The Big Long? A Deep Dive on U.S. Housing (Part 3) — Part 3 – Homeowner Balance Sheets and Historical Declines in Home Values
Voss Capital is a Houston hedge fund founded by Travis Cocke in 2011, running value-oriented, bottom-up strategies focused on underfollowed small- and mid-cap special situations through long/short and long-only funds, increasingly turning activist.
In plain words
This report argues that a U.S. housing market crash is unlikely. While prices have risen sharply, history shows that big national declines (like 10-20%) are rare except for the 2008 financial crisis. Today, homeowners have much more equity—the value of their homes minus mortgage debt—than in 2007, and debt levels are low. So waiting for a crash might mean missing out. Worth reading because it challenges common fears with solid data.
Voss Capital conducts an in-depth analysis of the supply-demand dynamics in the U.S. housing market, with a particular focus on homeowner balance sheets and historical home price declines. The core thesis is that despite calls for a market crash, current homeowner financials are robust, making a lar
Theme and Background
This chapter is the concluding section of Voss Capital's housing research series, designed to address the growing market calls for a "housing market crash." By examining homeowner balance sheets and historical U.S. home price decline data, the report refutes widespread crash expectations. The core context is that, since the 2008 financial crisis, many have come to view a home price crash as the norm, but the current market environment fundamentally differs from 2007.
Core Thesis
The author's core investment argument is that the likelihood of a nationwide, large-scale crash in the U.S. housing market is extremely low. Despite substantial home price appreciation over the past two years, historical data shows that nationwide declines are exceedingly rare outside of financial crises. With current homeowner balance sheets strong and supply severely constrained, buyers waiting for a crash may be disappointed.
Counter-intuitive/contrarian market views:
- Rising home prices do not necessarily mean they must fall; history shows that nationwide price corrections (e.g., 10%-20%) are not common.
- The current mortgage debt-to-home equity ratio (46%) is near its lowest level since 1965, far below the historical average (60%), and homeowner financial conditions are vastly superior to 2007.
Key Arguments and Data
The author supports the thesis with two core sets of data: homeowner balance sheets and historical home price drawdowns.
1. Strong Homeowner Balance Sheets
Since the 2006/2007 peak, home value growth has far outpaced mortgage debt growth, leading to a surge in home equity.
| Metric | 2006/2007 Peak | Current (2022) | Change |
|---|---|---|---|
| Home Value | $24.0 trillion | $38.1 trillion | +$14.1 trillion |
| Mortgage Debt | $10.7 trillion | $11.7 trillion | +$1.0 trillion |
| Home Equity | $14.4 trillion | $26.4 trillion | +$12.0 trillion |
Since 2019:
- Home Value: +$8.1 trillion (+27%)
- Mortgage Debt: +$1.3 trillion (+12%)
- Home Equity: +$6.9 trillion (+35%)
The current mortgage debt-to-home equity ratio is 46%, just 1% above the lowest level since 1965 and 14% below the 56-year historical average (60%). If mortgage debt remains unchanged, home prices would need to fall 18% to return to the historical average; if the ratio were to return to the 2006 bubble peak level (70%), prices would need to drop 25% (comparable to the 2007 crash magnitude). Current home equity as a percentage of home value stands at 69%, near its historical high.
2. Historical Home Price Drawdowns Are Extremely Rare
Of the 281 quarters since 1951, only 30 witnessed a nationwide sequential decline in home prices, with 21 of those occurring during the 2007–2012 financial crisis. Outside of the financial crisis, there have been virtually no other significant nationwide home price declines.
| Historical Largest Drawdowns Rank | Period | Decline | Trough Time | Time to New High |
|---|---|---|---|---|
| 1 | 2007 Financial Crisis | -25.5% | 21 quarters (2012Q1) | 18 quarters later (2016Q3) |
| 2 | 1974 | -2.1% | 2 quarters | 2 quarters later |
| 3-9 | Others | All less than 2% | - | - |
The author notes that the 2007 crash was an extreme historical event, with a decline more than 10 times larger than the second-largest drawdown (2.1%). The current environment is dramatically different from 2007: supply is insufficient, demographic-driven demand trends are strong, and homeowner balance sheets and buyer credit conditions are solid.
Companies/Assets Involved
This chapter does not directly mention specific companies but involves the following assets and markets:
- The U.S. Housing Market Overall: The author is bullish, arguing that the probability of a nationwide crash is low.
- Mortgage Debt Market: Current debt levels are relatively stable, with low risk.
- Home Equity: As a key indicator of homeowner wealth, it is currently at a historical high.
Investment Implications
Specific implications for investors:
1. Shorting the U.S. housing market carries extremely high risk: Based on historical data and current fundamentals, positions betting on a nationwide crash (e.g., declines of 10% or more) may face significant losses.
2. Focus on regional rather than nationwide opportunities: The author emphasizes the need for more granular analysis by MSA (Metropolitan Statistical Area) rather than relying on national data. Subsequent chapters will delve into housing affordability and the outlook for repair and remodeling spending.
3. Buyers waiting for a crash may miss opportunities: If the market does not experience the anticipated sharp correction, a wait-and-see strategy could lead to higher home purchase costs or missed entry points.