A reader asks:
I own 76 single-family houses, the property management company running those and a small real estate brokerage. I love real estate. But how is this sustainable? Are wages increasing enough to maintain the increase in housing prices? If not, how are people going to ever afford buying a house? What will cause prices to fall? We still have supply issues, mortgages are legit and very regulated, so what the hell is going to happen? Are there other periods in time we can study to see what happened?
76 houses!
I’d say that’s an empire. This question is a great reminder that even experts in the housing industry don’t really know what’s going to happen next with prices.
If you had told me 3-4 years ago that we would have 7% mortgage rates for an extended period of time following a 50% rise in national home prices I would have assumed prices would get dinged. That hasn’t happened, obviously.
There is one important fact to note when trying to ascertain when housing prices will fall — it doesn’t happen very often. These are national housing price returns by year going back to 1950:
There have been just 7 down years in this 75 year period.1 It’s also important to recognize the only two periods when housing prices fell both came during a financial crisis — the savings and loan crisis and the Great Financial Crisis — that was heavily influenced by the finance sector and poor pending standards.
That’s simply not the case today:
At the height of the housing bubble in 2006, 25% of all mortgages were going to households with credit scores of 760 or higher. But the same amount was going to subprime borrowers with credit scores of less than 660.
Today, 65% of mortgages go to borrowers with 760 or better credit scores while subprime borrowers make up less than 8% of the total. Borrowers are in good shape.
Short of a financial crisis, what could cause prices to fall?
Housing supply needs to increase. There are typically two ways this can happen:
(1) Build more homes.
(2) Make housing prices too unaffordable.
The second option seems more realistic in the short run. In fact, it’s already happening in some places.
Remember, housing is local. Nationwide housing prices reflect that average of millions of different neighborhoods and communities.
Here’s a good chart from Lance Lambert that shows the current mix of buyer’s and seller’s markets across the country:
It still looks like a seller’s market in the Northeast, Midwest, and West Coast. It’s turning into a buyer’s market in the Southeast and Southwest.
That’s a good thing for prospective homebuyers. The problem is the areas where supply is increasing is also where most of the massive gains came during the pandemic housing boom.
Let’s use Miami as an example.
Bill McBride noted in a recent update that Miami now has an unsold inventory of more than 12 months of housing supply compared to the national average of three-and-a-half months. This is a good thing for homebuyers in Southeast Florida.
The problem is housing prices in Miami have far outpaced the national averages since the start of this decade:
Plus, one of the big reasons supply has swelled is because insurance costs have risen considerably in recent years.2
A higher supply of homes give buyers negotiating power but that doesn’t necessarily mean it’s super affordable to buy there, even if prices come back to earth a bit.
I’m not saying housing prices can’t go down. They can and will in some locations more than others.
But don’t expect it to happen very often. Housing prices in this country are extremely stable over the long run.
Unless we finally decide to build more housing, a sustained period of falling prices seems unlikely because we have a massive demographic of young people looking to buy.
The best-case scenario is probably stagnating housing prices for a few years so incomes can play catch-up to help with affordability. Falling mortgage rates could help too but I’m convinced that will also increase demand.
Maybe I’m wrong. Maybe housing prices will fall 10% across the board, mortgage rates will drop and housing supply will magically increase.
But I wouldn’t bet on that outcome.
Josh Brown joined me on Ask the Compound this week to discuss this question:
We also answered questions about the difference between a portfolio and a plan, personal finance advice for someone who lost their job, when to go from DIY to an advisor and how to get out of your illiquid investments.
Further Reading:
Timing the Housing Market: When Should You Sell?
1The S&P 500 has experienced 16 down years in that same time frame but far more corrections along the way.
2A few years ago that condo collapsed in Miami so new rules went into effect that require a bigger maintenance fund for each building.
