Home Prices: Downhill From Here

As the effects of inflation take a toll in our economy, the housing market is beginning to soften. If the price of housing continues to decline, prepared individuals will have an opportunity to invest in this inflation-adjusting asset. The question is: are you prepared?

Interested in investing in real estate? Learn everything you need to know with our six-part video series, "Investing In Real Estate for Safety & Profit". Watch the first 2-hour episode for free

The Growing Threat To Paper Assets

With negative interest rates metastasizing across the globe and central banks once again speaking in unison about resuming QE (a.k.a., massive money printing), we have a pretty good sense that we're approaching the limits of current monetary policy.

After a decade of injecting tens of $trillions of ‘thin air money’ into the world economy, what do the central planners have to show for it?

Not a return to robust economic growth, which was the outcome sold to us.

Not a “normalization” of these “short term” emergency measures, which was also promised.

Instead, we’ve had rampant inflation in the prices of all the assets that the elites own. For everyone else, the cost of living has exploded. But wages have been stagnant. Savers have been starved of return. Companies have borrowed to reward their executives handsomely while investing in automation eliminating an ever greater percentage of jobs.

We’re left with the widest wealth gap in US history. One that’s worsening every year.

The response from the central banks at this point is clear: to do more of what isn’t working. To intervene more. To double down. And then triple down. (the latest example: Mario Draghi’s swansong stimulus announcement from yesterday)

So, as we look into the future, we see a high risk of the world money supply increasing further. Or put in layman’s terms, your money being devalued by rampant inflation.

Investing In Inflation-Adjusting Assets

Due to this financial trajectory, we've long been advocates of owning inflation-adjusting income streams produced by tangible assets. These include:
  • Productive farmland
  • Profitable businesses
  • Resource mining companies
  • Investment real estate property
These are investments whose innate value can't simply be inflated away. As more money is printed, their product prices will keep pace with inflation. Plus, investors will be building long-term equity along the way.

However, odds are we won’t simply ride up the inflation curve in a straight line from here. Deflationary corrections, perhaps severe ones, will punctuate the process. And when they do, windows of very attractive investment opportunities will open.

Take real estate, which appears to entering the start of a correction now.

Why Housing Is About To Go On Sale

At some point, housing prices become so expensive that no matter how low interest rates go, the average household simply can't afford to buy.

We may very well be at that point now. But even if not yet, it’s clear that the tremendous tailwind driving US housing prices since the Great Financial Crisis is sputtering out.

With this year’s plummet in mortgage rates and the seasonally-strong summer months just ended, one would expect a strong boost to home sales. But instead, Realtor.com just reported a highly unusual price drop from July to August – the largest summer decline seen since the company started compiling this data set.

Suddenly, many of the most incandescent of the red-hot US housing markets are now cooling off fast. This list of the 16 Fastest Shrinking Housing Markets includes San Francisco, San Jose and Boulder, CO

It’s not just prices that are slumping. Home construction is plummeting in hot markets, too. Take San Diego, which just reported that there were 43% fewer homes built in H1 2019 than the year prior. All of SoCal fell 25% for the same period.

What’s behind the sudden softening? We can identify at least three contributing factors:

1. Affordability

While wage growth has been anemic since the Great Recession, US household debt is now higher than it has ever been:

<img class=“aligncenter size-medium” src=“https://peakprosperity.com/wp-content/uploads/2021/09/ny-fed-1.png” alt="“US Household Debt chart” width=“500” height=“354” />

Home prices, meanwhile, are back over their 2007 bubble highs – leading Robert Shiller (famed co-developer of the Case-Shiller Home Price Index charted below) to state last week “I wouldn’t be surprised at all if house prices started falling”:

<img class=“aligncenter wp-image-402415 size-large” src=“https://peakprosperity.com/wp-content/uploads/2021/09/Screen-Shot-2019-09-13-at-1.39.16-PM-1024x759-2.png” alt="“Case-Shiller Home Price Index” width=“1024” height=“759” />

2. Fear

As we've been covering here at PeakProsperity.com, the recent inversion of the yield curve and other too-big-to-ignore recessionary warning signs have (finally) caught the attention of the average Joe. A recent ABC News poll shows that now 60% of Americans believe a recession is ahead. With that concern, folks are becoming less enthused to pay the high prices today's sellers are asking for.

3. Marginal capital flows

We've written in the past about the critical role the marginal buyer plays in real estate. If s/he disappears, how much less is the next marginal buyer able to afford?

Well, we’re now finding out. For the past decade, foreign capital has flooded into US real estate, largely to seek safe haven, though also to chase yield as more and more countries have resorted to negative interest rates.

But that flood of money is beginning to dry up. Fast.

For the period April 2018-March 2019, the value of US homes purchased by foreigners dropped 36%, from $121 billion down to $78 billion.

That’s the result of capital controls, trade war concerns, a slowing global economy, and a host of other factors. The net result is that a lot less money is flowing in to prop up today’s inflated housing prices. And as the data above show, we’re beginning to see the start of a decline.

How far will it go? Are we staring at another vicious bursting like we saw from 2007-2009?

It’s too early to tell at this point. But with interest rates near all-time lows, bubble asset price levels in the financial markets, and a recession looming, the outlook is not positive.

Fortune Favors The Prepared Mind

As we often emphasize: Your prospects tomorrow will be determined by the actions you take today.

If your take on the data is the same as ours, than it behooves you to ask yourself how you want to be positioned should home prices indeed drop substantially over the next several years.

If you own property, perhaps you might want to sell now. Or, if you plan to hold, at least mentally prepare yourself for the emotional stress should market values drop for a prolonged period of time.

If you have tenants, you may want to lock in longer leases to ensure you have the necessary income to ride out the down cycle. Or re-finance or re-capitalize as may make sense.

And if you’re interested in using a market correction as an opportunity to buy property at much better valuations than today, then you should use the time now to become prepared.

Because real estate investing takes serious time and effort. In order to be successful, you’ll need to:

  • understand how real estate as an asset class works and its overall economics
  • determine which type of property and what market you want to invest in
  • get familiar with that niche and start tracking prices and listings to develop an eye for what constitutes good value
  • identify and recruit a good team of expert professionals to help you (e.g., realtor, mortgage lender, accountant, attorney, property manager, syndicator, etc)
  • line up your financing
All the above takes time, measured in months (at a minimum) to do well. So get started now.

Restoring Balance (Another Reason To Invest In Real Estate)

Remember, you won't be the only one aiming to buy when there's "blood on the streets". A lot of others are, too. And many of them have a lot more experience and much deeper pockets than you. So you want to have your plan carefully prepared in advance so you can act with clarity, speed and confidence when the time is ripe.

Which brings up an important point many don’t think of. Many of the investors poised to scoop up large swaths of property upon the next housing correction will be huge asset management firms like Blackrock. Its real estate arm currently holds over $24 billion worth of properties and intends to double that amount over the next five years.

This corporate ownership of America’s housing stock is creating a company store dynamic for our society, something we’ve been loudly warning of. Where does this end? As more and more middle class workers get squeezed and forced to sell their homes, do we end up with Wall Street being the nation’s landlord? Because that’s the trajectory we’re on.

One reason (in addition to those mentioned above) to consider becoming a real estate investor is to restore some balance to the equation. To offer renters a choice other than the company store. Hopefully one with more integrity, fairness and a higher ethical standard.

Heeding The Signal

So, the outlook shows that lower -- perhaps much lower -- real estate prices are ahead. That's your signal to start getting your plan ready if you indeed want to become a future real estate investor.

Put the time to good use.

For those interested, we have compiled and published our excellent 6-part educational video series How To Invest In Real Estate For Safety & Profit into a Vimeo playlist. It’s a hugely helpful resource.

Its first episode (2 hours long), can be watched here for free. If you find value in that, you can purchase the other episodes individually, or purchase the full bundle at a substantial discount.

But the key point is to get started. Your prospects tomorrow will be determined by your actions today. Fortune favors the prepared mind.


This is a companion discussion topic for the original entry at https://peakprosperity.com/home-prices-downhill-from-here/

Hi Adam, just a few points:

  • If a housing downturn is starting, why are house builders not suffering? Their stock prices aren't signalling any problem.
  • I'd like to get more context on the Robert Shiller quote, but can't find the interview online. Would you happen to have a link?
  • Real estate was at the epicentre of the last financial crisis, but is unlikely to be at the centre of the next. Don't you think there's a chance you're 'fighting the last war'? What if real estate prices stay strong and rise alongside gold? (Being a real asset that can produce cashflow). Do you have a plan B for entry or are your plans contingent on a price drop? I have no real estate and have been waiting for a correction to provide some value, but fear it may never come. I'm thinking maybe to invest in something that's cash flow neutral, and hope for capital appreciation. A more risky strategy I know, but at least then the money printers are working in my favour.

do pay members have access to the full series of Real Estate videos? i’m assuming so, but can’t find them anywhere?

This was a very thought-provoking article. Thank you. Thoughts:

  1. I anticipated and prepared for your scenario back in 2007-8 (fully in cash) yet never saw my local housing market twitch. Why? Because the FED & TARP. The government killed a great free-market investing opportunity. So in the end, I just bought stocks in their trough & accepted the government was going to keep the flow of cash going. And politically, I can’t see this changing. Why can’t we keep this money injection going at every downturn? Does anyone think Trump (or whomever replaces him) will be encouraging a recession? No, the FED has no brakes.
  2. I concur with Eannao’s comment asking why won’t real estate just inflate along with gold and oil? Immigration is driving this equation so I can’t see real estate going down unless the FED allows a deflationary event, which they have the full and absolute power to stop since they don’t fear inflation at all. To me, real estate is the best of all worlds in this environs - not a paper asset, but a real-world, limited resource, that generates cash via rent, unlike gold, which costs storage fees.
    I 2X my NW in 2008 when stocks fell but I don’t see much opportunity in this coming downturn. Why? Housing is up, stocks are up, bonds are up. The FED won’t let anything deflate, and they have proven they have the power, political cover, and will to act. And since the economy uses fiat, we are their captive audience.

You write “The FED won’t let anything deflate, and they have proven they have the power, political cover, and will to act.” This assumes the Fed’s policies have more power than natural cycles do. I don’t know if they do or not, but I don’t think the answer is obvious (I’d be interested to hear arguments from both sides). My knee jerk reaction is that the Fed doesn’t have the power to conquer the natural cycle. Over time, more stimulus is needed for markets to rise the same amount. This is problematic. Will there ever be a time when markets do not react to Fed stimulus at all? I’m not sure.
If the Fed does have that perpetual power to keep markets inflated, the sky high asset scenario is correct. If they do not, everything must crash sometime.
Thoughts from the crowd?

MKI said -: real estate is the best of all worlds .... that generates cash via rent
Whenever I've had the same thought the one unanswered question which has popped up in my mind is: if the next recession is as bad as what we're expecting i.e. jobs are shredded and personal asset bases are destroyed, then where's rental income for landlords going to come from? Sure, I can find a tenant, but is this tenant going to have the means to pay rent, and how easy will it be to find a reliable tenant if wide scale unemployment - or low-paying employment prevails? Who's going to guarantee that rent for me? The government? Unlikely. Or maybe they'll subsidise 20%, 30% of it. Maybe. That's if there's money left over after servicing its debt mountain and unfunded liabilities. The scenario above would probably need examination in very localised markets i.e. country A's property market may not suffer to the same extent as country B. However, if property investors get shaken out and we move more toward a higher proportion of owner-occupiers then the dynamics of the real estate market could change substantially. If a critical mass of the tenant population can't afford its rent then holding multiple real estate assets may just become a millstone for landlords.

Maybe that’s a misprint but it is not true.
Here is the March 2019 for total BlackRock assets under management (AUM):
BlackRock AUM march 2019

Sorry, the uploaded figure of BlackRock’s AUM is a bit hard to read. The March 2019 figure is $6.515 trillion so property AUM could not be $24 trillion.

My current job requires a nomadic lifestyle, and I’ve been using the time to develop skills and evaluate the different places I’ve lived as potentially permanent spots to settle down. I read the “Time to relocate” article and comments with great interest in that regard.
For one move, I bought (and subsequently sold) my first home near one of those hot markets. So I have some dry powder invested for when the time is right to purchase my family’s permanent “home base”.
If a drop in home prices does occur, that will ease things significantly. However, do the emerging consequences of other negative trends, as frequently discussed on this site, warrant taking action sooner? Obviously there’s no clear answer, but it’s a good point to discuss, especially for those of us younger folks currently priced out of many markets that are looking for a home as opposed to an investment. Thoughts?

Housing prices seems to be a conundrum for me. I’m very curious to see where prices go from here. I live in an area that is currently booming. Mainly older folks moving here to enjoy a placid lifestyle in their end years. The data shows that roughly 60% of the folks moving to Idaho are from California. Sadly, many have brought their attitudes and their pace of life with them. Young people in my area are effectively blocked from the market as prices have sky rocketed in the last 8 years. The interesting thing about much of the new housing here is that it’s large and on acreage. All these rich boomers are building massive homes with huge shops and barns for all their toys. These are people with likely 25 years or less to live. I’m just wondering who the hell will buy their monstrosities after they pass. Just the upkeep alone on some of the places being built would be oppressive. There are a lot of service jobs here for young people however. I hope we see a dip so I can invest in some rental property. Seeing that even Greenspan was recently saying negative rates are coming to the US, I wonder if lower rates can sustain higher prices? In my mind I feel that could be the case. The only way forward I can see a deep housing dip is for a market crash or financial disaster. How long can central banks hold back the flood waters of debt? That is the ever present question.

MN, I’ve been frustrated with you on real estate demographics for 30 yrs. Thoughts:
1. negative rates…I wonder if lower rates can sustain higher prices?
Why won’t future negative rates drive drive prices up & up? It’s easy loan heaven, exactly what the FED wants. Everyone gets to be their own central bank, free monty! Look, the USA has so many advantages: most food, high oil & NG production, lots of nukes (power or war), the most coal, ability to take on immigration. Where else to buy real estate?
2. Young people in my area are effectively blocked from the market.
Not if they are clever. Take on a property manager job for nncome-gen property on the side. Next, chip away at equity on a low-cost place on loan. Finally, learn to repair/maintain housing. Being young you a huge advantage here; as boomers age out they will need strong backs and reliable youth to keep them afloat and due to the collapse of the family on the boomer watch, quality youth workers that are not imported are now rare.
3. …rich boomers build massive homes for their toys…25 years or less to live…who the hell will buy after they pass…upkeep alone be oppressive.
We think alike. Sadly, I believe rural outdoor places like you are talking about will become like Detroit, price-wise, once the romantic greenie boomer fades to black. Where I live the beautiful rural areas that used to be “plumb assignments” are impossible to fill because only white boomers were outdoor wanting lots of land folk. The new kids and minorities, no-way. They want a city life. I also think real estate in the non-crime cities will be gold as a safe haven for inflation.
4. I hope we see a dip so I can invest in some rental property.
I wouldn’t wait for a dip, just buy in partnership with other young guys and get as much low-interest debt as possible and take my lumps if it falls. Bankruptcy is always an option in a crisis. Why am I so sanguine? The FED is working day and night to inflate prices for me. Real estate may be risky, true, but what isn’t? Even PM face possible confiscation in a crisis (it’s happened before). So I will just keep 10% NW in physical PM, own rent generating real estate & stocks that pay dividends (oil stocks w/dividends are especially conservative baring fusion getting invented…).

I’ve been talking to several contractors for a few years. The total cost they give me for a new house has gone up 50% during that period due to skyrocketing material costs. Will these material costs crash when “it” happens?

By the last war you mean what happened to the bubble that exploded with the GFC in 2007/08/09? You think housing can stay strong and rise in spite of stagnant wages when adjusted for real inflation? I have seen lately that it is nearly all younger people buying into this market and it is panic buying, some housing financing (FHA for example) have gotten permission to abandon the 43% debt to income ratio that has been the federal loan guarantee for q while now. So that these young people can spend more than 43% of their income on house payments. Does that really seem sustainable to you? The old rule of thumb was never spend more than 35% of gross or 30% of net income on monthly house payments, and 25% on rent. But with rents pushing past 50% in many markets what choice do people have other than to wait for their parents to die and leave them a home?

MKI, I saw housing in 2007 as a huge bubble, I was shown a house locally (3 bed, 2.5 bath, 3 story townhouse, new construction with about half the development built) selling for $275,000, several had been sold at that price. I told the agent when they went below $150k call me, and walked away. Well, March of 2008 I was called and they had a unit for $129,900 and in April I jumped on it because it was lower than the actual cost to build, 6.5% interest though, payments just about $968 PITI.
Well, that was the bursting of the bubble, and everyone thought now that prices were down we would get back to NORMAL appreciation rather than reinflation of the bubble, but the curious thing is that is not what happened. By June 2009 they were auctioning off foreclosures where people had just walked away for $60,000. I was already under water on my mortgage, my house was worth less than half what I paid a year earlier.
I also ended up at the end of the year walking away, Chase stole my house.
Why will a bubble in housing not simply rise along with oil, gold, and presumably other assets? First neither oil nor gold are in a bubble such as housing is now. Had they risen at the rate of equities we would have $240+ oil and gold would be at more than $4,000 per ounce. They have room to run, housing does not. Housing in all the markets I have looked at has also risen by well more than 120% since 2012. It is overpriced and the median income cannot sustain the median house price.
Someone asked why home builders are not being hurt on their share prices in spite of lower levels of building. They have been in the game a long time and know when to build and when to cool off. It is when they get building levels wrong that they lose money on virtually every dwelling. Part of the reason they have not lost a tone is they quit building so much lower end housing and concentrated on higher margin luxury homes. They already saw the handwriting on the wall when lumber prices soared to records thanks to Trump’s bashing of Canadian imports, and now tariffs on Chinese goods, by the way do you know how much of our building materials come from China? More than half the cost of supplies to build a house are imported. As the article states a 37% reduction in LA housing starts. They saw this coming and prepared for it.
Also, there really is no doubt in mature minds that we are either already in recession or about to, it is going to get difficult. People do not buy housing when their finances are not secure. I would buy again but damn I just can’t pay what they are asking even though my take home pay is pretty much exactly median income (I am a 100% disabled vet so I also do not pay ~$150 per month mortgage insurance, and in Florida where I am looking I am also exempt from a couple/few thousand per year property taxes) I still can’t afford it. I would pay up to $1,300 per month for the right place, but unless prices drop at least 15-20 percent I will not seriously look. With rents now up over 90% in the last few years where I am I suppose it is either buy or live in my car with the January rent increase. But I cannot pay $1,450 for a rental. That is way over the rule of thumb and what I am willing to shell out.

Pokjbv: First neither oil nor gold are in a bubble such as housing is now. Had they risen at the rate of equities we would have $240+ oil and gold would be at more than $4,000 per ounce. They have room to run, housing does not. Housing in all the markets I have looked at has also risen by well more than 120% since 2012. It is overpriced and the median income cannot sustain the median house price.
Home prices didn't fall much in where I live (resource state) which is the only market I know. Yet profitable-dividend-paying stocks fell 50% making a fairly safe trade without leaving my computer. But I was and am still not skilled enough to cash in on a real estate crash with an activist FED (although obviously people in the right markets killed it in 2007). I made a lot of money around 2000 building housing, but that was just a strong dollar trade. Nothing like this today. But I don't disagree with your analysis from a free-market perspective. Housing is overvalued. Oil & gold have room to run. However, will the FED let them run for political reasons? And will they refuse to let stocks nor housing fall, again for political reasons? They've done both for a decade. Why not another decade? I hope you are right and oil & gold find their rightful place. But I can't get that timing right. But I would work hard to own the home I live in no matter what the financial pain because the FED is capable of anything IMO, & rentable real estate that makes cash, or oil stocks that pay dividends, are about the only physical asset I trust has real value anymore. But oil price has no political winds like housing. And I can own a pretty cheap place and rent a shared room if I miscalculate on housing. But I fear insane rents & I can see the FED setting that up. Think Japan 1990 - housing has a lot of room to run to reach those levels with the FED holding the whip hand.

Over the next 12 years, a conventional 60/30/10 stock/bond/cash portfolio allocation will average just 1% total return annually. So, how should we allocate our portfolios?

Dear Adam and Chris
I’d like to know where you are putting your own assets.
What is the distribution of your current portfolio?
That would be a great example to see. Ideally with historical changes. If you’ve already given us details in the past please send the link…thanks!

Excellent Real Vision episode of housing market dynamics. The defaults and reluctancy of banks to foreclose is outrageous. I should just stop paying the mortgage and live for free for 5, 6, maybe 7 years… there’s a thought.