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Exactly How High Housing Can GoBy
Thursday, September 5, 2013
U.S. house prices have soared in the last year... So how much higher can they go?
I will answer that for you today... The truth may surprise you. Let me explain...
It's hard to believe, but house prices in some American cities (including Las Vegas and San Francisco) are up 25% in the last 12 months.
A 25% gain is a crazy move in house prices, relative to history... Before the 2006-2011 boom and bust, house price increases were pretty darn boring... On average, they'd risen at less than 1% a year above inflation.
With such extraordinary price gains recently... and with the recent jump in mortgage rates... you might think the rise in house prices over the last year might be near its end.
I disagree... House prices can still go much higher from here. By my calculations, fair value for the typical American house is somewhere between $25,000 and $75,000 higher than today's prices.
Let me explain why... starting with a chart...
This is a chart of ACTUAL U.S. house prices (in black) versus our True Wealth Systems computers' estimate of "fair value" of the median U.S. house (in blue):
 Our fair value calculation is based on housing "affordability." (Specifically, we're looking at the monthly mortgage payment needed to buy the median home in America, relative to median incomes in America.) House prices had tracked our fair value number for years... Then in 2006, they soared above it... And by 2012, they'd dropped way below it.
Now look at where we are today... Check out the huge gap between the fair value and the current price. It's $76,000!
An important thing to note is, this chart is based on 12-month averages. But in recent months, house prices have gone up... and so have mortgage rates. These moves have had an extreme effect on affordability. If we ONLY looked at the most recent month of data, as opposed to the last 12 months, the gap would be closer to $25,000.
So I am comfortable saying that there's still between $25,000 and $75,000 of upside potential in the typical American house – and that's just to get us to fair value...
I actually expect house prices will go higher than that. I think they will overshoot fair value...
For one thing, people have very few good alternatives for their money today. So a lot of money will work its way into real estate. Also, real estate tends to go in cycles, with prices going above and below fair value.
I can't guarantee that house prices will overshoot.
But I can tell you with confidence that – even after some markets are up by 25% over the last year – house prices still have plenty of upside potential... I believe the number is somewhere between $25,000 and $75,000 higher than today's median house price...
I am still buying real estate with my own money.
Good investing,
Steve
Further Reading:
Even with the dramatic moves in house prices and mortgage rates, history shows that there's still plenty of upside potential left. "Today," Steve writes, "we are at the same level of affordability that we were when house prices soared roughly threefold in a decade (in the 1970s)." Get the details here.
If you're interested in non-U.S. real estate, one of the best real estate investors on the planet – Peter Churchouse – is buying property where Steve never expected. In this foreign market, Steve writes, "Russian and Chinese billionaires are paying upwards of $100 million – for an apartment." Learn where Peter's buying now... and why... right here.
Market NotesTHIS MAJOR EMERGING MARKET IS IN FREEFALL Things keep getting worse for Indian stocks.
Emerging markets are one of the classic "boom and bust" areas of the market. Countries like China and India offer faster growth than places like Europe and the U.S. The problem is... investors pile into these foreign markets when times are good. When these economies hit a rough patch, the money pours right back out.
That's exactly what's been happening in India. The nation's economy is slowing down. Inflation is rising. And its currency – the rupee – just hit an all-time low versus the U.S. dollar. The result has been a huge downtrend in Indian stocks over the past three years.
As Steve pointed out in June, this bust has made these markets super-cheap. But we don't have an uptrend yet.
As you can see in today's chart, shares of major Indian stock fund PIN hit a fresh four-year low last week. The downtrend continues for this major emerging market.
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