Real Estate May Be A Time Bomb

Summary

  • Relative to history, housing remains affordable but consumers remain squeezed and incomes are falling.
  • Housing demand is weak but supply is low causing price to remain remarkably stable for now.
  • Rising interest rates dramatically impact housing affordability; and rates have been rising.
  • I believe the consumer will continue to get weaker as incomes continue to fall causing the housing market to take a down turn over the next year.

Where We Stand

After bottoming in 2009, home prices showed strong growth through 2013, and has since cooled off slightly. Over the last 2 years, home price growth has been remarkably flat due to an interesting tug of war between supply and demand.

Focusing on the growth rate of housing as opposed to the nominal price of housing is important. For example, if home prices are growing at 10% year over year and then falls to 5% growth year over year, home prices are still going up, although at a slower pace. Although prices are still moving upwards. Measuring housing in this fashion often allows you to front run real estate moves because the growth rate has to fall before becoming negative and waiting until the growth rate is negative (or home prices falling in nominal terms) is often to late. Studying the change in growth rate allows you to stay ahead of the curve.

Currently the growth in home prices has been very flat at around ~5% year over year. Since the growth rate is flat, this provides little insight into the direction of the next move in the real estate market. It is now even more important to understand what is causing home price growth to remain so stable.

Supply is very low, putting upward pressure on prices, while demand is weak putting downward pressure on prices; the result being home price growth that has been flat for almost 2 years.