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Bear Market Face-Rippers

Updated: Jul 20, 2023

For his book Irrational Exuberance, published in May of 2006, Nobel laureate Robert Shiller constructed a database of home prices in the United States going back to 1890.

Shiller’s data showed, just as the housing bubble was about to go kablooey, how bonkers U.S. housing prices were when compared to historical data. To put it mildly, his timing was pretty good.

We all know what happened next. The housing bubble that triggered the Great Recession burst, and prices across the country fell 36% on a real basis through the bottom in 2012. Schiller’s was an excellent call that was backed by data-- the kind of data with which we’re faced today.


Shiller cited data that showed that U.S. home prices, adjusted for inflation, were often lower in the 1990s than they were a century ago. The drop came as cities spread out to cheaper land and homebuilding technology improved. He went on to show that real housing, after adjusting for inflation, returned very little for homeowners over the long run.

In fact, from 1890 to 1996, the total real return for housing in the United States was just 13%-- a real annual return of just 0.1% per year for more than a century. (What makes it even more fantastic is that people have been complaining about CD rates that whole time.)

However, that real return was not disastrous because home prices at least kept up with inflation over the long term. Still, this could be described as nothing less than a severely disappointing result for most homeowners, especially when compared to the returns of other financial assets.


Homes valued at $1 million or higher are now the norm in 481 U.S. cities, more than double the number just five years earlier. In 2021 alone, 146 cities reached that level, according to Zillow data released last month. That’s the most ever in a single year. By comparison, the number of towns with million+ average home values was 234 in 2016 and just 126 a decade ago.

It has proven to be a continuation of the pandemic-era trend in which low mortgage rates, a shortage of available homes, record government stimulus and a newfound focus on work-life balance combined to spur historic price increases. The average home last year gained 19.6% in value.

Homes sold faster than ever during the four weeks ending February 13, as a record 57% of homes that went under contract did so within two weeks of being listed.

People buying homes now are paying more than ever before; asking prices soared 16% year over year to a new high and mortgage rates shot up to their highest level since May 2019. The monthly mortgage payment on the median asking price rose to an all-time high, up 27% from a year earlier when 30-year mortgage rates were at 2.73%, and it was up 31% from the same period in 2020 when rates were 3.47%.

The bottom line is that homebuyers are facing the fastest and priciest market on record.


In this environment, we feel like it would be a terrible mistake to ignore last week’s inversion of the 2- and 10- year Treasury yields. It is the one signal that has been correct 100% of the time at predicting recessions. To just believe the Fed, which is always wrong and whose every tightening cycle has led to a financial crisis, would not be prudent, in our view.

That being said, we are not surprised at the recent proliferation of “This Time Is Different” white papers. Well, maybe a little surprised to actually see it straight from the Fed, but…:

"Ultimately, we argue there is no need to fear the 2-10 spread, or any other spread measure for that matter. At best, the predictive power of term spreads is a case of "reverse causality." That is, term spreads predict recessions because they impound pessimistic—often accurately pessimistic—expectations that market participants have already formed about the economy, and thus an expected cessation in monetary policy tightening."

That kind of stuff makes it sound like the Fed has invested too much over the last few years in gender theory PhD diversity hires instead of economists. It lies in direct contrast to the San Francisco Fed paper from 2018 that found that inversions of the 2-yr/10-yr spread correctly signaled all nine recessions since 1955. Nine for nine. Thank you; I'll take history over propaganda every time.

As for the stock market’s fabulous bounce over the last couple of weeks, we’ll simply point out that bear markets historically produce the most vicious rallies-- recall the relentless face-rippers of October 2008 and March 2020. So, it is perhaps not surprising that the S&P has produced one of its sharpest rallies in history over the last two weeks.

Don’t be tempted; it’s still a bear market.


I consider myself to be a student of the markets (and a pretty good one at that). Nevertheless, I don’t have an answer for everything. If any of you readers can tell me what the hell is going on in Crazy Town Mill Valley, I’d really like to hear from you. Thanks.

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