Over the past several months I have heard from news sources, lenders, clients and just regular people telling me that the housing market is expected to crash.  In fact many are predicting a recession.  I asked repeatedly in each of these conversations for them to help me with some data to support their claim. houses for sale, for sale sign

The only thing I get is “the housing prices are too high.” So I ask myself, “Will the market slow down or crash? And what are the factors supporting each hypothesis?”

I first turn to current economic data collected by Kimberly Amadeo’s article “US Economic Outlook for 2019 and Beyond”:  Updated January 01, 2019 https://www.thebalance.com/us-economic-outlook-3305669  I found her article typical of the rhetoric I have been hearing from other sources stated above, it  was biased and inaccurate, numbers came out of nowhere, for example she states that the US GDP for 2018 is around 3% and will fall because of the “Trump Trade Wars” but data sited from government sources show 2018 GDP is 5.46% (1st, 2nd and 3rd quarters) almost double what she states. 

Articles from Fortune, Goldman, Reuters, all forecast a rescission for 2019…yet none will show the numbers they us!

So I look further for information on: Gross Domestic Product (GDP), Inflation, Unemployment, Interest Rates, and Oil and Gas Prices from direct sources and got the following.

Year       Inflation (1)         Unemployment Rate      GDP (3)                Avg Hr Wage (2)

2005      3.4%                     4.70%                                  6.47%

2006      3.2%                     4.60%                                  5.29%                                   

2007      2.8%                     5.00%                                  4.59%

2008      3.8%                     7.80%                                  -0.83%                 $   21.18

2009      -0.4%                    9.80%                                  0 .47%                 $   21.96

2010      1.6%                     9.10%                                  4.19%                   $   22.42

2011      3.2%                     .30%                                    3.65%                   $   22.86

2012      2.1%                     8.00%                                  3.56%                   $   23.26

2013      1.5%                     6.60%                                  4.43%                   $   23.75

2014      1.6%                     5.70%                                  4.42%                   $   24.22

2015      0.1%                     4.90%                                  2.89%                   $   24.75

2016      1.3%                     4.70%                                  3.40%                   $   25.38

2017      2.1%                     4.10%                                  4.49%                   $   25.99

2018      2.4%                     3.70%                                  5.46%                   $   27.39

1. U.S. Labor Department (https://www.usinflationcalculator.com/inflation/current-inflation-rates/)

2.  US Bureau of Labor Statistics (https://www.epi.org/nominal-wage-tracker/)

3. US Bureau of Economic Analysis http://www.multpl.com/us-gdp-growth-rate/table/by-year

 

Year                      Oil Prices/barrel  (4)        Fed  Interest Rate (5)      US Housing Prices            

2005                     $86.33                                 4.25%                                  $246,600

2006                     $76.25                                 5.28%                                  $245,400

2007                     $115.18                              4.25%                                  $238,400

2008                     $64.55                                 0.00%                                  $222,500

2009                     $92.61                                 0.00%                                  $219,000

2010                     $79.48                                 0.00%                                  $224,300

2011                     $94.88                                 0.00%                                  $221,100

2012                     $94.05                                 0.00%                                  $251,700

2013                     $97.98                                 0.00%                                  $273,600

2014                     $93.17                                 0.00%                                  $298,900

2015                     $48.72                                 0.05%                                  $302,500

2016                     $43.58                                 0.75%                                  $310,900

2017                     $50.84                                 1.50%                                  $337,900

2018                     $48.71                                 2.50%                                  $325,200 (3rd Quarter)

4.  https://www.macrotrends.net/2516/wti-crude-oil-prices-10-year-daily-chart

5.  https://www.thebalance.com/fed-funds-rate-history-highs-lows-3306135

6. Federal Reserve Bank https://fred.stlouisfed.org/series/MSPUS

 

So are there any signs of an impending recession?  Is the housing market going to crash? The housing “bubble burst” in 2007/2008 and lasted until 2012.  There was also a major recession from 2008 to 2015.

Looking at all of the major indicators above; unemployment, oil prices, and interest rates are the only indicators of a financial meltdown.  One can argue the unemployment is a “result” of the economic recession, not the cause.  But living through three recessions, I can vividly remember what caused the one in the 1980’s and the one in 2008; and it was oil prices.  Everything in our economy was effected by oil prices, i.e. transportation, home energy and heating, manufacturing, everything.  All other indicators are reactions to the inflation caused by the dramatic increase in oil prices.

 

Here is one prospective of the cause of the housing collapse in 2007,  according to  Inflationdata.com (https://inflationdata.com/articles/inflation-adjusted-prices/inflation-adjusted-housing-prices/)

“So How Could a (Housing) Bubble Like This Happen?”

“This was primarily the result of government policy changes not due to any intrinsic value in houses. What happened was that congress decided that everyone has the “right” to buy a house whether they could afford one or not. So in order to facilitate this utopia, they instituted loose lending practices through Governmental Fannie Mae and Freddie Mac agencies. And at first it had wonderful effects on the economy -- demand for houses rose, builders made money, banks made money, life was good.

This combined with a loose money policy by the FED to goose the economy through the turn of the century Y2K scare and then the FED added in artificially low interest rates and you have a government sponsored housing bubble. But to make matters worse some smart guys on Wall Street figured out how to squeeze even bigger bucks out of this boom by using some creative financing and slicing and dicing these mortgages (which everyone now thought could only go up). Since they believed that most people wouldn’t default on their mortgages, if you bundle enough of them together the risk was very low. So with low risk you could use extreme amounts of leverage to buy these mortgage derivatives and theoretically make a fortune.

But remember the foundation was that anyone could get a mortgage even if they couldn’t afford it.  So when housing prices stopped going up in 2006 and people realized that inflation wasn’t going to bail them out, they began defaulting on their mortgages.  This snowballed and took down these large derivative bundles of mortgages and because they were highly leveraged in themselves when the tide turned against them it took down some of the biggest players on Wall Street like Bear Stearns and Lehman Brothers.”

Given the irresponsible actions of government and banks in and before 2006 that created the housing bubble, and when oil prices shot up which started the economic collapse, including facilitating the housing market crash, are there any signs of a similar occurrence repeating itself?

What traumatic event like oil prices rapidly rising is foreseen by so many that they are not telling us about?  Trump Trade Wars?  Where is the data showing the negative impact?  I have concerns about what the Government is doing in the Farm Bill of 2018 that subsidize a few select industries, but what other indicators are there that predict a recession and a housing crash?

Housing prices have risen too fast as of late in California, but the numbers coming from the California Association of Realtors and IVAR (Inland Valley Association of Realtors) show an increase in housing inventory yet it also shows prices going up by about 2% (https://www.iehousingmatters.com/wp-content/uploads/2018/12/2018-11-ivar-housing-data-report.pdf)

 One possible answer for the concerns of many is consumer beliefs.  Way back when I was in college taking an economic class ,one of the principals we learned was that “consumer beliefs” affect markets.  If enough people believe something, their belief/actions will cause the event regardless of other events.   This phenomenon was the cause of “bank runs” and banking collapse that destroyed economies through the western world for centuries. 

 So are our fears founded in facts and data or are they just fears?