Last year, during the throes of COVID-19, I expended many words arguing that the U.S. economy would be OK despite the dark period we were in. We just needed patience. We aren’t in a housing bubble. Today we are enjoying the most remarkable comeback of the U.S. economy, which almost no one saw coming. The America is Back Economic Model and the 10-year yield should share the Oscar for best performance.
Favorable demographics have been a significant contributor to our rapid economic rebound, especially in the housing market. The U.S. economy was plugging along nicely before COVID-19, and the housing market was doing even better. The month before COVID-19 became a known entity in our country, demand for housing started to break out. Once COVID hit in earnest, many predicted that housing would crash.
Demand did take a pause — but that was brief. Inventory levels stayed stable, housing demand picked up after five weeks and mortgage rates went lower. Housing is a necessity — it’s not optional. Because of this, if we have the demographics for home buying, then we will have stable replacement demand. The only factor that changes this in a big way is if mortgage rates get too high. Since 1996, it’s been very rare to have existing home sales fall below 4 million in a month.
When you have the best housing demographic patch ever in history and the lowest mortgage rates in history, with housing tenure at 10 years, then we have to start worrying about home-price growth. All those factors are in play, and home prices are growing too fast. This was my main concern in the years 2020-2024, and that is being played out currently. Today the Case-Shiller index showed 12% home-price growth. For me, it’s always about real home-price growth, and this price index, as you can see, has gone parabolic now.
This is a big reason why recently on Bloomberg, I talked about how this is the most unhealthy housing market in a long time.