Housing Bubble Reblown: Last Chance for a Good Price Was 7 Years Ago

-edited

Housing prices have far outstripped wage growth and rental prices. Something has to give. So it will.

Every month I am amused by the comments from NAR chief economist Lawrence Yun regarding housing fundamentals, especially job growth.

Forget about strong jobs. Toss Yun's views in the ashcan.

Compared to wage growth, homes are nearly as unaffordable now as they were at the peak of the housing bubble.

That's without factoring in student debt and attitude changes regarding debt, assets, and mobility.

January 1987 to January 2000

In the 13-year period between 1987 and 2000, home prices, rent and wages all rose together. Homes were home, not speculative playthings, not a retirement vehicle.

That changed in 2000.

January 2000 to July 2006

In the 6.5 year period between January 2000 and July 2006, home prices soared 85% vs 22% for both rent and hourly earnings.

People thought homes would never stop rising. Supposedly there was a massive shortage of homes. People line up for block for the right to buy a Florida condo. In a few short weeks, after the pool of greater fools ran out, the housing crash began.

The housing crash lasted longer than the stock market bust and finally ended in late 2011. January 2012 was the last time rent, home prices, and wages were roughly in sync.

January 2012 to April 2019

Home prices are not quite as bad as they were in July of 2006, but pressure on would-be buyers is extreme.

Wages are up 19%, rent is up 23%, and housing prices are up 55%. Those are national averages. Some markets are better and some much worse.

Millennials are under sever pressure because the price of rent has outstripped wage growth. Waiting to buy has generally made matters worse.

Those who could not afford to buy a home in 2013 are much further behind today.

Worst Time to Buy Since 2012

Now is the worst time to buy since 2012. Markets vary of course, and so do strategies. Those who own a house, especially a big one in a hot area have a good chance to downsize.

But the new kid on the wanna-be block would be wise to think twice.

Deflationary Bust Coming

I am convinced another deflationary asset bubble burst is at hand.

For discussion, please see Deflation Coming: CPI Supposedly Headed Nowhere, But Let's Dive Inside.

The bust could easily last six to eight years this time, not two. Indeed, that is my expectation.

The bubble represents asset inflation. Asset deflation will likely be accompanied with a small amount of price deflation as well.

No Crash?!

Unlike others, I am not calling for a crash. The liquidity conditions are way different. And the primary bubble this time is not housing, but junk bonds and equities coupled with very deflationary demographics.

I expect something more along the lines of -15%, +3%, -10%, +5%, -8%, -8%, +5%, -18%. The result of that is about -46% with nothing worse than -15 to -20% or so.

When I called for a deflationary bust in 2005 I was widely thought of as a fool. I was, for two years.

Maybe I am again, for even longer.

Mike "Mish" Shedlock

Comments (38)
No. 1-15
shamrock
shamrock

You never take into account interest rates when talking about housing affordability. In this recent run up mortgage rates have dropped 25-30%, meaning a house that's 20% higher now has the same monthly payment. That knocks a big chunk out of that 55% price increase.

Jackula
Jackula

I think this time around, because pension funds are levered heavily in their search for yield plus their private sector bond purchases being a huge source for corp stock buybacks, the US government will be forced to tax and monetize like there is no tomorrow. May be a lot longer.

Mish
Mish

Editor

"No it does not. Let's not confuse owning a mortgage with owning a house. Yes the cost of the mortgage went down. The price of the house did not."

Bingo

Realist
Realist

You could be right in your prediction Mish. On the other hand, what happens to house prices in the future if interest rates go negative and banks pay you interest to take out a mortgage? It has already happened in some European countries.

wootendw
wootendw

"Now is the worst time to buy since 2012. Markets vary of course, and so do strategies. Those who own a house, especially a big one in a hot area have a good chance to downsize."

Well, I'd rather not wait any longer. I'm still using the address of my house in the Phoenix area which I gave to my ex-wife (at least my half) two years ago. I had an awful experience living in a (relatively) cheap apt in Mesa, AZ, waiting for the housing bust that still hasn't come.

I'm now sitting in motel in the OKC area. Houses are cheaper here; you can buy a small brick or stone masonry house here for under 100k. I won't get one that cheap because I'm looking in Norman, a college town, where real-estate is a little pricier, but still cheaper than other temperate, suburban places in the country. This town appears to quite liveable. Oklahoma is also a low cost-of-living state in other ways.

I may buy something this weekend. When the bust hits, I shall probably get a double-hit as the student loan bubble bursts with real-state. So be it. All I want is a place to live and surf the net. And a place to park my belongings that are now in storage.

Sechel
Sechel

in ny house prices are up but cost of carry is up even more. maybe not the mortgage rates but real estate taxes, mansion taxes and labor upkeep all cost way more

GirlOnFire
GirlOnFire

Oh man, I'm in Orange County CA and I am flabbergasted at these prices. I can't find even a small townhouse in our price range (500k), and we make well above the median income. And even with the "slowdown" prices aren't dropping even nearly enough for us to buy. Debating between a 1 or 2yr lease renewal and have no clue when to hope for an affordable place.

Mish
Mish

Editor

Property taxes in Illinois are nuts $15K a year on our $400K home

MrDebtFace
MrDebtFace

I'm under contract on an $800k house in a NJ train town that still needs $80k of work. This could be a huge mistake but my wife and I are getting old and it's now or never to start a family.

High skilled immigration plays a role in this too. Since the 80s we've been importing massive amounts of immigrants from India, China, Pakistan etc.. who far outearn the average American. I work in tech and probably more then half the people I work with weren't born here.

Maybe I'm wrong but in places like NY, SF, Seattle it's just supply and demand - so many more people then 20 years ago but the same single family housing stock. Developers have only been building of 1 and 2 bedroom apartments - great when you're living the single lifestyle but it's not going to meet growing demand for family housing

The only way I can see housing in these coastal markets decline is of people leave them for places like Oklahoma City. Maybe that's going to happen and I'll be ruined, but I'm hoping not.

AWC
AWC

Three steps forward, one step back,,,,as always. Massive immigration just amplifies the process, and as long as the corporatocracy needs cheap labor, the status quo will continue. The Fed’s printing may have gotten a bit behind here, but it will catch up and monetize the gap between housing and wages, eventually.

Fiscal spending boondoggles next up. Election year, you know.

Greggg
Greggg

Six000mileyear
Six000mileyear

Prices may look like a bubble, but the volume does not confirm one. In a classic bubble mania BOTH prices and volume increase. The housing market reflects the economic polarization of society. The argument that low housing inventory will inevitably cause price spikes fails to acknowledge ownership rates are STILL hear historic highs (saturated market), that many people do not put their house on the market because they feel they cannot get the price they want, and that there is no longer job security to back 30 years of mortgage payments.

RonJ
RonJ

"In the 13-year period between 1987 and 2000, home prices, rent and wages all rose together. Homes were home, not speculative playthings, not a retirement vehicle."

The Ownership Society scam. Alan Greenspan took lending standards to ZERO. In 2001, 10,000 appraisers petitioned the government over appraisal fraud. Nothing was done about it. In September, 2004, the FBI warned congress of massive mortgage fraud. Nothing was done about it. In 2004, the Big Five investment banks were given leverage waivers by the SEC. They subsequently leveraged up as much as 30 to 1.

Paul Krugman noted that Greenspan needed a housing bubble to grow the economy out of the .com crash. Thus unchecked appraisal fraud, mortgage fraud and leverage waivers for investment banks.

No banker has gone to prison for participating in the scam.

everything
everything

It's the interest rate that is going to give, mortgage rates already fell while the fed rate is still the same, the banks know.

digitalnilesh
digitalnilesh

Why is Canadian bubble is so different, any explanation, thoughts ? being largely dependent on US economy, why it has no impact even in recessions.