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Housing Bubblicious 2.0

This is my initial blog post in the new category I call "Housing Bubblicious".

In this post I will discuss the events that have transpired to date in the housing market, using the U.S. Home Price Index courtesy of Fred and annotated in Stockcharts:

Units: Index 1980:Q1=100, Not Seasonally Adjusted

Frequency: Quarterly

Estimated using sales prices and appraisal data.

Suggested Citation:

U.S. Federal Housing Finance Agency, All-Transactions House Price Index for the United States [USSTHPI], retrieved from FRED, Federal Reserve Bank of St. Louis;, January 15, 2024.

The chart below shows 45 years of available data going back to the early 1980s. The trendline is not precise but it gives a visual clue as to where we are relative to trend. As we see at the 2007 top, prices were roughly 37% above trend. Leading up to the 2007 top interest rates had been taken down to 1.5% in 2003 to buffer the post-Y2K recession. We also see that after 2007, prices returned back to trendline.

Next, we see that with 0% interest rates secured by the 2008 bailout, home prices soon began levitating above trend again. During the period 2009-2014, the Fed was using their balance sheet (bottom pane) on and off to support markets. Starting in 2016 the Fed began balance sheet rolloff which means that as bonds matured, they received payment from Treasury and did not reinvest in newly issued bonds. They stopped explicitly supporting the T-bond market. Then the pandemic hit, and as we see the balance sheet doubled in a year. In addition, home prices inflected upward (blue up arrow). Currently, home prices are almost 70% above trend when measuring linear distance to the trendline.

The housing narrative has continued to evolve over the past few years. During the pandemic, people left the cities in droves and bought up Airbnb vacation homes as a form of social distancing. Then came the deluge of Fed liquidity and the collapse in mortgage prices which further accelerated the nascent bubble. Then when the Fed signaled it was going to start raising rates, demand accelerated again because buyers felt that they had to get into the market before rates rose.

During the past two year rate hiking cycle, pending home sales collapsed as the market essentially became non-functional. Buyers could not afford homes at the higher prices and rates, and potential sellers were "locked in" to their low rate mortgages.

However, now we see there has been another spurt higher in home prices recently. When the Fed signaled they were done raising rates, buyers reasoned that lower rates will attract stronger demand, so they bid housing prices up again.

All of which is why I have explained that as we saw in 2007, home prices come DOWN when rates are lowered. Because sellers become unshackled from their mortgage "lock in" and are now free to sell.

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