After Seven Lean Years, Part 1: US Residential Real Estate: The Present Position And Future Prospects

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

"Prosperity" based on serial asset bubbles and near-zero interest rates is neither real nor sustainable.

Longtime readers know I have been covering residential housing since mid-2005. In those 8+ years, housing has proceeded through a cycle of bubble-bust-echo-bubble: now the echo bubble is crumbling, for all the same reasons the 2006-7 bubble burst: a prosperity based on asset bubbles and low interest rates is a phantom prosperity that cannot last.

Correspondent Mark G. has written a three-part series on the current state of the residential and commercial real estate (CRE) markets. Part 1 addresses residential real estate.

The broad context of this analysis is straightforward: an economy based on ever-rising consumption falters when real household incomes stagnate or decline. Real income for the bottom 90% has been stagnant for forty years, and has declined since 1999.

The only way to keep consumption rising when incomes are stagnant is to boost the borrowing power (i.e. collateral and creditworthiness) of households by inflating asset bubbles that create temporary (i.e. phantom) collateral and by lowering interest rates so the stagnant income can support more debt.

This is why the Federal Reserve and the other agencies of the Central State have been reduced to blowing serial assets bubbles: there is no other way to keep a consumption-based economy from imploding.

But "prosperity" based on serial asset bubbles and near-zero interest rates is neither real nor sustainable: real prosperity is based on rising real incomes, not debt leveraged on phantom collateral.

Here is Part 1 of Mark's series on U.S. real estate.


Today consumer spending represents approximately 68% of the total gross domestic product and the annual economy of the United States.

PCE = Personal Consumption Expenditures. GDP = Gross Domestic Product. The ratio of these numbers times 100 produces the percentage figure.

PCE includes food, entertainment, residential housing, automobiles, clothes and iPads. The consumer broadly has two ways to obtain the money needed to support this spending. The first method is to earn it and the second method is to borrow it.

Since 1999 average real household income in the USA has declined by 10%. This real decline was only temporarily reversed during the peak bubble years. From 2000 to 2008 the full effects of this decline were masked by a vast expansion of household debts of all kinds, a collapse in mortgage and consumer lending standards and a concurrent decline in household net worth.

Exactly which 90% of the population is bearing the brunt of this collapse, and why it is occurring, is beyond the scope of this overview.

This trend culminated in the financial crisis of 2007 – 2009. This began in the subprime mortgage sector, spread to the entire residential real estate market and progressively engulfed commercial real estate, banking, the stock markets, commodity markets and finally all of international trade.

In response the Federal Reserve multiplied its balance sheet five times from $800 billion to $4 trillion dollars. And the US Government concurrently ran peak fiscal deficits up to $1.8 trillion. The US Government also extended many trillions more in direct guarantees of minimum prices of financial assets of all kinds.

US Residential Real Estate

The observed result of all this monetary and fiscal stimulus, combined with the lowest mortgage interest rates in the post World War II era, was to only slow the rate of decline of median US household income. In the combined residential US real estate market this set of policies had the following results:

Existing Home Sales

The rate of existing home sales has yet to recover to the levels of the mid-1990s. Since the most recent decline in sales rate is paralleling the upward spike in mortgage rates it is reasonable to believe they probably will not recover.

The average sales price of existing homes has recovered to approximately 2003 levels.

(Note: Whether increasing average home prices for a population still experiencing declining real average household incomes is an intelligent public policy goal is a second question. This question deserves far more critical discussion than it currently receives.)

New Home Sales: (This time it really is different)

Those interested in detailed numbers for single and multifamily housing construction can find them here:

New Privately Owned Housing Units Authorized by Building Permits in Permit-Issuing Places(Census Bureau)

New-Home Production Tops 1 Million in November (NAHB)

The National Association of Homebuilders (NAHB) announced in mid-December 2013 that new starts in single and multi-family housing had finally exceeded an annualized rate of 1 million units. In other words, the actual 2013 new construction number will be approximately 935k.

Prior to 2008 these sub 1 million total new build numbers were only seen in the six years of 1991,1981, 1980, 1975, 1966 and 1960. They have subsequently occurred six straight years in a row from 2008-2013. It will not be known for another year whether new builds will finally exceed 1 million in 2014.

Note that US population has been continuously increasing over the entire time period. Therefore the present era represents the lowest per capita rate of new construction on record for six decades.

Near Term Prospects

There are two primary reasons that residential real estate has not recovered more that it has. These are very straightforward:

1. Real US household incomes continue to decline.

2. Residential mortgage lending standards have been significantly tightened since 2007.

These charts represent averages and sums across most of a continent. Within this expanse some areas are already experiencing new record bubbles while many others continue to fall deeper into local depressions.

There are several other factors that have affected and will continue to affect the residential real estate recovery.

Factor One: Habitable Vacant Dwellings

“As of the first quarter of 2013, there are just over 133 million housing units in America and 10.7 percent of them — more than 14. 2 million — are vacant all year round for some reason or another, according to the Census Bureau."
To this 14.2 million empty dwellings we can add several million additional vacation homes that are only occupied for a few months a year.

Factor Two: Cultural Shift To Multigenerational Households

At least one person is required to create a household and occupy a dwelling. A related question is, what is the average number of empty bedrooms per occupied dwelling in the US? It is at least 1.0 and very probably much higher.

During recent years there has been an increase in average household size and a corresponding drop in the total number of households. This is the result of adult children and grandchildren moving back in with the “folks” to weather the economic storm. Whenever this occurs, two households become one household and residential housing demand is sensibly reduced.

A related trend is adult children who are economically unable to ever leave their parents household. To the extent these shifts are permanent trends rather than temporary expedients this will permanently reduce the per capita demand for residential housing.

Based on results the decline in real household incomes has proven insensitive to a variety of economic theories and policies. Neither the Republican-Bush era tax rate cuts nor the Democratic-Obama Keynesian pump priming at fire hydrant pressures has succeeded in reversing this long term trend. Nor has anything appeared recently to suggest an abrupt reversal is at hand in this key trend of average household income.

In these circumstances the only other possibility for further residential real estate “recovery” would be for government regulators to foster another bubble by effectively relaxing residential mortgage lending standards again.

Three Possible Future Outcomes For U.S. Residential Real Estate

In order, these are: go up further, stay the same or resume declining.

1. Up. The Federal Reserve has already begun withdrawing from its bond buying program, albeit at a slow rate of ‘taper’. This has accordingly led to mortgage rate increases which were accompanied by a prompt decline in existing home sales. It is mathematically impossible for a population with declining real household incomes to propel residential real estate markets higher in the face of higher interest costs.

2. Steady State. At a minimum, this outcome requires that average household income cease declining and that mortgage rates not rise significantly. Neither of these outcomes is likely. The following review of commercial real estate will examine clearly visible economic trends that make further household income declines a certainty.

If we cannot go up and even staying the same becomes doubtful this leaves:

3. Down Again.


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q99x2's picture

It will last. The globalists only destroyed the Arabs so far. They just started to go after the Africans.

LawsofPhysics's picture

Correct analysis, but the outcome is wrong.  Yes, consumer spending will decline, but then again this is the case in all centrally planned states.  If the people of the world continue to accept fiat in exchange for the fruits of their labor, then only the government "leadership" and their corporate cronies will have any wealth to spend on non-essentials soon enough. 

hedge accordingly.

1835jackson's picture

Residential real estate is more or less finished like everthing else that has been left in the wake of a Titanic monster financial system. Ice berg coming our way. 

Canoe Driver's picture

You're all wrong. How does the foregoing analysis change if we simply increase the TERM of the typical mortgage? Up next, the 50-year and maybe 100-year, "products."

donsluck's picture

Perhaps, but you run into diminishing "returns". For instance, a move from a 20 year mortgage to a 30 "saves" you 22% in monthly payments, but a move from a 30 year to a 40 year only "saves" you 13%.

AGuy's picture

"You're all wrong. How does the foregoing analysis change if we simply increase the TERM of the typical mortgage? Up next, the 50-year and maybe 100-year, "products.""

It probably won't make enough of a difference, especially when banks are not offering no money down, interest only loans. Loan standards are considerably tighter now. Also consider:

1. Boomers are reaching retirement age and are not interested in buying a second home, and are more likely to downsize to a condo. It expensive to maintain a home and difficult on a fixed income.

2. Young workers are already buried in student loan debt and can't afford to take on more debt. There is also a large number of middle age people that went back to school and loaded up on debt too.

3. The job market has become very volatile. People need to relocate frequency as companies relocate, get merged, downsized, etc. Many workers will be forced to rent to avoid getting stuck with a home they cannot sell quickly when they need to relocate for work. Renting provides flexibility.

4. Declining wages and job availability makes it more difficult to afford homes. A lot of families have reverted to single income as one spouse is laid off. Others are only finding part time work. The Labor force participation rate is sinking like a rock,

5. The only reason why home prices rebounded was because of people chasing yield. People with savings purchased rental properties since they were getting nothing on their savings. Hedgies also loaded up on rental properties in the chase for yield.


The only thing that will drive up home prices further is inflation. In my opinion, Its likely that the economy will double-dip this year as Obamacare kicks in, and inventories of manufactured goods have been piling up, which will trigger factory shutdowns and more layoffs.  Inflation for 2014 not likely to drastically change if we do double-dip (unless the dollar crashes).


BKbroiler's picture

If lowering interst rates causes home prices to rise, then rising interest rates have the opposite effect.  So if we're at the lowest possible interest in history, and interest rates have nowhere to go but up, how could housing not go down?

NoDebt's picture

I have a hunch the Real Median Household Income graph is going to complete the old "up, over and down" just like the Labor Force Participation Rate has.

LawsofPhysics's picture

are you suggesting that people need a wage in order to pay a mortgage or rent?  /s


NoDebt's picture

No, not at all.  We know the two aren't correlated in the new bizarro world (100 year mortgages, anyone??).  I'm just saying median income is going to fall like the labor force participation rate has.  

TPTB have decided that having a middle class is no longer desirable.  It's dangerous to their plans, in fact.  You can't have millions of people running around deciding what they want to do and having the financial means to carry through on those decisions.  They could make bad choices.  Obviously, government knows best, so their choices will be limited in numerous ways, including the most effective way- having very little money to do anything with.

Winston Churchill's picture

Multi generational mortgages have really held up Japanese housing prices.

Oh wait....

LawsofPhysics's picture

Exactly, the earth cannot adopt the Japanese model.  WWIII will happen first.

hedge accordingly.

Seasmoke's picture

Been saying since 2009. House prices need to reset back to 1997 prices and modifications must be given to ALL homeowners. Until then , NOTHING will be fixed. FUCK THE BANKS !!

Blankenstein's picture

Since most mortgages are owned by Fannie/Freddie/FHA you want to give taxpayer money to people who were irresponsible (bought way more house than they could afford), or were hoping to get rich quick in the housing ponzi?  How about helping the taxpayer and letting all of those who took big risks or were irresponsible (buyers, investors, banks) deal with the consequences.  There are plenty of people who didn't participate who would end up paying for those who did, who again will not LEARN anything as no one is allowed to experience the downside of an investment or decision.  

Sudden Debt's picture


the rats that is...

CheapBastard's picture

My old house increased in value 2-4% per year from 1980 to about 2002 and then shot up 300%.

That's not normal and it's not worth it ... even though I love it, it's still not worth 3x more now. Also, no way private sector salaries have increased 300%. Only way someone can afford it is with a masive leveraged loan and some serious debt unless some foreigner lays out a massive wad of cashola.

It's crazy stuff.

Sudden Debt's picture

If I wanted to buy my own house now which I have for about 10 years, I couldn't afford it anymore with my salary and I make 2 times what I made than.


Gromit's picture

This time it's a little different.

There used to be two basic determinants of residential real estate pricing: household income and recent price performance. Eventually price increases overwhelm the abiltiy to pay therefore prices fall.

Now there is a third determinant: due to financial repression seniors can no longer earn a decent safe return in financial markets (in 2006 3 month T Bills yielded 5%) so they are piling into residential real estate,

 paying all cash, and receiving maybe 6% yield. So long as financial repression (=QE) continues, yield will remain a floor supporting prices, call it the QE Put.

piceridu's picture

Pretty simple...

Residential real estate booms rely on 3 things:

Full employment, loose credit standards and a viable secondary market.


Do we have any of these?


Case closed.



starfcker's picture

or a crazy guy with a beard printing 85 billion a month. or ben bernanke

hugovanderbubble's picture

Excellent Charles Hugh;Regards¡

More_sellers_than_buyers's picture

Nothing will fix real estate until local finances are fixed.  I aint buying shit if Im on the hook for real estate taxes that are insane, and they dont even begin to cover expenses.  Its like buying a family member with a gambling problem.  Everything seems ok, but you know eventually your gonna be on the hook.

highwaytoserfdom's picture

Didn't Yellen predict this?  ROTFLMAO  you can put this up in those biggest lie jokes.  Humpty Humpty put all his eggs into property tax authoritarianism and protecting the Usury class.  PRICE TO INCOME  is the cost but the collateral table where the FED paid 85% on CDX worth 8%.  
 This in the name of market making.     Mr Market is not going to like this not one bit.  

Ignorance is bliss's picture

Wait until obamacare starts taking a bite out of family income. Didn't taxes also go up? Then of course the baby boomers will want to downsize from their current McMansions and get relief from local taxes. I'd say 2014 looks like another bubble busting year.

orangegeek's picture

Philly Housing Index - index of publicly traded home builders remains well below 2005 - nine years later


Banks hiding foreclosure inventory to mask how bad it really is doesn't help.   As you can see, the markets reflect this deception.

JR's picture

Today consumer spending represents approximately 68% of the total gross domestic product and the annual economy of the United States.

So, what percentage does the government consume?

In 1890, total spending by the US government as a percentage of GDP was less that 6.26% of GDP. In 2010 it reached more than 42%; in 2012 it was reported to be 39.46%.

The percentage of GDP takeover by the government has been growing like a cancer since 1914, when the Fed opened it doors for business on November 16, 1914. It's called socialism.

On December 12, 2013, debt held by the public was approximately $12.312 trillion or about 73% of Q3 2013 GDP.

 “Today said Karen Kwiatkowski on September 16, 2010, “Washington and other government successfully gobbles up 38% of GDP (and spends over 60% of GDP.

According to the World Health Organization (WHO), the United States spent more on health care per capita ($8,608), and more on health care as percentage of its GDP (17.2%), than any other nation in 2011. A large percentage of that was by government.

Wikipedia reports, “Health care in the United States is provided by many distinct organizations.[1] Health care facilities are largely owned and operated by private sector businesses. 62% of the hospitals are non-profit, 20% are government owned, 18% are for-profit.[2]  60–65% of healthcare provision and spending comes from programs such as Medicare, Medicaid, TRICARE, the Children's Health Insurance Program, and the Veterans Health Administration Health insurance for public sector employees is primarily provided by the government.”

In addition, the government currently provides over 47 million participants in about 23 million low-income households with debit cards they can use to purchase food each month. Means-tested welfare programs consume 5% of GDP.

Writes Heritage:

In 1964, “the American welfare state was still relatively small, consuming only 1.2 percent of U.S. gross domestic product (GDP). The American family was also still intact, with 93 percent of children born into stable families. But then President Lyndon B. Johnson’s War on Poverty happened. Forty-five years and $16 trillion later, thanks to big government, poverty is winning. Thanks to over $900 billion a year (over 5 percent of GDP) of spending on over 70 means-tested welfare programs spread over 13 government agencies, more than 40 million Americans currently receive food stamps, poverty is higher today than it was in the 1970s, and 40 percent of all children are born outside of marriage.

U.S. military spending accounts for 4.4% of U.S. GDP.

“The lessons of history, confirmed by the evidence immediately before me, show conclusively that continued dependence upon relief induces a spiritual and moral disintegration fundamentally destructive to the national fiber. To dole out relief in this way is to administer a narcotic, a subtle destroyer of the human spirit.” -- President Franklin Roosevelt, 1935 State of the Union Address

donsluck's picture

JR, in your third sentence you said "In 2010 it reached more than 42%; in 2012 it was reported to be 39.46%" That is a downtrend.

JR's picture

Thanks for the reply. Yes, there was a recent drop but overall the trend has been up, up and up.

Obama's $800 billion stimulus program, said the NY Times in 2012, concentrated over a three-year period, "amounted to 1.1 per cent of G.D.P. in 2009, 2.4 per cent of G.D.P. in 2010, and 1.2 per cent of G.D.P. in 2011. So far, some $750 billion in stimulus money has been paid out: about $300 billion went to tax breaks for individuals and firms; roughly $235 billion was dispersed in the form of government contracts, grants, and loans; and another $225 billion was spent on entitlements—unemployment benefits, Medicaid, food stamps, and so on."

IMO, forcing people's savings and personal discretionary spending via inflation and taxes into government-manadated GDP is when it starts to get very sticky --  robbing Peter so Paul can spend, so to speak.

In this case (which unemployment figures prove), much of the stimulus went to government workers, such as teachers and federal workers.

OldE_Ant's picture

Well since interest rates are as close to zero as we'll ever see don't see lower interest rates helping.

Income is down.  On a inflation adjusted basis WAY DOWN.   Free cash flow drying up, faster all the time.

And yet supposively prices are rising.   <sarc>Sure that's gonna last</sarc>


Laughing at the idea that 50, 100 yr morts can save us.  won't do dink.   The black debt hole has reached terminal mass and is starting the great suck and no amount of money printing can save us.  

We have reached "Terminal debt horizon".  At this point the more they print the faster we get sucked in to the 'debt horizon event'.   They know it, and they know we know it.