The average price of a home was about $170,000 in 2013… Today it stands at $400,000.
That’s a 150% increase in just a decade, while wages have only risen by 57%.
For comparison, it took 23 years for home prices to jump by 150% between 1980 and 2003.
The housing market over the last 15 years has been one of the strongest in history.
Most people have not been able to keep up with the rising price of homes.
Many hope this trend will reverse so housing can become affordable again.
But as you’ll see, those wishes unfortunately might not come true, and that could have serious consequences.
The Affordability Crisis
We can look at the ratio of home prices relative to wages to understand what’s happening on a deeper level.
Going back to the 1960s, home prices were quite low relative to the average wage.
Today, home prices are at the highest levels in history relative to wages, making this one of the most unaffordable housing markets of the last 60 years.
At first glance, this might look like an asset bubble waiting to pop, just like 2008.
In fact, this home price to wage ratio is at the exact same level today as it was at the very peak of the 2008 bubble.
So, is the housing market really in the same situation as 2007?
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Why This Isn’t 2008 Again
One key characteristic of an asset bubble is excessive risk-taking through leverage.
In the housing market, that leverage comes in the form of mortgage debt.
Mortgage debt between 1950 and 2000 stayed below 50% of GDP.
During the housing bubble, that ratio went above 50%, and in 2007, mortgage debt represented about 75% of the total size of United States GDP.
This surge in debt was a key driver of the 2008 housing crash.
Fast forward to today and we don’t see evidence of similar behavior.
Mortgage debt as percentage of GDP has been declining steadily since 2010, recently crossing below 50%.
When we compare mortgage debt to the total real estate market value, we see a stark contrast.
The early 2000s housing boom was fueled by excessive debt.
But today, home prices have risen without any kind of excessive debt taking.
This isn’t a typical asset bubble…
The Corporate Profit Factor
So, does that mean housing prices have simply gone too far and are due for a correction?
After all, personal savings as a percentage of GDP are at their lowest levels since the 2008 financial crisis.
If Americans have little savings, how can home prices continue to rise, right?
But despite this, we actually believe home prices can still climb!
One key driver can be found in corporate profits per unit of production.
Between the 1950s and 1970s, the average profit per unit stood steadily around $0.02.
This margin then rose in the 1980s and has increased aggressively over the last two decades.
In 2024, corporate profits per unit of production reached $0.2.
That’s 10 times more than it was 50 years ago.
In dollar terms, these profits amounted to about $3.5 trillion in Q3 2024.
Most of these corporate profits are re-invested into capital that can generate returns.
This has created an unprecedented flow of money into financial assets, fueling:
- 61% move up in the stock market since 2022
- 75% move up in gold prices
- 58% return on private equity
The housing market, however, has been relatively flat during this same period.
In fact, housing has even lagged behind wage growth since 2022.
That’s highly unusual.
The Great Divergence
Typically, the housing market and the stock market trade very closely to one another.
The divergence between stock market and real estate prices that we’re seeing today is an anomaly.
As traders, when we see this kind of divergence, alarm bells start ringing.
This isn’t the first time we’ve seen such a divergence though.
In the late 1990s, a similar divergence developed.
Home prices stayed flat despite the stock market’s aggressive bull run.
But as the stock market reached extreme valuations in 1998-1999, the housing market finally began to accelerate higher.
In financial markets, this is called rotation.
Investors rotate their allocation from certain assets to others based on economic conditions and relative value.
We saw this again in 2012.
The stock market jumped 110% between 2009 and 2012, while real estate prices declined.
But, once stocks got expensive, investors likely rotated those profits into the cheap real estate sector at the time.
Stocks have reached their highest valuations since 1999.
We believe there’s a good chance the housing market begins to catch up to other financial assets.
This could suggest as much as a 50% rise in home prices over the next few years – comparable to what we saw between 2019 and 2022.
If this happens, it would be devastating to those who already cannot afford homes at current prices.
Housing unaffordability is already at all-time highs, with the average mortgage expense representing 40% of median household income.
Further price increases could make housing completely unattainable for a significant portion of the population.
Of course, this is just our opinion, no one knows the future
But as traders, this is the bet we’re making right now.
When the timing is right, we’ll be initiating a leveraged long trade on a real estate investment fund ETF.
We’ll be guiding our clients through it every step of the way.
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