Similar to the equity market, we’re seeing quite a bit of asset price inflation in the housing market. Somewhat surprisingly, the 6-month rolling average of new home sales prices as a multiple of average family incomes exceeded last cycle’s peak, as of 12/31/17, and has actually done so for quite some time now.

While a chart like this is sure to invoke bad memories for many of us that experienced the housing bust and subsequent credit crisis first hand last decade, I believe, dare I say, this time appears to be different. We know housing supply has been lacking for a number of years based on approved permit trends for new homes versus historical averages as well as below average for sale listings of existing homes versus historical averages. In many markets, there are several showings of homes within hours of being listed with multiple offers within days after that, often times in excess of the asking price.

While residential real estate may have benefited, to an extent, from yield starved investors, it appears the rise in housing prices has been more of a result from a classic supply/demand imbalance. That’s not to say prices can’t meaningfully deflate when the next recession comes, but we likely aren’t going to see the same fallout witnessed last cycle when home values were pushed substantially higher, irrespective of fundamentals, due to financial engineering.