Are US housing prices going to collapse? Yes.

We’ve already discussed the coming Baby Boomer Housing Bust, as a prime reason why housing prices must collapse in the USA.  If you haven’t seen the infographic, it’s worth checking out.

But there’s a more immediate problem at work, and it’s the disconnect between household incomes and housing prices.    Anyone taking a look at real-median income levels in the United States can see that American households are getting poorer.  The real median household income level in the United States is now at levels not seen since the mid 1990′s.   And yet housing is far more expensive, and getting more expensive every day.

There is something very wrong here.

There is something very wrong here.

In Housing Bubble 1.0 (from 2000 – 2008) US housing prices soared from a median sales price of $135,000 to more than $220,000.   During the same period salaries basically maintained their value or rose in value along with the rising value of real estate.  Household income peaked in 2007 just after housing peaked.   Since the collapse however, we have the spread between prices and income-levels yawn ever wider.  Household income (the orange line above) plunges consistently lower, while housing prices go back into bubble land.

Clearly this isn’t going to work for much longer.

One cannot have perpetually lower household incomes and perpetually higher housing prices.    Particularly since interest rates have reached their lower threshold.

Something has to give.

Here’s a hint:  It’s probably not going to be a sudden spike in salaries.

 

The “2.2 ratio”:  The House Price to Household Income Ratio

Historically speaking,  the price of a house has always been about 2.2 times the median salary.    This has been true for as long as records have been kept, with a few short aberrations which typically reverted to the mean within a decade.

Today that ratio has been blown away:   The current ratio of  housing prices to median household incomes is over 4.  Not only is this historically unprecedented, it is clearly unsustainable.

Real Estate investors:  Math is not your friend.

Real Estate investors: Math is not your friend.

 

As with most other trends, you can distort mathematics for a while.  Sometimes for quite a long while.  But in the end things will eventually revert to the mean.   Combine today’s unsustainable ratio with the coming Baby Boomer sell-off, and there’s a whole lot of pain heading this way for anyone who thinks real-estate always goes up.

Unless of course, you’d like to make the argument that interest rates can keep going forever lower.    Even if rates were to go negative in the USA, they can’t progress into negative territory forever.  Sooner or later this game must end.

 

Stop calling for a housing price “recovery”.  We’re already at historic highs relative to income!

Back in May, Janet Yellen announced that what she was most concerned about was that the “housing recovery” might stall.   “recovery“?  “stall?”

Janet Yellen.  She's got your back.

Janet Yellen. She’s got your back.

When the ratio of median house price to median salary is already double the historic average, isn’t the “crisis” that housing prices are much too high, Janet?   For whom exactly would it be a “crisis” if housing prices were to stop rising?   (A rhetorical question, of course)

Why is it that the Federal Reserve consistently tries to pitch “housing inflation” as if it’s a good thing?     Can you imagine if we talked about a “recovery” in health-care or food costs?   Or expressed concern that health-care costs were “stalling”?