Are U.S. Home Prices setting us up for a Housing Crash like Japan had in the 90s?
Gotta love clickbait headlines
Okay, so here is a long-term trend of almost sixty years of median U.S. home prices:
Whenever you see a big rise like that, it’s easy to predict that what comes up must go down. For example, Japan had an absurd boom for decades and then it took a massive dive:
But, we can’t just look at something like price in a vacuum. We should benchmark it against other indicators. A great one to consider is income - after all, people have to make money to buy and maintain their home and mortgage payments:
A rule of thumb is that it is suggested to spend between three to five times an individual’s (or family) income on a home. That could mean a pretty big home price range and it also depends on a lot of personal finance factors, so don’t quote me on that or take it as financial advice (it’s a rule of thumb) but let’s see how that looks over recent history:
Wow! The rule of thumb is actually pretty spot on. In fact, the range is a bit tighter sticking between about three to four times income.
However, we do see some serious elevated levels here compared to history. That’s worrisome. But, will it lead to a crash? Let’s consider another factor:
Here are bank loans for real estate. Banks used to regularly grow this portfolio segment by double digits (with some volatility). Post Housing Bubble / Financial Crisis? Not so much.
This implies a recent decade plus of financing underinvestment relative to history. It’s not exactly a one-to-one here and the picture is complex but underinvestment has correlation with undersupply (other housing metrics confirm this as well).
So, while housing prices may be crazy and elevated by certain measures, there are also echoes of a regime change that has persisted since even before the last recession.
Price has a relationship to both supply and demand. Demand is big right now and supply is lower than it would’ve been if there had been more investment in the housing market over the last decade.
In my opinion then, while things are out of whack, I don’t expect the severity what happened in Japan’s housing market to happen here. But…while history may not repeat it certainly can rhyme!
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