Harvard Predicts Crash in 2024


Some people love to scream “the sky is falling.”  Maybe I am just more of an optimist.  Or perhaps, I pay closer attention to the economic fundamentals of a market than the soundbite headlines written to sell ads.

A recent report by CoreLogic notes that US home values have increased by more than 37% in the last five years.  MANY people that glance at headlines for their news are concerned that this is evidence we may be on the verge of another housing crash.  In my last article, I jumped on my soapbox and said that the economic fundamentals of the current economy are solid and I said we are NOT on the verge of another crash.

But the subject keeps coming up, so here are the statements of a few other experts that may help alleviate your fears:

Sean Becketti, Chief Economist at Freddie Mac “The evidence indicates there currently is no house price bubble in the US, despite the rapid increase of house prices over the last five years.”

David Blitzer, Chairman of the Index Committee at S&P Dow Jones Indicies “Housing is not repeating the bubble period of 2000-2006.”

Nonetheless, there is a 2016 article from Teo Nicolais of the Harvard University Extension School that keeps popping up in my discussions with other economics and finance junkies. 

In this article, Nicolais predicts the next housing bubble will occur in 2024.  He comes to this conclusion after looking at previous peaks in real estate values going all the way back to 1818.  He uses the research of several economists and he describes a “four phase” cycle as pictured above. 

In Phase I, the economy has just experienced a crash.  Real estate vacancies are high and prices are low, as housing inventory supply outweighs demand.  It is during this phase that Fiscal and Monetary policies will be implemented to spur a recovery.  Typical tools are reductions in interest rates (both Fed Funds rate and Interest on Reserves), open market activities (purchasing government securities in the open market) and reserve requirements (the amount of money banks are required to keep in reserve).

Typical Fiscal policy tools are taxes and spending.  If the government wants to increase the amount of money in the pockets of its citizens, it will reduce taxes or increase spending (and often a mixture of both).

Assuming fiscal and monetary policy has been successful, the economy and the real estate market will enter a recovery phase.  Nicolais refers to this as Phase II – Expansion. 

During this phase, vacancies decrease and the supply of housing does not meet demand.  Builders begin developing more housing to absorb the unmet demand, but because the lead time for new development is so long, the current supply of housing will experience an increase in price.  Associated with this increase in price is also a decrease in the time on market for existing houses. 

This is the phase the San Diego real estate market is in.  The current supply of housing in San Diego is at all time lows.  In 2007, at the height of the market, there were nearly 25,000 homes for sale on any given day.

In 2017, the supply of homes on the market was hovering around 6,000 and as I write this article, the number of homes for sale in ALL of San Diego County is 5,091.

Just take a look around and you will see new construction going in.  In fact my son’s middle school in La Mesa was torn down to make room for 50+ single family homes. So have we started to nudge our way into Phase III – Hyper Supply?

How would we know if we have entered Phase III?  I would argue that when vacancy rates begin increasing and Time on Market creeps up, we are only then starting to flirt with Hyper Supply.  If you have tried to buy a house lately, you know we are nowhere near that phase.  If you are not the first person to walk through the door of a new listing and if you don’t offer full ask with favorable terms, you’re probably not getting that house.  How many of you have heard stories of buyers making 10+ offers on houses before they finally get one? (Side note, if you have spoke to people like that, have them call me…I can write offers that WIN!)

Nicolais continues his article highlighting that as the real estate market enters Phase III, supply outweighs demand, prices collapse and we have a “crash”.  I fundamentally disagree with the use of the term crash.  Crash implies a RAPID loss of value.  When the stockmarket “crashes” billions of dollars of value is lost overnight.  When the market lost faith in mortage backed securities in 2008 and the financing tools used to underwrite the real estate market lost their value, that happened overnight.  Supply and demand forces working naturally in the real estate market do not happen overnight.

As I argued in the previous article, the fundamentals of the current growth in real estate values are solid.  Save an outside force (terrorist attack or WWIII) impacting the world economy, the real estate maket will act as any other market.  It will react to supply and demand forces.  I do want to add my one concern or variable that needs to be watched.  The amount of debt the Millenial generation currently holds, mainly from student loans, will CERTAINLY have an impact on the US economy.  Millenials do not make up a significant portion of the real estate market, but when they do, any significant downturn in the economy will be amplified by their debt levels.

So what does this mean to you?  We are not facing a “Real Estate Bubble” that will pop in 2024.  If you believe in the economics of Nicolais and his sources, we are just now entering Phase II.  We still have a long way to go until we reach Hyper Supply levels.  And let’s be honest, where is this new supply of houses going to be built?  There are only so many old schools that can be torn down.  We have the Pacific Ocean to our west, Camp Pendleton and Los Angeles to our north, Mexico to our south and mountains and deserts to our east.  Where are we going to find the land to build to a Hyper Supply?  If you know of any usable land, let me know…I have clients that would love to buy it from you!

Please let me know your thoughts and as always,

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