How Much Longer Can Our Unaffordable Housing Prices Last? (Spolier Alert: Not Much)

Tyler Durden's picture

Submitted by Charles Hugh-Smith via,

Markets discover price via supply and demand: Big demand + limited supply = rising prices. Abundant supply + sagging demand = declining prices.

Eventually, prices rise to a level that is unaffordable to the majority of potential buyers, with demand coming only from the wealthy. That’s the story of housing in New York City, the San Francisco Bay Area and other desirable locales that are currently magnets for global capital.

In the normal cycle of supply and demand, new more affordable housing would be built, and prices would decline.

But that isn’t happening in hot real estate markets in the U.S.  What’s happening is rental housing is being built to profit from rising rents and luxury housing is being built to meet the demand from wealthy overseas buyers.

With limited land in desirable urban zones and high development fees, it’s not possible to build affordable housing unless the government subsidizes the costs.

Meanwhile, the supply of existing homes for sale is limited by the owners’ recognition that they won’t be able to replace their own home as prices soar; it makes financial sense to stay put rather than sell and try to move up.

Some homeowners are cashing in their high-priced homes and retiring to cheaper regions. But this supply is being overwhelmed by a flood of offshore cash seeking real estate in the U.S.

This is part of the global capital flows I described in my recent analysis What Happens Next Will Be Determined By One Thing: Capital Flows. As China and the emerging market economies stagnate, capital that was invested in these markets in the boom years is moving into dollar-denominated assets such as bonds and houses.

This globalization of regional housing markets is pricing the middle class out of housing in areas that also happen to be strong job markets.

Many commentators are concerned that a nation of homeowners is being transformed into a nation of renters, as housing is snapped up by hedge funds and wealthy elites fleeing China and the emerging markets.

But will current conditions continue unchanged going forward?

Let's start with the basics of demographic demand for housing and the price of housing.

Demographics & Housing Valuations

There are plenty of young people who'd like to buy a house and start a family (a.k.a. new household formation), but few have the job or income to buy a house at today's nosebleed levels -- a level just slightly less insane than the prices at the top of Housing Bubble #1:

(Charts courtesy of Market Daily Briefing)

The current Housing Bubble #2 (also known as the Echo Bubble) certainly isn’t being driven by rising household income, as median household income has declined when adjusted for inflation:

What enabled households to buy homes as prices pushed higher?  Super-low mortgage rates:

Now that mortgage rates have hit bottom, there’s not much room left to push housing valuations higher by lowering rates. No matter how solid the buyers’ credit rating, mortgages remain intrinsically risky, as unexpected medical emergencies, job losses, divorces, etc., trigger defaults in the best of times. In recessions, job losses typically cause defaults and lenders’ losses to rise.

All debt, including home mortgages, is based on household income and debt levels. The higher the debt load, the more money the household must devote to debt service. That leaves less to spend on additional debt or other spending.

As this chart shows, the ratio of debt-to-earned income (wages and salaries) has declined since the speculative frenzy of Housing Bubble # 1, but it remains almost twice the levels of the pre-bubble era:

Based on the fundamentals of domestic income -- debt levels and current home prices -- only the top 10% of households has much hope of owning a home in globally desirable regions:

If domestic buyers can no longer afford to buy, then who’s left? Cash buyers from overseas is one answer.

Capital Flows into U.S. Real Estate

Chinese millionaires buying homes for cash in the U.S. and Canada have been voting on conditions in China with their feet.  The tide of money leaving China has turned into a veritable flood, with hundreds of billions of dollars leaving China in the past year aone as economic conditions there deteriorated.

This flood tide can be seen in real estate transactions, not just in the U.S. but in Australia, Canada and the U.K.:

These cash purchases by wealthy foreign nationals are creating a bifurcated housing market.

In areas deemed desirable, Chinese and other foreign nationals are dominating the market (see: 80% Of All New Home Buyers in Irvine, CA Are Chinese).

In regions that are below the radar of offshore buyers, for example, broad swaths of the Midwest, home prices remain more affordable.

But even domestic markets with relatively few foreign buyers have seen soaring home prices if there is strong job growth and limited land for new development.

A Bifurcated Housing Market: The New Normal?

These dynamics have created islands of strong job growth and global/domestic demand for housing in which only the wealthy can afford to buy and everyone else is a renter for life. These islands are surrounded by a sea of lower-cost housing in regions with weak job growth and stagnant wages.

Is this bifurcation the New Normal? Or is Housing Bubble #2 heading for the same shoals that popped housing bubble #1 in 2007-08?

Right now, the general consensus is that housing prices “will never decline” in New York City, the San Francisco Bay Area, etc.—the islands of job growth and high valuations--due to the strong U.S. economy and capital flows into USD-denominated assets. But if the bulk of this capital flow has already occurred, and capital controls and clawbacks become the order of the day, this prop under current nosebleed housing valuations might be kicked away far sooner than anticipated.

In Part 2: How A Major Housing Correction Can Happen Over The Next 1.5 Years we examine the strong argument can be made that conditions are far more fragile in this Bubble #2, as the global recession that is rapidly spreading around the globe can’t be reversed with the same bag of tricks that worked in 2008-09.I expect home valuations to fall rather quickly once capital flows out of China drop off and the recession swamps America’s economy.

History suggests that the markets that soared the most are also the ones that collapse the farthest.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access)


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junction's picture

The housing prices will stay high as long as there is money laundering and flight capital.

CaptainAmerika's picture
CaptainAmerika (not verified) junction Oct 10, 2015 7:45 PM

if interest rates ever go up, the prices will come down since most buyers budget on the monthly payment

Handful of Dust's picture
Why $10B of China’s money is laundered every month(NYP, July 2014)


To avoid taxes or even seizure by the government, rich Chinese have exported a stunning $1.4 trillion between 2002 and today.

China leads the world in “illicit capital flows” — we call it “money laundering” — while Russia, with $800 billion hidden outside the country, is runner-up.

So much money is fleeing China — $10 billion a month — that it’s distorting the global economy, particularly in the art market and with real-estate booms in cities like New York.



Has it gotten better? or worse?


I know, I know..the New York Post, but it's still relevant.

tarabel's picture



Two thoughts:

1) That was last year's number. I'll bet it's a lot higher now.

2) How is this accounted for on national GDP calculations? It seems like it should be accounted for as part of the balance of trade in some fashion, but I doubt it is.

NihilistZero's picture

I doubt mortgage interest rates are going up significantly anytime soon. But you had near record low rates in 2011-12 and prices were fairly affordable then. Housing Bubble 2.0 is solely the result of a speculative frenzy buying into momentum. This run up has occurred on the same miniscule volume that the stock bubble has grown. Unlike the liquid stock market, housing is going to be nigh impossible to prop up once price momentum takes hold. There RE a huge amount of scotch tape and glue renegotiated mortgages due to reset. These horrible Regis which included no principal write downs are goijg to be foreclosed. The other organic sales due to job loss, etc should add some inventory, which is already rising, to a market that isn't full of hot money buyers anymore. Things are beg8nning to cycle. Once the momentum changes I expect a correction to early 2012 prices. That was the last time the market wasn't hyper manipulated outside of the artificially depressed mortgage rates.

nathan118's picture

Dude, you should start a blog about this stuff. :)

NihilistZero's picture

If only I had 2 more hours in each day LOL!

TBT or not TBT's picture

Bought a bay area mcmansion in in 2011 at 3.4% / 30y fixed.  Same house goes for 40% more now, at 3.8 or whatever it is now.   Foreign flight capital appears to be propping this up. Also, artificial scarcity of single family homes here.  Because central planning, NIMBY, leftism, etc.   Neighbors are employees at Apple, Google, Facebook, medical device and pharma, oracle et al.  Lot of green card holding techno-coolie couples too.  

FreedomGuy's picture

I would add that the house flipping seminars are back in force. This is another form of artificial demand and fertile grounds for the next crash.

Part of the reason for growing income disparity is low interest rates, as well. Most people are not sophisticated investors and basic interest bearing vehicles are their primary method of growing their savings. Grandma has been eating the principle in her investments or taking more risk.

Limbs Akimbo's picture

Actually, I'd opinion the prices have to go back to 2002 with some adjustment for wages.

On the last down turn, many areas retreated to 2002-2003 prices. But the free money pump started with the tech bubble so that altererd the economy. Then the liar loans started in 2002.

TheEndIsNear's picture

Yes, the principal owed doesn't mean much to those of us who are 85 years old and just signed up for a 30 year fixed rate mortgage. Too bad they don't have 100 year mortgages.

Deathrips's picture

Without a loan, whats the price of a home?



world_debt_slave's picture

I live in the mid-west and the housing market is way above pre 2008 price levels, up 12% in the last year.  Rents keep rising each year, and I thought moving to the mid-west was going to be cheap.

SeattleBruce's picture

You must be near an urban center..

Yen Cross's picture

 I'm pretty confident with my short HYG trades.

 I'm coming for MBS next. I have a bunch of friends in R/E that are scared shitless.

 You saw how I shorted corporate debt. I even spoon fed you the inverse ETF links.

 You can buy credit default swaps, or directly short ETF's or individual stocks, Mortgage Backed Securities.

 Personally, I like to have my hands on things, so CDS doesn't work. Insurance companies are skum of the Earth, when it comes to reciprocity.

  It's one thing to win a bet, and entirely, another to enforce your winnings.

LetThemEatRand's picture

The Fed is focusing on the stock market now.  They lured cash investors chasing safer yield (versus stocks) into real estate, and gave them yield while the bankers quietly unloaded their remaining shit.  That rug is about to pulled.  I like your bet.

centerline's picture

+1.  It was all about balance sheet repair.  No surprises there.  Posturing for the next move.  The Fed represents very private interests. 

greenskeeper carl's picture

thanks for posting that link, Id never heard of that guy before. its funny, about 8 of those 10 reasons are exactly why I am renting right now and saving my money. I firmly believe that you will be able to buy a house much cheaper in the future if you can just buy it outright

Normalcy Bias's picture

There's never been a better time to buy a home for twice its actual value.

Ignorance is bliss's picture

If you really want to know how this ends up, watch what he insiders do. They are not morons. I suspect the insiders will destroy the dollar through high inflation to pay off corporate and government debt. If they destroy our wealth they also destroy our debts. The question then becomes  are houses truely overvauled or is the Dollar overvauled?

Md4's picture

This is a misunderstanding.

If the dollar declines in value, our pay checks aren't raised up to compensate for lost purchasing power. On the contrary, you get what you get, and buy what you can.

In a severe inflationary period, especially a hyper inflationary one, the last thing you care about is debt owed--for anything. It no longer matters to either party. You need whatever YOU have to survive, and the creditor wouldn't get much for your payment anyway.



What would they do with it?

Who would they resell it to?

What would a new owner do with it?

When you think this through, you realize without a stable, prosperous middle class economy RESTORED, you end in collapsed chaos. TOTAL chaos, ala the movie "War Games".

We're here PRECISELY BECAUSE we not only refused to understand and accept the original problem (and we still haven't because it still continues), and because we continue to allow TPTB to skirt the issue. They have been turning markets into rackets, NONE being worse than the shack racket, in an insane effort to overcome a problem THAT DOES NOT HAVE A SOLUTION beyond a COMPLETE COLLAPSE AND OVERHAUL of a broken middle class economy. Until THAT happens, nothing works right, regardless of what it is.

Our dead economy is a middle class JOBS-PRODUCING INCOME problem, and NOTHING else.



Yen Cross's picture

 Tyler, that exhibit from June is priceless.

 lol, "slightly lower level of insanity". I love the Tylers!

buzzsaw99's picture

Now that mortgage rates have hit bottom...

you wish.

silverer's picture

Get rich! Refinance with negative rates! lol

Yen Cross's picture

 That 30 year mortgage wedge is priceless.

 I'll bet Black Stone, Rock has that on the front page of their '16 prospectus.

 My bad, we should be looking at Chinese uptake?

xrxs's picture

NIRP should help keep the bubble nicely inflated.

techpreist's picture

If everyone could borrow at NIRP rates, then why work? Just take out infinite debt and let said debt go down to zero.

Hmm... where have I seen easy money like this before...

froze25's picture

Love the avatar, I rooted my old Samsung gs3.  Good to see another tech warrior.

Berspankme's picture

US is the money laundering capital of the world. Every thug tin horn thief in the world buys real estate here

terry44's picture

I thought that was London.

Panic Mode's picture

Yeah, check the cost of train journey to London before 9am. Your jaw will drop. Thanks to those train union fucktards.

Temerity Trader's picture

Trump and only Trump. NO MORE foreign nationals will be allowed to buy U.S. property and those that have it, must sell. That will drive down prices and restore the American dream.


TheObsoleteMan's picture

They could create affordable housing conditions tomorrow if they wanted to, the truth is, they don't want affordable housing.

ZD1's picture

"Eventually, prices rise to a level that is unaffordable to the majority of potential buyers, with demand coming only from the wealthy. That’s the story of housing in New York City, the San Francisco Bay Area and other desirable locales that are currently magnets for global capital."


San Francisco smells like piss in most areas.

A light pole corroded by urine collapsed and crashed onto a car this summer narrowly missing the driver.

wcvarones's picture

Housing prices can and will at least plateau.

Nobody can afford another widespread price decline -- not households, not banks, not municipalities, not pension funds.

Therefore, shit will be propped up.  NIRP and more QE if necessary.

GooseShtepping Moron's picture

Tht's not going to work any better than sub-prime did. The households you speak of who "can't afford another decline" are getting old and creaky, meanwhile an entire generation of younger people are being bled dry and can't afford anywhere to live. Banks and municipalities cannot fix their balance sheets with crap collateral pumped up by QE. The housing bubble has to burst or the economy as a whole just isn't going to work right anymore.

terry44's picture

A currency crisis could force  the issue.

Professorlocknload's picture

Someone is buying them, so they are affordable.

yogibear's picture

When rates do go the other way housing prices will as well.

Historically low rates causes huge distortions, 

kiwigal's picture

The problem stems from countries allowing Chinese and non residents to purchase. The same is happening in Auckland, New Zealand, Sydney and Melbourne, Australia, Canada and the U.S.  The leaders do NOT want the flow of money to stop coming into respective countries even though the Chinese leader has expressed concerns on this. Quite simply citizens our leaders don't care about us, we are just the peasants...nothing has changed the serfs and masters.

August's picture

The only way for a young family to get into a decent home in Auckland (not to mention Vancouver, Melbourne etc. etc.) is to inherit one. 

If not the initiation of true neo-feudalism, it's at least a step back to 19th Century Britain / Europe.  It seems that the economic elite are always and everywhere very happy to see rising real estate prices, since they are the owners of the most valuable slices.

No wonder so many Maori, the original owners, are chronically pissed off.

kiwigal's picture

Yes interesting we get to see what it's like from the position of being the target for the conquer. Our leaders have betrayed us, every country that has allowed the foreign dollar invasion to destroy housing markets. But all through history when the poor are oppressed there is revolution, they are sowing the seeds of anarchy.

yogibear's picture

As long as the Fed keeps pushing lower rates and flooding the market with cheap money.

Making the bubble enormous is their job at hand

Gary Shiller said a couple days ago the Fed's going to push the 30 year to 2%.

When this does go the other way it will beyond the Fed's power. 

Fireman's picture

The irony of it all; so-called Western "capitalism" and Anglozionazi real estate has been converted to a global Chinese laundry and to top it off Pentacon Kill Industries is getting ready to start WW3 because of a minor real estate spat in the...Spratleys.


You couldn't make this s#it up.

Monetas's picture
Monetas (not verified) Oct 11, 2015 4:19 AM

Income tax is racism .... graduated income tax is genocide !

Monetas's picture
Monetas (not verified) Oct 11, 2015 4:23 AM

You can give a nigger a house .... if you pay all the expenses .... and hire illegal aliens to clean it, maintain it and do the gardening .... this bubble has a way to go !

Monetas's picture
Monetas (not verified) Oct 11, 2015 4:27 AM

Wealthy Chinese are good neighbors .... just bring in 10 Muslim scumbag terrorists .... for each Chinese entrepreneur .... for social stability ?