What will the US housing market look like over the next several years and into the future? Will house prices ever go down? Is another housing market crash coming? These are the questions that almost every homebuyer, seller, and real estate investor are asking right now.
Taking a look at some market experts, it seems it is mostly a one-way trade … up. Here are a couple of them and their commentary:
- Overall, housing market predictions are optimistic for 2021 when it comes to price appreciation. Zillow reports a 7.9% YoY increase from now through October of next year. The states with the biggest expected increase in house prices YoY are Arizona, Idaho, and Washington – all by 8.2%, according to Zillow predictions. On the other end of the spectrum are Alaska (only 3.9% up), North Dakota (5.5% up), and Hawaii (5.6% up). A housing market crash is not likely to happen. Experts expect just flattening of the growth curve but still expect prices to remain high.
- The housing market in 2021 is continuing to explode like fireworks. Experts see a post-pandemic rebound – we’re talking steady mortgage rates, job recoveries, and the law of supply and demand all working together to make home sales go kaboom! Click here for a more detailed analysis from Ramsey Solutions.
More and more investment management firms are getting into the act. The New York City risk and investment management titan BlackRock is among several high-powered firms pushing working families out of the housing market and into rentals, therefore depriving them of capital and the opportunity to build credit and equity. According to a Wall Street Journal report, BlackRock – led by billionaire Laurence Fink – is purchasing entire neighborhoods and converting single-family homes into rentals; while in cities like Houston, investors like Fink account for one-quarter of the home purchasers.
So is the housing market on a one-way bet up?
Historical house prices:
Historically housing prices have been flat since the 1950s on an inflation-adjusted basis. The historical median price on this basis has been around $175,000 even through and after the 2008 Great Recession in its real estate crash (see the brown line in the below chart).
The median actual house price has only gone up due to currency debasement (see the blue line in the above chart), though if one was leveraged with credit, one could build significant wealth without really doing anything. Today one can clearly see housing prices are out of line (too high) based upon historical averages – similar as they were in 2008.
The other part of understanding house prices is the mortgage rate one can obtain. Higher mortgage rates tend to dampen house prices. Since the 1980s, mortgage rates have been on a steady decline (see chart below).
The Fed has been propping up house prices as well as other assets for some time. To main the current level, the Fed must continue this decline in mortgage rates. But with inflation starting to rear its ugly head, something not really seen for decades – can the Fed allow these mortgage rates to eventually go negative, or will the Fed need to start raising rates significantly to stop inflation – similarly as they did in the 1980s?
Summary: So with historically high inflation-adjusted house prices and expectations of rising mortgage rates due to an inflation-fighting Fed – does this spell trouble for the housing market? Something even worse than we saw in 2008?
The Fed has repeatedly told us that inflation would be transitory. However, the Fed unexpectedly signaled backing for two interest-rate hikes by 2023 amid higher inflation. Not much of an inflation fight – but enough to spook the markets. All of the other Fed policy signals turned more hawkish. The Fed’s quarterly economic projections showed that policymakers, as a group, see inflation pressures as somewhat more persistent. Let’s look at some recent inflation data.
Inflation is accelerating as headline CPI soared 5.0% YoY (hotter than the +4.7% expected) in June 2021.
US Producer Prices (input prices) soared 6.6% YoY in May – the fastest pace on record. This is the 13th straight month of MoM PPI increases.
US import and export prices rose more than expected in May (+1.1% MoM and +2.2% MoM, respectively). This pushed Export prices up by 17.4% YoY – the highest on record (since 1984) and import prices rose 11.3% YoY – the highest since 2011.
Summary: Ouch! These inflation data points are shocking – clearly, the Fed has a problem, and it is no wonder that they had to say something. And yet, for now, it is pure jawboning. But, can the Fed really raise rates considering the amount of debt outstanding? Any significant rate rises will cause the dominoes to fall – both in government and private debt. Remember the dual Fed mandate of full employment and price stability. Currently, the Fed is failing on the latter. The Fed has placed themselves in a box.
Before we move on with this analysis, just how much debt is out there in terms of both government and private debt relative to the ability to pay it back – i.e., debt to GDP ratios? In terms of government, the US has recently spiked up to near 130% of GDP – the highest ever.
Likewise, the private debt is surging to record highs near 240% of GDP.
One other pesky thought we have not even touched that government technocrats may be hiding from us – unfunded liabilities. DoubleLine’s Jeffrey Gundlach pointed out that the surge in debt doesn’t fully capture how much money the federal government owes. There are also unfunded liabilities that, when combined with all local, state, and federal debt, leave US citizens on the hook for $163 trillion. That’s more than 5 times the $28 trillion national debt.
Summary: Though there is some amount of room to increase these debts to GDP ratios, there is not much. Financial trouble often comes into play when these levels reach 300% – sometimes called the Minsky Moment. The Minsky Moment defines the tipping point when speculative activity reaches an extreme that is unsustainable (i.e., inability to service debt loads), leading to rapid price deflation and unpreventable market collapse.
The other key question here is, can GDP growth be obtained to lower these ratios – and hence to enable the economy to service these debt loads. Any potential market collapse will inevitably affect housing prices as an asset class.
Ability to service the debt:
With all the exploding debt and the risk that rate rises are on the horizon, just how capable are governments, corporates, and individuals ready and able to pay it back? For decades now, wage growth has been stagnant – to even falling (see chart below). With inflation screaming, the income individuals have to spend more will be problematic.
For corporates, profit margins are at historical highs – around 9% (see chart below). Do corporates really have pricing power considering their customers are in such bad shape? Margins are more likely to fall back into historical norms of 6% – forcing corporates to absorb much of their input price inflation.
Much of the Fed liquidity being pumped into the markets and a potential margin squeeze – what could this mean for stock prices? Much of the Fed’s low-interest rates have been used in stock buy-backs boosting stock prices in recent years. New investments for more GDP growth do not seem in the cards.
Given that the PE (price-earnings ratios) are near historical sights at near 40 (see below) – to get back to normalcy (i.e., around 20), there would need to be a sudden boost in earnings (which may not be not likely), or stocks could suffer a 50% collapse. This would further crush individuals in their retirement plans (401Ks). This would force more savings to make up the difference, or individuals would need to accept a less optimal retirement than originally believed.
Looking at the ratio of home prices to the median income, we are heading back to historical highs. The norm has been around 4.5 to 5 – we are now around 6.5. The American dream to own a home is increasingly evaporating for many Americans – new housing starts have been disappointing – see here. We are nearing the top of the current housing bubble.
Summary: There is clear evidence that debt and prices being paid for houses may have reached a level where further advances become problematic. Further evidence of this lack of pricing power for consumers is in the latest retails sales. With a lack of new stimulus from the government to keep the spending dream alive, analysts expected a 0.8% MoM plunge in retail sales, but the data was even worse, tumbling 1.3% MoM for May – see here.
Perhaps the Fed is partially correct, that inflation is somewhat transitory – read here a case for deflation. So how can the Fed and government fiscal policy transmit its stimulus policy to the economy without merely bloating asset prices?
Fed transmission tools:
Historically the Fed would lower interest rates in the hope that corporates would borrow to then make investments to add to the economic GDP growth and, by consequence, individuals. This transmission policy recently has not been working well.
For example, the US 10yr treasury yield is now a whopping -3.5% when accounting for inflation – the lowest since 1980 (see below). With all the government stimulus and low-interest rates, the economy should be screaming – it is not.
Summary: Some government think tanks have already recognized this poor stimulus transmission issue. This is why we have repeatedly been getting stimulus checks to get the economy going – using Covid as their reasoning. But will it stop there?
EBT cards, Fedcoins, or other mechanisms are being devised as stimulus transmission mechanisms to stimulate the economy since the traditional mechanisms are problematic. Can you say UBI (Universal Basic Income)? And it won’t be for just the poor. One can see it now, similar to the Covid stimulus payments, anyone making less than $75,000 will receive their government monthly stimulus on their EBT cards. Welcome to socialist America. But would Americans accept this paradigm so easily – certainly the poor would. One would need a catalyst to get Americans to accept this.
Yes, this is a lot of charts and data to absorb. Let’s recap the main takeaways:
- Housing prices, being flat (inflation-adjusted) over the decades, are at historical highs on an inflation-adjusted basis and maybe reaching this cycle’s top.
- Inflation is screaming, though some of the inflation may be transitory because individuals being tapped out, and corporates have little pricing power.
- Mortgage rates may be bottoming if the Fed has no choice but to raise rates to fight inflation. This makes further house price increases problematic.
- Debt loads are record levels, and further debt may become problematic in terms of the ability to service it.
- Stock prices at all-time highs may also be in a bubble and could wreak havoc on people’s retirement savings. This would dampen future potential growth in the economy – including house prices.
- The Fed and governments have few ways to stimulate the economy other than UBI-like tools. This would maintain house prices, though it would make the citizenry dependent on the government. However, it would take a catalyst event to implement.
With all these data points in mind, what could be the possible outcome for housing prices over the next 10 years? Refer to the inset chart to give an idea of the role coaster ride house prices may take. The following are the steps these prices may take.
1) Bubble top – current price rises are being driven by pent-up post-Covid demand and the belief that inflation is not transitory. In addition, some house moves are being driven by cultural events – such as downsizing from expensive areas and a flight from draconian Covid regulated areas as well as crime-ridden areas.
Some of the inflation we see today is transitory. However, look for the housing market to remain tight with prices that continue to rise throughout 2021, though most of the price rises have already been built-in. Toward the end of 2021, buyers will begin to dissipate as the mortgage rates moderately climb.
2) Collapse – real estate prices have historically gone through boom and bust cycles. The straw that breaks the camel’s back is often unrelated to all the previous straws that burdened the camel. Perhaps a triggering event, such as Covid 2.0, a geopolitical event, financial stress, or some other, may pop the bubble and spark a sudden collapse in all asset prices.
Coupled with a triggering event, the government may further exacerbate a collapse with new taxes, regulations, and other cultural events that may cause further house movement in the populations. It should also be noted that Boomer demographics may be at play. Many Boomers will be further moving to lower-cost retirement areas as well as simply dying off, adding to supply. Immigration may not pick up this slack as they may not qualify at current prices to become new buyers.
Housing prices could fall back to historical norms (with some overshoot) in terms of inflation-adjusted median house prices and the inflation-adjusted median vs. median income ratio. This could mean a 20 to 30% decline in house prices. Stocks may fall as well from 30 to 50%, bringing PE ratios back in line with historical averages. This dip in prices may take 6 to 18 months to occur. These declines in prices may be attenuated by the rate of any currency debasement that may occur at the same time.
3) Recovery – like in many crises, the government will come to our rescue. Whether this is a good thing is another matter. The recovery will largely depend on the government’s response. Like in 2008, will the government support the free market and allow the too-big-to-fail, or will they support the markets with all kinds of financial support? Judging from recent history, the latter is more likely.
Most likely at the bottom of this cycle’s crisis, the government will support the too-big-to-fail corporates and individuals with UBI to make debt payments and pay their rent. This stimulus is all about further currency debasement and could put the US economy into uncharted waters – inflation, job losses, and a new normal of lower standards of living for the American people.
On a more nefarious note – in the 2008 crisis, market players targeted losers that were the lower to middle classes – many in this class have never recovered to this day. Moving up the food chain, this time around, the target will be the middle to moderately upper classes – i.e., those who have between $100K to $2M in assets. Much of these assets will be seized via market failures and government taxes (inheritance, capital gains, and other taxes). This will further exacerbate the wealth inequality, which could drive people to adopt even further social policies accompanied by social conflict. These social policies may detract from any quick recovery.
In the end, via currency debasement, asset prices will eventually recover and go even higher – if you have the time and money to wait it out – it may take a 5 to a 15 year recovery time. However, for some classes maybe never – achieving a “Great Reset” of social equity. Something that many social engineers have dreamed of.
Like many traders in the markets know, larger players tend to force out the weaker players by forcing prices in one direction only to go in the other. This will allow these larger players to buy up assets on the cheap. The losers pay the winners, and a large number of Americans may find themselves falling off the bottom rung of the economic ladder and prevent them from achieving the American dream.
No, the housing market is never a one-way bet, though, over the long run, with currency debasement by governments, it can be. Of course, real estate is all about location, location, location – so any house price movements will be quite regional in nature. Keep your hands inside the car at all times, as the real estate roller coaster ride could make your head spin.