The Big Short: Part Deux? US Home Prices Slow As Wage Growth Highest Since Early 2009 (Tiny Bubble OR BIG Bubble?)

No matter which US home price index you choose, US home prices have risen above the peak of the housing bubble in April 2007 (as highlighted in the book and film “The Big Short”).

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Thanks to relaxed credit standards, including the infamous NINJA (no income, no job) loans, the US saw a steady and increasing growth in mortgage credit and a corresponding growth in home price growth … until 2005. Then the bottom fell out out the housing market.

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Today, we are witnessing a slowing of home price growth even as earnings growth is at its highest level since early 2009.  The last time we saw home price growth and earnings growth so in alignment was back in the 1995-1998 period following the enactment of HUD’s National Homeownership Strategy. 

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The big difference between the 2000s housing bubble and today’s housing bubble is that the 2000s housing bubble was driven by subprime and ALT-A credit. But today’s housing bubble is in part driven by foreign investors on both the west and east coasts, not to mention the Federal Reserves low interest-rate policies. And we are seeing a softening of credit standards from Fannie Mae and Freddie Mac.

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And Fannie and Freddie’s debt-to-income (DTI) is rising to 2008 (financial crisis levels).

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So does the US have a tiny bubble? Or a big bubble?

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Gold, Housing And Credit Impulses (US House Price Growth Slowing As US Residential Credit Impulse Slows)

As Hurricane Dorian (cat 4) approaches the eastern Florida coast and Hong Kong protestors clash with police, I thought I would discuss something cheerful .. like rising home prices globally and in the US. Cheerful for current homeowners that is, not current renters.

According to the International Monetary Fund (IMF), the global REAL house price index (white line) has recovered from the global housing bubble burst and is now at an all-time  high. US NOMINAL home prices have recovered from the housing bubble and are now higher than at the peak of the US housing bubble (2005).

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If we look at real estate with respect to gold, US housing was the most expensive in the early 2000s. And the ounces of gold needed to buy an average US home remains relatively low (that is, back to 1984 ratios).

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Of course, the flow of credit can help explain housing prices. In the US, both Commercial and Industrial loans (C&I) and loans and leases (Lo&Le) are significantly lower than during the late 2000s. Yet, US home prices continue to rise.

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If we put home price growth YoY (green line) on the chart, you can see home price growth slowing with the lower than average credit impulse (red line).

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At the global level, credit impulses are down but may be showing signs of increasing.

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