George Gammon: A very high probability that real US Home Prices fall by 50% over the next few years
George Gammon, an American real estate investor and popular YouTuber, believes that the housing crash in the US is well underway and about to get much, much worse.
Before we visit George’s arguments, let’s take a look at what has been happening in some of the US residential markets.
So, that graph makes for pretty dire reading. What makes the situation even worse, is that these losses are in nominal terms.
As inflation continues to rage in the US, real losses are actually far steeper and threatening to continue to erode value over a much longer term.
Plagued by rock-bottom interest rates, displaced national and global supply chains, a prolonged halt in global economic activity during the previous two years, and a deadly combination of unprecedented monetary and fiscal stimulus, I do not expect inflationary forces to be reined in any time soon.
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In the latest figures, US inflation is staying stubbornly above 8%, despite the Fed tightening monetary policy at 3 times the standard rate.
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The lag between tightening and its full effects flowing through the economy only adds to the argument that inflation is not easing meaningfully in the immediate future. You can read more about policy lags in my earlier article.
Moreover, if the central bank were to pivot, the real loss in purchasing power would become much more acute.
Economic drivers pushing real estate to the edgeCopy link to section
Gammon believes that there are multiple key factors which are contributing to the current slowdown and impending doom in the national housing market.
Firstly, the number of retirees in the US has increased substantially since the onset of the pandemic. A fact sheet issued by Social Security this year, notes that there were 48 million retirees on benefits in June 2022, and this is expected to rise to 76 million by 2035.
For the older demographic, the bulk of their financial security is in a combination of home equity and their 401(k). However, this year, portfolios are being battered left and right, with equities and bonds bleeding profusely.
For instance, at the time of writing, the S&P 500 is down 19.6% YTD. The US 10-year note which was yielding a low of 1.341% in its 52-week range is trading at 4.027% today, with bond prices taking a beating.
For a retiree, this is an extremely worrying realization, as a lifetime of working towards financial independence is violently rocked in just a few short months.
With the majority of targeted fiscal stimulus and other supportive policies such as mortgage forbearance under the pandemic-era CARES Act having all but dried up, home owner-retirees are finding themselves increasingly squeezed, with a bleak future ahead.
As a result, a big chunk of retirees who were looking forward to enjoying the evening of their lives, are being forced into a fight for survival.
Worse, as in the graph above, house prices are being decimated all over the country, with top markets such as San Jose conceding nearly 10% of their value in just the last 90 days.
Unfortunately, with home equity often being the last source of refuge for the older demographic, and beginning to slip from their fingers, the natural response would be to panic sell.
We can expect that evaporating 401(k)s and fears of ever-higher inflation, will force a lot of these homes back onto the market. Other than the extra supply, forced selling will drag prices that have already crumbled this year even lower.
Mortgage rates crush the once unthinkable 7% markCopy link to section
But the trouble for the housing market is just beginning, with mortgage rates skyrocketing above 7%, and 30-year rates at 7.22% earlier this week. This is a remarkable (and terrifying) increase since rates were hovering around 3% only earlier this year.
Among struggling home owners and mortgage holders, this would only add to the desperation to sell.
Simultaneously, with mortgage rates set to tighten even further, we can expect more demand destruction in the housing market leading to a lengthy period of slowing residential sales.
Low supply, lower demandCopy link to section
In the US, there are approximately half-a-million houses for sale at any given time. This stock tends to govern the price dynamics of the much larger total number of over 80 million residences throughout the country.
We can see that monthly supply is increasing, as retirees, homeowners and even investors unwind their positions.
The process of price destruction is accelerated when banks make their appraisals for mortgage loans and incorporate this stressed selling into lending decisions.
Soon the individual plight of a struggling family or distressed retiree can be transmitted into weaker appraisals across the board, and accordingly, lower funding for the purchase of houses.
One of the central arguments against the idea of prices falling is the notion that housing supplies are still relatively low.
However, Gammon argues, that as mortgage rates stay elevated and affordability continues to decline,
Low supply doesn’t matter if demand is even lower.
In such a situation, home prices will continue to plummet.
Joseph Wang, a former senior trader at the Fed’s open market desk, believes that the Fed may continue to keep rates high for longer than many anticipate.
His thesis is based on the tools that the Fed has developed including swap lines, the repo facility and debt buy-backs to manage treasury market turmoil, corporate bond market volatility and banking crises, respectively.
In short, Wang expects that the Fed will be able to continue keeping rates high without ‘breaking’ anything, thanks to intervening whenever pressure builds somewhere in the system.
Of course, these are hardly permanent solutions, and cleverly, he calls these tools,
…monetary duct tape.
As per Wang’s argument, mortgage rates may shift higher while following the Fed funds rate, since inflation does not seem to be going anywhere, anytime soon.
Equally importantly, the Fed and other central banks can only manage the short end of the interest-rate curve and exert a very limited influence on products like mortgage rates.
ExpectationsCopy link to section
With home prices accelerating on the downside, Professor of Finance at Wharton, Jeremy Siegel expects,
…(a) fall (of) 10% to 15%…I think we’re gonna have the second-biggest housing price decline since the post-WWII period over the next twelve months.
Keller Williams Chief Economist Ruben Gonzalez warns,
The Federal Reserve will continue to ratchet up the federal funds rate to slow inflation, and if the Reserve’s approach becomes more aggressive, we will see mortgage rates increase even further.
Dark predictions indeed.
But again, these are nominal projections.
As long as inflation resists the Fed’s efforts, home values will see severe real cuts in the coming months and years.
Gammon notes that,
Even a nominal price decline of 20%-30% over the next few years, when you adjust for inflation, could easily be a price decline in real terms of 50% plus.
With yield curve inversion signalling a severe recession in the coming months, we can expect unemployment rates to spike as well, forcing a loss in purchasing power and further dragging down home demand and prices.