Problem with not only the economy but housing is that asset price appreciation has far exceeded what the fundamentals dictate. This has been driven by artificially low interest rates. First as a fact Median Home Prices have risen 22% from the last peak back in 2008 which isn't unreasonable given inflation running about 2% per year. However, prices are 50% higher from the 2009 lows which translates to nearly 6% per year rise. When compared to wage growth thats 2x the rate which begs to question where did the money come to buy homes if not from wage growth. The wealth effect of the stock market can account for some of that, but its also the fact that 10 Year Treasury rates are near 3% vs 5% which they were in 2007! So if the economy & housing is doing so well how can that be since rates should rise with economic growth? Central Banks artificially keeping rates low in relation to fundamentals!
The question is that changing? The answer is clearly yes as the Federal Reserve is raising Short Term rates while Long-term rates have not risen nearly as much in response. If you believe like I do Long-term rates either have to rise significantly or economic growth slows either way housing demand and/or prices MUST decline. As the chart below shows that process is underway, but has only begun since home sales are nowhere near prior levels when rates were much higher. In fact they aren't even back to 2014 levels especially New Home Sales.
If one looks at the University of Michigan buying condition which in our view reflects how affordable housing is (as I said prices have risen faster than wages can support) its back to 2007 levels! So as I said something has to give. One solution is wages rise, but if that occurs rates SHOULD rise especially since they are still too low. Now you know why the Administration is targeting getting wage growth and arguing rates are rising too fast!
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