Think US home prices are high? At least we’re not Canada
Knowing this reality, my priority before 2020 was to try to convince people that the United States was not in a second real estate bubble. To persuade people of this, probably one of the most important articles I’ve ever written in my life was in 2019 titled: Real estate bubble 2019? It was my best attempt to convince the housing bubble boys that what they believed in was more invention than reality before 2020-2024.
It is now clear that housing has not collapsed and, in fact, house prices are wildly unhealthy. And it’s not just here in America. As you can see above, other countries have seen strong house price growth and Canada is leading the way. Will the US real estate market follow Canada?
The short answer is no, we won’t have the kind of house price velocity that Canada has experienced because our housing market is more diverse than theirs. What I mean by that is that the growth in house prices in Canada has been significantly, if not massively, influenced by its two major cities: Vancouver and Toronto. Although the United States has its high-priced metropolitan areas, our size and diversity means that our national home price index will never be determined by just two cities.
Also, the US real estate market is more tied to mortgage buyers. Unlike these two cities in Canada, we are not as dependent on foreign buyers. Just last month, the Prime Minister of Canada proposed a two-year ban on some foreign investors buying Canadian real estate in an attempt to control price growth. Here in the United States, foreign buyers have historically accounted for less than 300,000 of total home sales for many years. When you think that our total home sales are between 5 and 6 million, foreign investment is not that important.
Size matters too. The population of Canada is nearly 38 million, while the population of the United States is nearly 332 million. We are a monster compared to them in terms of population and the majority of home buyers in America use mortgages.
When mortgage rates go up, two things always happen here in America.
1. Days on the market are increasing, giving people more choice and less forced bidding.
2. The growth rate of house prices is slowing.
We saw it in 2013-2014 and 2018-2019. Home prices have fallen and days on market have increased. Even though nominal house prices have never fallen, the rate of price growth has slowed. This should not change.
I tried to point out that we have to worry about house prices overheating in 2020-2024, but not because of a massive credit boom like we saw from 2002 to 2005. As we can see below, our current situation is not about mortgage credit spiraling out of control. This year, shopping app data will experience its first real year-over-year decline since 2014.
Since the largest number of home buyers in America are mortgage buyers, this will help control home prices when rates rise. Knowing that demand in the years 2020-2024 had the potential to burst, I established a firm five-year house price growth model of 23%. Breaking this threshold would mean that we are in a country where house price growth is unhealthy. This level only lasted two years and house price growth worsened in early 2022.
Fortunately, all we needed was for the 10-year yield to exceed 1.94% to create equilibrium, and since house price growth has been so strong since 2020, we will see some equilibrium in price growth. houses. This will prevent America from experiencing parabolic growth in house prices outpacing disposable income, as Canada has experienced.
What I see in the painting below is beautiful; yields increase and eliminate some of the excesses of the economy! The timing of this rise in yields was unique, as it was in early February of this year that I went into ‘higher rate team’ mode. On February 20, I pinned a video to my Twitter account as a desperate plea that we needed higher rates to stick with. Bond yields and rates took off from then on.
The growth in house prices went through several levels after 1996; the reality is that demand has been stable enough to keep stocks at bay (aside from the credit boom and bust of the housing bubble).
Another factor in our low house prices (compared to other countries) is that other countries never had the excess credit leverage that we saw in the United States from 2002 to 2005 , which led to the forced sale of credits. This is why I believe that Canada and other parts of the world have seen continued growth in house prices, while the United States has had to deal with the credit crunch.
As we can see below, we had to deleverage a lot of real estate debt as US credit deteriorated from 2005 to 2008. Then, after all that, the great financial crisis happened. Much of the mortgage debt disappeared due to foreclosures and short sales, causing house prices to plummet.
Currently, the American owner’s balance sheet is excellent, in fact it has never been better. The housing crash premise that house prices must return to 2012 levels is crazy. Housing debt does not work like margin stock debt. A stock can drop 40% in one day, while a house doesn’t have that kind of speed. One of the reasons homeowners can’t sell their homes at a 50% to 80% discount so freely is that the bank won’t let them if the home’s value drops below the home’s debt. . The owner would have negotiated with the lender about this.
Trading leveraged margin debt on stocks, on the other hand, can go up and down much faster. This has been a reality with the offer for some time now; homeowners would need to have a recession with job losses to be forced to sell their homes. With all the nested equity built in, a full-scale foreclosure process should take place during a deep recession of job losses with loans made at the end of an economic expansion. These loans with a small down payment risk being foreclosed or sold short if house prices fall rapidly during a job-loss recession. However, most homeowners are doing well, over 40% of homes in America don’t even have mortgages, and the nested equity is huge now.
While home price growth in Canada and other countries shows the potential for US home prices to skyrocket, I believe we have limits here in the United States. Most homebuyers are mortgage buyers, so credit rates and limits are important. We’re seeing strong house price growth in parts of the United States where wealthier homeowners are moving, and that’s part of the unhealthy house price growth data we’ve seen since 2020.
However, even that has limits when compared to the massive growth in house prices in Canada relative to disposable incomes. Our biggest home buyers are millennials, so housing demand has limits. Also, mortgage rates have fallen more than 2% in every new cycle since 1981 to a new low, which would mean that if this trend continues, which I doubt, mortgage rates would have to fall to 0.125% – 0.50% in the next recession. It’s probably not anytime soon since low mortgage rates have been 2.50% recently and we are over 5% today.
That’s why if total home sales in America go up for 6.2 million or more in 2020-2024, consider it a beat and see this period as having a good number of replacement buyers, but no boom in credit sales. With the massive home price growth we’ve seen since 2020, that level of total new and existing home sales that I’ve been focusing on is threatened by higher rates. As you can see below with the home buyer profile of NRAmost of our shoppers are millennials and Generation X. Over time, Gen Z will be old enough to buy more, but we’re not there yet.
House prices have accelerated too much, in my opinion, but with the current rise in rates, we should see a slowdown in demand. What happens with higher prices is that we see more days on the market and the rate of price growth slows down. I know it’s fun on social media to compare home price growth in Canada versus the United States, but in reality I don’t see us having a similar dynamic for the United States to explode so much prices that we would catch up with Canada’s levels of house price growth relative to disposable incomes.
So yeah, it’s a good thing we’re not Canada because we’d have a much tougher housing affordability crisis if we were!