Home values ​​are still 4.6 times income, worse than the 2006 Bubble

According to an analysis by Reventure Consulting CEO Nick Gerli, the US housing market continues to show signs of trouble even as mortgage rates decline.

Despite recent rate declines, homebuyer demand remains weak, with mortgage applications down 57% from the peak of the pandemic and 43% below pre-pandemic levels.

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The persistent weakness in buyer activity has surprised many real estate professionals. Industry expectations of a quick rebound in response to lower rates have not materialized, reflecting deeper problems in the market beyond funding costs.

Gerli said three key factors behind sluggish demand are affordability constraints, buyer burnout after the pandemic boom and record pessimism about the housing market. Recent data from the University of Michigan shows that 87 percent of consumers think it’s a bad time to buy a home—beating even the early 1980s, when mortgage rates hit 18 percent.

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Perhaps most concerning is the current ratio of home value to income, which Gerli said is about 4.6, much higher than historical norms. This level has only been approached twice before: during the housing bubble of 2006 (4.4) and the post-World War II boom (nearly 5.0).

Major housing affordability corrections followed both periods.

“The US has never supported a housing market so expensive relative to people’s incomes,” Gerli said on X, formerly Twitter. “The market is confused and buyers know it.”

Historical precedent suggests two main paths to rebalancing: falling house prices or rising incomes. Following the 2006 bubble, prices collapsed, dropping the ratio to 3.2. In contrast, the post-war era saw a gradual improvement through robust income growth, with housing becoming twice as affordable between 1953 and 1973.

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Looking ahead, Gerli anticipates a potential combination of both factors. Some markets — particularly in the Sun Belt, where inventories have risen — may see faster price corrections. Austin, Texas has already demonstrated how quickly values ​​can adjust under the right conditions. Other regions, particularly in the Northeast and Midwest, where supply remains tight, could experience a more prolonged period of stagnation.

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He said the road to market normalization could take years, requiring a sustained period of falling mortgage rates, price adjustments and rising wages to restore buyer confidence. That timeline runs counter to more optimistic industry forecasts, but aligns with current data showing persistent weakness in fundamental buyer demand — a trend that began in late 2021, when rates were still below 3%.

As the market grapples with imbalances, the possibility of a broader economic downturn looms as a potential catalyst for accelerating price corrections, particularly in overvalued regions. For now, the real estate market remains uncertain, with many potential buyers sidelined by financial constraints and deep skepticism about current market conditions.

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This article Housing Market ‘Out of Whack,’ Says Reventure CEO: Home Values ​​Still 4.6x Revenues, Worse Than 2006 Bubble originally appeared on Benzinga.com

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