Housing: It’s A Bad News, Bad News Situation

Among The Juice’s 100+ financial media partners is one of the best housing blogs you’re going to find — Bill McBride’s Calculated Risk. 

Bill does an excellent job covering the entire housing market and then some. Over the last few weeks, he has been relaying reports on 2023 year-end housing prices. And the news isn’t good, at least not if you’ve been waiting for lower prices. 

If you read The Juice regularly, you know we’ve been predicting a return to record housing prices in 2024 for a while. 

Consider our most recent take: 

Even if a, say, 6.6% interest rate isn’t attractive to everyone, it’ll be attractive to enough people to pull them off of the sidelines and, at the very least, keep prices steady. When people want to do something bad enough, they’ll pay a financial premium. If their target was 5.5%, they might convince themselves to take the jump at 6.5%. You get the picture. 

So, the lower the rates go, the more people who — exponentially — come off of the sidelines. They’ll drive this housing market beyond crazy in 2024. We don’t think anybody is prepared for or has predicted (cough, cough!) what’s about to happen. Record prices and the return of bidding wars in 2024.

In that December 2023 installment with the catchy title, Divorces Are Being Finalized, we supported those two paragraphs of opinion with some facts. You can get specifics at the link after you read today’s Juice, but, in the shell of a nut, housing market activity was picking up in November and prices were continuing to trend up. 

With the 30-year mortgage interest rate waffling around 6.6% for what feels like the longest time (after plunging from as high as 8.0%), let’s look at some of Bill’s posts on housing prices as the reports from the different groups who keep track of the data started rolling in. 

There’s this one — Inflation Adjusted House Prices 2.3% Below Peak: 

People usually graph nominal house prices, but it is also important to look at prices in real terms.  As an example, if a house price was $300,000 in January 2010, the price would be $425,000 today adjusted for inflation (41.5% increase) …

In real terms, national house prices are 10.4% above the bubble peak levels. There is an upward slope to real house prices, and it has been over 17 years since the previous peak, but real prices are historically high.

That’s one reason why we like Bill. He keeps it real. 

As we noted in Gen Z Ain’t Got No Home, purchasing power matters, be it within the context of inflation, local wages or the relationship between the two. 

Then, there’s this one — Case-Shiller: National House Price Index Up 5.1% year-over-year in November with the subtitle, FHFA: House Prices “Up 6.6 Percent from Last Year”: 

On a seasonally adjusted basis, prices increased in 14 of the 20 Case-Shiller cities on a month-to-month basis. Seasonally adjusted, San Francisco has fallen 8.8% from the recent peak, Seattle is down 7.2% from the peak, Portland down 4.5%, and Phoenix is down 3.4%.

If we may editorialize for a second. 

Yes, prices are down in those cities (according to one source). But they’re among some of the nation’s formerly hottest and still most expensive housing markets, particularly San Francisco and Seattle and, to a lesser, but still real extent, Portland and Phoenix. 

At the end of the day, how do these drops in prices help the average or even meaningfully above-average would-be homebuyer? They don’t. Looking at these markets might be fun — we enjoy doing it — but it doesn’t tell the part of the story that matters. 

The part that matters is that — as The Juice noted yesterday in a discussion on cost of living — housing prices are up 11.4% year over year in Cincinnati. In Buffalo, they’re up 4.9%. In Greenville, South Carolina, they’re up 13.2%. In Raleigh, North Carolina, they’re up 5.3%. In Detroit, they’re up 21.4%. That’s all according to Redfin. 

Of course, everybody’s data is a bit different due to the time frame and methodology, but it all ultimately lines up. This is from Bill’s post where he quoted data from S&P Corelogic: 

The 20-City Composite posted a year-over-year increase of 5.4%, up from a 4.9% increase in the previous month. Once again, Detroit reported the highest year-over-year gain among the 20 cities with an 8.2% increase in November, followed again by San Diego with an 8% increase. For the third month in a row, Portland fell 0.7% and remained the only city reporting lower prices in November versus a year ago.

We could keep going. But we won’t. 

The problem is clear: Price drops in the usual suspect hot markets mean very little. Plus, not all of the hot markets are in decline. And the ones that are will likely come back sooner rather than later. It’s these price increases in places that have been bastions for affordability that are concerning.

So we go back to our original opinion. If you’re looking to buy in one of these affordable markets, you must be getting antsy. Or you already went through that. Even with interest rates still relatively high, we’re seeing these markets surge. What happens when the Fed actually cuts rates and the cost to secure a mortgage decreases? 

We think all hell is about to break loose. 

The Bottom Line: We’re in a real pickle on housing. And for the people who are not locked into a low rate or don’t own their homes free and clear, this is a big problem now and going forward. As we keep saying the housing and retirement crises are, in many cases, interconnected. 

In Monday’s Juice, we get back to our 2024 retirement focus. That $500 a month we keep talking about. We’re going to start to discuss how to put it to work as part of a long-term retirement plan.

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