Housing prices have far outstripped wage growth and rental prices. Something has to give. So it will.
Every month I am amused by the comments from NAR chief economist Lawrence Yun regarding housing fundamentals, especially job growth.
Forget about strong jobs. Toss Yun's views in the ashcan.
Compared to wage growth, homes are nearly as unaffordable now as they were at the peak of the housing bubble.
That's without factoring in student debt and attitude changes regarding debt, assets, and mobility.
January 1987 to January 2000
In the 13-year period between 1987 and 2000, home prices, rent and wages all rose together. Homes were home, not speculative playthings, not a retirement vehicle.
That changed in 2000.
January 2000 to July 2006
In the 6.5 year period between January 2000 and July 2006, home prices soared 85% vs 22% for both rent and hourly earnings.
People thought homes would never stop rising. Supposedly there was a massive shortage of homes. People line up for block for the right to buy a Florida condo. In a few short weeks, after the pool of greater fools ran out, the housing crash began.
The housing crash lasted longer than the stock market bust and finally ended in late 2011. January 2012 was the last time rent, home prices, and wages were roughly in sync.
January 2012 to April 2019
Home prices are not quite as bad as they were in July of 2006, but pressure on would-be buyers is extreme.
Wages are up 19%, rent is up 23%, and housing prices are up 55%. Those are national averages. Some markets are better and some much worse.
Millennials are under sever pressure because the price of rent has outstripped wage growth. Waiting to buy has generally made matters worse.
Those who could not afford to buy a home in 2013 are much further behind today.
Worst Time to Buy Since 2012
Now is the worst time to buy since 2012. Markets vary of course, and so do strategies. Those who own a house, especially a big one in a hot area have a good chance to downsize.
But the new kid on the wanna-be block would be wise to think twice.
Deflationary Bust Coming
I am convinced another deflationary asset bubble burst is at hand.
The bust could easily last six to eight years this time, not two. Indeed, that is my expectation.
The bubble represents asset inflation. Asset deflation will likely be accompanied with a small amount of price deflation as well.
No Crash?!
Unlike others, I am not calling for a crash. The liquidity conditions are way different. And the primary bubble this time is not housing, but junk bonds and equities coupled with very deflationary demographics.
I expect something more along the lines of -15%, +3%, -10%, +5%, -8%, -8%, +5%, -18%. The result of that is about -46% with nothing worse than -15 to -20% or so.
When I called for a deflationary bust in 2005 I was widely thought of as a fool. I was, for two years.
Maybe I am again, for even longer.
This material is based upon information that Sitka Pacific Capital Management considers reliable and endeavors to keep current, Sitka Pacific Capital Management does not assure that this material is accurate, current or complete, and it should not be relied upon as such.
Recommended Content
Editors’ Picks
EUR/USD drops below 1.0800 after German Retail Sales data
EUR/USD has come under fresh selling pressure and trades below 1.0800 after the data from Germany showed that Retail Sales declined by 1.9% MoM in February. Resurgent US Dollar demand is adding to the downside in the pair. US data are next in focus.
GBP/USD stays weak near 1.2600 amid market caution
GBP/USD remains defensive near 1.2600 in European trading on Thursday. The hawkish tone from Fed Governor Christopher Waller keeps the US Dollar afloat amid a cautious trading environment ahead of key US data releases and the Good Friday trading lull.
Gold price holds strength ahead of US core PCE inflation
Gold price holds onto gains near $2,200 in Thursday’s European session. The precious metal exhibits firm footing ahead of the United States core PCE Price Index data for February, which will be published on Friday.
XRP price falls to $0.60 support as Ripple ruling doesn’t help Coinbase lawsuit against SEC
XRP programmatic sales ruling by Judge Torres was completely rejected by another US Court that ruled in favor of the SEC in a lawsuit against Coinbase.
Portfolio rebalancing and reflation trades emerge into Q2
Yesterday’s price action pointed at a possible end-of-quarter portfolio rebalancing as the session saw the laggards of the quarter like Apple and Tesla gain, and the stars like Microsoft and Nvidia retreat.