Former Goldman Sachs Head of Housing Research says that “House prices are 12% overvalued today. They have already started to decline. Today’s misvaluation matches the excess of 2006-07, just before the Great Recession.
House prices are 12% overvalued today. They have already started to decline. Today’s misvaluation matches the excess of 2006-07, just before the Great Recession. Since World War II home prices have been tightly correlated to income and mortgage rates (R2 = 96%). Investors/cash purchasers, which make up 50% of home sales, have driven real estate volatility to unrivaled levels in trackable history. As public policy makers debate seminal decisions on “forward guidance” and unconventional monetary stimulus we note that each 1% increase in rates drops home valuations by another 4%; at a 2% fed funds rate, where fed officials and investors expect to be by the end of 2016, the overvaluation equals 20%. Respectfully, the United States can not afford another housing driven recession. The facts and correlations – the tenets of probabilities – suggest it is more likely than not that home prices fall 15% in the next three years.
We do know that house prices are rising rapidly (though slowing) and that increase is not associated with a rise in real median household income (which is stagnant).
What is bubbling house prices is lower interest rates that benefit investors more so than the traditional middle class homebuyer. But The Federal Reserve is forecasting a rise in The Fed Funds Rate!
Sept. 17 (Bloomberg) — Federal Reserve officials raised their median estimate for the federal funds rate at the end of 2015 to 1.375 percent, compared with 1.125 percent in June.
The rate will be at 3.75 percent at the end of 2017, the Fed said today for the first time as it included that year in its Summary of Economic Projections. That is the same as Fed officials’ longer-run estimate. The median estimate in June for the long-run fed funds rate was also 3.75 percent.
So, what if The Fed Funds Rate rises to 3.75% at the end of 2017? If wages remain stagnant, there could be “Trouble In River City.” Or Potomac City (aka, Washington DC).
We MAY have Trouble In River City if real wages don’t start rising in a serious fashion.