This morning, @unusual_whales on Twitter sent out a tweet reading, “The US house price to income ratio is now at a high of 4.8x, the highest since 1945, per FT.” Such statistics have been widely reported in the press since the pandemic summer of 2020. Housing prices have soared as properties sell at breakneck speeds. This summer, as my own parents geared up to sell my childhood home, stories of other homeowners finding buyers in a matter of days created an excited sense of urgency to get our property out of our hands. There are many reasons such an environment exists today: low interest rates through the late 2010’s made the US dollar feel cheap to domestic consumers; supply shocks in the construction industry have decreased the rate at which new homes are built; hybrid work environments have opened up opportunities for urbanites seeking more space to move away from cities. These reasons, among a myriad of others, beg the obvious question: are we living in a real-estate bubble?
For many, an obvious point of reference is the conditions leading to the 2008 housing crash. Revisiting the price-to-income metric shows us that in 2008, the ratio sat at 3.8. Consumer credit reports also give us a look into how households are financing their purchases, if not necessarily for houses. From the end of 2005 to the beginning of 2008 (the period just before the crash), household debt increased by 29.1%. In a similar three-year period from 2019 to 2022, debt increased by 19.1%. Here, percent increase in the debt burden is what is important, as this is what shows us if a credit binge is taking place. Household debt increased at a steady pace from 2014 to pre-pandemic 2020, a normal occurrence for the good state of the business cycle at the time. From pandemic 2020 to now, the pace in borrowing increased, an observation in line with the high availability of the dollar in the pandemic environment. Similarly, for corporations, debt increased at a pace of 18.1% from the end of 2019 to the beginning of 2022. From the end of 2005 to the beginning of 2008, corporate debt increased 22.7%. Though the increase in the price-to-income ratio is concerning on the surface, a quick analysis of total debt burden shows us that there may not be an immediate threat to the real-estate market. A credit binge like that seen leading up to 2008 would signal that households and corporations were recklessly borrowing, leading to a messy fallout when it came time for the debts to be paid. What we see instead is that currently, we are not borrowing at an uncontrollable rate and that we may be sparing ourselves from a larger fall. I believe a fall to be inevitable, as the FED must increase rates to curb the current inflationary environment that we face. Last month the FED agreed to raise the benchmark rate by 75 basis points, though they had also remarked that a slowdown in the rate of increase of interest rates was also necessary in the future.
Though I do not feel that we are currently in a real-estate bubble, the upcoming moves by the FED will decide whether the housing market will move into bubble territory or not. If interest rate slowdowns are in the cards for the future (~1-2 years), the pace of total debt burden may yet increase as consumers and businesses feel that the worst of inflation is behind us. This could potentially lead to credit binges that push us over the edge. However, if the FED holds tight on rate increases through 2024, a bubble can be avoided. In this case, I believe that the economy as a whole will enter a recession, though not one that will derail global markets as happened in 2008. I feel that this recession could act as more of a course correction of the generally hot markets we have seen since the mid-2010s. This rudimentary analysis of the current housing market leaves out many factors that contribute to recessions/bubbles, instead choosing to focus on larger-scale metrics that are present in most (if not all) bubble environments. I present a recession here as a better-case scenario, knowing full well that lower-income Americans will bear the brunt of the losses in a downturn.