If I knew how, I’d short the real estate market. Right now. Because it’s pretty clear that home prices across the country will be falling for years.
The last time this happened, after home prices peaked in 2007, some investors made a killing by shorting the stocks of mortgage companies, Wall Street firms, Fannie Mae and Freddie Mac, and the big banks.
This time that probably won’t work, because the boom in home prices was so rapid and so thin (that’s why it was so rapid) that vulnerable mortgages are a small percent of mortgage portfolios. The big problem in 2007 was the huge number of sub-prime mortgages that eventually produced vast numbers of empty homes because the owners couldn’t make their payments; the risk today is just that some recent homebuyers will walk away from their mortgage if their equity disappears.
Why am I so sure that home prices will fall? In many parts of the country, especially the Southeast, they’re still rising at a good clip. Prices in Miami are up 12 percent over last year. The average increase for the country as a whole is 5 percent. Sure, every boom comes to an end at some point, but won’t prices just stay high? Inflation has pushed up a lot of prices that we don’t expect to come down again.
The answer is “income”. Since 2020, home prices are up 40 percent, but income just 13 percent. People with money can push home prices up, but after that, the buying has to be done by ordinary folks, who can’t afford to pay that much; so prices will come down until they can.
This isn’t just an article of faith, we’re seeing it happen right now; which is why I’m sure that home prices will soon be falling in many places.
Exhibit “A” is Austin, Texas. For more than 20 years, it’s been one of the strongest growth markets of the country. The annual population growth in that time has always been more than 2 percent, with jobs growing at an even faster pace. From 2000 to 2019, average income in Austin doubled, and so did home prices.
But it’s a different story with home prices since then. In the pandemic boom, since 2019, the average price in Austin rose 60 percent, far above what the average resident can afford but not unusual in the boom. Prices rose 60 percent in Phoenix and Miami, 56 percent in Charlotte, 54 percent in Nashville, 53 percent in Atlanta, 50 percent in Salt Lake City and Dallas, 67 percent in Knoxville, 76 percent in Naples, Florida.
And now prices in Austin have begun to come down again. 8 percent in the past 12 months, and more on the way.
The other measures of economic growth in Austin are still high. The population grew 3 percent in 2022; the number of jobs increased 3 percent in the past year. Average income in the last three years is up 15 percent.
Home prices in Austin are not falling because the local economy is in bad shape, they’re falling because they’re unaffordable. And that will happen elsewhere too.
Look at the chart that shows home price increases in Austin, then the one for Tampa.
Tampa also has been a growth market. The population grew 2 percent in 2022, jobs in the past year are up almost 4 percent. Average income in the last three years is up 18 percent. And home prices are up 63 percent.
Is there any reason to think that the chart for Tampa (or Phoenix, Charlotte, Atlanta, Nashville, etc. ) will not pretty soon look like the one for Austin?
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