Maria Irene
If you’re a student of financial history, Gerli’s assertion is chilling. Between 1890 and 2000—a whopping 110 years—home prices did not grow when adjusted for inflation. The Case Shiller Home Price Index floated gently around 100, which essentially meant that the value of a home was pretty stable over time. Fast forward to the early 2000s, and you see this equilibrium disrupted. The Federal Reserve’s rate-cutting spree, starting with Alan Greenspan in 2001, was the catalyst for this dramatic shift. The trend continued under subsequent Fed chairs, including Jerome Powell, who took over in 2018 and led the Fed during the pandemic. With interest rates pushed down to historically low levels, home prices began to soar at an unprecedented rate, often far exceeding the rate of inflation.
But that’s not the whole story. While home prices were leaping, incomes were plodding along. According to Gerli, the typical home value in America today is about $350,000, compared to a median income of $78,000. This has resulted in a Value/Income ratio of 4.5, nearly the highest on record. What does this mean? In layman’s terms, owning a home is becoming a far-off dream for an increasing number of Americans.
Taking a walk down memory lane, there have been only three periods since 1955 when homes have been this unaffordable compared to income: 1955, 2006, and now. In both earlier cases, the Home Price/Income ratio eventually collapsed. Will history repeat itself, or is it different this time?
Gerli suggests that there are two paths out of this conundrum. Either home prices crash, as they did in 2006, or incomes rise significantly, like they did in the 1950s and 60s. A third option, a combination of rising income and declining home prices, is also a possibility but will require multiple economic factors to align favorably.
However, it’s not just the Home Price/Income ratio that is concerning. The Inflation-Adjusted home price graph also indicates that a correction is due. There are two ways this can occur: either home prices crash or inflation surges. What is more likely? No one can predict the future with certainty, but the current indicators are alarming, to say the least.
Nick Gerli is throwing down the gauntlet, challenging both policymakers and the public to face an uncomfortable reality. The housing market is a bubble waiting to burst. The big question now is, how will we mitigate the fallout, and who will pay the price when the bubble eventually pops?
This warning from a seasoned industry expert cannot be taken lightly. Whether you’re a homeowner, a potential buyer, or a mere observer, the prospect of living in a second, more volatile housing bubble should give us all pause for thought. What action, if any, will be taken to avert another 2006-like catastrophe remains to be seen. Until then, we remain perched on a financial precipice, wondering when and how we’ll make the inevitable descent.
