The HOUSING MARKET CRASH has BEGUN
The housing crash is inevitable and in this video, I will explain why.
Over the last couple of years, the housing market has been on an absolute tear. This has been driven by a sustained period of record-low rates and a limited supply of inventory in the marketplace. Additionally, demand for houses has been very strong driven by both the individual home buyer as well as large institutions buying up available inventory and jacking up home prices.
So what's changing? What's going to cause the housing market to crash?
Well, there are a few reasons for this but the biggest culprit is going to be a sustained period of rising interest rates.
Today 30 year rates are over 5% for a 30-year mortgage and rising daily. The rate differential between say 2.5% to 5% on a $300K home is almost $500 a month. That’s real money. It's $6K a year.
That should in itself create a headwind for the housing market as the rate rise isn’t offsetting income rises in several situations.
Analysts expect mortgage rates to cross 6% and that may not be the top of it. This is due to the second factor which is the rising fed funds rate.
The fed has been clear in its communications that interest rates are going to rise. Between 2022 and 2023, analysts have cited 10+ interest rate hikes. Some of the more recent commentaries from fed leaders could mean even faster rate increases by 50 basis points or more.
These rising rates will have a significant impact on the demand for homes.
Then there are other headwinds that are rapidly emerging for the housing market as well. Take, for example, rising inflation. Rising inflation is going to impact all sectors of the economy.
With already existing supply chain shortages, this will further increase the costs of manufacturing homes. Thus making homes even more unaffordable.
Thus payments on homes will be even steeper since the price of the home has gone up as well as the associated interest rates which will further crush housing demand.
More recently, you will see articles about the impending recession. While it's still difficult to say whether we will have a recession or not, it is safe to say that the fed will do whatever it takes to curb inflation.
Inflation is over 7% and there are expectations that on the next CPI print it will be well over 8%. To curb inflation, the Fed will take drastic measures to reduce the money supply – first with rates and then by reducing the size of its balance sheet.
One of the challenges with low unemployment is that demand for goods and services will continue to persist thus driving up prices even further.
So the fed effectively needs to curb this. Meaning they need to curb demand.
There are a couple of simple ways to curb demand – one is to make things unaffordable and the other is to take money away from people's pockets.
Rising rates or balance sheet-related actions by the fed will make it more expensive for companies to borrow money to make internal investments. An increase in raw material or labor prices will eventually curb demand.
With demand for products dropping, and with the inability to make internal investments, it will push for the start of layoffs and thus decreased purchasing power for the end consumer, and spiral the economy towards a recession.
Needless to say, this will also impact the housing market.
And this isn’t just for new homes or existing homes or home builder stocks. But the entire housing market includes the entire ecosystem, so mortgage lenders, furniture companies, and home improvement stores will all be adversely impacted.
Lots of people have borrowed on the equity of their homes to do home improvements or in some cases to even buy second homes.
But with the equity declining and interest rates rising, this whole market will start drying up.
The path to a housing market is straightforward.
The silver lining could however be for people that have saved up lots of money but have been sidelined since they haven’t been able to find a house they can afford or have been priced out of the market.
It certainly seems that the time is coming for these folks to be rewarded particularly if they can afford the interest rates.
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DISCLAIMER: The opinions expressed in these videos are not meant to be financial advice. Always consult with your financial advisor and do your own due diligence as individual facts and circumstances may vary.
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