I continue to have a more dire outlook on the housing market than most. Of course, when I was calling it a bubble in 2005 & 2006 and the “greatest risk to the U.S. economy” many people laughed. But the evidence never lies and it’s still overwhelmingly negative. Let’s take a look:
The crux of the housing issue continues to be econ 101: supply and demand. As we continue on the path of deflationary de-leveraging it’s highly unlikely that the U.S. housing market will see any enormous upside move in housing demand. More importantly, it’s unlikely that any increase in demand will offset the incredible inventory on the market. Existing single-family homes on the market are still above 3.5MM. We would need to see a 40% decline in inventories just to reach the historic average.
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In addition, house prices remain elevated in terms of median income. Add in the massive job losses and it’s hard to imagine that this ratio improves drastically in the coming years without further declines in house prices.
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I continue to project a long U-shaped move in housing prices that takes us back towards the historical norm. Certainly, there will be bumps in the road and signs of recovery, but housing, in contrast to popular opinion, does not appreciate at a rate much higher than inflation. Historically, housing prices have barely outperformed inflation. The Fed is pumping in unprecedented amounts of liquidity to the market and they’re trying everything in their power to manipulate home prices. I think this is the very worst thing they can be doing now. The market needs to correct. It needs to normalize and punish those who made bad decisions. That is the only way the market can recover and build a base for a sound future. If I am wrong about my price projections I am afraid it will be due to the manipulation I mention above and it will likely result in even greater pain down the line.
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Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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