EC The Distorted Reality Of The Housing Market

It’s very easy to get caught up in the housing bubble talk because many indicators in November and December showed weakness and the last cycle ended with a housing bubble burst. Plus, when you add in the fact that the housing market leads the economy, housing has become unaffordable, and 8 out of the past 10 recessions have been catalyzed by weakness in residential investment, now seems like the perfect time to be negative.

When you only list the negatives, the situation looks dire, but we don’t do that because that’s not the full story. We believe in garnering long term readers versus short term click bait (even if that means less readers). Consistently perma bullish or bearish commentary leads to readers paying the ultimate price, wasting their time.

The positives aspects of the housing market are that interest rates have fallen, the consumer has deleveraged this cycle, especially in terms of housing debt, private lending standards are much higher than the previous cycle in terms of credit scores and due diligence (zero doc loans are illegal), housing wasn’t built up as much as last cycle, and prices haven’t soared as high in real terms.

When stats are in nominal terms they are deceiving. For instance, housing debt peaked at $9.99 trillion in Q3 2008. If you just wait until that level is reached again to claim there’s a bubble, you will be grasping at straws because every year there is inflation and population growth. The current $9.54 trillion in housing debt is much more sustainable. Even in a recession, delinquencies won’t get as high as they did during the last recession. The chart below proves housing debt isn’t a problem because it shows mortgage debt as a percentage of personal disposable income is the lowest since at least 1980.

Source: FRED

Another example is looking at nominal home prices. It would be ridiculous to assume house prices would never get back to their 2006 peak because house prices have historically risen. Nominal wages have risen since 2006, so housing prices can rise above that level and still be affordable. Housing is currently unaffordable in some areas; the point here is prices rising above the 2006 level doesn’t equal a bubble. While the national, 10 city composite and 20- city composite house price indexes are at a record in nominal terms, the chart below shows real prices are below their record high. If homes aren’t affordable, lower price growth will ensue, but there won’t be a bubble burst like 2008.

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