The unaffordability of housing

Back in bubble territory

There is new evidence that we are in a housing bubble as enormous as the mid-2000s. This bubble preceded the financial crisis and great recession, from whose effects we still suffer today.

Consider the following graph from FRED, the research arm of the St. Louis Federal Reserve Bank. It depicts the ratio of the All Transactions House Price Index for the United States (numerator) to Average Hourly Earnings of Production and Nonsupervisory Employees (denominator). It is proportional to the number of hours a person has to work to purchase a house.

The scale means very little. It is standardized so that its lowest level, in 1976 Q1, is 100.

In 2006 Q1, it peaked at 175.4. That means it cost the average worker 75.4% more hours to buy the average house.

Bubbles never burst; assets never deflate; so everyone bought into the asset-backed security craze. They were bundled into securities, called collateralized debt obligations, without regard to credit ratings.

The bottom of the drawdown was 122.9, which occurred in 2012 Q2, a decrease of 30%.

House prices began reflating slowly, then rapidly since the pandemic. The new peak, 177.1, is an all-time record, achieved in 2022 Q3 and 2023 Q3.

The current bubble has a similar shape and amplitude as the previous bubble. It is reasonable to believe that it will deflate in a similar fashion. The only issue is how much of the economy will be destroyed in its wake this time.