An inflection point in home prices?

Home prices and earnings

The charts show the Purchase Only House Price index (a broad measure of the movement of single-family house prices) along with the Average Hourly Earnings index (a classical measure of income from labor).

  • The indices have been rebased to 100 starting in 1991.
  • The second graph, the ratio between the two indices, allows for a better visualization of the indices’ relative performance beyond the trend.

Causes of divergence
During the ‘90s, home prices rose in line with the average earnings growth. In the early ‘00s, the indices diverged significantly only to mean-reverse during the great financial crisis. Since 2014 they diverged again albeit at a lower pace.

  • Monetary policies such as lowering rates or quantitative easing combined with fiscal policies such as easier access to credit for subprime borrowers might explain the divergences.

Is this time different?
Following the Covid-19 outbreak, hourly earnings spiked in April and then stabilized, while house prices plateaued until June, before re-accelerating exponentially.

  • Is it a new structural phenomenon consecutive of deurbanization due to newly adopted home-office solutions?
  • Could this divergence force the central bank to raise rates causing another crisis?

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