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Author Cullen Roche, the founder and CIO of Discipline Funds, pointed out in a tweet that a mean reversion of house prices to pre-COVID levels may take a long time and that could mean the economy could be in for a long slog.
Citing a chart that shows a comparison between house prices and rents, Roche raised a question as to how much will the prices revert.
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“This is the main driver behind my ‘muddle through’ perspective and why I think the U.S. economy is in for a long slog. The process of this mean reversion will take years to play out,” he tweeted.
Roche also noted that it’s a serious problem for the Federal Reserve since upward rent pressure puts more pressure on inflation, thereby forcing the central bank to keep rates higher for longer. “Which, paradoxically, creates more downside risk for house prices,” he said.
A report from the Federal Housing Finance Agency on Tuesday showed home prices rose 6.6% in the 12 months through December, registering the smallest rise since June 2020, after increasing 8.2% in November, according to a Reuters report.
Gradual Fall: Roche believes if house prices mean revert to their pre-COVID average of 15%, they will fall about 15% from peak to trough. “This should be a baseline estimate and very likely a conservative one,” he noted.
“This will take time though. None of this moves fast because housing is such a big slow moving sector. So we might not even see this come to fruition until 2024 or even 2025. Patience, friends. Patience,” he said.
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Image and article originally from www.benzinga.com. Read the original article here.