Dear Reader,
Happy Friday.
Today I want to talk to you about the housing market.
A lot of reports came out this week that the housing market is now more overvalued than at any time in history.
You know, it really stinks for young people who are priced out of homes. It really hurts.
Many of us have our homes already, we bought them years ago.
We’re settled - married, kids, or divorced, whatever it is.
But if you’re like a lot of people, buying the big home was the purchase you made younger, and you’ve ridden that thing out for a while and have plenty of home equity to show for it.
But for the younger generation, there’s a lot of people out there who haven’t bought their first home…
Who have been trapped in a rent cycle and are completely priced out of the housing market.
The report came out this week that real estate sales have dropped, but housing prices have hit an all-time high and are now more overvalued than at any time in American history.
We did a report on this where we really illustrated some of the root causes of that.
Even more than the Covid pandemic, it was letting Wall Street get into the business of buying homes and renting them out - opening up homes as an asset class.
We are big fans of not allowing that to happen - to get Wall Street out of the buying up homes and renting them out business.
I have some interesting statistics here I want to share with you:
Home prices have doubled in the last 10 years.
In 2014, the average home in America cost $200,000.
Now, the average home costs over $400,000.
Never in the history of this country have homes been this expensive.
You don’t need me to tell you - just look around; it’s crazy.
The problem is, the average income has not doubled in the past 10 years.
Ten years ago, the average person made $65,740 a year. Now the average income in America is $74,580.
So, incomes have increased only 13.8% in the past 10 years, but home prices increased 100% in the past 10 years.
And look, at the end of the day, no matter what, home prices will approximate incomes, because remember, no matter what fancy math or logic one wants to use, 90% of loans are underwritten by banks or mortgage companies.
And when you sit down with a lender and they’re looking at your application, they are going to determine what kind of mortgage to give you based on your income. Period.
So no matter what, homes should approximate incomes.
That’s why we use the price-to-income ratio when it comes to analyzing homes.
It’s very much like the price-to-earnings ratio that we use when we’re looking at stocks.
The P/E ratio tells you the price of a stock in relation to how much it earned in the prior year.
And with homes, we use the price-to-income ratio which basically tells you the average price of a home in relation to the average income.
Now, in the normal, healthy housing market for the last 75 years, the average PI ratio was 3.4.
Meaning that if the average income in America is $74,000 a year, the average home should sell for about $251,000, or 3.4-times the average income.
But right now, the average home in America has a PI ratio of 5.8. This is the highest ratio ever recorded in American history.
And just to put this into some context - at the peak of the housing boom in 2006, the PI ratio hit a then-record of 4.7.
So right after that, the market crashed 60% from its highs.
And of course you remember that when the real estate market crashed, the stock market crashed, too.
But today’s PI ratio is about 25% higher than the PI ratio of 4.7 that we saw at the peak of the housing boom.
So, again, we’re talking about a split-screen scenario where we have the President really juicing up investment, etc., etc.
And we have euphoria - people are very optimistic.
I’m optimistic.
I think AI’s absolutely revolutionary - there’s no doubt about it.
But at the end of the day, a couple things have to happen for the housing market to correct itself.
Here’s a few scenarios:
Scenario #1: It just kind of drags along here for 10 or 15 years until incomes catch up - meaning an entire generation of people won’t be able to afford to buy homes.
Scenario #2: There’s a crack in the housing market. This could be triggered by interest rates going higher.
If the President fires Federal Reserve Chairman Jerome Powell, all of a sudden there’s a spike in the long-term side of the curve.
Even if he fires Powell or Powell resigns under pressure, and even if a new Fed Chairman lowers rates under pressure from the President, the long end of the curve doesn’t really change.
The short end of the curve will change, but the long end of the curve, where sophisticated investors are making decisions with their money won’t.
They’re going to say, “this is a Fed Chair we don’t trust, and we’re just going to keep rates higher for the long end.”
Which is why they’ve gone higher every time he’s threatened to fire Powell and why he keeps backing off of the electric fence.
Scenario #3: The third way this can get fixed is by adding supply to the market.
One of the things the President talked about when he was running for office was coming out with a housing bill that helps builders.
It’s part of his “Make Housing Affordable Again” campaign.
If you add a lot of supply to the market that’ll take care of prices.
Here’s what that looks like, and our top 3 homebuilder stocks. (The way I see it, one in particular will be a 1,000% winner).
So we are at this interesting place in American history.
Now, in the very, very long-term, when you look at your assets, for most people their biggest asset is their house - period.
So we have a whole generation - 20 years of people who are not going to be able to buy a house.
So when they come to retirement age, they’re not going to have this otherwise biggest asset.
This is a problem.
This is going to be a very, very big problem.
But that is a tomorrow problem.
The today problem is this crazy, super-high-priced housing market.
It doesn’t just impact young people who can’t afford homes.
It affects every homeowner in America and anyone holding U.S. stocks.
There’s three steps I urge you to take right away to prepare. I put them all right here in this new report.
Anyway, that’s all I have for you today. Have a wonderful weekend. I’ll see you Monday.
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