It's a Bad Time to Buy a Home

Mish

Home are priced for perfection and few can afford them. I expect prices to decline.

The National Association of Realtors will not like this post, but home prices need to come down, and they will. 

Even before the Covid-19 pandemic, home prices were on a trend that was unlikely to continue for long.

Median Home Price vs Median Household Income

Median Home Price vs Median Household Income

Median home price vs median household income is another measure that tells the same story.

Median household income series only dates to 1984 and is on an annual basis. The most recent data is for the end of 2018. 

Both charts show very stretched valuations. 

Home prices have outstripped hourly earnings, household income, and rent.

Massive Drop in Homebuyer Interest

On May 3, I commented Massive Drop in Homebuyer Interest.

That was not unexpected as Over 20 Million Jobs Lost As Unemployment Rises Most In History.

Job Losses Understated

Unfortunately, the unemployment are and job losses are hugely understated. 

For details, please see A 6.4 Million Discrepancy Between Employment and Unemployment

From restaurants to hotels to home buying, Don't Expect a Return to Normal This Year

So, if you are thinking of buying a home, there's no reason to rush. Better prices are around the corner. 

Mish

Comments (57)
No. 1-25
Tengen
Tengen

Completely agree that prices have to fall. I've talked to people about this recently in different parts of the country and the consensus is that while they haven't seen declines in asking prices, sales velocity seems to have slowed to a crawl.

Sellers may be in denial after this 11 year mania, but reality will set in before long. Unemployed people don't buy homes without NINJA loans and frightened people will be reluctant to buy regardless of circumstances, and the ranks of both groups are growing rapidly.

ajc1970
ajc1970

Why isn't your first rectangle on the first chart extended to the left? Seems like any time before 2000 was a great time to buy a home based on your first chart, and based on the 2nd chart, there hasn't been a recent great time to buy a home.

anoop
anoop

Do not fight the fed.

(If you do, the consequence is getting priced out.)

MRUNKNOWN
MRUNKNOWN

sell or hold or buy that prime location in a seasonal resort area now mike?

Tony Bennett
Tony Bennett

Mortgage Credit tightening:

WASHINGTON, D.C. (May 7, 2020) - Mortgage credit availability decreased in April according to the Mortgage Credit Availability Index (MCAI), a report from the Mortgage Bankers Association (MBA) that analyzes data from Ellie Mae's AllRegs® Market Clarity® business information tool.

The MCAI fell by 12.2 percent to 133.5 in April. A decline in the MCAI indicates that lending standards are tightening, while increases in the index are indicative of loosening credit. The index was benchmarked to 100 in March 2012. The Conventional MCAI decreased 15.2 percent, while the Government MCAI decreased by 9.5 percent. Of the component indices of the Conventional MCAI, the Jumbo MCAI decreased by 22.6 percent, and the Conforming MCAI fell by 7.1 percent.

"The abrupt weakening of the economy and job market - and the uncertainty in the outlook - drove credit availability down in April for the second consecutive month," said Joel Kan, MBA's Associate Vice President of Economic and Industry Forecasting. "The overall index fell to its lowest level since December 2014, and the sub-indexes pointed to tightened credit supply for all loan types. The decline was largely driven by lenders dropping many low credit score and high-LTV programs, as well as further reduction in jumbo and non-QM products."

Added Kan, "There was also a large decline in loan offerings pertaining to cash-out refinances, given the GSEs' constraints in purchasing cash-outs that have fallen into forbearance."

Tony Bennett
Tony Bennett

"Home are priced for perfection and few can afford them. I expect prices to decline."

...

Absolutely.

The two markets I follow closely "sticky prices" still rule. The SAME listings sit ... and sit. No price cuts (yet). Slow sales.

The only question will be how far prices drop, not "if".

AbeFroman
AbeFroman

B-b-but what happens to those co-ops and condos in NYC? Taxes will be going up. Maintenance always goes up.

Montana33
Montana33

Agree that prices will drop but sellers are stubborn and won’t sell unless they have to so it may take a while for reality to set in. Unemployed people will have to sell but they will wait until their savings are depleted. If I were someone who thought I might have to sell then I would hop on it now and discount appropriately to avoid what will surely be a bigger decline later. Also the high end will be impacted by the stock market so multi million dollar sales should drop like a rock.

rob_abides
rob_abides

I am a real estate agent and agree. I have been asking my clients to ask themselves the following questions:

  1. Is it reasonable to expect the price of the home to rise 7-10% in the time I expect to hold it? (Or, am I in position to hold on to the home "forever"?)

  2. If not, am I ready to be a landlord?

  3. If I am ready to be a landlord, does the house cash flow?

These are the absolute minimum questions to ask.

CaliforniaStan
CaliforniaStan

People may not wait to buy a cheaper TV, they may not wait to buy 80% of things as Mish says......but they will wait to buy a house if they think the price will be going down. (Which anyone with any sense thinks in most markets) And they will definitely wait if they are unsure about their job. (How many can be completely confident?) The question is not will prices go down, but rather how far. The question is not whether to wait, but rather how long.

SAKMAN
SAKMAN

Nothing is just around the corner, prices havent started dropping yet.

Around the corner means 4-5 years from now. Housing moves slowly. Look at the start of crash to bottom last time.

njbr
njbr

The impact of AirBNB investors in hot markets will be revealed--they will be the first sellers in the decline.

k-rits
k-rits

I'd raise one issue that Mish seems to omit from his posts about house prices. Interest rates. Since most purchases are financed, the interest rate has a huge effect on the price of the house. Lower rates mean higher home price.

So long term house price charts like the ones in this post that do not account for interest rates can miss the full picture. It'd be really interesting to see a line that represents the average mortgage payment over time on the first chart in this article.

I bought my first house for $177k in 2001 and had a payment of $1600/month and a rate of 7.375%. I'm about to buy one for $530k at a rate of 3.25%.

Sure, house prices may drop significantly due to an upcoming foreclosure crisis caused by unemployment......assuming that government funded forebearance on a massive scale does not happen. That's a big assumption.

But housing (in my area), when measured in mortgage payment, is very much in line with income when compared to 20 years ago.

Casual_Observer
Casual_Observer

I think we will see a wave of refinances as people plow back into 30 year loans to make up for income and job losses in hopes of things coming back. It will take awhile for this to play out to see if prices fall significantly. Supply was still short prior to covid19 and this drove prices up in many metro areas. I dont expect to see housing capitulate this time because a lot of purchases especially in high cost areas over the last decade were all cash buyers. That is what they are in my area.

Herkie
Herkie

ALLEGED CPI Mish, LOL. Funny!

tokidoki
tokidoki

Consumers are super bullish on the stock market. They know now where the game's at.

ZNS
ZNS

Isn't it pretty obvious, Mish? I mean housing demand was outstripping supply for a while. Now that there's a demand shortfall, the prices will come down.

davebarnes2
davebarnes2

It is a good time to buy a house. "Suzanne researched this".

shamrock
shamrock

Interest rates are much much lower, you never take that into account. Any analysis that leaves that out you can safely ignore.

zirp
zirp

flippers will be shut out of the market due to more stringent lending standards. thus they have to fall.

Herkie
Herkie

Bad time because inventory is so low bidding wars are breaking out. Here is a story about it at CNBC today:

The point is inventory was already low prior to the CV shutdown and something like 39% of total inventory has been pulled from the market. Even as pent up demand is seen, and in this case it literally was PENT UP for months. People have and are spending months and feeling cooped up, seeing up close the flaws in the present living conditions. If there were no forebearance we would see millions of homes hit the market overnight as people try to sell at any price to avoid foreclosure, but as long as we have forebearance we will not see a huge rush to sell.

I think this is going to lead to a huge spike in prices that people will rationalize as worth it because of low interest rates. But, I also think the actions of the Fed and government are grossly inflationary and in spite of a deflationary impulse in some areas of the economy I think consumer prices are about to go ballistic, to the point where a whole lot of goods and services will meet tremendous price resistance. That will lead to a depression. This will ot be a V shaped recovery.

asteester
asteester

I think places like Phoenix will benefit by the desire to leave cities because of the virus scare. Maricopa county being #1 price increase champ will keep its reign, even if it does dip, will be best in US.

Juvanta
Juvanta

That was great information provided. I think this is something helpful for those who are planning to sell their plot. Here they provided the graph which is data for the information that due to the pandemic the value of the lands and properties have come down and it is not the best time to sell properties more here

QTPie
QTPie

Well, by this same logic, stocks have also gone up a lot in recent years but are only down a measly 10% from their all time highs. If they haven’t crashed (and they tend to move much more quickly than housing) then I am not sure why we should expect housing to.

Anna 7
Anna 7

Mish, i agree. People who lose their jobs won’t be buying and the subset that lives paycheck-to-paycheck will have to sell if they own. Nevertheless, it will be interesting to see what happens in an environment where interest rates are zero or negative. The absence of positive interest rates mean title holders aren’t penalized as much (as in 2008-9) for sitting on vacant property (as I wish they were).

Speaking of which, a nearby retail development owned by a national RE firm has been 50% empty for years because the owner kept jacking up the lease rates. I suspect higher interest rates would motivate them to either sell the property (to avoid paying actual interest on the loan) or put the property to better use (to afford paying actual interest on the loan). As it stands now, maybe a lazy or obstinate corporate lease officer makes less money off the property but doesn’t risk bankrupting the firm. Also, by showing ridiculous lease payments and extrapolating to the entire complex, the firm can perhaps sell the “asset” to the taxpayer at inflated prices. Maybe this combination of factors explains why they let half the development sit empty.


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