Article contributed by Ren & Heinrich. Follow them on Medium here, and on Twitter here.
Photo by Marc Sendra Martorell on Unsplash
Peak Bubble
House price to median household income ratio in the United States has far surpassed the 2006 housing bubble peak. This is one of the prime indicators that prices are too high and a bubble in the US real estate market has formed. However, it must be noted that this mainly affects real estate in urban areas.
House price to median household income ratio in the US, 2004–2022 (Source: https://www.longtermtrends.net/home-price-median-annual-income-ratio/)
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At the same time, mortgage payments for median new home as percentage of median household income has sharply increased over the last few months. This makes it harder to afford a house in the US for the average person. What’s worrying is the steep climb. We haven’t seen something like this before.
Mortgage payment for a median new home as a percentage of median household income in the US. Source: https://politicalcalculations.blogspot.com/
US House Prices Keep Falling
Unsurprisingly, the number of homes sold in the United States is declining. Note how this year’s peak is way below the peaks of previous years. Also, the rapid decline in sales already started in July — normally the best time for the real estate market in the US. Also, so far there are no signs of the trend stopping. The curve continues to go steeply downwards.
Number of homes sold in the US, 2017–2022. Source: redfin.com
As a consequence, home prices, which had been skyrocketing up until then, fall. Note that the decline in median sale prices for US homes is very pronounced.
Median sale price for homes in the US, 2017–2022. Source: redfin.com
What direction have US home prices moved in the last month? July 2021-July 2022. Source: https://www.realestateconsulting.com/
This is supported by the following chart which shows the homes with price drops — a high or growing share of homes with price drops suggests that the market is cooling off. Again, what is also worrying here is the steep climb we are seeing.
Homes with price drops in the US, 2017–2022. Source: redfin.com
I have warned about these developments in a Medium article I wrote several months ago. Back then I wrote: ‘I believe that house prices around the globe will contract a lot within the next 6–18 months. If you plan on buying a house, it would be a good idea to wait on the sidelines.’
All of this is happening while the global economy is in deep decline. Many of the existing problems have not been resolved. It now looks like the system is reaching its limits. That leads me to believe that the crash in the US housing market will pick up speed.
At the same time, I also expect massive slumps in the housing markets in other regions — e.g. Europe, China. Because, as I said, this is a global phenomenon.
Final Thoughts
Now is NOT a good time to buy a house. My expectation is that in a few months the prices will be significantly lower. Rents are expected to increase as the number of people a) cannot afford to buy a house, b) have to sell their house due to financial difficulties, will increase.
Timing is difficult here. However, if the current recession turns into a depression, house prices could remain at a significantly lower level for a longer period of time.
As underlying problems such as energy shortages remain long-term in many places, inflation will also remain high. This will reduce the purchasing power of the population, which will focus on essential things — food, transport, and shelter.
The property price decrease in the EU region will come at a slower pace than in the US because the ECB is more cautious on rate strikes, thus borrowing is still cheap. As a result, there are still some people who are desperately searching for a home to buy regardless of the sky-rocketing inflation. I expect to see the real state market cooling down in the EU region till the end of 2022, and a price decrease in early 2023.
Disclaimer: this article only represents the writer’s personal opinion, and is for informational purposes only. It should not be treated as financial advice.
