If you have read this site much, you will hear me frequently say we are in an everything bubble (many asset classes). Either that or a big inflation, but I tend to think price crash then inflation.
Perhaps the single largest predictor of the last housing bubble was to compare growth in home prices against growth of income, and here we are again, 10 years later, and home prices have risen at twice the rate of wages and inflation (according to S&P CoreLogic Case-Shiller U.S. National Home Prices NSA Index). Some larger cities have grown at 3x.
The question is, where is the baseline? The purple line is the linear trend for the period, but the red line is a possible baseline as well–the main problem is the data does not go back far enough, but one thing seems clear: the highs and lows are far more pronounced, like many asset classes, which is why I refer to the current state of the world as an asset bubble. Perhaps the overvaluation is only 20% at the worst, but there are much bigger currents underneath the relatively small housing market.
Well, to answer my own question, here is Robert Shiller’s 120+ year view of home prices in REAL terms (meaning adjusted for inflation – original chart and data here). He believes that home prices have been relatively constant since the late 1800’s, extracting historical data, made famous in his book Irrational Exuberance.
Notice first that the housing bubble of 2008 is very clear in hindsight, yet few saw it coming–did you? Second, I have added the red line to show where interest rates began to decline. Notice the rise in home prices overall (coincidence I’m sure 😉 ? Third, where are we today?
Here is the govt’s own Shiller index, going back to 1987, for all cities, and although it does not go back nearly as far, it’s more current. Notice the 2020 spike.
Now, here’s my own chart, using the FRED data with REAL home prices (adjusted for inflation). You can see in 2020 the frenzy is entering its last and final phase. True, we will see inflation, but the market also needs to crash at some point (but which first?), bringing down home prices with it (in theory). The other possibility is that Fed’s official inflation data tracking is way off, meaning far too low; a mistake not unique to the USA. But if the Feds keep playing the low interest rate game forever, while the rest of the govt hands out free money, the skyrocketing prices might run for a long time before it topples.
Additionally, most experts would agree that population growth has slowed and incomes have been fairly stagnant since the last recession, so why should home prices rise at all if they are tied to wages?
“Looking across the 20 cities covered here, those that enjoyed the fastest price increases before the 2007 to 2009 financial crisis are again among those cities experiencing the largest gains,” Blitzer said. “San Diego, Los Angeles, Miami, and Las Vegas, price leaders in the boom before the crisis, are again seeing strong price gains.”
Update: Now, I had previously posted a section in here showing a slowdown in 2019, but since that is no longer the case, I simply removed it.
Should You Buy a House Today?
Here’s how you minimize risk in my unprofessional but (historically accurate) opinion*.
- You buy the lowest home you are comfortable living in, which is sound advice regardless of the market. In this way, it will have less of an effect
- You do not plan to move anytime soon, but in the long run, it is still going to cost you by the amount you overpaid.
- Worst case scenario, your job is not recession-proof.
https://www.zillow.com/reno-nv/home-values/
if you move your mouse over different years:
- 2012: $165,000
- 2019: $401,000
Meaning home prices are 2.4x more expensive than in 2012, or $236k more. In other words, these homes get $33k more expensive every year. Add a loan to that and its probably closer to $60k more every year when you count interest! Who can afford that?
True, home prices should rise about the rate of inflation, or 3%-4% per year, but they are rising at twice the rate of income, as I wrote about here, again (like before 2008 housing crash).
I have a rent vs buy calculator on that article, but I would personally wait to buy a home in most cases.
Those zillow charts are real useful for seeing these long term trends, so dont forget to use them.
Plan B: Rent, Until Prices Come Down to Earth
I created a rent or buy calculator that lets you account for where home values probably should be today. I built it for myself, but putting it out there for anyone to use.
Surprisingly, it may still be cheaper to buy instead of renting for 2 to 4 years, depending on rental rates, how much of a deal you get on your house, and future rent rates (unknown).
The calculator takes in account the inflated price of the home, which is what makes it unique.
Rent vs Buy Calculator + Current Housing Inflated Price Considerations
* Last time I bought a house was near the bottom back in 2009, and just sold my house in a high demand area, trading down for a much lower priced home.
Plan C:
Buy and hope inflation kicks in, meaning even though home prices have gone up, eventually wages will skyrocket to match.
Clearly inflation has to come at this point because of govt spending and eventual slowing/decrease in real GDP, etc…
But which comes first: market crash or inflation? or both? Perhaps in that order.
But could both happen? Sure, then we repeat the 1970’s: high unemployment, high inflation. It was called stagflation, and defied traditional beliefs about ecomonics. I mean, how can prices go up where there are fewer jobs to buy stuff? Anyways, its very possible that era repeats.
So if you have a really stable job, plan C might end up being a better option, but in today’s atypical economic world, everything is increasingly a gamble.