The US Housing Market's Darkening Data

When looking at residential real estate, we often tend to focus almost solely on recent price movements in assessing the health of the housing market at any point in time. But as both homeowners and income-earners in the larger economy, of which the housing market is an important component, to really understand what's going on, we need clarity into the larger cycle driving those price movements.

The more we look at today's data, the more it looks like that we are in a new type of pricing cycle -- one that homeowners and housing investors have no prior experience with.

And the more we learn about the fundamentals underlying the current cycle, the harder it becomes to justify today's home prices on any sustained level. Meaning a downward reversion in home values is very probable in the coming years.

Housing & The Economy

Housing construction has been meaningfully additive to overall US GDP in virtually every economic expansion cycle on record. Moreover, sales of home furnishings, appliances, landscaping and gardening equipment, etc. have contributed to expansion in consumer spending, the largest singular component of US GDP. And maybe most importantly, residential real estate investment has been a key wealth-generation asset for the middle and lower classes for decades.

Residential housing has typically been purchased with leverage that has been paid down over time accompanied by a commensurate increase in household equity as homeowner’s age and mortgages are paid off.  Particularly for the middle and lower classes, residential real estate investment has been the single largest contributor to net worth expansion of any household investment asset class.      

With the clarity of hindsight, we know that the prior 2006-2009 period witnessed the most serious downturn in residential real estate prices in a generation. Few saw it coming as it was an event never experienced in their lifetimes. One would have to travel back to the 1930’s Depression period to find a similar occurrence. There is an old saying in the markets -- People don't repeat the mistakes of their parents, they repeat the mistakes of their grandparents --  and this was certainly true in residential real estate markets in the middle of the prior decade, as the buildup of excess and often reckless leverage was ultimately the key provocateur leading to price declines, as was the case in the 1930’s.

Recovery At Last (?)

Accompanying the current economic expansion that began in June of 2009, residential real estate prices have recovered. In fact, in high-ticket geographic areas such as many parts of the San Francisco Bay Area, New York, etc, current prices have well exceeded the prior cycle peaks of 2006.

Indeed, the following chart (using data from the US Census Bureau) shows us that the median price of a single family home in the US has now recovered to a level just above the prior cycle peak:

Remember, this incorporates meaningful and often anomalistic sales activity in very high priced areas such as New York and San Francisco, clearly skewing the median numbers higher.

In one sense, the recovery in price is at least graphically pleasing and simplistically suggests a return to longer term normalcy, or trend, in the overall residential real estate market. But as we look a bit deeper beyond just price into the important components of housing activity as they relate to the real economy (GDP) and household balance sheets, we see something very different: as the prior cycle downturn was a once-in-a-generation event, so, too, is the character of the current housing recovery. The anomaly of the current recovery has implications for both the real economy and investment activity ahead. 

In headline fashion, the contribution of housing to US economic growth is found in new home sales and housing starts.  Demand for new homes drives demand for building materials and construction work, both important in prior cycles in driving job growth, the bedrock foundation for consumer spending. Again, if one only looked at residential real estate price trends, one would assume a very normal recovery.

The Data Tell A Much Darker Story

But the data below show us that actual new home sales and housing starts currently rest very near half-century lows.  How can this be?  What we see at present with new home sales and construction starts is what we saw at the depths of every US recession of the last 50 years. These data points suggest that the current is anything but a normal housing recovery. 

Here are the numbers are current through April of this year:

(Source: US Census Bureau)

Accompanying the dearth of new home sales and starts is the fact that the number of new mortgage purchase applications currently rests near the lows seen since 2009.  Just how can prices be ascending so spectacularly when new home sales are in prior recession territory, new housing starts have not recovered, and the number of new mortgage purchase applications has not climbed from the depths seen in 2009-2010? 

Accompanying these trends is the fact that the US homeownership rate post the peak seen in 2004 has fallen to a near 19-year low. The message is that although total household formation has marched forward, households are increasingly choosing to rent their primary residence as opposed to own residential real estate.  Of course, this is the reason that median rents in the US, seen in the bottom clip of the next chart, have incrementally marched to new all-time highs: 

(Source: US Census Bureau)

How Will This Contradiction Resolve?

The key macro conclusion of the current cycle is that we are not witnessing a “normal” residential real estate recovery at all, but rather an investment cycle driven by actions of central bankers (think the Fed), global flows of capital, and a new entrant to the residential real estate market from the institutional investor side.

In Part 2: Get Ready For Falling Home Prices we identify the new primary drivers of home values in this unfamiliar pricing cycle and examine their implications for the broader economy, and household consumers specifically, as we look ahead.

Long story short: price reversion is coming. If you own housing as either a residence or an investment, don't let yourself be caught as vulnerable as you were in 2008.

Click here to access Part 2 of this report (free executive summary, enrollment required for full access)


This is a companion discussion topic for the original entry at

"very high priced areas such as New York and San Francisco, clearly skewing the median numbers higher" would have been awarded zero marks by me when I was a Maths teacher.  Extreme values do not skew the Median average by a significant amount. In fact this is the main reason why we use the Median average instead of the Mean average.

We are witnessing a transfer of wealth from capital poor people without access to cheep credit to capital rich people with access to cheep credit.  The rich are robbing the poor, buying the homes they can't afford. I write from experience of being in former class. Currently I lead a comfortable life while my tenants work hard to pay me rent.  How fair is that?  That's capitalism for you. Low interest rates suites me fine. By the time the wheels come off, I will have paid off all my mortgages.  I say "I" but it's my tenants who are paying this back.

The data presented is of prices of newly sold homes.  If most of those homes sold are in elite metro areas, then the median can be drawn high by elite sales in those areas since the sticks are not selling much and mostly renting out home.

All my life, UK government (unofficial) policy has been to limit the number of homes being built, increase its population and limit public provision of social housing so as to drive up house prices.  Remember it is through credit(debt) expansion that money supply can expand, which in turn gets spent into the economy. This has been and still is the government's method of choice for promoting growth. 

Mathematically I am correct and you are wrong.

[quote=climber99]Mathematically I am correct and you are wrong.
Maybe you are right…
But if the data is normally distributed there will be very little difference between the median and the mean, and you can use either to measure your central tendency.  With normally distributed data as the sales mix moves towards higher priced units both the median and the mean will move upwards together.
On the other hand if the data is heavily skewed, the median will be far less sensitive to outliers and is your better measure.
Without knowing how the housing data is distributed, I cannot assess whether you are right or wrong.
/Took a lot of statistics in grad school.

As a broker. I see inventory increasing, prices going sideways and starting to ebb downwards slightly. This is the busiest time of year so its ok right now. We will see what the 4th quarter will bring which is traditionally the slowest. I expect it to dip a bit, but not to crash like previously. There are a number of reasons the market is what it is. The younger college graduate entry level buyer is saddled with much higher amounts of debt making it more difficult for them to buy. Their debt to equity ratios are considerably worse than a decade ago. Student loans are an anchor around the neck of the younger professional and it DOES impact what they can buy. The wealth that home building spurs throughout the economy has been consumed by higher (and of questionable value) educational institutions. Good for them, but not for the economy. 
Another thing we are seeing locally is a large percentage of move up buyers disappearing as they either did a strategic default in 2008-2010 (Arizona is a deed of trust non recourse state), or they did a foreclosure/short sale. They for the most part can't qualify or if they can its for an entry level home as their FHA mortgage will only go up to just over $300,000 locally. This has created a larger renter pool. It will take another few years so the people who were foreclosed upon or whom did short sales can go back to a conventional mortgage or a jumbo loan (which is only $417,000+ locally). 7 years…so I would expect in 2015 and 2016 we start to see much more activity with buyers borrowing because they can again. 

What I'd like to know is: when might Canadian house prices drop? They are in crazy territory, esp in Vancouver and Toronto. See for a chart comparing the US and Canadian housing markets.

Having worked in real estate for the past thirty years my own anecdotal experience parallels that of the author and that of Scottsdale. 
Presently there is a high end market which is doing very well as the upper middle and well to do classes are not only experiencing recovery, but seem to have surpassed the incomes they enjoyed pre 2008. 

There is an investors’ market of hard money.  These are cash transactions which occur rapidly but usually at a steep discount from what a normal home purchaser would pay. These make up a far larger share of the market than pre- 2008. I often work with decedents’ estates and with parties who, due to illness or old age, need to sell long held properties.  These situations are favorite targets of the investors (as still are foreclosures) and I have worked with a number of situations where sale prices are discounted twenty to thirty per cent below “market prices” for a quick sale.

There is the “normal” residential market of people who need to move due to job change, or have just married, had another child, or are looking to upgrade or downscale.  This market is better than it has been for the past five years but is nowhere near the former volume of sales or the former highest prices.  This market also appears to set what the real estate agents are treating as “market prices”.  How the appraisals work out for these is a question that I cannot answer.  One would think the bottom fishing of the investors would skewer the general market lower but this does not seem to happen. It the prior pre-2008 reality, appraisers could ignore sales from estates, bankruptcy or other “distressed “ situations as not representing true market conditions.  After 2009, for a time, the regulatory agencies seemed to require that distressed sales be calculated into the market value.  This no longer appears to be the case. 

The most worrisome trend of the past few years is the disappearance of first time home buyers in their twenties. This demographic seems to be gone in our area. Part of this is due to student loan debt, as discussed by Scottsdale.  Part of it is inability to qualify for a loan due to poor job history during the recession.  More indicative of the future, is an attitude which sees home ownership as a burden not as something desirable.  Having watched parents, family and friends loose homes to foreclosure or be tied to one place by an upside down property, many twenty somethings I speak with do not want the obligations of home ownership.

The market where I do most of my work is still depressed economically.  Unemployment is still high and income/wages for most people have been stagnant for years.  Just thirty miles up the road, in Boston, times never got as bad as in most other parts of the country.  The city, like New York and San Francisco, appears to be booming.

From Mauldin's Strategic Investment Conference:
Jeffrey Gundlach was quite negative on US housing but positive on multifamily rental real estate, because rentals increase as home ownership drops. Home ownership has dropped from 69% of households to 65%. One well-known US investor, Sam Zell, expects it to drop to 55%. A 1% drop means 1.2 million additional households are looking for rental accommodations. Another speaker had mentioned that over 1 million millennials are living with their parents, which is a major factor in the reduction of household formation. He expects the US to see deflation before inflation makes a comeback.

[quote=climber99]Mathematically I am correct and you are wrong.
An example of Median skewed higher than average.  Please argue with examples not ad hominem statements.

I'm siding with Climber99 on this one. Both Chris and Krugs make correct and valid statements, but they do not directly address Climer's original points. Climber made the following points:
"'very high priced areas such as New York and San Francisco, clearly skewing the median numbers higher' would have been awarded zero marks by me when I was a Maths teacher."
True. Good math teachers should award zero points since our discussions on this point have demonstrated that it is not clear at all. The use of the word "clearly" is the prime culprit here.
"Extreme values do not skew the Median average by a significant amount. In fact this is the main reason why we use the Median average instead of the Mean average."
True. If there are sufficient "extreme" values to skew the median higher than the mean (see Climber's examples), then the values are not objectively "extreme" in the context of the overall population distribution. In this case, the "extreme" moniker should be suspiciously viewed as a bias of the analyst.
I would suggest the original author could rephrase as follows:
"overrepresentation of very high priced areas (such as New York and San Francisco) in the sample set  could cause difficulty interpreting the data since these areas could skew the median numbers higher"
Overall, the article is a good one. These discussions are simply math folks quibbling for the sake of quibbling.

Well, in my example the Median went from 3 to 100.  I would say that is an extreme change on a percent basis.

I've heard it repeated almost endlessly as a goldbug article of faith that "the US Dollar is a completely unbacked currency."
And yet, all those Chinese zillionaires with their zillions skimmed who knows how from the Chinese economy can come to the US and buy bits and pieces of our country using all those unbacked dollars.  Turns out, these dollars are worth something after all.

People used to imagine that dollars had to be backed by gold to retain value.  Turns out, fiat money of all types is backed by what you can buy with it.  In a very real sense, US Dollars are backed by all the "stuff" within the boundaries of the 50 states in North America.  And likely other places too.  That's because people here in the US are willing to trade their stuff for dollars, simply because they are loaded down with debt that requires dollars to discharge said debt.

Put a different way, all those debt slaves on the debt plantation require all those unbacked fiat dollars in order to keep title to what they've bought using borrowed money.  So the USD is backed by something - debt slaves, willing to trade stuff for the ability to keep feeding their personal debt beasts.

[OPM - or debt - is super useful during a time of steady inflation.  Its deadly during deflation, however.  Guess how we've been conditioned to behave over the past 50 years?]

Just some thoughts about fiat money, property, and debt.

I agree with you davefairtex.  In an expanding world it has been profitable to take on debt. Debt amplifies your gains which is why it is called 'leverage'.  However if (and it's a big if) the world is rolling over and about to go into contraction this is no longer a winning strategy.  If you are fortunate to have accumulated a lot of capital then now would be a good time reduce your debts I would suggest.  Debt can be viewed as a ponzi scheme and you need bank your profits before it collapses.  The ponzi scheme could continue for a bit longer if we can force the new generation to get heavily indebted. i.e. to form a new base to the pyramid.  Could work as there is no evidence that this new generation are aware that they are getting screwed and even if they are, they are powerless to do anything about it because they need  education and shelter.

You guys are beating the deflation drum.  Where is it?

The Wall Street Journal reported yesterday that home-equity lines of credit (Helocs) had increased at a 8% rate year-over-year in 1Q14. Some banks are more aggressive than others, and perhaps we shouldn’t be surprised to see TBTF government welfare baby Bank of America leading the charge, with $1.98 billion in Helocs in the first quarter, up 77% versus 1Q13.

Between our Gov't borrowing, and the continuation of the current margin, college loan, car loan, and now HELOC loan expansions... I am not seeing this deflation you guys speak of?   

Good question. That's the battle going on at the moment. The governments round the world are throwing the kitchen sink to combat deflation.  The equity markets are indicating that they think the governments will win in the end but the bond markets are indicating that they might not.  My view is that the world faces insurmountable problems in the near future which are ultimately deflationary so I'm with the bond market in this.  Definitely deleveraging at the moment and not loading up on more debt.

it. The issue of title regarding bought goods actually belongs to the feds, through our use of their legal title, or in other words, the NAME on our berth certificates. We actually only retain equitable title, or what the item is tradable for in fiat. We exist in their system only through the use of their legal title which owns everything that we obtain with it using legal tender.

The BACKING point regards the government's ability to print currency on-demand.    Nothing in human life is perfect, but gold (a ratio peg which IS doable) would restrain the professional politician from printing to Mars.  Corruption can never ridded, but it can be controlled with a sensible system.  There is a strong correlation between easy money and corruption level.
World wars happen during times of inflation, not deflation.