One of my goals for 2023 is to diversify more into real estate. But I find myself very hesitant to buy anything at this point because I think housing prices are going to continue to go down significantly.
From the charts I've looked at, in most markets we are looking at a 30% drop to get back to baseline.
So as I am wont to do, I looked up housing prices compared to the money supply:
This chart takes the Case-Shiller national index and divides it by the M2 money supply.
Neither one of those measurements are perfect, but good enough for broad averages.
I was really surprised by this chart. We can see 5 general regimes here.
- From about 1990 to 2003, housing prices were falling compared to M2. So houses were actually getting cheaper in real terms.
- Then from 2003 to 2008 we have the housing boom. We can see housing outpacing M2 significantly.
- Of course then we get the GFC. Prices fell compared to M2 into the beginning of 2012. (Side note: bought my house at the end of 2011 - nailed it!)
- From 2012 to the start of covid housing was basically flat compared to M2.
- In the post-covid world we had a sharp drop and then a recovery over the last few years in M2 terms.
I think what is most relevant here is the most recent history. The sharp drop was a result of M2 exploding with monetary stimulus. Then in M2 terms, the drop we've already had is already back to the 2012-2020 baseline.
If that's true (and it seems to be), there might not be that much room left for housing to fall. Mortgages are at 7% interest rates and house buying activity is way down. But will it go further? Will the Fed keep hiking interest rates, causing mortgage rates to continue to climb?
I think we have 1 or maybe 2 more rate hikes left before the Fed pauses for a while. But then the jobs picture, which is a very much lagging indicator, needs to be factored in.
Net-net? My guess is we hit bottom in housing mid-2023.
Edit: Something occurred to me after posting. For people looking for a replay of the GFC housing market, there is a critical difference: in the GFC the money printing started after the crash. Here in the covid response, the money printing was on the front end. So I think we will see somewhat of a reversed dynamic.