The real estate crash has started. Even the New York Times is coming out and saying the housing market is worse than you think.

  • How low will prices go?
  • Why might this crash look a lot different than the one we saw in 2009?

I'm gonna explain this to you in one simple, fast step.

Let's get right into this Case Shiller chart of US home prices.

The Case-Shiller Home Price Index is a widely used measure of US home prices. It is based on data from thousands of repeat sales transactions in hundreds of metropolitan statistical areas across the United States.

The index tracks changes in residential real estate values and uses a three-month rolling average to smooth out volatility associated with seasonality.

And we can see that prices are already falling. This chart goes from 1987 to roughly today's date. On the left, it's an index, we go from 0 up to 350.

case shiller housing index
case shiller housing index

Around 1986, we were right around 60. Then it drifts down toward its historical trendline as we get into the 1990s.
case-shiller 1986

Going all the way back to 1900, you can see that prices did not go up from 1900, all the way to 1998 when you adjust for inflation.

Prices did not go up from 1900, all the way to 1998 when you adjust for inflation

Then we go into the housing boom of the early 2000s. You guys most likely remember that, and prices go parabolic.

S&P/Case Shiller
The housing boom of the early 2000s

Prices go all the way up to 100 on this index. But then they come crashing all the way down. Where? To their historical trend line, or very near their historical trend line, going all the way back to 1900.

And then, the Fed comes in with quantitative easing, dropping interest rates, trying to prop up the economy.

And the housing market bottoms out in 2012, and then goes right back up to where it was.

Recently, since the cervesa sickness in 2020, and 2021, prices have gone even higher. In fact, they are much, much higher than they were at the peak of the last bubble in 2006.

Now, let's go over some of the reasons you're not hearing in the mainstream media as to why prices could come down even further.

Forced Supply

First and foremost, we've got what I call ‘forced supply.'

I'm sure when you listen to the news, or you listen to CNBC, you always hear that the supply in the housing market is very, very low. There aren't that many people who are selling their houses.

And since prices are set at the margin, if there are very few homes for sale, and you still have significant demand, that's going to increase the prices of all the other homes across the United States that aren't currently on the market.

Starter homes are unprofitable to build

Builders have not built starter homes, because they're simply unprofitable. And what I mean by starter homes, are the typical three-bedroom, two-bath, 1500-square-foot homes built in the 1960s, 1970s, and 1980s.

We're just not building any more of those, because they're not economically feasible. But this doesn't mean that we can't have more supply of those homes, or all homes in general, coming back onto the market. Let's think about this.

What could happen when we go into a recession

If we go into a recession, and this is key, you guys watch my videos, you know, we've been talking about the bond market and the inversions in the yield curve a lot. This inversion of the yield curve is a very powerful predictor of recession.

Are we already in a recession? Find out here.

So let's just assume we go into a recession in 2023. The unemployment rate most likely goes up. And if we have a hard landing, it could go up significantly.

Also, we would see asset prices, like the stock market, go down.

We've already seen the bond market get absolutely crushed when interest rates, like on the 10-year, have gone from 50 basis points, all the way up to now, let's say, 350 basis points. A massive increase in percentage terms.

US 10 year treasury
Rates on the US 10-year treasury have increased from 50 basis points to over 350 basis points since July 2020.

So what that means is all of the retirees and all of the average Joe and Jane's that had these bonds in their portfolio, have taken a huge haircut.

How bonds work

The yields on US Treasury bonds are inversely proportional to their price. As bond prices rise, yields fall. This indicates a growing investor demand for safe assets. Declining bond prices and rising yields indicate weaker demand.

So if you combine that with the s&p 500 going down by, let's say, 30 or 40%, this is going to have a massive impact on a lot of homeowners throughout the United States.

S&P 500
52-week range of S&P 500 experiencing a 30-40% drop in 2022.

And going back to the unemployment rate. I'd also point out Michael burry's bullwhip effect.

the bull whip effect
The bull whip effect

The bullwhip effect is something we've talked about on this website extensively.

You've got companies like Amazon, which had 800,000 employees in 2019. And now they have over 1.6 million.

number of amazon employees worldwide
Number of amazon employees worldwide

They hired all these additional people, because of the economic sugar rush from all the stimulus checks, well, those have now come to an end.

We could see Amazon, maybe not go back to 800,000 employees. But even if they went back to a million employees, they're still having to lay off or fire 600,000 people.

And think about if that phenomenon happens throughout all the businesses in the United States.

We could see this dynamic where people might not want to sell their house, but they have to sell their house, they don't have a choice.

An Example Of Forced Supply

We've got not the average Joe, the average Joe's grandfather. That's right, we've got Grandpa Joe, we'll call him. He's there with his cane. He's 75 years old, and he's retired.

The good news is Grandpa Joe has a house. And he has a significant amount of equity.

Retirees with significant amounts of equity
Grandpa Joe – He owns a house. He has equity. He's losing equity due to the changing market. He's worried. He decides to equity strip and downsize.

However, he's no dummy and sees housing prices going down. This is stressing him out, and he's losing a lot of sleep over this.

Let's say his portfolio right now includes $500,000 of equity in this house, maybe a $50,000 portfolio, which has taken a huge haircut because the bonds in the portfolio have gone down significantly in price, and then maybe he's getting $1,500 a month in Social Security.

Let's say right now he's got a 3% fixed-rate mortgage. He doesn't want to give that up. If he sells the home and buys another one, then his mortgage rate could go up to, let's say, 7%. He's motivated to keep his house.

But on the other side of the coin, he's looking around him, seeing prices coming down. And he's reading the news about the recession, maybe he's looking at the yield curve.

And he says, “Wait a minute, here, the majority of my net worth, the amount of purchasing power that I need to get me to the end, at the end of my life, quite literally, is pretty much in this house.

I could sit back and hold the house and just roll the dice, hoping the prices don't go down much further, or I could sell right now and extract that equity.

I might have to rent a much smaller place, but at least I've got my purchasing power to last me into my 80s 90s. And maybe hopefully even further to make sure that I don't have to work at Walmart or McDonald's to make ends meet.”

This is just another example of forced supply coming onto the market because of a recession that could put downward pressure. Even on nominal prices.

Alternative Investors Could Dump Their Rentals

Another thing you won't hear in the mainstream media is alternatives. From 2012 to pretty much today's date, all of these huge funds, like Blackstone, have been buying up properties all around the United States. Why?

Because it was their best risk/reward. But now we've got t-bills that are yielding, let's say 4.5-4.6%. And let's say that you get this on a six-month treasury.

Yields on a 6 month treasury
Current yields on a 6-month treasury as of this post

So now you have these groups like Blackstone saying, “Well, wait a minute here, we're getting 5% on our rental properties. And we've got to deal with tenants and toilets. Why on earth would we do that when we could just get 4.5% on a six-month t-bill, roll it over and have ultimate liquidity?”

And I'm not the only one that's pointing this out. My good buddy Adam Taggart recently interviewed housing expert, Nick Gerli, on his show called Wealthion.

Nick Gerli: There are anywhere from 20 to 30 million single-family homes in America that are investor-owned homes and second-owned homes where the owner does not live there. So think about that. That's a quarter of all single-family homes in America.

In terms of this logic, and this thinking about what's going on in the recession.

These people can easily sell. They don't live there. Right. And that's something we actually did not see as much in 2006, believe it or not. In 2006 we had a higher share of people actually living as primary occupants in the homes than we do now.

And so that's something, especially in investor-driven housing markets, that I think could lead to a subprime 2.0 type of situation where the investors all of a sudden start selling.

We know already, they've stopped buying in a lot of markets. But once they start selling, that has the potential to just flood the market with inventory in a way that's very difficult for people to conceive of right now.

So we've gone from an environment of T.I.N.A, There Is No Alternative, to an environment where we've got plenty of alternatives, maybe alternatives that are a lot better than dealing with those rental properties. So what do they do?

They sell them onto the market so they can take that cash and buy, let's say, treasuries.

Selling increases supply, which again, puts further downward pressure on prices.

So then the question becomes, okay, George, I get what you're saying here with the chart and the force supply the alternatives. This makes a lot of sense. But the main question that I want to know is, how low will prices go?

How Low Will House Prices Go?

Will we see home prices go all the way back to 2012? My answer is, yes.

There are no certainties, only probabilities. This is my base case, but here's the catch. They might not go down that far, in nominal terms. Only when you adjust for inflation.

Here's a chart of the housing market in the 1970s housing market.

chart of 1970s housing market
An inflation-adjusted chart of the 1970s housing market

We can see that housing prices throughout the 1970s went up nominally (blue line), although there were a couple of periods where they plateaued. So compare that to prices where inflation is removed (orange line). You get a much different picture.

Nominal vs. Inflation-adjusted

  • The nominal value of any economic statistic is measured in terms of actual prices that exist at the time. These prices include the price effects of inflation.
  • Inflation-adjusted refers to the same statistic after removing the effect of price inflation from the data.

You can see that there were a couple of peaks, but prices at certain times actually came right back down. And this is what I think you'll most likely see throughout the 2020s.

New York Times - The Housing Market Is Worse Than You Think
New York Times – The Housing Market Is Worse Than You Think

Right now, we've seen nominal prices coming down.

And if we look at many articles out there, like this New York Times article, a lot of Experts are predicting that prices could go down in nominal terms, well, let's say 20%, just in 2023.

What If High Inflation Persists?

If we continue with high rates of inflation, at 10%, maybe 7% or even 5% compounded year after year, it doesn't take you long, maybe three or four years before housing prices adjusted for inflation, go right back to where they were in 2012.

The next real estate crash, that we could be going into, right now, may look a lot different than what we saw in 2009 when nominal prices just came crashing straight down.

This time, they might come down slightly, they might even plateau. But when you combine that with the rate of inflation being relatively high, you would see the exact same chart in real terms, but in nominal terms, the chart would look a lot more like it did in the 1970s.

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