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Is History Repeating Itself?

Warning signs are flashing in the housing market, says Lakshman Achuthan, COO and Co-Founder of the Economic Cycle Research Institute in New York. Achuthan recently published an article with Bloomberg in which he discussed the decline in growth in real home price since the summer of 2018 began.

This drop in home prices has been closely monitored across the industry, as seen in a recent report on the Redfin Housing Demand Index showing demand flat for a third consecutive month. But Achuthan goes further, claiming research done at his institute indicates real home price growth hasn’t just declined in recent months, but rather has “entered a cyclical downturn that is likely to intensify.”

This trend in decline home price growth, he suggests, very well could lead to an actual drop in housing values, reversing significant gains made since housing prices plummeted in the wake of the subprime mortgage crisis.

“With rates rising and the broader economy in a stealth slowdown that few recognize,” Achuthan warns, “stock prices are vulnerable to corrections… In this context, the home price downturn raises the risk of generalized asset price deflation that could result in a negative wealth effect for the first time since the financial crisis.”

As underlying factors fueling this downturn, Achuthan points to forecasts in data which reveal a drop in housing starts and existing home sales, both trends have been discussed by our sister publication, MReport, here and here.

Another factor Achuthan cites for his belief that home prices have entered a cyclical decline is the affordability issue, which continues to be a serious problem for many potential homebuyers who feel locked out of the market. But affordability is likely to persist as a dampener for home sales for the foreseen future—and will likely to be exacerbated by mortgage rates also widely expected to increase (as reported on by Deborah Kearns in a recent Bankrate article). Achuthan believes the increase in mortgage rates outpacing home prices combined with a paucity of new housing starts and rising costs in construction all together signal a real driver in a cyclical downturn in home prices across the nation.

“If nothing else,” Achuthan insists in closing, “the prospect of this scenario warrants serious monitoring.”

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