ripped off?”
With math. I said before there are various ways to calculate the value of an asset.
1. Cost to produce asset (plus margin for profit)
2. Cash flows from the asset (i.e. rental income)
3. Inflation – Land that cost 100k 30 years ago should be worth more based on inflation adjustments.
4. Supply/Demand – Price discovery.
I think all but #3 are broken and #3 is out of whack.
#2 is only for rentals, so doesn’t matter for people looking to own their homes.
I’m not even sure how you’d do a meaningful valuation on #1 unless you are talking about brand new homes. Home that are 20 or 30 or 40+ years old were built so long ago it doesn’t matter especially since many could no longer be built today (not up to modern codes).
If you are looking to buy as a landlord, it should be reasonably straightforward to work out the cash flow as you’ve mentioned in plenty of other threads how you do so.
For someone looking to be a homeowner, the answer is quite different especially if they plan to live there a long time.
#2 is only for rentals, so doesn’t matter for people looking to own their homes.
I disagree, you may intend to live in the home for 30 years but if your job moves you to a new city or state then you need to evaluate what the house is worth and possibly rent out. It will certainly factor into any kind of move decisions. Again, best to plan for all scenarios not just the best case.
I’m not even sure how you’d do a meaningful valuation on #1 unless you are talking about brand new homes. Home that are 20 or 30 or 40+ years old were built so long ago it doesn’t matter especially since many could no longer be built today (not up to modern codes).
There are several mechanisms for this – replacement cost, e.g. check your home owners insurance policy – the information is there.
In today’s world, looking at things from a 1960’s linear perspective is a sure fire way to the poor house. Maybe it’s always been that way and the smart people (like good old Elon) see a different path and plan differently that leads to better wealth. Be more like Elon and less like grandpa.
“Home prices wildly disconnected from the CPI in 2000 and in 2013. The disconnect accelerated in 2020.”
The media is always prattling on about the shortage of housing without explaining that the “shortage” was caused by Fed policies that ignited a stampede of investors to rampage through the housing market to outbid first-time homebuyers with cash offers. Maybe buying $30B of MBS per month while housing was skyrocketing in price amidst panicked bidding wars was not the best policy in retrospect.
Perhaps there should be some thought given to looking out for the next generation of homebuyers instead of the endless drive to inflate asset prices as part of the wealth-effects doctrine
I wonder what portion of the 30% cash buyers were private equity versus single home buyers. 30% cash buyers seems a bit hight. Don’t know what the historical percantage is.
%
Let the shjt show begin!
You have to look at what caused the 40-year bull market in bonds. The initial impetus was the bottling up of bank-held savings. Banks don’t lend deposits. This destroyed money velocity.
Then, we got the Romulan cloaking device, the payment of interest on interbank demand deposits. Interest on IBDDs (when it is higher than money market rates which is illegal per the per the FRSSA of 2006), induced nonbank disintermediation, an outflow of funds or negative cash flow. This reduced velocity even further.
QE, or LSAPs on sovereigns, reduced the demand for and increased the supply of loanable funds, aka, Bernanke’s “wealth effect”.
Now, we’ve had a 18% change in the composition of the money stock. This has increased Vt and the level of interest rates. And the Federal deficits matter.
The 40 year bond bull market is part of a larger 60 year cycle. These cycles have been occurring WITH PRECISION since the late 1700’s. Nothing exogenous could prevent these cycles from varying by 2-3% over time. War, technology, and elections had no impact. It’s tough to accept the cause is endogenous investor mood when the physical world we live in is governed by changes in physical forces.
Fundamentals precede the technicals.
Professor emeritus Leland James Pritchard (Ph.D., Chicago Economics 1933, M.S. Statistics, Phi Beta Kappa) never minced his words, and in May 1980 pontificated that:
“The Depository Institutions Monetary Control Act will have a pronounced effect in reducing money velocity”.
Why? In short, because banks don’t loan out deposits. Deposits are the result of lending. All bank-held savings are lost to both consumption and investment, indeed to any type of payment or expenditure.
I think the Fed should use a little more of the Prime Directive and a little less interference.
I once knew a man who used the Prime Directive as his defense in the Court of Law. He would have won on principle but his shirt looked a little too Star Fleet. He should have worn the suit and tie instead. Oh Well, Such is the condition of Jurisprudence in Administrative Law, Nice Try though.
1) New multi families in construction 5+ reached 995K, slightly below 997K in
July. If they stall, or fall, b/c of the higher interest rates, rent might rise. Mortgage
rates might spike > 8%. Mortgage payment > 4,000/ month.
2) There are 4,500 banks in the US. The media claim the regional banks are in
trouble with office building loans, b/c they issued most commercial loans. That’s
true, but the cancer is growing in the major cities, which are JMP, Citi…big bank
assets.
3) There are 6TD until Sept 29. If SPX closes < June 30 high the correction
might have started in July. If above, option #1 : no correction in Q4, or beyond.
Option #2 : Oct correction, suddenly and without warnings.
Yesterday I commented how the interest rate cycles support the Fed’s near term dot-plot. Today Elliott waves of mortgage rates show a similar support for those near=term dot-plots. From the 2020 lows to the 2022 highs, is a clear 5-segment wave. Since then rates have consolidated in what I interpret to be a flat counter trend pattern. Wave A (zigzag) of the flat completed in January 2023. Wave B is nearly complete (a more complex zigzag with an ending diagonal in smaller degree wave c). That leaves Wave C to start a downward move to the 5-6% area. Many will falsely believe the bond bear is over. Now would be a good time to put money into a 1 year CD or US government bond.
“It does not include property taxes, insurance, or association dues.”
OR>>>>>>Maintenance.
DJ,
Most men had sheds with lots of tools back in the day. They did the work themselves after they got off work. Hiring someone was not an option for most tasks.
I still visit the old neighborhood to help my Mom on her maintenance. All my Dad’s tools are still there. Unfortunately I get slowed down by the new younger neighbors, mostly single moms or their kids asking me to fix a tire, put air in a basketball or wanting to know how much I charge to cut their grass or fix a fence…meh. I will help sometimes but they want me to be the surrogate repairman on the block. The old sheds in their backyards are either rotten, gone or empty.
Permitting killed a lot of the do-it-yourself jobs that men used to do.
A lot of places now require licensed work in order to get a permit and if you don’t get a permit then good luck when you go and try to sell the place because it won’t pass inspection (or worse some Karen rats you out and your HOA fines you for unpermitted work).
I live in a heavily governed area and if do work without a permit, you can sell your home. It might be brought up in inspection that something wasn’t done right. And if someone complains during construction, they may make you stop and get permits and inspections before proceeding.
Spot on.
Saw another report the other day about the absolute pressing need for mechanics in automotive, electrics, heavy machinery, technical ‘hands dirty’ jobs.
They simply cannot find people or when they do, they leave within a month or two because they’re being offered higher wages elsewhere.
I guess these are all symptoms of a society that has lost an entire generation to social media, influencer-insanity, the hysterical worship of celebrity.
They believe you make money by buying any kind of crypto, NFT or invest in stonks. Or to become a Youtuber, Onlyfans, Streaming….all overhyped and most definitively in bubbleterritory. What happens if advertisers cut back 50%?
Anyway, at the risk of sounding like an old man, there’s just something deeply worrying about todays society.
I can’t be the only one feeling disconnected, perpetually angry and hopeless about our weak, corrupt and failing leadership. Globally.
A metaphor for US manufacturing and know how.
Now that a high % of mortgages are at or near 3% what impact is all this going to have in terms of the how for decades folks used the house as a piggy bank.
the cash out refi safety net is gone, I know folks that cashed out to get out of debt more than just a couple times. That’s over now, so now what?
The “cash out safety net” is not gone. The amount, as a percentage, may be smaller but that isn’t the same as zero percentage. As Mish said, the number of transactions have “crashed” but the number of homes for sale has also “crashed”. Supply and demand still apply. As a seller, I’m only interested in one transaction: mine.
HELOCs at 9% woohoo!
Still less than the 32% the credit card charges.
Not many buy a house with a credit card!
They refinance to get cash out to pay off credit card debt with high interest rates 20-30%
9% is still cheaper than 20-30% interest rate on credit cards.
What has yet to be explained is the 14 years of zero percent money that was offered to the already-wealthy and their hedge funds and private equity pools that gave hundreds of billions for free to these groups to buy up everything in sight — houses, apartments, businesses, other real estate — so it is no wonder why there are no houses available raising prices, the number of stocks have been cut in half, businesses are buying their competitors (reducing prices and increasing prices for stuff), and how more and more US neighborhoods have empty houses being used as investments. And Congress and the media arent talking about any of it.
They might eventually JUST talk about.
my Wash. Fed branch manager said closer to 8%
and over 10% on construction loans
What needs explaining? They used money and power to help each other and screw over everyone. You want to know what that is? It’s called capitalism.
In no particular order:
The Fed Reserve, PPP loans, PPACA, bank bailouts, cash for clunkers, COVID stimulus, mortgage forbearance, rent payment pause, lockdowns, vast expansions of medicaid/medicare, subsidies for green vehicles, and absurd Congressional spending for the last 23 years would like to have a word with Capitalism.
What you’re describing is crony capitalism….
Do we need to bring back Glass Steagall? Not looking backwards and saying what would or could have been changed but looking forward
No, Glass Steagall would not have prevented our bubbles and crashes as long as the Fed behaved the way it did. Fed authority needs to be curbed.
Using the Fed to rig the market in your favor is NOT capitalism.
No, it is called crony capitalism. In free market capitalism there would not be impediments to the little guy starting small and competing on service, quality, price, honesty etc to build a customer base and grow.
You’re forgetting about the whores in the media spinning, lying and enabling these abhorrent practices.
And, if you take Ireland as an example, if they politicians themselves are landlords with multiple properties, aided and abetted by their buddies in the bankingcartel and their friends in the media.
This is what you get. But the tide is turning and I guarantee you, people are bursting with anger.
Because they know who to blame now.