When will FOMO hit the housing market?
Prices are astonishingly robust against weak transaction activity and sentiment.
Disclaimer: The information contained in this article is not and should not be construed as investment advice. This is my investing journey and I simply share what I do and why I do that for educational and entertainment purposes.
This article is entirely free to read.
“When the time comes to buy, you won’t want to.”
Walter Deemer
TLDR Summary
From a sentiment perspective, the US stock market and the US housing market could not be in more different places right now. While stocks are in a raging bull market with a lot of optimism that could be construed as exuberance, the housing market is in the doldrums. Transaction activity is close to the lowest level in forty years and most people believe this is not a good time to buy a house.
Curiously, this sentiment is not price driven, at least not in the traditional sense of positive price-sentiment correlation. Home prices are at all-time highs and they are marching just like stocks, currently at an annual rate of about 4%. The housing market benefits from fiscal impulse liquidity just like stocks. And it should in theory be an equally solid protection against currency debasement, the raison d’être for the $3tn invested in crypto. What is lacking for real estate however is the right story to lighten up sentiment. High interest rates are scaring buyers and in many cases prohibit them from actually making a move.
Whatever happens next, transaction activity cannot remain at these ridiculously low levels forever. Life circumstances change and people need to move. Once activity picks up, it may become the necessary catalyst to accelerate price development as it has been in the past. Home sales typically lead home prices by about nine months.
It is both remarkable and - in my opinion - very bullish how robust home prices have been against weak transaction activity. This divergence seems unprecedented and it suggests that there are very few forced sellers. US households are in a very strong financial position. The aggregate mortgage-to-value ratio is just 27%. It has not been lower than that since 1959.
Affordability is admittedly poor as a result of resilient home prices and surging mortgage rates. But lack of affordability alone does not constitute a bear case. Instead, we must ask where it comes from and whether the driving force is sustainable. If homes get a store-of-value premium similar to certain stocks or Bitcoin, they can decouple from historical valuation benchmarks. If the average existing home sales price can be north of $400k with 7% mortgage rates and terrible sentiment, where may it be if (when?) mortgage rates return back to 4%?
From the pandemic housing mania to an utterly neglected asset class
Four years ago, people were chasing homes like they are chasing Bitcoin today. Many people were concerned that this was unsustainable. In early 2022, I published a piece arguing that it actually might be sustainable. I pointed to a favorable demographic environment for housing demand, to insufficient supply, to strong private sector financials and to changing consumer & investor preferences.
With US home prices at all-time highs, I would say this aged fairly well. If you had told someone back then that home prices would keep marching even with 7% mortgage rates in 2025, I doubt many would have deemed that possible. Yet, here we are and there is signal in that fact alone.
Weak sentiment
Sentiment on residential real estate is even poorer today than it was when I wrote that article. In their monthly National Housing Survey, Fannie Mae asks respondents whether they believe it is a good or bad time to buy a home. ‘Net good time’ (which is share of ‘good time’ minus share of ‘bad time’) is -57% vs. -40% in early 2022. This sentiment is much weaker than it was for most of the last 10 years.
Oftentimes, the sentiment in an asset class correlates positively with recent price direction. Nothing deters stock market investors as much as a cruel long lasting bear market. With housing, it has been the opposite. Rising mortgage rates have done nothing to bring home prices down which is very frustrating for prospective buyers. This has stalled deal activity which - in contrast to historical reference periods - also has not harmed prices.
In general: more transactions = higher prices
The chart below plots the S&P CoreLogic Case-Shiller Home Price Index against existing home sales (shifted 9 months to the right). Home prices clearly correlate with transaction volume. The higher the velocity in housing transactions, the more inflation it will exhibit.
It’s stunning how well the housing market has taken the transaction volume decline after 2021. The current seasonally adjusted annual run rate of home sales is 4 million units, which is about 25% lower than the average level of the late 2010s and 35% lower than the spike in 2020/21.
After 2007, the drop in transactions came with a significant price correction. This time, prices have kept climbing. I consider this a very bullish signal. Once transaction volume picks up, prices should accelerate, too.
Strong financial position of US households
The primary reason for this resilience is likely the very strong financial position of US households. They have deleveraged for almost ten years. The mortgage-to-value ratio is just 27%. It has not been lower than that since 1959!
Potential sellers are not under pressure. They can wait.
What about affordability?
The Atlanta Fed publishes a monthly Home Ownership Affordability Monitor (HOAM). With homeownership cost at 45% of median income, homeownership is currently equally ‘unaffordable’ as shortly before the GFC.
To bring this back to the 2010s range, homeownership costs would have to drop by 30% which equates to about $900 per month. This would be consistent with a mortgage rate drop from currently 7% to 3%.
Pointing to affordability is an important argument for anyone trying to build a case against the housing market. There is however a huge problem with it. Lack of affordability is not a sufficient condition for prices to come down.
You may have a point in pointing to the fact that owning a home costs people 50% more of their income today vs. a decade ago. But that doesn’t mean it will mean revert to that level. We need to appreciate the signal in the price in conjunction with current sentiment. And we need to ask where that comes from. And whether the forces at play are sustainable.
Store of value premium?
The unprecedented fiscal and monetary response to the pandemic and its after-math has shattered many people’s trust in public institutions. There is a consensus now that policymakers will always inject liquidity to combat crises as opposed to allowing financial markets to digest potential excesses. That we are still at 7% deficit/GDP in the US now in 2025 feels like we have lost control completely on public finances.
This is why Bitcoin exists with a $2tn market cap. Millions of people searching for alternative means of storing their wealth. I firmly believe their choice is ill-educated delusional. Bitcoin will disappoint them. But I do understand where their affection for it comes from.
I find it curious in this context how unpopular real estate is as a protection against deliberate and grossly negligent currency debasement. In my opinion, this asset class is highly suitable for store-of-value purposes in terms of its liquidity, transparency and understandability.
People love Bitcoin because there will only ever be 21 million coins. Nobody ever makes an argument against it based on affordability. It’s general consensus that any level is justified because it will keep rising forever.
Real estate has the same scarcity baked in. How many condos are there in Manhattan and how many more can realistically be built? And if you don’t like Manhattan, I am sure you can think of other desirable locations, the popularity of which will only increase in the future. I find it confusing that real estate sentiment currently doesn’t get any uplift from the widespread affection for Bitcoin. Perhaps its volatility is too low which makes it unattractive in a society that degenerates from investing into gambling?
If we assume that monetary and fiscal policy will continue the current path and we want to protect ourselves from that, then there should be a “store-of-value”-premium for those assets that are suitable hedges. These should be assets with scarcity features. In the case of real estate, this would mean prime locations that cannot be easily replicated. With such a “store-of-value”-premium, these assets might detach somewhat from the overall income level and instead be priced based on cost of carry alone.
The role of interest rates
Most people agree that low or at least falling interest rates are the oxygen that the housing market requires to perform. I do actually expect rates to fall after the current capitulation. But even if I am wrong about that, I have doubts that stubborn rate can harm home prices.
Interest rates can rise for two reasons. Either the economy grows in real terms or there is more inflation than anticipated. In both cases, rent growth will offset the negative impacts to the discount rate in a real estate valuation. Over reasonable time frames, the net effect of rising interest rates on real estate valuations is therefore limited.
Case in point: Between 1966 and 1981, mortgage rates surged from 6% to 17%. And home prices? Did a 3x, easily beating the S&P 500.
Sincerely,
Rene
Phenomenal article... I am a realtor in San Antonio, Texas... better known as Military City USA... we have sustained demand from the relative affordability of Texas compared to many other states in addition to the largest population of active and retired military members in any American city and let me tell you.... Very few sellers HAVE TO sell.... they're happy to let their house sit on market longer than ever..... and the people who HAVE TO buy.... unless they are a very qualified buyer they struggle to afford the homes that truly interest them given the high interest rates... not to mention property taxes and insurance costs have also skyrocketed while home prices remain stubborn... However, I have noticed that a lot of pre-owned inventory in the median price range of about $300,000-$400,000... these homes get practically stolen because the sellers have no choice no other offers.... many buyers either need starter level homes in $200s or new construction build homes that carry ridiculous builder incentives including 3.99% to 4.99% interest rates.... so the pre-owned inventory in that median range sits on market until the perfect buyer comes and steals it. Thank you sharing, you're absolutely right, if these homes are at high prices while mortgage rates are around 7% I can only imagine what will happen to home valuations when mortgage rates drop just a couple of points.