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Here We Go Again — The housing market is softening.
Why wouldn’t it? The Fed knows what it’s doing: rate hikes also put upward pressure on mortgage rates, making monthly payments less affordable for the same amount of house. You guys know this by now. But one thing a lot of people don’t know is the huge percentage of Americans that only have $10k or less in savings.
For the second half of the 20th century, many American families dedicated less of their income to savings because they banked on a couple of other legs of the table to prop them up in retirement.
They expected to receive a pension, which, if you don’t know what that is, google it. They banked on collecting fat social security checks, which is the ultimate stimmy check in my eyes. And they used the rising tide of home values in America as a savings account.
After all, when you finally make 30 years of payments on a home, looking at housing price trends in the US, it was highly likely that you made out like a bandit if you owned a home anytime between 1950 and the Great Recession.
Cue The Big Short, Too Big to Fail, and a handful of other great books written about the game of musical chairs that ended up cratering the global economy about 15 years ago.
Since the end of the Great Recession, home prices in this country have risen from bargain-basement pricing to all-time highs. I love me some Zillow, but I have seen far too many hovels that have no business selling, let alone being listed for in excess of $400k. But that’s the reality that we have lived with for the last 18 months or so.
Now here’s the kicker, increasing interest rates have already started to curb demand in many markets, even with rates hovering between 5 and 6% for ye ol’ 30-year fixed. These are arguably still in the category of historically low-interest rates.
Now imagine a world in which mortgage rates are near 8%, approximately a third higher than they are right now. I’m not predicting this, but it could happen: we could see home price growth flatten and potentially decline in many markets. This would be only the second time in the last two handfuls of decades when home prices lost ground.
Think about that. It might not be at the same scale as the Great Recession, but we just might see consumers with high debt burdens yet again underwater with their mortgages.
I don’t have to predict this because other “experts” already are, including Chief Economists and Moody’s, Redfin, and even Daddy JPow himself with his little “reset” comment.
How low will prices go? How high will interest rates go? These two answers are correlated. However, only time will tell how this yo-yo ends up swinging.
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