U.S.: Are House Prices Over the “Top”?

Housing, for example, is also seeing very high prices. That’s also Jeremy Grantham’s (British investor) view.

The House-Prices-to-Income Ratio in the U.S. suggests the current value is sitting at 7.5. The historical average is closer to 5. And if this were to revert to the mean, then the housing market alone would lose 30% of its total value alone — costing roughly $15 trillion of wealth.

The fundamental problem with asset prices rising in such a short period above the mean, is that we will have to pay the price for when they return to the mean eventually. The $30+ trillion of destruction was also created over the past couple of years.

But if this negative wealth and income effect is compounded by inflationary pressures in other areas, then Grantham says we are bound to have some serious economic issues. If that were to happen, it wouldn’t be just stock portfolios suffering, but also things like salaries, pension funds, and government deficits.

Finally, as a potential catalyst for this bubble bursting, he is calling out the fact that the FED might potentially raise interest rates higher than expected, therefore starting the domino effect with the housing market. Not that they will want to do it intentionally, but rather that they might have to do it because of uncontrolled inflation on the loose.

As you can see from above, interest rates are also way off from the mean value. This time, not on the upside though.

Not only that, but if interest rates double from current levels, housing will not be the only one affected. This might trickle down to other assets too, like unprofitable tech businesses:

Everybody is scared that the markets might go down now, but nobody was questioning their choices when housing prices or stocks were going up 50% a year. The FED kept printing money, and politicians were bragging of these achievements. Why should you do iceberg avoidance, when you can wait until the ship is sinking to address the problem? This has always been the motto of the FED, especially after 2008.

So, what’ll happen next? What should you do about it? Nobody knows. Grantham isn’t shorting US stocks. And he isn’t cashing out all of his investments either, so maybe it won’t be the end of the world after all.

Reference:

Jeremy Grantham is warning of a “super bubble” in US markets, Thomas Herold, https://medium.com, Jun 14, 2022