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What would you think if I told you the price of an existing house and a new house in this country were negatively correlated? (Case/Shiller HPI only measures resale). That sounds impossible and I would argue to my grave that it is certainly impossible over the long term. But…

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What happens when your house appreciates significantly in a short period of time? You feel good about it. There’s pride associated with it. It’s the topic of conversation and bonding at every neighborhood get together. Can you believe how much our homes are worth?

Existing homes are established and perhaps sit in prime locations. New homes may be built where an old house was scraped, but many are developed on cheaper land further and further away from existing infrastructure. I think there are a few dynamics going on to cause this abnormal price divergence. First, can existing owners afford to ditch their current home given the rapid rise in interest rates (do they even want to)? Second, if they do move, they are forced to buy something smaller, cheaper and likely less desirable. So it appears likely that there is some downsizing going on which aligns with the broad affordability constraints on the housing market.

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