This report was originally published by Adam Taggart at PeakProsperity.com
Our good friend John Rubino over at DollarCollapse.com 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 PeakProsperity.com 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:
- Toronto: Prices clearly peaked in early 2017. Prices are now down 3% vs last year.
- Syndey: Compared to last year, prices are now down 5% and supply has ballooned 22%.
- Stockholm & Vancouver: Over a recent 6-month period, prices in the luxury property market fell 9% and 7.6%, respectively.
- New York City: In Q1 2018, prices were down 8% YoY and sales were down 25%. NYC’s luxury properties fared even worse.
- San Francisco: After hitting a record price high in January, the city has seen a rare spring decline in prices, while rents across the SF Bay Area are starting to “cool off”
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 PeakProsperity.com 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)
Housing prices are directly related to interest rates since people buy big ticket items on monthly payment amounts instead of total price.
Raise interest rates and prices go down accordingly, lower them and prices go up.
Taxation benefits such as deductibles are also related to both prices and payment amounts.
Dumped my overpriced house in the city back in early 2015. No mortgage now, off the grid and land in the country, privacy, security, life is good. No city taxes, no city rules and polices. 2 fawns were playing today just yards from my cottage door. Nature is humbling. Have a plan folks. SHTF is a coming. I predict dollar crash. Buy Gold and Silver for a hedge.
Anonymous;
I can’t argue with your post but I hope nothing happens too quickly since we own a rather valuable place in one of the overpriced areas and we would like to sell and move to do one more. It will be next year before we are able and it will be iffy. Sold last one in late 2006 and timing was perfect. Problem is this time if we miss the window I may not have enough life left in me to come out the other side. At least we are rural and secluded but we need about 1/2 the living space with the same amount of land. It’s amazing how one can find a place most would kill for to be a burden.
You should have listed that place back in April. List it now. Waiting a year? Dumb.
Housing locally is so high that the average local income in not high enough to rent the average apt let alone buy a house All due to people fleeing Calif and the insanity there. They come with ample money and as a result the locals are evicted and the rent hiked and they are replaced with Californians All they can do is leave the area becoming economic refugees Greed rules the scene i may go back to the Res
Owning or buying a home lmao, finding an affordable dump to rent is the new reality for the majority. Grossly low balled enployment numbers, hyper priced food costs, clothing, all of lifes basic necessities steadily rising. Even a cardboard makeshift shack with a tarp covering is cost prohibitive. Finding a job paying the pitiful minimum wage offers no solutions. Welcome to the new third world American reality. MAGA until you gag a lot.
Housing prices have always cycled from boom to bust to boom ad infinitum, as long as records have been kept. However, there are some particular reasons now that stand out more than usual as the cause for the great soon to come boom/bust cycle: 1- Wages have been stagnant for more the 40 years, actually declining when factoring in inflation. (For example, when I was shopping around for a house a few years ago I saw on Zillow how the price of many houses cost twice what they did in the early 2000’s. As the realtor was showing me homes she commented how good it was houses were increasing in value, I corrected her by saying they were increasing in cost, not value. I told her I looked on Zillow at home prices going back ten years before and asked her how can home prices continue to steadily increase while wages stayed flat. I asked her how could she expect real estate prices to keep defying what the market can eventually tolerate. She looked at me like I was too stupid to understand real estate). Another reason is the demographics of today. The educated, the skilled, the professional, the businessman, who typically made up the vast majority of traditional home buyers and sustained a middle class are declining in numbers. Vast tracts of comfortable suburbia of today will be slum-like in another generation. You can also attribute hyper-extreme wealth concentration; wealth, and access to it is drying up for most Americans diminishing their future prospects. I am not anti-capitalist, I am pro free markets, but super wealth concentration causes large scale economic distortion, eventually affecting standard of living and quality of life.
Market laws are more powerful than any gov’t that ever existed. Inevitably, real estate prices must correct. The middle class is shrinking, with the average wages of today there cannot be a large viable sustainable middle class. Add in insurance, utilities, and medical costs are too high, and combined fed., state, local, business, and property taxes are too burdensome. Combine this with the fact that gov’t, the banks, and the real estate industry has so manipulated real estate and jacked it out of market reality it will soon not be able to function, prices will come down-a lot. Eventually everything assumes the price what the market can bear. Stop buying what you can put off or actually do without, you will see prices drop. Show a little character, delay your gratification. Stop mindlessly spending money, stop being a slave to your consumerist impulses. You WILL gain personal economic power.
Good points, Bill. I don’t know how people cannot see the obvious, what is right there in front of their faces. Oh wait – their electronic devices are right there in front of their faces!
Hi, Adam Taggart. Looks like we are neighbors.
In the last year, six of my friends have moved from the area; five to other states, one to a more rural northern area. Everywhere you go – banks, grocery stores, cafes – people will talk about “where can we move?” It has been all the buzz.
Right before the Tubbs fire, my little apartment community had received five rent increases in 1.5 years – punishing rent increases. From last October thru April, the CC put a moratorium on rent increases because of the wildfires (that appeared to be started by blue lasers, another story for another day . . .) and now that moratorium is lifted and rental prices are rising again. $2,100 for a small one bedroom cardboard casa in a not-all-that-nice part of town.
I have not been able to understand the extreme rent prices along with the extreme housing costs. They usually balance each other out but not currently. This is the evidence that tells me we’re in for some serious SHTF scenarios with the housing bubble.
And then there is the student loan bubble . . . and the used-car loan bubble . . .
Question: “What will the ‘market’ do?”
Answer: “The ‘market’ will fluctuate.”
_
Mine is paid for…I just worry about escalating taxes.
Unless they change the law I’m guaranteed to have a tax increase of 3.5% per year for the rest of my life. They can only raise residential assessed values 3.5% per year, even though the market value has increased, say for example 400%.
You are very lucky! Here in Houston TX. the max per year is 10% per year over 10 years. Any individual year can be much more so long as other years in a 10 year span cancel it to 10%. As you can cynically guess the increases ALWAYS figure exactly to 10%! In election years I have had actual decreases, while years right after as much as 15% increases.
I’ve generally been lucky with housing. I’ve bought less than optimal properties, in good locations, have never lost money and always traded up to a better location(not always a better house or situation). I started in a CA mobile home, went to a WA state housing division in a mill town, to WA mountain view acreage, to HI ocean and mountain view acreage, and ending up debt free.
The trick is to live well within your means. Have a good skill set so you can do most if not all the things around a house and property.
Tools are way cheaper than paying someone else to do stuff you can do.
The number one thing is to marry a woman that is not very materialistic.
Then you can buy properties that would turn most women off, but you can get a property that has lots of potential and then develop that potential, not for flipping, but for living as you see fit.
Most all this housing stuff other than government caused by regulation, is “Image” driven.
Granted I’m an exception rather than the rule, I’d commute 200 miles a day before I’d live in a city, subdivision, or a place with a homeowners assn. But I’ve been immune to the housing ups and down for the last 40 years, however I have repaired a lot of cars.
Millennials since Obummer might have university degrees but ene up working at a coffee shop. They aren’t marrying and are not in the market to buy a home as they lack the down payment.
I don’t know why people can’t figure this out.
An average blue collar worker in manufacturing made $35,000 in 1990. Due to inflation, that equals $66,000. But the median American household income is $55,000. And that is combining income!
Due to Free Trade and Feminism, two are earning less than one! Explain how that will ever support a real estate market???
And since 31-37% of Millennials live with their irate parents, nothing will change. Prior to 1945, the average home in America was multigenerational ie the grandparents owned it free and clear and deeded it to their children who lived with them, and they in turn produced offspring.
After 1945, returning GIs bought homes in the suburbs but those were nothing like suburb homes today. White flight made wealthier ie upper middle class folks to sell their urban homes and move to newer country homes due to civil rights seachange.
That created a wave of urban blight and the end result are dilapidated crack houses that once were mansions!
Trump is turning it around, but the democrats and the globalists are defying him, regardless that FINALLY African American and Hispanic American unemployment has plummeted. He’s the real deal. Frankly anyone with a lick of common sense should be supporting him.
75 million are struggling due to student loan debt with a potential default rate of 40%. And that affects co-signers. And that depresses the real estate market.
Without manufacturing, America is doomed and at the mercy of China. And there are 10 million more government workers (who are the greatest concentration of union workers) than manufacturing workers.
This cannot EVER WORK and support a robust real estate market. It causes a need for rental property and nontraditional renters will occur as they lose their home as they cannot pay their mortgage, maintenance, and taxes.
Face reality. It actually is good common sense to buy a country homestead big enough to keep everyone employed and live three generations under one roof as then you have built in child and elder care. This is what America is returning to. That was the paradigm from inception through 1945.
The whole idea of Christians dating to find a wife is absurd as before 1920, only the idle rich did so.
What happened was homesteading caused a flood of immigrants with 2/3 failing in many cases and eventually multigenerational homes where the better off in laws sheltered the newlyweds.
That largely ended in 1945 and by the seventies was considered quaint. But the sexual revolution ended up causing massive illegitimate births, single moms who were abandoned, and a MASSIVE undiagnosed STD rate.
Something like 80 million Americans have an STD and don’t know it due to immorality. That is the end conclusion of the sexual revolution and mammoth abortion rates such that the number one cause of death among African Americans is ABORTION.
I live in an area where Commifornicates are moving. Here is a clue: don’t talk about being from Commiefornia. We hate you.
I don’t care if my property value drops. In my area I couldn’t rent an crappy apartment for what I am paying in PITI. I plan on keeping the property for awhile and turning it into a rental while I travel the US in either a Class B or a Class C van/RV while I look for a nice, quiet, rural area to buy another house.