House Price Bubbles 2.0 In Pictures

By Mark Hanson Of M Hanson Advisers

Bottom Line: House prices and end-user, shelter-buyer fundamentals have never been further apart in key, economically significant cities.

The two charts presented in this note highlight just how diverged house prices have become from end-user, shelter-buyer, employment and income fundamentals in the most populated, economically significant US cities.

I maintain that House prices are always drawn to the purchasing power — or, economic strength — of the end-user, shelter-buyer cohort, as the dominant, permanent demand driver.

But, sometimes House prices, like other asset prices, go through periods of separation from end-user, shelter-buyer cohort fundamentals.  And based on the most recent data of incomes, mortgage rates, and House prices in key cities around the nation, house prices and end-user fundamentals have never been further apart.  Even in Bubble 1.0, the divergence wasn’t this bad because exotic loans, which were the incremental driver of House prices, made for legitimately low monthly payments.

Some positive or negative divergences can be solved through lots of time, as the economy shrinks or grows.  But, over the past several years, as the economy barely grew each year, house prices soared at a pace that exceeded Bubble 1.0 in most regions.

As such, it’s reasonable to assume that the massive divergence in most key metros has been driven largely from the three things that just so happen to be present in all bubbles throughout history; SPECULATION, LEVERAGE, AND EASING CREDIT STANDARDS, regardless if on an individual, corporate, financial market, or Gov’t level.

* * *


If everybody had to buy a house the exact same way — say, with a 30-year fixed, fully-documented mortgage and 20% down — HOUSE PRICES could never detach from the end-user, shelter-buyer employment and income fundamentals for a particular region. In other words, HOUSE PRICES would be attached to and track these fundamentals, perfectly.

But, in times, of increased speculation, leverage, and declining credit standards, the end-user, shelter-buyer employment and income fundamentals get drowned-out and asset prices attach to the incremental spec and high-leverage drivers.  How long and far asset prices are driven by the incremental, spec and leverage drivers determines the scope of the divergence and ultimately the possible downside risk in an asset class.

For housing, in particular, using these data, I can easily calculate the potential HOUSE PRICE downside in each area.

Bottom line This massive HOUSE PRICE/fundamentals divergence will close at some point, either from surging wages, plunging credit standards or rates (make monthly payments less), falling HOUSE PRICES, or a combo of all three. 

* * *

Onto the data.

A big problem with house prices experiencing even a “moderate” correction of 10% to 20% — already underway in many of the most over-priced regions — is with between 40% and 50% of all house purchases for years being of the “less than 10% down” variety — and because it takes 8% to 10% equity to sell plus the 3% to 10% down payment on the new house — it doesn’t take much downside to swamp the nation in “NEGATIVE EQUITY” once again. And we know for certain that many homeowners rather pay their credit cards and car payments before their mortgage when they are underwater.

* * *

ITEM 1)  Household income INCREASE needed to Buy the Median Priced House in Key Cities.

Bottom Line:  On a “national” basis the divergence isn’t too bad…6%.  But, in the key cities that drive the US economy, Bubble 2.0 has blown large.  This represents significant downside, especially in the sand states, just like in Bubble 1.0.

ITEM 2)  DIVERGENCE between Actual Household Income & Income Needed to Buy the Median Priced House.

Bottom Line:  Here too, on a “national” basis the divergence isn’t too bad…-6%.  But, in the key cities that drive the US economy, Bubble 2.0 has blown large.


adanata Raffie Mon, 08/21/2017 - 19:22 Permalink

Been following this market in Western NC as prices soared above housing bubble 1.0 [I sold out at the top of that bubble and put the equity elsewhere]. Now, for the last few weeks, virtually every housing solicitation is headlined "Price Reduced" and I actually got a call from a realtor offering a "cash rebate" if I would sell my house [I'm waiting it out in an apt so no 'cash rebate' for me]. He should be talking to the banks holding property off market to sustain nose bleed prices. In any event, clearly there's a change in the air; many people are staying put while others won't buy at these prices. Although I would beware of foreign buyers; it's one of China's favorite methods of colonization.

In reply to by Raffie

NoWayJose adanata Mon, 08/21/2017 - 19:36 Permalink

I thought about moving to western NC but there are too many skinny weaving roads trying to handle all the cars from the people that already moved there! Tried to go about a mile and make a left turn into a restaurant - pretty much a "You can see it from here, but you just can't get there from here".

In reply to by adanata

City_Of_Champyinz adanata Mon, 08/21/2017 - 19:41 Permalink

I have been living in a truly shitty rental duplex waiting for a correction, NW Indiana real estate prices are too rich for my blood, I would like to buy a place, a mortgage payment is much less than rent, but I need to be able to sell and move whenever i want as I hate working in Chicago and don't plan on staying long.  I buy now and there is a big correction and I am totally fucked and stuck in the house.

In reply to by adanata

Paul Kersey adanata Mon, 08/21/2017 - 19:42 Permalink

Adanata, you must be talking about housing somewhere out in the boondocks, because I sold my house in North Asheville way too early. House prices are still climbing:

"The median home value in Asheville is $253,900. Asheville home values have gone up 9.1% over the past year and Zillow predicts they will rise 2.8% within the next year. The median list price per square foot in Asheville is $227. The median price of homes currently listed in Asheville is $359,000. The median rent price in Asheville is $1,500."

In reply to by adanata

Blue Boat adanata Mon, 08/21/2017 - 22:05 Permalink

adnata - I'm here in Asheville and am bailing out. Closed in Jan 2014....just before the market took off again... on a nice, well-located, solid brick house on a pretty property. Very fortunate timing.Decided I'm done with this town. Too narrow-minded and intellectually boring (both the liberal transplants and the local, mountain Baptist-types), also touristy economy is pretty limited and money-grubbing. I like most other things about the town.Anyhow, I listed my home myself on Zillow and Trulia a few weeks ago. Got 3 lookers the first couple of days, ALL made good offers but the first two couldn't beat the lady who offered with no agent attached to her. She's solid and we're almost done with due diligence. She's asking for no closing money, no warranty and no repairs (house in great shape). So, I'll get her full offer with no reductions!!  (The other 2 buyers came back almost begging).  I never even put a sign in the yard let alone paid the fee to get MLS listed.  My brain had a hard time processing this as I've sold two properties previously, elsewhere, in shitty markets. This has been a dream!Have purchased a house in the Cincinnati metro that is 1/3 smaller and property is 1/2 the size but it only cost me 42% of what I'm selling the Asheville house for.Cashing out of this bubble and it feels GREAT!!Edit: Oh, and property taxes just went up 30% this year and the brilliant citizens of this little city of 90,000 just voted last Nov for 3 bonds + interest that puts the town almost 100 million dollars in debt. Sayonara, MFers.

In reply to by adanata

EX-floor hedger Raffie Mon, 08/21/2017 - 20:46 Permalink

hit a bid - git a check....Happened to my goof-ball brother in Chi-Raq during the last housing bubble... then he lost his job and he actually walked away from it. Couldn't afford the payments. Moved in with his whore girl friend. He still doesn't own anything, everything is in the girl friend's he's waiting for mom to die so he gets an inheritance...absolute urban white trash...

In reply to by Raffie

forestgump227 Raffie Tue, 08/22/2017 - 00:22 Permalink

As you can see in the chart above home values in seattle are still not much higher than they were in 2007, not even accounting for inflation. For example, I bought a condo in a lower priced seattle suburb for 135,000 last year. I could sell it now for 165,000. In 2007 i tsold for 175,000. Accounting for inflation it is still well below 2007 levels.

In reply to by Raffie

Paul Kersey Five Star Mon, 08/21/2017 - 19:37 Permalink

"The percentage of people owning homes is crashing"

Yes, but the percentage of corporations and hedge funds owning single family houses has gone way up. Remember, the Fed's major purpose, as well as that of the Treasury Dept., regardless of what one might hear from the lips of liars like Fed Chair Yellen or Treasury Secretary Mnuchin, is to pump up the prices of assets owned by the WORLD's wealthiest people.

Remember when the housing market was on its ass in 2011?. The Treasury, needing to help the TBTF banks dump their foreclosures, offered first time home buyers an $8,000 tax credit. Then the Fed followed by monetizing enough longer term Treasuries to bring the rates down to 4%. So, if home sales die down, and hedge funds can't get rid of their SFH inventory, count on the Treasury to issue 40-year Treasury bonds, and count on the Fed's Primary Dealers to sell those Treasuries to the Fed on the secondary market. The plutocrats will always find ways to get the Fed and the Treasury to keep the debt slaves deeper in debt, and to make the rich asset holders, even richer than ever.

In reply to by Five Star

I am Jobe Mon, 08/21/2017 - 18:59 Permalink

Austin, Dallas not on the list. Not worth buying a house in these places plus property taxes way too high. Not many high paying jobs . All gone

Delphi_Addiction American Snipper Mon, 08/21/2017 - 22:38 Permalink

Yep. Collin County is one of the wealthiest in America below the Beltway, just below Ft Bend Co. And CA corporations moving there in droves, so the foundational premise for *some* appreciation exists. All dramatic bubbles need their "story" to rationalize the insanity, and (liberal) migration is the one for this cycle. It's a very easy stpry to digest. But being Texans, everything is bigger and this version will be no different. The crash will be equally profound, I feel like I've seen this Dallas movie before.…

In reply to by American Snipper

chubbar Mon, 08/21/2017 - 19:07 Permalink

Next question is what is the leverage of the institutions holding the paper on these houses? I still think the banks are technically insolvent but my guess is that a bunch of this shit is parked in pension plans. This crash is going to be epic. Seriously, when this goes, there will be no paper assets that don't get crushed.

GodHelpAmerica (not verified) Mon, 08/21/2017 - 19:10 Permalink

It's a global economy except when it comes to real estate. Fools...

The US is getting poorer relative to the rest of the globe. Might want to start factoring in those foreign speculators --who are wealthier than ever before--into your analysis as to why home prices are so astronomically high despite the local economies being unable to support the incomes needed to afford them.

See Canada. The same shit is going on there...

And this is how the west will be inundated by inflation--from OUTSIDE demand, where economies are actually growing and real wealth is still being created.

NoWayJose Anarchyteez Mon, 08/21/2017 - 19:32 Permalink

What if the combination of weak US dollar, government regulations, cost of materials, employment costs for builders (including healthcare), insurance costs for builders, land costs, etc - are actually showing these prices to be 'real'?

Yes, there are places with $500,000 homes - but those markets are not based on the cost to build as much as in the foreign buyers or big paying local government, defense, or tech jobs.

In reply to by Anarchyteez

WhosJohnGalt NoWayJose Mon, 08/21/2017 - 19:41 Permalink

That would only be a valid argument if wage inflation was up as well.And we all know that wages are stagnant for the past 10 - 15 years.So no -- these are not "real" prices.Unbelievably, it's the mother of all bubbles -- even after the original "mother of all bubbles" back in 2008.Americans are just too stupid (and greedy) for their own good.I'm going to enjoy watching these housing and equity fools get eaten alive this time.And I am 100% confident that this time will NOT be followed by a V-shaped recovery in both housing and the stock market like last time -- i.e. it's going down and staying down for good this time, at least for the rest of our lives more than likely.

In reply to by NoWayJose

ronin12 Mon, 08/21/2017 - 19:32 Permalink

Was in the bank today and the mortgage guy was telling me they are looking at excluding student loan debt from the debt to income ratio calc. So many of the student loan debt slaves can't get mortgages - so clearly the answer is to pretend the debt doesn't exist. Sounds like a recipe for bubble 2.0. 

pkea Mon, 08/21/2017 - 19:53 Permalink

patiently wating for any kind of pullback that seems as real as rainbows and uniconrs at this point .. there is a steady demand in the luxury sector over 1M in san diego,,,

pkea TBT or not TBT Mon, 08/21/2017 - 20:55 Permalink

In my area(coastal san diego) they are in the strong hands but i noticed that the strongest hands(with multiple properties so it wasnt a big deal to sell something that appreciated since 2010-2012) actually sold this spring and summer along with me at the much weaker streched loan we will see...have to note there are a lot of chinese buying for cash...

In reply to by TBT or not TBT

illuminatus (not verified) Mon, 08/21/2017 - 20:05 Permalink

After the last bubble popped people that had money snapped up the cheap housing ( along with real estate rental etf's etc.) and so they started jacking up rents, which is where we are now. Plus obviously wages for the working class have been stagnant so the 99 % have had to go into more debt to afford housing and everyting else. There is so much money flowint to the top that needs to go somewhere that banks and the wealthy would rather hold on to houses and let them sit empty than lower rents or the sale price. It's a total mess and it all is directly traceable to fhe easy money policy of the fed.

any_mouse Mon, 08/21/2017 - 20:11 Permalink

Article doesn't state the source of the house price figures.

There is a big difference between sold price and asking price.

Buying a house using leverage is expensive.

Most would not purchase a buy and hold equity using leverage.

Why buy shelter that way?

Shelter is a tool, like a vehicle. Utilitarian.

FIRE wants to sell houses on credit. They can feed off your labor for years.

Sorry_about_Dresden Mon, 08/21/2017 - 21:26 Permalink

Nobody even mentions the $1.78 trillion the Feral Reserve has printed to buy MBS to languish and then roll over, or did I just miss it???

The Feral Reserve is in the market competing w/ buyers, this is what drives RE prices up, same phenomenon in UST market, they keep yields lower bounded.

These are criminals distorting markets. Very simple.
Here is proof:

Does not take a genius to figure it out, I am pretty dumb, and it is obvious to me.

Nope, did not miss it! ZH is just msm. I need to start a rag politely, indirectly, writing the truth about the Khazars, and they will just give me money to go away.

PN7 Mon, 08/21/2017 - 21:37 Permalink

So California & New York & Massachusetts are "sand states"?  Seems like Phoenix and Las Vegas would show up as problems if the problem was worst in "sand states."  Phoenix seems to be doing okay, and Las Vegas isn't even listed.

LightBulb18 Mon, 08/21/2017 - 21:38 Permalink

Its not enough information. The pivot is on how much surrounding land is off the market, due to environmental racket, government ownership, or whatever pretense keeps land from being utilized for affordable housing at under A 1 hour drive, considered the maximum that people are willing to drive to get to work. Today you would also need to know how many homes are held in foreclosure and not available on the market, in order to support bubble valuations. In A free country with reasonable economic transparency, we should easily be able to see approximations for income levels in the city broken down into poor, middle class and rich. Then we would add other pertinent information, like how many renters, paying how much rent, and how many may be looking to buy approximately. But when all is said and done we don’t need statistics anymore with 40 to 50% of young people living with their parents, and A simple drive down the street exposes us to the vast numbers of minimum wage and near minimum wage employees littering the stores all around us with no chance of renting an apartment and eating in them with the lights on simultaneously. 30 – 40k is the minimum to get an apartment for A single person, and your rarely going out and living in poverty. Home ownership is for married couples who hooked up near the time period of high school and college, when being broke wasn’t shameful. At like 50,000+ you can get into A home as A single person in A neighborhood that you don’t have to own A gun, even though its always A good idea. Still poor at 50k in south florida. If the neighborhood is dangerous, most people choose to rent in A neighborhood where they don’t worry about getting robbed, and their aren’t thugs hanging out in the streets late at night, endangering the women folk. Reality is depressing and totally fatal, but it is A relief when you spend most of your life listening to bull. Sad that most women live with attitude and end up not getting married at all. They never figure out why men don’t want to spend the rest of their days with them. Or the men don’t figure out that the women need help to survive this time period and level of revelation, before partial disaster sets in. Hopefully we figure it all out, and accept in time! In God I trust.

ozziindaus Mon, 08/21/2017 - 23:17 Permalink

We've been talking housing bubbles, me included, since ZH started. Like the stock market, if you just stayed put and took your licks, you'de actually be UP by now however, there's always a crisis around here and just around the corner. I'll take my chances