We are in the middle of a silent real estate crash and few realize it as my colleagues in the real estate industry continue to say there is no crash.
Some point out that prices have barely fallen and even risen slightly in the last month at a .9% annualized rate. The problem is that core inflation is at 5.3%.
Nominal prices rose precipitously in 2020 to 2021 as the pandemic, QE, low rates and stimulus showered the economy with cash while we saw deflation in 2020 and low inflation later that year.
The median home sale price in 2019 was $327,100 (St Louis Fed data Q4, 2019). Today it is $436,800 (Q1, 2023). That is a nominal change of $109,700 or a 33% increase.
But behind the scene inflation since 2021 has accelerated. $327,100 in 2019 is now worth $389,114.
That nominal gain of $109,700 has been reduced to $47,686 or a haircut of 56%. When home prices grow below inflation it is like taking a price cut.
As rates continue to be elevated for longer, demand will continue to be depressed and home prices will either fall or stay relatively flat. Inflation-adjusted, homes prices will continue to fall and all the gains will be eroded.
Inflation is not the friend of real estate as many believe. Some point to the 70s and claim it is. In the 70s, rates were well below inflation. From late 79 to 1981, rates were getting and got above inflation, and real estate prices were flat for years while continuously being eroded by inflation.
From 2013 to 2020, the real estate market was in a Goldilocks zone. Plenty of money rolling around in the economy, good to strong GDP growth, low rates, easing lending standards, and inflation at or below 2%.
Today inflation is well above 2%, rates are high and will continue to be high, GDP growth is slowing down, lending is tightening, and there is no end in sight.
Do not expect inflation to fall suddenly and hence don’t expect the Fed to cut anytime soon.
The silent real estate crash will continue, which isn’t bad.
