Why Home Prices Have Not Crashed - YET

TL;DR

Home prices have not crashed yet, but three leading indicators, the monthly supply of homes, the mortgage-rate and Treasury-yield spread, and M2 money supply, suggest a major correction may be approaching. After real home growth averaged 4.5% annually from 2012 to 2022, typical houses began selling below listing price for the first time in 17 months. Read on to understand the indicators and how falling values could weaken consumer spending.

Transcript

i like to compare the economy to a magic trick which is weird because people think they're not the same but they actually share the most important thing together psychology and here's what i mean if i show you this deck of cards which by the way is a completely ordinary deck of cards i could by shuffling it make you think and condition you to belie... Read More

Key Insights

• ❓ Real estate prices strongly influence the wealth effect, which impacts consumer spending and the overall economy.
• 🤑 The monthly supply of homes, spread between mortgage rates and bond yields, and M2 money supply are leading economic indicators that suggest a potential correction in real estate prices.
• 🆘 Understanding the psychology behind real estate prices can help investors make informed decisions.
• 🪐 Real estate is often the largest asset in households, making its performance crucial to overall net worth.
• ⌛ Timing the market top and bottom is challenging, and consistent investment through dollar-cost averaging is often a reliable strategy.
• ❓ Monitoring economic indicators and being aware of market conditions is essential for both buyers and sellers in the real estate market.
• 👨‍💼 Real estate market corrections can have a significant impact on the overall economy, affecting consumer spending and business investment.

Questions & Answers

Q: Why have home prices not crashed yet?

The real estate market experienced real home growth of 4.5% per year for 10 straight years between 2012 and 2022, conditioning people to expect continued gains. However, three leading indicators, the monthly supply of homes, the spread between mortgage rates and Treasury yields, and M2 money supply, suggest a major correction may be approaching.

Q: What signs suggest that home prices have started falling?

A typical house was selling for less than its listing price for the first time in 17 months. The transcript also says falling prices were expected to spread to more than 184 cities, potentially reaching declines of 20% or more.

Q: Which three indicators may predict a housing-market correction?

The three indicators are the monthly supply of homes, the spread between mortgage rates and Treasury yields, and the M2 money supply. Together, they are presented as signals that real estate prices may undergo a major correction soon.

Q: How does the monthly supply of homes affect real estate prices?

More homes for sale create less competition among buyers, which can push prices down. When the supply is limited, greater competition among buyers can drive prices higher.

Q: What does the spread between mortgage rates and Treasury yields indicate?

Mortgage rates follow trends in 10-year Treasury yields. A widening spread between mortgage rates and Treasury yields indicates greater risk in the real estate market and may signal a potential decline in home values.

Q: How does M2 money supply affect home prices?

M2 represents the amount of money circulating in the economy. Increased liquidity tends to support higher home values, while a declining money supply may negatively affect real estate prices.

Q: What is the wealth effect in real estate?

The wealth effect is the theory that people spend more as the value of their assets rises. When home prices increase, homeowners may borrow against their properties through home equity loans and use that money to support their lifestyles.

Q: How could falling home prices worsen a recession?

When home values fall, homeowners have less capacity to borrow against their properties, reducing their spending power. Banks may also become more defensive and lend less, slowing capital velocity and worsening the effects of a recession.

Summary & Key Takeaways

• Real estate market conditions can influence people's perception of the economy and their spending habits.

• The wealth effect theory suggests that as asset values increase, people tend to spend more money.

• Three leading economic indicators, including the monthly supply of homes, the spread on mortgage rates and treasury yields, and the M2 supply of money, suggest that real estate prices may experience a major correction soon.