Kash’s Call #4: Housing Market Prices

My prediction is that housing prices will peak in 2004 in many (perhaps most) of the major regional markets in the US. By late 2004 or 2005 house prices will actually begin to fall in many of those markets.

Why? First, because housing prices are historically high. The chart in the post below that shows house prices in several states describes what I mean. I’m a great believer in reversion to long-run trends in general, and housing is one market in particular where prices have almost always reverted to long-run trends. As the IMF report also cited in the post below concludes, “housing booms are more likely than stock booms to end in a bust.”

Second, because the discrepancy between rents and house prices is huge. Right now, rental markets are soft in many places. Rents are stable or falling, and renting is cheaper than buying a similar place almost everywhere in the US. Historically, such a condition does not persist – people arbitrage between renting and buying (albeit slowly), and in the long run the two types of housing prices tend to converge.

Third, because interest rates will rise later this year. Various forces make this likely, including decreased lending by foreign investors and an increase in inflation in the US from its historically low levels. Recently, low interest rates have enabled people to put off repaying more of their house until later, so some people have been willing to pay a higher price for a given house than they would have otherwise (see the post below for further explanation). Well, the reverse is also true – when interest rates and inflation rise, people will react by being willing to pay less for their house.

Put these factors together and I am forced to conclude that we’re near the peak of house prices in several markets – and that once we’re past the peak, they will go down.