Much of the economy is in flux at the moment, so it’s difficult to find a trend that’s reliable. Stocks have put together several downtrends, interrupted by strong rallies. Interest rates have generally gone up, but this week, rates fell. Consumer spending is up in some venues, down in others. Shortages plague us here, but not there.
One trend, though, is covered nearly daily by the media: rising home prices. Homes are the single largest source of wealth for most Americans, so their prices have a big impact on our economy. With mortgage rates up and homes already so expensive, what can we expect in the future? More appreciation, or … declines?
The best historical example we have is the 1970s, when interest rates ratcheted up to unimaginable highs, and inflation was running rampant. From 1973 through 1982 – the worst period for rising prices and high interest rates that this country has of yet seen – inflation was running at about 9% a year. Home prices matched that rate nearly exactly. In the decade of the seventies, stocks returned roughly 5.5% per year, and home prices rose about 10% a year.
But using the 1970s experience is probably not as sensible as it seems. For one thing, housing became more volatile starting in the early 2000s, and prices decoupled from inflation. Home prices climbed dramatically from the late 1990s up until about 2006, at a rate far higher than inflation. Then, from 2008 through 2012, home prices crashed. It took years for some locales to recover. While inflation marched along, homes were moribund. Another surge began in about 2013 – and from then to now, homes have returned far more than inflation. This decoupling is reason to believe that perhaps the scenario of the 1970s is less relevant today than we might think.
We believe we may be entering a down cycle for housing, or at least a period when prices no longer match inflation. While many purchasers have paid cash for homes and are consequently less vulnerable to foreclosure, that will not prevent a softening in the price of this asset. There are always owners with mortgages dependent on high incomes to cover housing costs, and if a job loss arrives, that home is likely going to market – at a distressed price. Those lower prices affect entire neighborhoods. Even if we escape a recession, higher interest rates generally confiscate value from assets, and this time around, we don’t think housing will be exempt.