The real estate market in my personal and professional opinion continues to defy logic. Case in point home prices rose 18.6% annually in June, up from a 16.8% increase in May, according to the S&P CoreLogic Case-Shiller national home price index.

However, is this rational? Consider the following:

  • Prices are now 41% higher than their last peak during the housing boom in 2006.
  • This past year including Covid had the largest annual gain in the history of the Case-Shiller index which dates back to 1987
  • The gains are literally across the country:
    • The 10-City composite rose 18.5%, up from 16.6% in the previous month
    • The 20-City composite was up 19.1%, up from 17.1% in the previous month.
  • All 20 cities reported higher price increases in the year ending June 2021 versus the year ending May 2021.

The usual set of cities are showing the strongest price increases. Phoenix which for those with short memories was decimated during The Great Recession has gained 29.3% year-over-year. In San Diego they rose 27.1%, and in Seattle they were up 25.0%.

  • Prices in every city in the 20-city index (except for Chicago) are at all-time highs.
  • Concerning Denver, the Year-Over-Year gain for June 2021 was 19.63%

However is the party starting to wind down? 

  • According to Realtor.com AKA the National Association of Realtors (NAR): Home sales have started to cool. Signed contracts on existing homes dropped in July. Prices usually lag sales by about six months, that could be a sign that price gains will stop accelerating as they have been for over a year.
  • "According to new Ally Home data (a mortgage co.) 45% of buyers say they have delayed purchasing a home due to market conditions, with 29% citing high home prices and 20% indicating homes selling too quickly as factors in this delay," 
  • Peter Boockvar, chief investment officer at Bleakley Advisory group, said prices are rising at "a really out of control pace that is unsustainable and unhealthy." Of note I am in total agreement. Here is a link to his video interview: https://www.cnbc.com/video/2021/08/26/investor-peter-boockvar-gives-housing-price-bubble-warning.html

My concern, while the market is cooling off in various ways i.e. lessening demand, fewer multiple offer situations and related I am concerned about inflation. The markets keep advising the present inflation is a by-product of the Covid situation i.e. supply-chain disruptions, demand outstripping supply and other factors.

Yet consider the following:

You may have noticed basic everyday items from groceries to apparel has increased in price. 

  • Over the past few weeks, I have noticed the local supermarket sale circulars are fewer pages and prices across the board higher.
  • Cost of gasoline can be seasonal however for the past few months I have been paying in excess of $4/gallon for premium fuel here in Denver since before the summer, prices I am more accustomed to in California and the Northeast.
  • We still have supply chain imbalances concerning products from Asia from durable goods to toys; one of the many reasons why inflation has not subsided.
  • Wage Inflation: Minimum wage has been increased by statute in many states to a floor of $15/hr. Coupled with inflation pressures starting hourly can be higher due to demand (here in Denver not uncommon to see entry level jobs being advertised paying $17/hr starting salary, even higher in the mountain resort communities) which impacts all of us concerning spending. 
  • Hurricane Ida: Almost 25% of the refining capacity for oil, liquified natural gas and other petrol-chemicals occurs on the Louisiana coast. Even when this market returns to normalcy consider the regional inflation concerning laborers and materials going to the Gulf Coast to rebuild.

If inflation is not tamed naturally the Federal Reserve could ease the purchase of mortgage-backed securities sooner than later and/or if inflation now considered temporary becomes more permanent the Federal Reserve could raise the rate on Fed Funds which would almost immediately raise interest rates on mortgages thus dampening the demand for housing. 

If there is a 10%-20% correction in the equities markets which some predict (see link below) this could lead to a chilling of the wealth effect which could impact housing. I am not the only one concerned about this possibility: https://www.marketwatch.com/story/this-canary-in-the-coal-mine-shows-a-10-s-p-500-correction-is-getting-closer-play-defense-say-strategists-11628681464

Or consider the opposite i.e. Covid cases spike in the Fall and Winter of 2021/2022 and/or a variant develops which is resistant to vaccines and other preventative measures. While Covid initially led to a housing boom i.e. those with the ability to secure larger homes a 2ndCovid shut-down or similar could actually lead to a longer-term recession which could lead to job losses and foreclosures similar to market conditions in 2009 and 2010. 

Message of this blog post; tread carefully, the next few quarters may be challenging.

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