• Bull.




Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.

Today's bonus chart showcases the shift in median home prices across the U.S. The insight here isn't exactly rocket science. We're a mere 5% away from the figures of 1970 and 2008, both years linked with severe recessions. While your local market might differ, remember this chart represents a national average.

Median Home Prices Approaching Recessionary Levels - 9.13.23

We're no strangers to the soaring unaffordability of homes. To reiterate, as of August, the monthly mortgage for an existing home stood at $2,322. This contrasts with the $1,200 witnessed in 2008. Once you factor in taxes and insurance, this figure balloons to roughly $3,000 monthly. This means homeowners are spending about 51% of the median household income before taxes and nearly 70% after tax and insurance are incorporated. This pressing issue for the middle class is literally the catalyst for the viral song "Rich Men North of Richmond." The unaffordability is genuinely hurting people. It's also worth noting that new builds account for 30% of home sales.

Now, let’s consider a few factors in the future. Between 1890 and 1996, home prices in nominal terms mirrored the CPI quite closely. This indicates that real home prices remained stable for 106 years. In real terms, home prices didn’t budge for a century. However, starting in 1997, real home prices began to climb. They then corrected themselves between 2008 and 2012. Now, home prices are so high, to revert to their 130-year average, prices would need to decrease by an additional 40% in nominal terms. This isn't a prediction of a housing market crash, but consider various influencing factors. For the past half-decade, among the major influences on housing prices have been interest rates, commodity prices, homebuilder profits, and wage growth. Many homeowners benefiting from low rates are hesitant to sell or refinance due to potential higher rates. This isn't groundbreaking news. However, in the face of a recession and rising unemployment, we likely see a spike in inventory as individuals sell homes to access equity. This influx of inventory can push prices downward, prompting more homeowners to sell in hopes of retaining some equity, potentially resulting in a cascade effect of price normalization—a little mean reversion doom loop over 4 or 5 years.

Learn more about the Market Situation Report written by Tier 1 Alpha.