Housing Headed For Sharper Correction Than 2008
The U.S. housing market is looking like a one way bet - down.
The unwinding is a simple two stage process.
First sales volume dries up. Then price drops follow.
The sales have already slowed.
CNBC recently warned, “
Home prices cooled in July at the fastest rate in history.”
CNN Business added, “
Sales are slipping, while prices are holding steady.”
Now it’s time for the prices next.
But how bad will it get?
Let’s look at the numbers to see
House Prices Need To Prices Fall 30%
Housing prices are ultimately driven by what buyers can pay.
So housing prices are set by incomes and mortgage payments.
First, we’ll take incomes.
The long time price-to-income ratio of housing in the U.S. is 5-to-1.
So the house price average is usually around five times the national average median income.
Therefore the average house price should be five times the national median income of $41,000, or $205,000.
Today it’s Case-Shiller average housing price today is right around $300,000
That puts the price-to-income ratio above seven, well above the historical average of five.
This has only happened one time before in 2006 when the price-to-income ratio peaked at 6.9-to-1.
We all know what happened after that.
Housing prices would have to drop 30% or more from current levels just to get back to the long-run average.
But that’s just one number.
Another key housing price number shows a correction just as big is needed.
That number is the mortgage payment.
The mortgage payment is everything for housing prices.
Let’s start with the average house price today of $300,00.
The monthly mortgage payment on that average house for a mortgage with the current rate of 6.9% is $2,000.
In 2021 mortgage rates averaged just under 3%.
The monthly mortgage payment on the same $300,000 house would have been $1250.
That means the mortgage payment required to buy a house has risen $750, or about 60%.
Or the inverse, the average house price would have to fall back to $190,000 to get mortgage payments back to that $1250/month level.
Housing Headed For 30% Correction
Regardless of how you look at it, housing prices are completely unsustainable.
House prices have to drop.
They will drop.
And the market is just starting to turn over.
This is a chart of the
CoreLogic Case-Shiller US Average Home Price going back to the 1980s has all the markings of a parabolic bubble top:
The long-term trend is strong, but there were two huge upturns.
The first major spike came during the housing bubble of the mid-2000s.
You know what came after that.
The thing is though, it took five years for prices to bottom out.
And if you bought and held at the top, it would have taken eight years to get back to breakeven.
Although we will be first to point out that this time is never different, there are some other factors.
Inflation will help keep prices up.
As the prices of lumber, copper, labor, and all the value elements of a house rise, so will the value of existing homes.
That means they’re likely to meet in the middle.
It won’t be a 30% drop, but it could easily be 20%.
Either way, it’s going to get ugly.
Avoid all housing stocks for now and maybe short some of them to “lock in” the value of your own house.
