Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Long Ideas

Median Home Price Indicates Real Estate Deflation Could Be Imminent

Personally I would not invest in real estate in the United States right now, except perhaps to buy a home. The reason I say this is that the real estate market in the United States is extremely volatile right now.


Cities 30-Year Fixed Mortgage Rate % Change from 3Q14 Median Home Price % Change from 3Q14 Monthly Payment (PITI) Salary Needed
Pittsburgh 3.98% -0.14% $135,000 -6.90 $740.05 $31,716.32
Cleveland 4.05% -0.18% $121,200 -6.70 $746.91 $32,010.41
St Louis 4.03% -0.18% $138,400 -7.86 $777.54 $33,323.09
Cincinnati 4.09% -0.16% $138,100 -7.32 $781.32 $33,485.23
Detroit 4.18% -0.16% $135,800 -10.36 $828.83 $35,521.47
Atlanta 4.09% -0.14% $157,700 -5.85 $835.34 $35,800.11
Tampa 4.13% -0.17% $160,000 +10.34 $880.42 $37,732.20
Phoenix 4.06% -0.17% $200,300 -0.10 $948.69 $40,658.08
Orlando 4.07% -0.13% $180,000 +0.00 $983.34 $42,143.30
San Antonio 4.09% -0.19% $185,500 -0.48 $1,058.73 $45,374.30
Minneapolis 4.07% -0.18% $210,000 -4.15 $1,111.29 $47,626.53
Dallas 4.09% -0.22% $189,600 -2.02 $1,138.35 $48,786.53
Houston 4.09% -0.17% $199,300 -1.58 $1,166.28 $49,983.37
Philadelphia 4.14% -0.15% $213,300 -7.78 $1,187.99 $50,914.04
Baltimore 4.03% -0.16% $233,200 -8.84 $1,228.78 $52,661.96
Chicago 4.09% -0.12% $195,100 -12.04 $1,268.09 $54,346.62
Sacramento 4.19% -0.14% $268,700 -2.40 $1,362.96 $58,412.49
Miami 4.09% -0.17% $265,000 -1.85 $1,363.40 $58,431.48
Portland 4.11% -0.17% $288,900 -0.82 $1,414.08 $60,603.50
Denver 4.08% -0.20% $314,800 -0.22 $1,438.32 $61,642.15
Seattle 4.15% -0.13% $352,000 -2.20 $1,699.70 $72,844.31
Washington 3.98% -0.22% $372,800 -4.19 $1,805.88 $77,394.82
Boston 4.05% -0.21% $383,200 -4.18 $1,867.83 $80,049.93
New York City 4.22% -0.15% $390,000 -5.34 $2,042.50 $87,535.60
Los Angeles 4.07% -0.18% $450,900 -6.43 $2,092.18 $89,664.86
San Diego 4.07% -0.21% $493,100 -4.77 $2,226.76 $95,432.68
San Francisco 4.02% -0.18% $742,900 -0.20 $3,323.79 $142,448.33


A good indicator of the volatility is the median price in housing for 25 large metropolitan areas in the U.S. in the third quarter of 2014 as calculated by the website As you can see from the chart, the price fell substantially in a number of major cities between Third Quarter 2013 and Third Quarter 2014.

The biggest decline was in Chicago, where the median price fell by 12.09% between 2013 and 2014. It looks as if a major correction or possibly a collapse in housing is beginning in Chicago. Detroit also saw housing prices tumble by around 10.36%, and Baltimore saw a drop of 8.84%. It looks as if real estate prices are beginning to collapse in those markets.

Judging by these numbers, we could be on the verge of a nationwide real estate collapse. Prices even in some formerly hot markets such as San Francisco, Los Angeles, New York, Boston, Denver, and San Diego are dropping. Median home prices in Los Angeles fell by around 6.43%. Yet the drop was across the board, affecting depressed markets like Pittsburgh and Cleveland as strongly as hot markets like New York.

Real Estate Price Collapse

My take on these figures is that we could see real estate prices in cities like Chicago, Philadelphia, and Baltimore start dropping to levels approaching those in places like Atlanta and Cleveland. It looks like the dismal real estate market in the Midwest is catching up with some of the larger cities.


Basically, it appears that housing is overpriced in most American markets, and a correction is beginning. One reason for this is that only one major real estate market in the United States, Tampa, saw a significant increase in housing prices between Third Quarter 2013 and Third Quarter 2014. In Tampa, housing prices rose by around 10.34%.

Buying real estate now would simply be dumb because prices could soon fall lower. So where would I buy given the results of this survey?

My suggestion would be to look to Florida, where prices are stable. Median home prices held steady in Orlando, where there was no change, and rose in Tampa. In Miami, there was a slight drop of around 1.85%. I would steer clear of the Midwest; Chicago, Detroit, Cleveland, Cincinnati, and St. Louis all saw significant drops in housing prices.

California too is beginning to see a significant drop in real estate prices. Median home prices fell in all four of the California metro areas on the list: Los Angeles, San Diego, San Francisco, and Sacramento. Los Angeles had the biggest drop and San Francisco the smallest; housing prices there fell by just .2%. It would probably be a good idea to stay out of the Golden State for now.

Another bright spot was Phoenix, where housing prices fell by just .1%, indicating that Arizona real estate might be recovering, although California might drag it down.

The figures show that the place to invest in real estate is the Sunbelt, particularly in states with low taxes and strong economic growth. That would be Arizona, Texas, Florida, and Nevada. Texas too was pretty healthy with real estate prices falling by 2.02% in Dallas, .48% in San Antonio, and 1.58% in Houston.

Yet I would hold off on buying for now because real estate prices will probably drop further. My guess is that we are just seeing the beginning of a significant drop in real estate prices nationwide.

The Big Picture: Real Estate Deflation

The median home prices indicate something else that we could be seeing: real estate deflation. Deflation occurs when prices keep falling and falling, often because people are afraid to buy because they think prices will drop further.

Deflation was one of the big problems in the Great Depression. Currently deflation of commodities, especially oil, is already wreaking economic havoc around the world.


So what’s driving the current real estate deflation? My guess is that it is income inequality; many people simply cannot afford to pay the prices being charged for real estate in many markets. This is partially driven by the deflation of labor or wages; salaries are falling because the demand for labor is falling because of automation, outsourcing, and contraction of the economy.

Another problem is that some forms of housing, particularly single family homes, in some markets are overbuilt. The median home price in Pittsburgh is $135,000, and the average price in Cleveland is $121,200 because there are simply too many houses in those communities.

If I were to buy for an investment, I’d buy a house or other residential unit in Florida or Arizona where demand is strong because of people retiring. The terrible winter in the Northeast and Midwest is going to set off a stampede to Florida later this year. I would stay away from empty land because housing is overbuilt.

One more prediction: we have not yet seen the worst in real estate housing collapse. My guess is that within the next two to three years we could see the median house price in some major American cities drop below $100,000. If that happens, we could see a collapse of the real estate market and major havoc in the banking and mortgage industries.

Another result of this will be a major flow of money into the stock market. My suggestion is to stay away from real estate from the next few years because the bottom is about to fall out of it.

Correction: an Earlier version of this post contained an outdated chart from last year.