Home Prices Start to Decline, How Low and How Fast Will They Fall? – Mish Talk
Case-Shiller home price data via St. Louis Fed, chart by Mish
Home Price Synopsis
Home prices have peaked this cycle but the decline is certainly tiny compared to the run up.
Case-Shiller lags. July is the latest data and that represents sales primarily made in May and June so the declines shown are undoubtedly understated.
CS National ,Top 10 Metro, CPI, OER
Home Price Disconnect Notes
- National is the Case-Shiller national home price index.
- 10-City represents the weighted average of the cities in the first chart.
- CPI is the Consumer Price Index
- OER stands for Owner’s Equivalent Rent. It is the single largest component in the CPI with a current weight of 23.65% of the total CPI.
- Rent of Primary Residence is a CPI component with a weight of 7.25% of the CPI.
OER is the price the Bureau of Labor Statistics (BLS) says one would pay to rent one’s own house from oneself, unfurnished, without utilities.
Price Percent Change Since January 2020
- Case-Shiller National: 44.7 Percent
- Case-Shiller 10-City: 39.8 Percent
- OER: 8.9 Percent
- CPI: 14.8 Percent
The Fed fueled a speculative bubble in housing, purposely, by reckless QE and unreasonably low interest rates.
Slowing Dramatically
By slowing dramatically, I mean housing transactions, not price.
We have not seen downturns like this outside of recessions.
For discussion, please see Existing Home Sales Decline Every Month Since February, Down 0.4 Percent in August
Great Recession Comparison
Unlike the Great Recession, this housing bubble lacks liar loans and the intense speculation of 2005-2008.
Nor will people be waking away from debt because most have positive equity.
On the job front, I expect a minimal rise in unemployment.
Where to From Here?
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Prices will slowly decline but 6 and 7 percent interest rates will kill affordability for years to come. Even 15 or 20 percent declines would be insufficient to stir up the massive surge in demand we saw from 2020 on.
If something goes up by 44 percent it would take a 31 percent decline just to get back to even. But factoring in the rise in interest rates, home prices would have to crash 50 percent or more.
Given the huge differences between now and the Great Recession, prices are far more likely to be sticky.
Many will become locked to their homes, unable or unwilling to move. Who wants to sell their house with a 2.5% mortgage to buy a home with a 7.0% percent mortgage?
Negative price pressure will come from downsizing or dying boomers and those who have no mortgage.
When children inherit a house, they will sell. There will be a big wave of forced selling in the future, but not now.
Expect a Long Period of Weak Growth, Whether or Not It’s Labeled Recession
Housing tends to lead the economy into and out of recessions. This slowdown is taking a toll on the economy now.
But unless the Fed comes to a quick rescue, housing will be in the doldrums for a long time.
Add it all up and you have a long period of slow economic growth that borders in and out of recession for years.
For discussion, please see Expect a Long Period of Weak Growth, Whether or Not It’s Labeled Recession
Cyclical Components of GDP, the Most Important Chart in Macro
If you missed it, please note Cyclical Components of GDP, the Most Important Chart in Macro
My follow-up article was A Big Housing Bust is the Key to Understanding This Recession
Housing leads recessions and recoveries and housing rates to be weak for a long time.
Add it all up and you have the opposite of the Covid-recession, a long period of economic weakness with minimal rise in unemployment.
It does not matter whether you label this a recession or not. Besides, the NBER might not even announce the recession until it’s over. That happened once already.
This post originated at MishTalk.Com
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