The US Property Market Is Doomed

In yesterday’s dispatch, we looked forward to the past to understand how stagflation in 2025 might stack up against stagflation from the 1970s.

Yesterday, I listed five industries that, in stock market terms, did well by investors in the 1970s: energy, metals and mining, consumer staples, healthcare, and utilities.

But one industry that performed admirably in the ’70s I specifically left out.

Real estate.

Today, I want to explain why, because I suspect real estate investors will be sorely disappointed by the returns they achieve in today’s stagflationary era.

And to be clear, I am specifically talking about US residential real estate, not foreign real estate, where I see excellent opportunities to chase capital gains and healthy rental income.

Moreover, my thinking here is broad, meaning I’m talking about US real estate in general. Certain pockets of American residential real estate will probably do OK simply because of location and micro-economic factors. (I’ll mention one surprising, potential winner at the end of the today’s missive.)

But broadly speaking, residential properties are not likely to see the kind of returns they saw in the 1970s. Half a century ago, real estate gained about 8.7% per year on average (again, broadly speaking), handily outpacing inflation that clocked a 7.5% annual uptick.

That is where the notion emerged that real estate is a hedge against inflation.

And to a degree, there’s some validity to that, if only in the fact that real estate is a hard asset and people tend to trade devaluing paper assets (i.e., the US dollar) for hard assets when inflation is eroding spending power.

However…

Times they have’a changed.

And those changes promise to impact real estate price trends in stagflationary times.

As I did in yesterday’s dispatch, let’s look at the differences between the 1970s and today…

Back in the 1970s:

• Baby boomers, then in their 20s and 30s, were vast in numbers and driving demand for houses.

• Median home prices were barely 2x median income.

• And with an abundance of middle-class manufacturing jobs (25% of the US economy in the 1970s) they had the income to support their homeownership dreams.

• Moreover, they didn’t carry much debt because credit card usage was minimal, and even though mortgage rates were in the 8.5% range, the affordability of houses meant that mortgage payment obligations consumed just 15% of the typical family budget.

Now, today:

• Millennials and gen Z are today’s buyers. And though they exist in numbers larger then the boomer generation, they face a very different and far more challenging housing and economic environment.

• Median home prices today are about 6.6x median income.

• Middle-class manufacturing jobs are now less than 9% of the economy, which is why nearly 5.5% of Americans now hold two or more jobs to afford their life (in the 1970s, that was about 2.2%).

• As such, millennials and gen Z are far more reliant on debt to survive than were their parents and grandparents (gen X and the boomers) at the same age.

So, we come to The Very Bigly Question: Who the hell is going to be buying real estate to such a degree in America that already overpriced houses race higher in value at a pace that exceeds inflation?

Boomers are dying off. They’re not looking to buy more real estate.

Gen X doesn’t give a damn for the most part. They’ve had to deal with raising kids while taking care of elderly parents, and they suffered the most from the offshoring of manufacturing jobs that once defined the American middle class, and as Corporate America ditched company-sponsored pension plans for self-directed 401(k) plans.

So, they don’t have the wealth to be driving up home prices. Plus, they (we, since I’m an Xer) have reached an age where coasting toward a simple retirement is the game plan.

That leaves millennials and Zs… who don’t have the money, don’t have the manufacturing jobs, and who have too much debt to take on the cost of mortgaging an overpriced home.

Sure, houses will be sold.

Some millennials and Zs will be homeowners, though many will be lifelong renters, most likely. And institutional behemoths like Blackstone will continue gobbling up real estate (forcing rents even higher). Plus, there is a chronic underbuilding issue in some areas that will have a generally positive impact on prices regionally.

Still, millennials and Zs are not likely to drive home prices rapidly higher at a pace exceeding inflation because they simply don’t have the financial capacity to do so.

Thus, I suspect that while home prices might rise going into the 2030s, price gains will quite likely fail to match inflation.

I mentioned at the outset that some markets might surprise to the upside. If you’re a speculator and you think long-term, poke around the Rust Belt, particularly Wisconsin, Michigan, Ohio, Pennsylvania, and western New York.

The warming climate is going to change where crops are grown and where people want to live. The Rust Belt will be warmer than historical norms, but less hot than the boiling south. It’s inland, further away from rising seas and hurricane threats, and the abundance of fresh water from rivers and the Great Lakes is going to make the area far more appealing to businesses and homeowners.

Revitalization of historically great American cities like Akron, Milwaukee, Buffalo, Cleveland, Evansville, Lansing, Bethlehem, Dayton and others is highly probable. Some of that is already happening. But get in while prices are still depressed in places like Detroit, and you could definitely see your real estate investment outpace inflation.