

According to a recent Zillow press release, buying is more affordable than ever in 94 of the 100 largest markets. But renting is now more expensive than ever in 88 of those markets.

Those rising rents make it harder for young families to save for a down payment on a home. Add in high student loan debts for many of them and less certain job prospects for younger people, who are experiencing much higher unemployment rates than the older baby boom generation, and the problem becomes very real.

I haven’t even mentioned the fact that inflation adjusted incomes have been falling since 2000.

This chart shows clear trends in opposite directions. Rents have been rising as a percentage of incomes while mortgage costs have been falling.

See larger image

Rents in the pre-bubble years of 1985 — 1999 averaged 24.9% of the renter’s income. That average has now risen to 29.5%.

It makes sense to think that rents would fall after home prices fell, but they didn’t due to rising demand vs. supply. This is why so many individuals and investment funds have been scooping up small homes and renting them out.

The big question here is how long can this go on without creating an oversupply of rental homes? It clearly doesn’t appear that this has occurred yet or rents would be falling. If we’re right about a deeper recession and depression just around the corner, it will lead to downward pressure on both rents and home prices.

The cost of mortgages as a percent of income has fallen from pre-bubble levels of 22.1% to just 15.3%. This is obviously due to the falling mortgage rates, but that’s an artificial and free gift from the Fed.

During the housing bubble’s 6-year run (2000 to 2005), mortgage costs rose from 18% to 25%. That’s why bubbles aren’t sustainable.

If you are wondering how renting could be so much more expensive than mortgage costs, part of the reason is that the average income of renters is much lower: $31,888 vs. $65,514 for homeowners. Rent reduces their already meager income by a higher percentage.

Ordinarily this would have caused a massive increase on home buying. In Chapter 3 of The Demographic Cliff, I explain why the housing market will never be the same in this post-bubble era. We’re approaching the point when there will be more sellers from the aging of the massive baby boom generation than younger buyers from the millennial generation that peak between age 37 and 41.

The numbers are similar to workforce growth where I subtract retirees from new tenants. For housing, I subtract the sellers at age 79 from the peak buyers at age 41 and then I can calculate “net” demand for housing for decades into the future.

Net demand has been falling since 2000, despite a slight bounce up in 2014. That small spike was almost in line with the slight rebound home prices had in 2012.

Once we slide into 2015, it will fall again and hit negative net demand from 2029 to 2039. Once there are literally more sellers than buyers, we won’t need any new homes built!

Housing should slow from 2015 forward — and economists are more confident than ever that we are in a sustainable recovery. The most affluent households also peak this year and will go off the “demographic cliff” like the average household did after 2007.

The truth is that the Fed is tapering at precisely the wrong time and I wrote about it this past July in “Their Economy Will Collapse, Including Ours.”

Once I describe a fall in real estate worse than the one that happened during the years of 1925-1933, I find it quite easy to talk younger households out of buying a home. But it is still proving difficult for me to talk older households out of buying a house.

Principle #5 of bubbles (page 146, The Demographic Cliff) states: “Bubbles tend to go back to where they started or a bit lower.”

Real estate prices will fall at least 40% from where they are now.

Don’t even think about buying a home (or worse an office) until at least early 2017. Let the coming stock crash and depression see its first and likely worst phase.

We’ll advise you further at that point.



Follow me on Twitter @HarryDentjr

Major Shifts Ahead for Real Estate in America

Harry Dent