Declining Home Prices Risk Negative Wealth Effect – Seeking Alpha

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Real home prices are going to fall, and it’s going to cause a massive negative wealth effect.

In this article, we’re going to talk about the coming decline in real home prices, why it’s going to happen based on reliable leading indicators, and what it’s going to mean for the rest of the economy and the developing 2022 recession.

To start, we’re going to be looking at REAL home prices, or home prices after adjusting for inflation. Why real home prices and not nominal home prices?

Real home prices are much more impactful for the wealth effect. Many people invest in real estate as an asset to beat inflation. If inflation is 10% and your home goes up 15%, you beat inflation by 5%, and thus, you are 5% wealthier in real terms.

If inflation is 10% and your home goes up 5%, you lost 5% of your purchasing power in an asset that is supposed to give you protection, and you are actually worse off.

Also, real home prices are the best measure of the true performance of real estate as an asset class across long periods of time. You can’t compare home prices today to home prices in the 1970s without looking at them in real or inflation-adjusted terms.

This chart shows real home prices since the 1970s, and you can see that real home prices have declined several times, mainly around the recessionary periods.

FHFA, BLS, FRED, EPB Macro Research

The 2000s recession was an outlier in which home prices ROSE in real terms.

The financial crisis in 2008 caused home prices to decline almost 30% in real terms. It took until 2021 to regain the peak in real home prices from 2006, 15 years!

If we look at the growth rate in real home prices, we can see that real home prices were rising at a 13% rate in 2021, higher than the peak rate of home price growth in 2006.

S&P, Dow Jones, FRED, EPB Macro Research

Real home price growth was positive from 1996 until mid-2006, 10 straight years, which created this belief that home prices don’t fall.

And here we have another 10-year period, since 2012, where real home price growth was positive, and massively positive at that.

Over the last 10 years, real home price growth averaged 4.5%, which is way higher than the 20-year average of 2.0%.

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