The “Recovery” in U.S. Housing Prices
Post-Crisis Supply Constraints and Prevailing Mortgage Interest Rates have Severely Exaggerated True Demand and Distorted Prices.
Housing prices have recovered over 54% of their dramatic 33% decline from peak 2006 levels to their nadir in early 2012. Yet underlying data indicates that the price recovery is not a recovery in the demand for owner-occupied homes. Rather, it is more the result of two factors:
(i) the knock-on effect of the mortgage bubble and crisis of the mid-2000s that has yielded a shortage of homes for sale; and
(ii) historically low mortgage interest rates unique to the present macroeconomic environment.
Neither of these phenomena are characteristic of a normal recovery in the housing sector and are not likely to be sustainable in the absence of other supporting factors.
U.S. home prices – as they did in the mid-2000s – once again threaten to disconnect from other economic fundamentals, with a supply/demand mismatch that has its roots in the mortgage crisis itself and in post-crash monetary policy.
Most analysts, whether they express it or not, know that a material rise in long term interest rates is incompatible with prevailing home prices – unless it is accompanied by significant growth in household incomes. And such growth is incompatible with present global economic realities.
But few focus on the degree to which home prices are a reflection of the unique post-crash circumstances that severely restrict the supply of for-sale housing, in terms of restricting both the number of homeowners who are able to trade their present home for another, as well as access to credit.
These constraints have served to flood the rental housing market with demand that has, in turn, escalated rents beyond levels that would be obtained if the inventory of owner-occupied housing was turning over at rates traditionally associate with economic expansion.
The impact of such exaggerated rent growth has skewed overall inflation statistics in a manner that overstates prevailing levels of inflation in the absence of the foregoing factors.
Accordingly, as it is unclear that we have reached a point of real price discovery in U.S. housing, with deflationary pressures bearing down on the U.S. economy it is equally unclear whether the housing sector – as it has for the past two years – will continue in its role as nearly the only force holding service sector price growth positive.
Please turn your attention to the attached presentation for details.
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