The Line That Explains The Coming Housing Depression

Summary

The video discusses a concerning trend in the U.S. real estate market, particularly in southern regions, where rapid price increases, unsustainable price-to-income ratios, and rising speculation mirror conditions from the 2008 financial crash. Economist Robert Shiller, known for predicting the 2008 collapse, highlights these trends using his Case-Shiller Index. While the broader market appears stable, southern areas like Florida show signs of vulnerability, leading experts to speculate about a potential market crash. The video explores these trends and compares them to early 2000s housing bubble indicators.

Takeaways

• 📉 Real estate markets are inherently local, but a significant correction is happening in a specific U.S. region while the rest of the country remains competitive and optimistic.
• 📚 Robert Shiller, a renowned economist and co-creator of the Case-Shiller Index, is cited as a leading expert on real estate trends, with insights that have predicted past market crashes.
• 🏡 Shiller's 2000 book 'Irrational Exuberance' identified three key factors that led to the 2008 housing crash: rapidly increasing home prices, high price-to-income ratios, and speculative buying.
• 📈 Home prices across the U.S. have surged, particularly in southern states, mimicking trends seen in the early 2000s before the last crash.
• 💰 The price-to-income ratio is at unsustainable levels, making homeownership unaffordable for many, and increasing financial strain in markets like Miami.
• 🔍 Shiller suggests that waiting to buy might be wise, as housing prices are still high and a potential downturn could occur.
• ⚠️ Speculation in the housing market is rising again, particularly in southern regions, with a growing number of home flips, mirroring pre-2008 conditions.
• 📊 Housing affordability is at historic lows according to the University of Michigan's consumer sentiment survey, indicating a very pessimistic outlook on buying conditions.
• 💸 Although subprime lending has been tightened since the 2008 crash, speculation and risky behaviors still persist, particularly in regions like Florida.
• 🌍 If a housing crash happens in 2024, it will likely start in the southern U.S. regions, which have shown more volatility compared to the rest of the country.

Q & A

What is the main theme of the video transcript?

The main theme of the transcript is the potential real estate market crash in certain regions of the United States, particularly in the southern states, and how factors like rapidly increasing home prices, price-to-income ratios, and speculation are contributing to this instability.

Who is Robert Schiller, and why is he significant to this discussion?

Robert Schiller is a renowned economist, academic, and author known for his work in real estate markets. He co-created the Case-Shiller Index, a widely respected tool for tracking housing prices, and his insights have proven valuable for understanding and predicting market dynamics, such as the 2008 financial crash.

What are the three main factors identified by Robert Schiller that indicate a housing bubble?

The three main factors identified by Schiller that indicate a housing bubble are: 1) rapidly increasing home prices, 2) high price-to-income ratios, and 3) speculative buying in the market.

How do current home price increases compare to previous market conditions?

Current home prices have risen significantly, with increases seen across almost every state, especially in the southern states. While these increases haven't matched the extremes of the 2008 buildup, the rise is still concerning, indicating similar speculative behavior.

Why is the price-to-income ratio considered a key indicator of market instability?

The price-to-income ratio measures housing affordability by comparing home prices to typical incomes. A high ratio indicates that homes are becoming unaffordable, suggesting financial strain on buyers or increased speculation, which is unsustainable and can signal a bubble.

What does Schiller suggest about current market conditions?

Schiller suggests that current home prices are very high by historical standards and that prices may cool off. He advises caution in buying decisions, though he acknowledges that purchasing a home is often more than just a financial decision.

How does speculation currently manifest in the housing market?

Speculation is evident in the high rate of home flipping, particularly in southern markets like Atlanta and Memphis, where the proportion of flipped homes is nearing levels seen before the 2008 crash. This indicates increased speculative activity in the market.

What regions are most at risk of a market correction, according to the transcript?

Southern regions, especially places like Florida, are most at risk of a market correction due to rapid price increases, high price-to-income ratios, and significant speculative buying.

Why does Schiller believe that predicting long-term housing market trends is challenging?

Schiller believes that predicting long-term housing trends is challenging because market dynamics are influenced by various factors, including psychological elements, economic policies, and broader financial conditions, making it difficult to foresee long-term outcomes.

What does the University of Michigan's consumer sentiment survey indicate about current home buying conditions?

The University of Michigan's consumer sentiment survey indicates that consumer sentiment regarding home buying conditions is at an all-time low, reflecting widespread pessimism about affordability and the current state of the housing market.

Outlines

00:00

🏡 Real Estate Market Warning: Signs of a Bubble?

The U.S. real estate market is showing regional signs of a major correction, particularly in the southern regions, despite a stable national outlook. Economist Robert Shiller, known for predicting the 2008 housing crash, offers key insights into current market dynamics. Shiller's analysis of historical data, housing prices, and speculative behavior warns that rising home prices, income imbalances, and market speculation could indicate another crash similar to 2008.

05:00

📈 Schiller’s Three Key Indicators: Are They Flashing Red?

Robert Shiller's analysis centers on three critical factors that predicted the 2008 crash: rapidly rising home prices, high price-to-income ratios, and speculative buying. Currently, home prices across the U.S. have soared, especially in southern states like Florida, with growth reminiscent of pre-2008 trends. The Case-Shiller index captures some of this rise, but its limited scope fails to fully reflect the extent of price volatility in other regions.

10:02

💸 Price-to-Income Ratios: A Dangerous Sign

The affordability of homes is rapidly declining as price-to-income ratios worsen across the country, particularly in places like Miami, where housing prices far outpace local incomes. This has led to financial strain for many homeowners, raising concerns about a potential market bubble. Shiller's comments during a CNBC interview highlight concerns over unsustainable pricing, though he hesitates to advise buyers against purchasing outright due to the personal nature of home ownership.

🛠 Is the Market Heading for a Speculative Collapse?

Speculative buying was a major factor in the 2008 housing crisis, and signs of a similar trend are re-emerging. Home flipping rates have reached concerning levels, approaching pre-2008 highs, especially in the southern markets like Atlanta and Memphis. While tightened loan regulations have reduced risky lending, speculation remains strong in real estate, raising questions about the sustainability of current market dynamics.

🌎 Southern Real Estate: A Region on the Brink?

The southern U.S., particularly Florida, is experiencing a highly active and volatile housing market. If a major crash occurs, experts predict it could begin in this region, where price increases and speculative buying are rampant. Analysts are watching closely to see if the warning signs from Shiller's analysis, similar to those before the 2008 crash, signal a broader market downturn. The video's conclusion encourages viewers to stay informed and visit the creator’s Substack for deeper insights.

Keywords

💡Real Estate Market

The real estate market refers to the buying and selling of properties, and in the context of the video, it highlights how the U.S. housing market is showing contrasting trends. While the broader market remains stable, some regions are facing a massive correction, suggesting a potential crash.

💡Robert Schiller

Robert Schiller is a renowned economist known for his expertise in real estate markets. He co-created the Case-Shiller Index, which tracks housing prices, and predicted the 2008 financial crash. His insights are critical in assessing the current real estate trends, including rising prices and speculation.

💡Case-Shiller Index

The Case-Shiller Index is a widely recognized tool for tracking housing prices in the U.S. It is mentioned as a benchmark in the video to assess current market conditions, though it is noted that the index covers only 10 metro areas, limiting its scope in capturing the full extent of price volatility.

💡Housing Bubble

A housing bubble occurs when home prices rise rapidly to unsustainable levels, leading to a potential market crash. The video compares the current housing market to the pre-2008 crash period, suggesting that rapidly increasing prices and speculative buying may signal another bubble.

💡Price-to-Income Ratio

The price-to-income ratio measures housing affordability by comparing the cost of homes to average incomes. The video emphasizes that this ratio is currently far below historic levels in many areas, particularly in Southern states, making homes unaffordable for many and raising concerns of an unsustainable market.

💡Speculative Buying

Speculative buying refers to purchasing assets, like real estate, with the hope that their value will increase rather than for practical use. The video highlights speculation as a key factor in housing markets, particularly in Southern states, where home flipping and price inflation suggest a risk of market instability.

💡Home Flipping

Home flipping involves purchasing homes with the intent to quickly resell them for a profit. The video notes that the current rate of home flipping is approaching levels seen before the 2008 crash, with some Southern markets like Atlanta and Memphis showing particularly high levels of speculative flipping.

💡Affordability Crisis

The affordability crisis refers to the growing gap between home prices and the ability of average people to afford them. The video points out that many regions in the U.S., particularly the South, are experiencing rapidly rising home prices, making it difficult for typical buyers to afford homes.

💡2008 Financial Crash

The 2008 financial crash was a global economic downturn triggered by the collapse of the U.S. housing market. The video frequently references the 2008 crash, drawing parallels between the conditions that led to that crisis—such as rapid price increases and speculation—and today's market.

💡Interest Rate Changes

Interest rate changes, especially those set by the Federal Reserve, influence borrowing costs for homebuyers. The video discusses how recent interest rate hikes have made buying homes more expensive, contributing to market instability, particularly in regions where prices are already elevated.

Highlights

A strange trend is unfolding in the U.S. real estate market, with one region undergoing a massive correction while the broader market remains competitive.

Robert Shiller, a renowned economist and co-creator of the Case-Shiller Index, has been instrumental in predicting real estate trends, including the 2008 financial crash.

Shiller's book, *Irrational Exuberance*, identified three key factors leading to the 2008 crash: rapidly increasing home prices, price-to-income ratios, and speculative buying.

Currently, home prices are rising sharply across the U.S., particularly in southern states, but the Case-Shiller Index only tracks ten metro areas, missing the full extent of the volatility.

In Miami, home prices increased by 1136% between 2001 and 2006 before the 2008 crash, and a similar trend is seen now with prices up 85% since 2019.

Affordability is plummeting nationwide, with price-to-income ratios far below historic levels, stretching people financially or inviting speculative investment.

Shiller recently stated that current home prices are 'out of control' and suggested that buyers might want to wait as prices could cool off.

The University of Michigan's Consumer Sentiment Survey indicates that home buying conditions are at an all-time low, reflecting widespread pessimism about affordability.

Speculation remains a concern, particularly in southern markets like Atlanta and Memphis, where home flipping rates are nearing pre-2008 highs.

Home flipping, a sign of market speculation, is at levels comparable to 2006, with 9% of home sales being classified as flipped properties.

While lending regulations have tightened since the 2008 crisis, speculation continues to drive the market, though it's hard to determine if it's reached excessive levels.

If a real estate crash does occur, it is likely to start in the southern regions of the U.S., which have been experiencing more market volatility than the rest of the country.

The broader U.S. market remains relatively stable, but signs of instability in southern regions raise concerns about a potential housing market crash.

Shiller's three factors—rapid price increases, price-to-income imbalance, and speculation—are present in today's market, echoing conditions before the 2008 crash.

Despite concerns, no one, including Shiller, has definitively predicted a 2024 crash, but the signs are reminiscent of the early 2000s housing bubble.

Transcripts

we all know that real estate is

inherently local however a strange trend

is unfolding in the United States while

the broader Market remains highly

competitive and optimistic one

particular region is undergoing a

massive correction this has led many to

speculate that a major crash might be on

the horizon though the rest of the

country appears stable the signs of

instability in this area hint at deeper

issues that could spell trouble ahead to

understand how people are coming to this

conclusion it's crucial to turn to a

leading expert in the field and not just

some YouTuber babbling on about stats

this is Robert Schiller Schiller is a

renowned Economist academic and author

who has made significant contributions

to the study of real estate markets he

co-created the case Shiller index widely

regarded as the gold standard for

tracking housing prices if there's

anyone who has extensively studied real

estate Trends dating back hundreds of

years it's Robert Chiller his book

irrational exuberance first published in

2000 served as a predictive warning to

investors about the overheating housing

market which eventually led to the 2008

financial crash Schiller's insights and

indicators have proven invaluable for

understanding and predicting market

dynamics by analyzing historical data

psychological factors and economic

indicators Schiller provides a

comprehensive framework for assessing

housing market conditions and potential

risks so how did he predict the last

crash and what can we learn to

anticipate in today's market it turns

out that that in his book he focused on

three main factors rapidly increasing

home prices price to income ratios and

speculative buying let's break these

down to understand why some people think

another 2008 style crash is coming first

let's examine the number one point

rapidly increasing prices there's no

doubt that home prices have surged well

above normal levels however Schiller's

case Schiller index commonly referenced

on the St Louis fed website doesn't

fully capture the extreme nature of this

search currently we're experiencing a

significant increase in prices across

nearly every state from California to

New York with even more severe rises in

southern states the K Schiller index at

least the one covered by popular media

only covers 10 Metro areas with Miami

being the only major southern city

included this limited scope

unfortunately does not reflect the full

extent of the Market's volatility for

example in Miami from roughly July 2001

to June 2006 the K Shiller index

increased by 1

136% right before the bubble burst in

the 2008 crash this period which I'll

call the' 08 buildup lasted about 5

years in the most recent buildup from

around the summer of 2019 to now prices

have risen by about 85% singling a

similar Trend while the growth hasn't

been as extreme when you factor in

interest rate changes and insurance

changes in Florida it can be argued that

this recent buildup is just as

concerning as the one in the early 2000s

in other Southern cities the story is

the same people are frustrated with the

rapid growth this region has experienced

over the last 5 years and it doesn't

seem to be reversing any time soon if we

judge the market based on the factors

outlined in Schiller's book IR rational

exuberance it's not unfair to say that

this Market easily ticks the first box

of a bubble rapidly increasing prices

now let's move to the second box price

to income ratios throughout the country

affordability is plummeting the price to

income ratio measures how much a typical

person earns and what percentage of that

income they need to spend to afford a

typical home breaking this down by

region and using Miami as an example you

can see that affordability is far below

historic levels this means people are

financially stretched to own a normal

home or there's a lot of speculation and

outside money entering the market

expecting Equity to continue Rising this

is seen as typically unsustainable and

is yet another piece of evidence that we

may just be in a bubble now back to

Schiller for a second he's recently gone

on record to say that prices are getting

out of control in an interview with CNBC

last March he told the audience that

clearly they should consider waiting to

buy as prices would likely cool off so

far he's been wrong but that doesn't

really change his rationale you can hear

him talk about it in this clip while

nobody including this renowned Economist

is going to tell you not to buy just

because housing is such a big family

decision that's way more than just

purely Financial it doesn't change the

fact that we're currently living in an

era far above historical Norms take a

listen to him explain hiking 25 basis

points at its last meeting despite the

recent bank failures of svb and

signature and as borrowing costs rise

what will the ripple effect be on

residential and Commercial Real Estate

joining us now Yale professor of

Economics Robert Schiller Professor

we're so happy to have you on the show

today um we're we're going to get a bevy

of housing data this week including K

Shiller home price index tomorrow we

have this Brewing debate about whether

we've seen a bottom or even at least a

stabilization in the housing market how

do you see it

well it's it's easy to forecast the

short run in the housing market not so

easy to forecast if you're a long-term

buyer it's not

clear uh but home prices are are very

very high and uh by historical

standards uh I would extrapolate the

downturn somewhat uh it's going to

continue uh maybe if you have a chance

to delay your purchase it might be a

good a good time to do it Robert I want

to go back to housing for a moment how

does this affordability standoff that we

see in residential real estate end I

mean we've got extremely low inventory

High interest rates is it going to take

higher unemployment to break landlord's

ability to to increase rents and from

there the Investments don't pencil out

anymore and and therefore they got to

dump them and and you know inventory

Rises and prices drop drop or something

else yeah well that's uh the capitalist

system with the Central Bank uh I think

it works pretty well most of the time uh

and

uh I I I wouldn't Tinker too much with

it uh we have smart people on the fed

and the treasury secretary I admire

Janet

Yellen uh they uh they may have to

accept however I think this is as own

power has put it they may have to accept

something of a recession but but for the

housing market how should the people at

home who are maybe thinking about

selling a home you kind of address

thinking about buying a home how should

they expect this to play out if you have

a chance to sell your house now even if

it's for a little less than you wanted

do you go ahead and do it because you

know higher inventories are inevitably

coming uh I wouldn't say

inevitably uh I would say that it's

likely to be some more

declines so uh but I hate to you know

home purchase is such a family decision

I hate to uh

overreact uh so we do have a declining

Market at the

moment uh but you know there are cost to

not selling at the right time the

convenient time or you might lose a

house that you liked uh to somebody

else uh so I I don't think it's an easy

answer to that that

question when these price to income

ratios go beyond historical Norms rapid

normalization often occurs unexpectedly

people know that now is a horrible time

to buy and this sentiment is reflected

in the University of Michigan's consumer

sentiment survey which has tracked home

buying conditions since the 1960s

looking at the long-term chart it's

clear that we're essentially at an

all-time low for buying conditions never

before in history have people been this

pessimistic about their ability to buy

witha going back over the past 60 years

years that makes check too now for the

last Point speculation it's true that in

the early 2000s especially in Florida

there were loose regulations that

allowed people to borrow excessive

amounts of money and engage in

fraudulent activities from the top down

from investors agents and appraisers to

Banks lending institutions and even the

federal government many individuals were

involved in practices that made them a

lot of shady money this created

environment where people turned a blind

eye to fraud and greed it's almost

unquestionable that prior to the last

big bubble there was much more

speculation in the real estate markets a

significant part of this was due to

subprime lending and loose loan

regulations which have since been

tightened however this aspect remains

Highly Questionable without a doubt

there is still plenty of speculation

especially in southern markets but

determining whether has reached a tulip

level of greed is challenging if we look

at home flipping as an example the raw

home flipping rate which is the number

of homes flipped in a quarter is

definitely concerning currently we're at

68,000 homes a number not far off the

2006 highs right before the market crash

to make matters worse if we examine the

flipping rate which is the ratio of

flipped homes to homes for sale we see

that flipping is pretty much on par with

the pre2 2008 highs with as many as 9%

of sales being categorized as flipped

homes or condos if you look at the

article Linked In the description you'll

see that regionally it's even worse than

this chart shows in southern markets

like Atlanta and Memphis the ratio of

homes that are part of a flip is even

higher so from that aspect regardless of

the loans these flippers are using it's

clear that speculation is on the rise

whether or not we can call it excessive

is very hard to gauge overall you can

see that Robert Schiller's points about

the early 2000s Market which included

excessive price Rises price to income

imbalance and speculation are evident in

today's real estate market while I don't

believe Schiller has explicitly called

this Market a bubble ready to implode we

can say that some of the same conditions

he used to make his argument in 2000 are

now apparent in the 2024 Market the big

question every real estate analyst is

trying to answer is where we go from

here what we do know is that in the

southern regions especially in places

like Florida we're seeing a very active

Market compared to the rest of the

country if there is some sort of Crash

it will almost certainly start in this

region which signifies two very

different markets thank you guys for

watching as always please make sure you

hit that like And subscribe button if

you enjoyed it and while you're at it

take some time to look at my brand new

substack which contains contains more

in-depth articles regarding these topics

complete with graphs and more in-depth

material the link is in the description