The housing market is printing highs on several indices. Inflation might be the final nail in the coffin that ends the multiyear bull market.
Believe it or not, the U.S. housing market is overvalued. This month, the U.S. Housing Market Index soared to 76, a level not seen in two decades. Some might claim that this is an ultra bullish signal but it’s more likely that the market is close to the top.
Hedge fund manager Will Meade shares the same sentiment. The former Goldman Sachs analyst says that the real estate market is extremely overpriced. He’s confident that the housing market bubble will burst in 2020.
One of the biggest reasons why the housing market remains sluggish is inventory shortages. American homeowners are hesitant to leave their homes because prices have sharply increased to the point where many can’t afford to upgrade. Aggravating the supply woes is inventory constraints. The dearth in labor and land is making it extremely difficult for homebuilders to keep up with growing demand.
The tight supply is sending housing into the stratosphere. The Case Shiller Home Price Index printed an all-time high of 218.97 in September. This spurred Will Meade to tweet something about the value of the real estate sector. He said,
The housing market is ridiculously overpriced in every major US market.
Although sellers may be able to command more for their houses, it’s unlikely they’ll find a buyer. Even with easy access to loans, first-time buyers can’t afford to purchase a home due to sky-high prices. In a Forbes interview, John Stech, chief executive of property middleman Sundae, says that high valuations may price out buyers. He said,
While sellers may be able to ask more for their homes, they’re likely to get fewer offers in total due to more buyers being priced out of the market.
It will only get worse for the housing market. Will Meade expects 2020 to put more stress on the real-estate sector.
On top of inventory shortages, there’s another catalyst that can push the housing market to greater heights: inflation. According to Meade, a weak U.S. dollar and high Treasury yields would result in inflation.
When inflation hits, prices of basic materials to build a house such as wood, steel, concrete and glass shoot up. Homebuilders, who are already struggling to keep up with demand, would be forced to spend more on building materials. Consequently, the price of new homes would skyrocket.
In the end, more homebuyers will likely be priced out.
As prices continue to rise, fewer buyers would be able to afford a home. Sellers would then be forced to list their homes at a significant discount to attract interest. At first, only a handful would adopt this strategy. Others would stay on the sidelines hoping that the market bounces. When it fails to recover, panic selling will likely ensue.
Once the dominoes begin to fall, it would be difficult to find a bottom just like in 2007. Meade seems to remember what happened clearly.
This could spell the end of the multiyear housing bull market. Inventory shortages coupled with inflation would send prices beyond the reach of buyers. If that happens, the housing market is toast.
Last modified: September 23, 2020 1:25 PM