This expert says the next recession will cause home prices to come down hard, but we learned last time that people have to live somewhere, and the government will save us.
Stack’s prescience makes his latest warning particularly ominous. He has dusted off the same Housing Bellwether Barometer that raised red flags more than a decade ago and is watching it to see when — not if — the nation’s booming housing market will turn down.
That barometer, Stack explained, is an index of “the most sensitive stocks in the housing industry” — including homebuilders and mortgage companies. It recovered nicely after the 2008-2009 crash and has been flat for the past few years. But over the past 12 months, Stack said in an interview, it “started to go up like a rocket ship again, similar to what it did back in 2004-2005.
That tracks the anecdotal evidence he’s seen of frantic bidding wars in some of the nation’s hottest markets. “It’s that kind of nuttiness that defines the psychology of a bubble,” he said.
Some key statistics also point to a new housing bubble:
- The Case-Shiller national index hit all-time highs last December and continues to rise.
- Case-Shiller indexes show prices in Boston, San Francisco, and Charlotte, N.C. about 10% above their previous peaks; Portland and Seattle, around 20% higher, and Denver and Dallas, 40% higher. These are the new boom towns, replacing Las Vegas, Phoenix, and Miami the last time around.
- The SPDR S&P Homebuilders ETF has quintupled (up 400%) from its March 2009 lows, vastly outperforming the broad S&P 500 , which has gained around 270%.
Stack says the best way to measure housing’s true value is to compare it with long-term inflation, and that measure is also raising a warning flag.
“Median family home prices are 32% above the long-term inflationary trend — in other words it has to fall 32% to get down to where it was,” Stack explained. “That’s not as bad as the 35% in 2005, but it does kind of wake you up and say, this isn’t normal, this is going to end badly.” To me, there isn’t much difference between being 32% and 35% overvalued.
Stack acknowledges there are big differences between 2005 and now. “You’re not seeing the esoteric mortgages, the so-called liars’ loans…,people buying multiple homes, thinking that they can rent it and make money on it,” he said.
Back then there was rampant mortgage fraud, huge demand from Wall Street for subprime mortgage securities and rating agencies giving them black checks, with no regulatory oversight whatsoever. Also, says Stack, there was an inventory glut then and a shortage now that is causing prices to soar.
On the other hand, “you are seeing lending institutions loan 95% or more of the value of the home,” he said. “That is a problem, because when home prices come down, it makes it very easy for the home buyer to walk away from that mortgage.”
One key similarity: “We still have a lot of easy money out there for mortgages,” he said. “We have a Federal Reserve policy today that’s unfortunately like the early 2000s,…, and it’s conducive to bubbles.” The federal funds rate now is very close to the 1% low where Greenspan pushed it, and that triggered the final, disastrous stages of the last bubble.
The big danger, of course, is the next recession, which Stack views as inevitable. “At some point we’re going to have another economic downturn, another economic recession,” he said. “When we see that downturn…you’re going to see [housing] prices come down quite hard over a period of 12- to 24 months.” He added that he doesn’t foresee a recession until at least 2018.
Stack’s record isn’t perfect — in early 2016 he called a bear market that never happened — but it’s been excellent over the long run, and going back to the 1987 stock market crash, he’s had a knack for spotting bubbles.
What we learned is that investors will be jumping in with both feet and the rest of their bodies, too. `Flipping` houses is considered a sure thing and that everybody who missed out after the last recession will not make that mistake again.
You cannot compare the loans which were given out then to today much more vetting and more realistic appraisals which are better regulated . I agree that a correction will occur but it will be prices will flatten. Not go down 30% the reason is more cash purchases, better borrowers. Lets take LA even if demand goes down 15% there are many other buyers. Each area of course will take its own path. I see San Diego, San Fran still desirable no matter what, but the world wide exposure of how great theses places will still fuel demand from overseas economy’s which might be immune to the US slowdown or come in and take it as an opportunity.
Why it is a good time to buy now interest rates are at the lowest level and will tend to go up even in recession times. The bottom line is if you wait, and the prices flatten what guarantee do you have you will get an interest rate fixed under 4%…going from 4% t0 5% us a 20% interest increase over the life of the loan. The main focus should be what is your OVERALL payment and can you sustain that for 7 to 10 years and not focus on the actual price, it is gonna cycle up or down or flatten. The one difference is today there is a housing shortage which was not at 2005…I remember my who lived in the depression saying people had to live somewhere, it always stuck with me.
Like it or not, republican or democrat, the simple fact is we have a population which is too great for the available housing resources with future looking even more dim in terms of more people coming in to California whether legally or not.
I saw that on cnbc, who hypes every new widget to come along. They will promote anything; good, bad or indifferent.
Did you see on the twitter feed what I said? Better agents sell homes for more money.
Nobody wants to consider that – the discount guys all act like the house will sell for the same price no matter who the agent is, so just hire the cheapest. Which is wrong.
But we live in the fake news era, where anybody can say anything.
Here’s a little food for thought….
And oh this new study that the 2008 was NOT caused by subprime it was the same people who are borrowing today/
Thanks Ty, glad we could get our two most favorite doomers mentioned in one comment section! You know that Hanson has been calling an imminent crash for at least five years now, right?
I do. I found Schiff in 2007 and these other guys including you shortly after the crash. This market is a fugazi, a fake. It’s all manufactured. And why am I blocked on twitter? I tried to follow you the other day. Never had any interactions with you before?
I’ll check. Never thought about blocking anyone on twitter.
Twitter is like the rest – short on instructions, so I don’t see anywhere on my settings how I could block somebody in advance, or someone who hasn’t had any contact with me before. You are welcome to try again, or give me your handle and I will follow you.
I did block the girl who wanted web-cam sex though – that wasn’t you, was it? 😆
I can’t follow you I’m blocked. Unblock please
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