Trouble Ahead For The Housing Market

Our good friend John Rubino over at just released an analysis titled US Housing Bubble Enters Stage Two: Suddenly Motivated Sellers.

He reminds us that housing bubbles follow a predictable progression:

  • Stage One: Mania -- Prices rise at an accelerating rate as factors like excess central bank liquidity/loose credit/hot foreign money drive a virtuous bidding cycle well above sustainably afforable levels.
  • Stage Two: Peak -- Increasingly jittery owners attempt to sell out before the party ends. Supply jumps as prices stagnate.
  • Stage Three: Bust -- As inventory builds, sellers start having to lower prices. This begins a vicious cycle: buyers go on strike not wanting to catch a falling knife, causing sellers to drop prices further.

Rubino cites recent statistics that may indicate the US national housing market is finally entering Stage Two after a rip-roaring decade of recovery since the bursting of the 2007 housing bubble:

  • the supply of homes for sale during the "all important" spring market rose at 3x last year's rate
  • 30 of America's 100 largest cities now have more inventory than they did a year ago, and
  • mortage applications for new homes dropped 9% YoY

Taken together, these suggest that residential housing supply is increasing as sales slow, exactly what you'd expect to see in the transition from Stage One to Stage Two.

If that's indeed what's happening, Rubino warns the following comes next:

Stage Two’s deluge of supply sets the table for US housing bubble Stage Three by soaking up the remaining demand and changing the tenor of the market. Deals get done at the asking price instead of way above, then at a little below, then a lot below. Instead of being snapped up the day they’re listed, houses begin to languish on the market for weeks, then months. Would-be sellers, who have already mentally cashed their monster peak-bubble-price checks, start to panic. They cut their asking prices preemptively, trying to get ahead of the decline, which causes “comps” to plunge, forcing subsequent sellers to cut even further.

Sales volumes contract, mortgage bankers and realtors get laid off. Then the last year’s (in retrospect) really crappy mortgages start defaulting, the mortgage-backed bonds that contain their paper plunge in price, et voila, we’re back in 2008.

Rubino's article is timely, as we've lately been seeing a proliferation of signs that the global boom in housing is suddenly cooling. I've also recently encountered similar evidence that the housing market in my own pocket of northern California is weakening, and I'm curious to learn if other are seeing the same in their hometowns.

The Global Housing Bubble

Housing, as they accurately say, is local. Conditions differ from region to region, making generalizations of the overall market difficult.

That said, the tsunami of $trillions printed by the world's central banking cartel since 2008 clearly found its way into the housing market.

The world real estate market is HUGE, over $200 trillion. That dwarfs the global debt and equity markets. So it's no surprise the central authorities did all they could to reverse the losses the GFC created for property owners.

As a result, many of the most popular locations to live are now clearly in bubble territory when it comes to home prices:

The chart above displays the most bubblicious major cities around the world in red. But it's important to note that the merely 'overvalued' markets denoted in yellow, and even some of the green 'fair-valued' ones, are still wildly-unaffordable for the average resident.

For example, in "yellow" San Francisco, where the median home now costs $1.6 million, prices are well-above the excesses seen during the previous housing bubble:

And in 'fair-valued' New York City, the median household must spend 65% of its annual income on housing alone.

Is it any wonder that 70% of millennials who don't yet own a home fear they'll never be able to afford one?

Signs Galore Of Topping Markets

At the end of a speculative bubble, it's the assets that are most overvalued that correct first and correct hardest.

So we would expect that as the highest-priced real estate markets fare from here, the general real estate market will follow.

When we take a closer look at what's currently going on with the red-hot real estate markets noted in the chart above, we indeed see evidence supportive of Rubino's claim that the decade-long Stage One mania may now be ending.

Here's a spate of recent headlines about these cities:

Sure looks like Rubino's predicted Stage Two symptoms of rising supply and stagnating prices.

Local Signs, Too

As mentioned, I live in northern California, quite close to Santa Rosa. 

Things here aren't as nuts as they are in San Franscico; but it's still a moderately-affluent region with lots of second homes. It's one of the semi-frothy areas I'd expect to see cooling off in first should there be a downwards turn in macroeconomic conditions.

Located less than an hour north of San Francisco, residential housing prices here have roughly increased 2x over the past six years as the Bay Area has boomed. Supply has been in chronic shortage, exacerbated by the loss of thousands of structures burned during last October's destructive Tubbs fire.

But recently, for the first time in many years, realtors here are beginning to talk of a softening they're seeing in the local housing market.

Median sale prices dropped from May to June, which is counter to previous years. And several towns are seeing year-over-year declines in median price -- something unheard of over the past 7 years.

Meanwhile, the days-on-market ratio for properties is beginning to creep up.

Of the greatest concern to the realtors in my area: bidding wars are no longer happening. Houses are selling either at or below asking prices now. That's a *big* development in a market where houses have routinely sold for $50-100K+ above the listing price.

In a similar vein, I'm hearing evidence of the softening rents down in San Franscico and the East Bay (Oakland/Berkeley). Wolf Richter has done a good job chronicalling the substantial volume of newly-constructed units that have recently hit the market threatening to depress rents, and I've heard from a multi-family unit owner down there how landlords in the area are now finding their rents ~$500 too high for the market to bear.

This is all early and anecdotal data. It's too little at this point to claim definitively that my local housing market has entered Stage Two.

But I'm curious to hear from other readers. What are you observing in your local markets? Are you seeing similar signs of concern?

Please share any insights you have in the Comments section below. Collectively, we may be able to add clarity, in one direction or another, to Rubino's hypothesis.

Prepping For Stage Two

Whatever the timing, Stage Two is an inevitability for today's ridiculously-overpriced real estate markets. It's not a matter of if it (as well as Stage Three) arrives, but when.

Given the data above, I think Rubino is correct in his assessment. Or at least, correct enough that prudent action is warranted today.

This makes even greater sense when considered along with the current trends of rising interest rates and quantitative tightening. Remember, home prices and interest rates have a mathematically inverse relationship: as rates go up, home prices must go down (all else being equal). And as central banks start withdrawing in earnest the excess liquidity that inflated property values to their current nose-bleed heights, expect further downward pressure on prices.

To drive the urgeny home even harder, we haven't even yet talked about the damage an economic recession and/or a painful correction in the financial markets would wreak on the real estate market. With the current expansion cycle the second-longest on record and our all-time-high markets looking increasingly vulnerable, it seems very unlikely we'll avoid at least one of those crises in the near to mid-future.

Here are worthwhile steps we recommend at this point:

  • Consider selling: If you're a homeowner and are not committed to remaining in your property for the next decade+, do some scenario planning. If prices fell 20%, how much of a financial and emotional impact would that have on you? If you have substantial equity gains in your home, Stage Two is the time to protect them. If you have little equity right now, make sure you're fully aware of the repercussions you'll face should you find yourself underwater on your properity. What will your options be should you lose your job in the next recession? Whether to hold, or sell now and rent, is a weighty decision; and the rationale differs for each household -- so we strongly recommend making it with the guidance of your professional financial advisor.
  • Raise cash: The vicious cycle that begins as Stage Two transitions into Stage Three is deflationary. Lower prices beget lower prices. During this period, cash is king. By sitting on it, your purchasing power increases the farther home prices drop. And when the dust settles, you'll be positioned to take advantage of the resulting values in the real estate market. We've written at length about the wisdom of this strategy given current market conditions, as well as how, while waiting for lower prices, you can get 30x the return on your cash savings than your bank is willing to pay you, with lower risk. Our recent report on the topic is a must-read.
  • Educate yourself: Yes, real estate is overpriced in a number of markets. But it has been and will remain one of the best ways available to the non-elites to amass income and tangible wealth. And as mentioned, when the next Stage 3 brings prices down, there will be value to be had -- potentially extreme value. If you aren't already an experienced real estate investor, now is the time to educate yourself; so that you'll be positioned to take informed action when the time to buy arises. Our recent podcast interview on Real Estate Investing 101 is a good place to start.

In Part 2: The Case For Starting To Build A (Small) Short Position, we conduct a similar analysis into the overvaluation and growing vulnerability of the financial markets (which are highly likely to correct much faster, sooner and more violently than the housing market), including the details on a recent short position we've started building.

The tranquil "free ride" the financial and housing markets have had for nearly a decade are ending. The string of easy gains with little effort are over now that the central bank money spigots are turning off at the same time the "greater fools" pocketbooks are tapping out.

For a brief time, prices will waiver, as investors remain in denial and refuse to sell at lower prices. But soon that denial will turn to panic, and prices will plummet.

Make sure you're positioned prudently before then.

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

This is a companion discussion topic for the original entry at

House prices have never been higher in Philadelphia and houses are selling in an average of 11 days at the asking price in my neighborhood. Ground will be broken on our retirement home in August and be done by the end of the year. We can’t retire and move until May 2019. Ideally we’ll list our house about March 1, but I’m watching the local market closely in case it makes sense to list and sell sooner. The trade off is if we sell early to catch bubble prices before they collapse then we have to move twice and rent a temporary place to live until we can quit our jobs. It doesn’t make sense to sell to keep from losing $20,000 on the sale price only to have to pay $25,000 in rent in a temporary place. But we have signed with a realtor and will pull the trigger early if it makes sense. I’m on the same page with you.

Excellent recap, Adam! Strategies for the coming crunch will be in short supply as the FED starts to reel in some of its balance sheet. The Canadian situation is abysmal and appears to be following in toe-step. this recent article talks about savings as a lost art and the corresponding effects real estate prices will have:

Economists use the term “wealth effect” to explain spending triggered by rising prices for assets such as houses and stocks. “My joke is that if the value of your house went up 10 or 15 per cent a year, you go to your wife and say, you know what, we’re richer. Let’s go out and have a nice dinner ‘on the house,’ ” CIBC deputy chief economist Benjamin Tal said. Mr. Tal believes that, with housing markets cooling and price gains harder to come by, it’s time to get back to active savings. The challenge here is to convince people that house prices won’t keep rising enough to lessen the need to actively save.

Good job on the article, Adam. I’ve seen many more “for sale” signs this year in my area than usual. I’ve also seen “price reduced” placards on some of those signs. One of my neighbors (2 houses away) just listed his place in May and it sold 2 weeks ago. I don’t know if it was sold for asking price or not.
The Federal Reserve has signaled that they want to raise interest rates further. Are they trying to save pensions, give themselves some future wiggle room, and/or destroy the economy so Trump gets the blame? If mortgage interest rates go up 1%, it makes housing ~9% more expensive. Unless the economy is so robust that wages are increasing accordingly, housing has to take a tumble. I don’t think wages are collectively increasing fast enough to allow a smooth transition.
Tumbling housing prices will be a blessing for all the Millennials who live in mom and dad’s basement. It will be a curse for anyone who is thinking of downsizing. That’s the way cyclical markets work. Someone is the bug and someone is the windshield.

I look at these sites too much, at least the ones that keep predicting the housing bubble and when it pops. It’s simply impossible to predict when it crashes. It won’t be as big as 08’ but it will still be historic.
As for Charlotte, NC I doubt it’s in bubble territory. There is little doubt that the neighborhoods in southern Charlotte and near downtown are getting overheated though. I look at the St. Louis federal reserves housing price graphs. It shows a long trend in prices that basically rise close to inflation. So it was fairly healthy for a long time until the couple years before the crash.
It’s not the correction I’m worried about, but the over correction. It took a long time for the city to recover from that. So, what will round 2 look like?

All this is just a number on a computer screen,we can take a 75%hit on the house before we turn negitive.When the market turns down that munch, there would no body to buy it.

This is an interesting counterpoint to the previous post about real estate investing. Besides the reduction in value of the asset your income stream from rent may also go down.
“rents across the SF Bay Area are starting to “cool off”

As I remember the cycle, the rents do cool, but then the lending market deep cools (hopefully not freezing) and many would be homeoweners become wanabe renters. The cooling rents warm fairly quickly.
As Adam well said, being in cash is important. When prices drop and defaults on mortgages begin, cash is king for buying at lower prices houses that can be rented. For most of the USA this means 3BR/2Bath houses. These can later be sold at a profit if/ when the selling mania cranks up again.

Here on Maui, the RE market has been cooling for nearly half a year now. It’s a brutal market (local people competing with outside money looking to invest in rentable properties or just wealthy outsiders wanting to have a place to stay 1 month out of the year and either Air BnB or warehouse it the rest of the time). The amount of Chinese money sloshing around here is stupefying.
I was sniffing around to maybe buy something last year but it was just too harsh an environment (I bought the last time the market was at an all time high, and lost my life savings when my [ex]wife and I had to short sell during the GFC) so I backed away.
During the search last year, I ended up on many realtors’ mailing lists. I keep getting emails even now about new listings…or – for the purposes of this dicussion, old listings getting a new and lower price.
“Newly Reduced!” – “Motivated Seller!” – “Hidden Gem at New Price!” and so forth. In my in-box every day now. One just popped up: “Price Reduced. Easy to See.”
When I was looking last year, I never saw those words in the subject line. Now it’s about half of all realtor emails.
Hawaii is a strange and wonderful place and something of a special case compared to the rest of the USA. But make of these anecdotes what you will…
VIVA – Sager

I live in a less desirable area of the Easy Bay that has been “up and coming” for a while now. I am just a few exits up the freeway from Berkeley, and a fairly straighforward commute into SF (for the Bay Area). The bubble here far exceeds the last one price wise, but is softening pretty quickly. Last year a house sold in our neigborhood in one day for 100k over asking, for a sale price of 530k. This is a neighborhood of 1000sf homes built in the early 1950s in an unincorporated area. In the late 1990s you could buy a home here for between 100-150k. After the last crash you could buy a home here in 2010-2011 for around 200k.
Several homes are now on the market in the neighborhood for around 500k and not selling and I am seeing price reductions. Nothing but really nice/larger homes are selling fast, and those need to be priced correctly, and the bidding wars have stopped.
I am looking for a place in the Eugene/Corvallis area right now. Everything with land or downtwn with a large lot and a livable house priced at 400k and below seems to sell very fast, but that’s it. Of course that’s what I am looking for.
Things are definitely softening…but from stupid priced back to unaffordable and still too high.

These are very noisy data series, so they could easily jump again next month, but the higher mortgage rates and rising house prices are a double whammy for home purchasers, especially first-time buyers.
Here’s the data from today:

Weekly mortgage applications fall 2.5% as buyers struggle to find affordable homes Home prices are high, listings are lean and potential buyers are frustrated. There is plenty of demand, but it is not translating into home sales. Mortgage applications dropped 2.5 percent last week, seasonally adjusted, according to the Mortgage Bankers Association. The weakness was driven entirely by a lack of buyers. Total volume was 12 percent lower than the same week one year ago. Mortgage applications to purchase a home fell 5 percent for the week and were just 1 percent higher compared with a year ago. Home prices continue to rise at more than twice the rate of income growth, and bidding wars are the rule rather than the exception for entry-level homes. New buyers are clearly struggling, and that is apparent in the type of loans for which they are applying.
U.S. Housing Starts Dropped Sharply in June Starts declined 12.3% from May while residential building permits fell 2.2% U.S. housing starts fell starkly in June after making solid gains the prior month, as single-family home construction and apartment building dropped from May. Housing starts declined 12.3% in June from the prior month to a seasonally adjusted annual rate of 1.173 million, the Commerce Department said Wednesday. This was the largest monthly percent drop since November 2016, in part representing bounce back from stronger 4.8% starts growth seen in May. Meanwhile, residential building permits, which can signal how much construction is in the pipeline, also declined, falling 2.2% from May to an annual pace of 1.273 million last month. Economists surveyed by The Wall Street Journal had expected a 2.2% decline for starts, but a 2.2% gain for permits in June. The sharp starts drop in June was also driven by construction declines in all regions of the U.S. for almost all types of housing.
This is how housing bubbles end…weaker volume, a final push higher for prices, then exhaustion sets in, inventories begin to climb while prices languish for a bit, and then prices finally slide. Has it started? There’s a good chance, especially if the Fed keeps up with the rate hikes.

I just spoke to my now ex-neighbor about his house sale. He said there were quite a few looky-loos. One person offered a low ball offer about 25% below his asking price. Only two other offers were submitted - no bidding war. He sold it for about 5.5% below asking price. He said his realtor “strongly advised” that he accept this offer because she saw “the market softening lately.” Of course, the realtor only gets paid when the property sells. Was that the primary motivation or was that the truth? He was satisfied with the amount he got. I’m going to miss him and his family!

I had the good fortune to meet Tude at the Sebastopol gathering in May, and came to realize that I was born in a house a block over from where she lives now. I remember, at age 7, helping my dad hang drywall on the ceiling of the garage to create a family room (the house looks the same to this day)…but I digress…My father bought the house in '50 for around $6K, as I recall (about 1.5 year’s salary), sold it in '62 for around $12K to build a home in a toney nearby town for around $35K. His house is now worth, what, $1.5M? I can’t quite figger out the exponential function displayed here, but, phew! Here on Kauai, well, Sager pretty much covered that one. Zuckerberg is building down the street. There goes the neighborhood…Aloha, Steve.

I unfortunately missed out of real estate. I rent a room in my friends house because most of the time he isn’t here. He recently sold that house in north van for $1.5 million. 70 years old, two story, bit of a dump. He bought a new McMansion up the block fir $3. All on debt.
The market seems to be softening. Stricter mortgage rules were brought in , rates have gone up, and they seem to be clamping down on the Chinese money laundering that has been flooding in over the last 10 years.

Just for the record, my numbers are off. Dad’s memory is better than mine ('course, it was his money!): he paid $9750 for the original house, and sold it for around $18K. He still remembers the name of the original RE agent- Pierre Alinio! 92 years old in a couple weeks…Aloha, Steve.

I have been watching the market ( Portland, Or and the surrounding areas) for the last 6 years and check in every few days or so.
Houses close to the city in the mid range sell quickly but recently at or maybe slightly above asking (not $20-50K above asking like in recent years). Mid range houses in the surrounding areas (0-40 miles) are dropping 5-15K off asking for the first time I’ve seen. Sales in the high end market of 1 million or more have slowed in town but crashed in the surrounding area and can sit for over a year. I’ve seen $1-2 mil houses drop 50% from orginaly asking price 40 miles outside town.
Just my observation.

Developments are underway in China that should dampen the housing market there:

The practice of rectifying market order stems from a special action by seven ministries. On June 28, the Ministry of Housing and Urban-Rural Development and other seven ministries jointly issued a notice, deciding to carry out special actions to control the real estate market chaos in 30 cities including Beijing and Shanghai from the beginning of July to the end of December 2018. The recent policy is a continuation of this action, and the scope has exceeded the above 30 cities. For example, Henan Province issued a document on July 9th, which intends to regulate the sales behavior of commercial houses in the province, maintain the order of trading in the real estate market, and protect the legitimate rights and interests of the people who buy houses. Shaanxi Province also issued a detailed rule on July 6, standardizing the fair process of commercial housing. For the first time, Zhejiang has launched a “double random” spot check with the special inspection of real estate development enterprises as the entry point.
This crackdown, plus the urgent need of developers to offload properities (i.e. spike supply) in order to raise more capital, is expected to bring prices down:
CITIC Construction Investment also said that the market supply scale will be further released in the second half of the year. On the one hand, the housing supply enterprises began to usher in the peak of supply in the third quarter, and on the other hand, in the environment where the financing environment is becoming stricter this year, the housing enterprises are out of cash. Streamline considerations will also accelerate the push to achieve cash withdrawals. This will also bring the heat of sales in the real estate market in the third quarter to continue. Yan Yuejin, director of the think tank center of Shanghai Yiju Research Institute, holds different views. He told the 21st Century Business Report that the third quarter is the time when the market is facing the most bad news. The transaction volume of the real estate market may decline, even negative year-on-year. In the fourth quarter, due to the impact of annual performance, companies are likely to accelerate the pace of pushing goods and promote transaction volume.

This post speaks to the very question I have been debating for the last several years. I am a low-to-moderate income member of this forum, very interested in building resiliency and positioning myself as best as I can for the long term future. I would like to own my own home. I am currently renting in the area I would like to live. However, I will need a loan in order to buy something. Whether I do it now or wait for prices to drop. In a way it seems better to try to lock in a lower interest rate sooner than wait for prices to come down, which may mean a smaller loan at a higher rate. I am working on qualifying for a NACA loan, which does not require a downpayment, and allows you to buy the interest rate down as far as .5%! I am also looking into the possibility of buying a multi-family home so I can have some rental income to offset the loan. I am interested to hear if others in this forum are in a similar situation and how you are approacing the possibility of positioning yourself to own. I am also interested to hear what people think of a NACA loan, vs. conventional first-time home buyer loans. I know that CM advocates for people getting set up well in advance of the collapse, and as I think about it, going through a first time home buyer class, realizing that having clear title to a property matters and if the system is in chaos, it might not be easy to get clear title. Things like that. So I guess I am leaning towards trying to buy something sooner than later. But would very much like to hear what others are thinking, particularly those who are in a similar situation.

Sometimes there are combinations that can make things easier rather than harder.
But it is highly location dependant.
That said, loans are a horrible idea if everything goes kaplooie… but not getting loans is how the magisterium loots the working class of their entire earnings, as long as it doesn’t go poom.
I know. I’m an engineer in construction who never got a loan, still living in an (owned) mobile home on rented land, 47 years old and never spending wildly, always trying to save.
That’s not the whole story… but my observations are boots-on-the-ground valid.

Yag, one big question is location. Is your location at least some-what walkable or have decent public transportation. There will be a signifcant need for walkable urbanism now and in the future. Obviously, the lots might be expensive, and depending on the city could be in overheated areas or even bubble territory. So it might not be the best time to buy.
Just know in the long run, walkable locations will be highly sought. Look for old street-car neighborhoods or areas laid out before the 1950’s.
Finally, it sounds like you want to buy a duplex or triplex of some kind. That’s great to start out, just consider if you can further expand like adding a cottage unit in the back-yard. Gives you a little extra income and depending on how things unfold, that little cottage might end up as your home. All depends on cost of construction, market and yadda… yadda. Good luck!