In preparation for a consultation on the state of the US economy in general—and housing in particular—I was reviewing various charts. They reinforced my view that people who are considering selling their homes in the near future (particularly in New York, California, and Illinois) should accelerate their plans. In this post I’ll lay out the basic macro facts on US housing.
The Raw Housing Price Index
First, consider the raw Case-Shiller US Home Price Index:
There was a local peak in 2006-07, which then slid into a 20% crash through 2009. But after troughing in early 2012, it began steadily recovering, and then shot up like a rocket following the Covid crisis. It is currently about 80 percent above the earlier peak of the “housing bubble” years.
Adjusting the Nominal Home Price Index for CPI
However, the first chart is arguably misleading, because the Fed pumped in boatloads of money in 2020. So in the second chart (below), we adjust the raw Case-Shiller index by the Consumer Price Index:
This new chart shows that the 2006 peak was sharper, and the subsequent crash harder, once we adjust for the general level of consumer prices.
Yet even so, US housing prices are still (near) inflation-adjusted all-time highs, more than 10 percent above their 2006 peak.
Taking Mortgage Rates Into Account
Finally, we plot the inflation-adjusted Home Price Index against the 30-year mortgage rate:
Analysts might differ on the interpretation, but I would argue that the addition of the 30-year mortgage rate series reinforces the view that US housing is poised for a correction. Specifically, in the prior run-up (during the early and mid-2000s), mortgage rates were in the midst of a decades-long gradual decline. In that context, it made sense that the price of housing would tend to rise, because a given monthly payment could—at a lower mortgage rate—“buy more house.”
However, we currently have mortgage rates roughly equivalent to where they were at the prior housing peak, and yet the level of home prices is higher. In fact, home prices shot up post-2020 while mortgage rates were also being jacked up.
Indeed, I heard anecdotally from several people in real estate that the sudden jump in mortgage rates from 2022 – 2024 paradoxically propped up home prices, because owners were reluctant to sell when they had locked in mortgage rates that were much lower than the prevailing market rate. Consequently, if someone had to relocate (because of a job change, divorce, etc.) he or she might simply rent out their old home, rather than placing it on the market.
Conclusion
Whether these anecdotal reports generalize, that effect would weaken over time. In conjunction with other reports of tight consumer finances and the ongoing turmoil in the Middle East, it reinforces my view that the US housing market is currently overvalued and poised for a correction over the next couple of years.
Dr. Robert P. Murphy is the Chief Economist at infineo, bridging together the dependability of Whole Life insurance policies with the benefits of blockchain-based finance.
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