*Home Prices Are Crashing Higher Despite 8% Mortgage Rates**
Wells Fargo Warns of 1980s-Style Housing Recession
Hey, everyone. I'm Alex, and welcome back to the channel. Home prices are crashing higher despite 8% mortgage rates, record low affordability, and home sales on pace for the worst year since 1993. In fact, home prices hit a brand new record high in September.
Wells Fargo believes a 1980s-style housing recession is imminent. But Morgan Stanley predicts prices, rents, and affordability will improve over the next year. So who's right? And what does it mean for you?
Let's dive in.
Historical Real Estate Crashes
The U.S. has seen its fair share of real estate crashes. The most famous is probably the Great Depression in 1929 when home values plummeted by 67% over three decades.
The early '90s also saw a crash due to the savings and loan crisis. And of course, there was the housing crash of '08 caused by speculation and adjustable rate mortgages.
But what about other periods? Well, home prices have been resilient in most periods. For example:
- During and after World War II
- The 1970s stagflation era
- The 1980s recession
- And the dot-com bubble of 2001
In all these cases, home prices either rose or fell only slightly before resuming their upward trajectory.
Wells Fargo's Warning
Wells Fargo believes we're on the cusp of another housing recession similar to the one in the '80s. They argue that high mortgage rates will lead to lower demand and falling prices.
But they also predict that home prices will continue to appreciate at a slower pace due to underlying demand and tight supply. They forecast that prices will rise by 1.8% by the end of 2023 and by 2.5% in 2024. In 2025, they expect a rise of 4.4%.
So which is it? Are we headed for a crash or not?
Inflation-adjusted Home Prices
To understand real price changes over time, we need to look at nominal home prices versus inflation-adjusted prices.
For example, Bill McBride from Calculated Risk blog compares today's real estate market to that of 1978 when real returns fell by 11% over three years due to inflation.
The National Case-Filler Index shows median prices up by 3.9% over the last year with year-over-year inflation at 3.2%. This suggests national home prices are up only 0.7% in real terms.
So while nominal prices are rising quickly, real price gains are much more modest.
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Morgan Stanley's Predictions
Morgan Stanley expects home sales to be weak in the first half of 2024 but pick up in the second half due to improved affordability from lower interest rates. They anticipate rates as low as 0.4% by late 2025.
The chief economist at realtor.com also predicts improved affordability with a fall in mortgage rates below 7% in the second half of 2024.
But critics argue that these associations did not predict interest rate increases in 2023 or rising home prices accurately, so their predictions for lower rates may be unreliable.
However, there is consensus that home prices are unlikely to fall significantly until sellers outnumber buyers due to an almost perfect equilibrium of supply and demand causing sideways price movement.
Redfin's CEO believes that homeowners selling now are not under financial distress like in 2008, which suggests little room for further price drops due to sellers' ability to wait for their desired price.
Affordability could return if mortgage rates fall by 4.4 percentage points, median household income rises by 62%, or home prices fall by 38%.
In October, Redfin reported that only 28% of homes sold above listing price, indicating bidding wars still occur in some markets but are less common than earlier this year when nearly half of homes sold above asking price.
Detroit had the fastest annual home price growth at 6.7%, followed by San Diego at 6.5%, while Las Vegas had a decline of -1.9% in home prices annually.
Investors believe the Federal Reserve will begin lowering interest rates in mid-2024 with a potential reduction by May and four more rate cuts throughout the year. There is $5.7 trillion parked in cash-like money market funds waiting for interest rates to drop before entering markets or real estate.
My Personal View
I've been investing in real estate since '08 and have seen many ups and downs along the way. But I've never seen anything like this before - where people are buying homes at record highs despite sky-high mortgage rates and record low affordability levels!
It's truly mind-boggling how resilient this market has become over time - even during periods when it seemed like everything was stacked against it (like during previous recessions).
So what do you think? Is now a good time to buy or should you wait for things to cool off?
Let me know your thoughts down below!
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