“The farther back you can look, the farther forward you are likely to see.” These words of wisdom from the great statesman Winston Churchill well describe the US housing market today. Luckily, thanks to the work of Prof Robert Shiller, we can put them into practice, as the chart shows:
- Shiller measured prices since 1890, and first published the above chart in his book ‘Irrational Exuberance’ at the height of the boom in 2005
- 2 years ago, the blog updated it to Q1 2011, when 23% of homeowners were in negative equity and foreclosures were rising
- Prices today are unchanged from then at $124k ($2013): 20% of owners are in negative equity and owe more than the house is worth)
- Another 23% of owners have less than 20% equity, and can’t move home as they can’t qualify for a new mortgage
Clearly all the recent support from low interest rates and mortgage write-downs has only provided temporary support for prices.
The problem is that the Federal Reserve has chosen to focus on trying to revive the housing bubble. Its liquidity programme is therefore doomed to fail, as it ignores the bigger picture.
The long-term trend since 1890 has been for prices to move between $90k – $110k in real terms (ie inflation-adjusted). They fell below this level during the Depression in the 1930s. They rose parabolically to peak at $198k at the end of the SuperCycle. Now there are 3 key reasons why reversion to the $90k – $110k level seems most likely:
- Rising interest rates mean mortgage applications and refinancings are falling again
- Home ownership rates have been falling for 10 years, as people rent instead of buy
- Even more importantly, 25-34 year olds entering the market:
- Prefer to live in urban rather than suburban areas, unlike their parents
- 25% plan to live in multi-family housing
Thus despite all today’s excitement, those waiting for the Fed to return prices to 2006′s peak will wait a long time. But there are plenty of profitable new opportunities emerging, for companies prepared to adapt to the new demand trends.