My analysis below highlights how out of scope house prices are from end-user, shelter-buyer, employment & income fundamentals in the most economically important cities.
This massive divergence has been driven largely from the things present in all bubbles; unorthodox capital, credit & liquidity driving speculation.
Like Bubble 1.0, house prices in the most lofty regions have been driven for years by “non-end-users” SPECULATING on rentals, second/vaca homes, and flipping – riding a wave of cheap & easy credit, liquidity & leverage – believing prices always go up.
While speculative cycles come & go, end-user, shelter-buyer demand is omnipresent. And end-user employment, income & credit fundamentals are what house prices will ultimately gravitate to.
With between 40% & 50% of buyers putting less than 10% down for years – and because it takes at least 10% equity to sell & rebuy – it doesn’t take much downside to swamp the nation in “effective negative equity” once again.
ITEM 1) INCOME INCREASE NEEDED TO BUY THE MEDIAN PRICED HOUSE IN KEY CITIES.
Bottom Line: On a “national” basis, it doesn’t look too badly. But, most of the most economically important US cities are experiencing “BUBBLE-LIKE” conditions again.
ITEM 2) Same methodology as the previous chart, but at the MSA level of various economically important regions.
ITEM 3) THE MOST BUBBLY REGIONS IN THIS CYCLE ARE IDENTICAL TO BUBBLE 1.0
Note, the pink/red shades highlight the regions in which the average earning household spends more than it earns each year to live. And the size/shades match up well to the regions in Items 1 and 2, showing the divergence between average household income and housing affordability.
Further, these are the exact regions that were the most bubbliscious in Bubble. 1.0. Yet, most think “it’s different this time”.