From Peter Reagan
The “American Dream” of home ownership is already out of reach of most Americans, thanks to the 50% increase in home prices over the last couple years. Homeowners who’ve purchased since the beginning of the most recent housing bubble are already regretting their decision, based on the chaos in the housing market.
Why does this matter?
It’s hard to overstate the importance of housing in the U.S. economy. For nearly every American family, their home is their single biggest asset.
Now, we don’t generally think of our homes as an “asset” because we live in them. We usually think of them as a necessity that happens to have a market value.
However, most American families actually do treat their homes as financial assets. For example:
- A HELOC (home equity line of credit) for emergency cash
- A traditional equity refinance for lowering payments (or a cash-out refinance to turn equity into cash)
- The controversial reverse mortgage, using your home as an income stream
Even folks who’d never consider investing in financial markets own homes. About 54% of Americans own stocks – compared to 63% who own real estate.
Well, this makes sense, right? After all, housing is “safer” than volatile financial markets.
Right?
Not at the moment. Here’s why…
How the war on inflation is crushing the housing market
Over the past 12 months, we’ve seen the Federal Reserve reluctantly raise interest rates from virtually nothing (0.08% average) to 3.75-4%. In addition, the Fed has begun to contract the nation’s money supply.
These are the opening salvos in the Fed’s war on inflation. Which is good news! We waited long enough, and 40-year record-high inflation must be eradicated.
Unfortunately, there’s a notable side effect from the Fed’s actions.
Since the inflation of prices for goods and services (like food, fuel and everything else we buy) and inflation of asset prices (like housing, stocks and bonds) come from the same source, the Fed can’t crush inflation without also crushing asset prices.
That means people who believe their families are insulated from stock market chaos may actually have more at risk than they believe.
Here’s what we’ve seen so far:
- Mortgage rates have risen to 20-year highs, more than double last year’s rate
- Eight consecutive months of declining home sales
- The steepest drop in the Case-Shiller home price index since 1987 (and in some markets the biggest plunges since the 2008 housing crash)
- A 52% collapse in mortgage applications compared to 2021 (to the lowest level since 1995)
- A 24% drop in closed home sales from a year ago
- Home-flipping startups Opendoor and Redfin withdrawing from the market after losing over 80% of their share value
If you buy a home right now, higher mortgage rates mean you’ll pay as much as 50% more monthly than a year ago.
Take a look at how much home prices have grown over the last decade, compared to the rise in average household income:
If you’re having trouble seeing any increase in household income over the last ten years, well, that’s because incomes have grown only half as rapidly as home prices.
Today, homes in the U.S. are less affordable than at any time in history (not even at the peak of the 2008 housing bubble).
That means several things:
- New home buyers are increasingly priced out of the market
- Thanks to higher interest rates, buyers who aren’t priced out of the market completely can’t afford nearly as much house
- The home buyers who took an adjustable-rate mortgage (10.5% from January to May 2022) are very likely to come to grief
Adjustable-rate mortgages (ARMs) offer a temporary fixed-rate period, usually five years, followed by an “adjustment” to market rates. Considering that the Fed’s interest rate hikes are likely to hang around for the next few years, that adjustment is all to likely to come as an unpleasant surprise…
In other words, buying or selling a home has gotten much, much harder.
In times like these, it’s probably a good idea to rethink any plans that rely on using your home as an asset.
That’s where things are now.
Where are they going? The prognosis doesn’t look good.
Why the housing market is about to get even worse
Investment Management Associates’ CEO Vitaliy Katsenelson summarized the current situation pretty well:
You cannot have both interest rates and housing prices making new highs. Something’s got to give.
It’s not just something, though – many things are starting to fall apart.
In an article describing the “annihilation” of “AI-powered home flipper” Opendoor, Wolf Richter explained why the company was no match for today’s housing market:
In other words, the company realizes that it will make a massive loss selling those homes because prices have dropped while it owned the homes…
It sure is a lot easier to jump into the market and buy homes when price doesn’t matter, than selling homes when price does matter.
All this would have been a good thing back in the days when the free-money virus was still turning investors’ brains to mush, when losses were equated with success, and when bigger losses were equated with bigger successes.
It’s much easier to profit from home prices or any other asset when cheap credit and easy money are prevalent. Richter says this heady combination was “turning investors’ brains to mush,” and that’s as good a description of peak-of-the-bubble manic investing behavior as I’ve ever read.
Just like always, those who made long-term financial decisions at the peak of the bubble, assuming the good times would last forever, already regret their mistakes.
Derek Thompson took to the pages of The Atlantic to try to drive home just how much things have changed, just how quickly:
Just 20 months ago, the average fixed rate for a 30-year mortgage was lower than at any time on record; today, it’s higher than in any other month this century. “You’d be kind of crazy to sell your house right now unless you have to,” financial commentator Joe Weisenthal said.
He finished the article with two chilling sentences: “I’m not a believer in curses. But if anything is cursed in this world, it’s the 21st-century American housing market.”
According to Wharton professor Jeremy Seigel, the housing market is staring down the barrel of an outright catastrophe:
I think we’re gonna have the second-biggest housing price decline since the post WWII period over the next 12 months. That’s a very, very significant factor for wealth [and] for equity in the housing market.
At least Seigel didn’t use the word “cursed.”
Here’s what this means for us:
- If you don’t currently own a home, realizing the “American Dream” of home ownership is going to be much more difficult in the years ahead
- If you do own a home, settle in – and don’t count on your home’s value (or equity) as a stable financial asset
That may be quite a blow. I hope not! I don’t write these articles to depress or frighten you – rather I want to give you a direct, easy-to-understand warning of what lies ahead.
So you can plan accordingly.
The good news is, you still have options.
There’s still a safe haven asset
We’ve seen that “safe as houses,” in this market, seems far from safe.
That means right now is a suitable time to reevaluate your savings and your exposure to risk. Excessive risk means you’re taking a big gamble, with the potential for high rewards and the certainty of high risks. How much has your home factored into your financial plans? Is it time to rely on a safer safe haven asset instead?
Ask yourself: “Is my personal risk exposure in line with my goals?”
Are your savings diversified among a variety of assets, or are all your eggs in one basket?
With global tensions spiking, thousands of Americans are moving their IRA or 401(k) into an IRA backed by physical gold. Now, thanks to a little-known IRS Tax Law, you can too. Learn how with a free info kit on gold from Birch Gold Group. It reveals how physical precious metals can protect your savings, and how to open a Gold IRA. Click here to get your free Info Kit on Gold.
It is my sincere desire to provide readers of this site with the best unbiased information available, and a forum where it can be discussed openly, as our Founders intended. But it is not easy nor inexpensive to do so, especially when those who wish to prevent us from making the truth known, attack us without mercy on all fronts on a daily basis. So each time you visit the site, I would ask that you consider the value that you receive and have received from The Burning Platform and the community of which you are a vital part. I can't do it all alone, and I need your help and support to keep it alive. Please consider contributing an amount commensurate to the value that you receive from this site and community, or even by becoming a sustaining supporter through periodic contributions. [Burning Platform LLC - PO Box 1520 Kulpsville, PA 19443] or Paypal
-----------------------------------------------------
To donate via Stripe, click here.
-----------------------------------------------------
Use promo code ILMF2, and save up to 66% on all MyPillow purchases. (The Burning Platform benefits when you use this promo code.)
Look up what Carlin said about the American Dream.
You’ll own nothing and be happy.
We’re living the elites American Dream.
The goal is total government reliance for your existence, just like prison. Where you dwell, the food you eat, and the energy you use. Each will have an allotment, and go over or step out of line and see what happens, you get nothing. See Canada 2021 &2022.
The Atlantic? Even if they publish actual fact, it is only by accident. Anyone who even references The Atlantic, other than as satire, raised immediate serious doubts about their cognitive processes. ANY other reference would have been better.
Right. That’s the rag mag that gave us the amnesty from covid article, among other things.
Like Barrak The Nigger Obama.
The magic negro as one black “journalist” called him.
Their entire staff went on my “to do” list that very moment.
I think sometime in the near future prices will fall big time and if you have the means to buy outright or pay a considerable amount of the price you will do well. Of course this assumes things don’t get any worse and who knows what kind of future shit shows are coming.
Just finished automating a large factory for home building supplies and materials. I was given notice yesterday that they are shutting it down indefinitely and we haven’t even commissioned it yet. Building supplies are the first indicator of “sum ting wong”
I think I mentioned once before that a friend who’s in the mortgage business had a customer who wanted him to falsely say they didn’t qualify anymore to buy a house with Lennar – the big builder out of Florida. The customer wanted to be officially “denied” (on account of rising rates), so that he could get his earnest money back. This was a few months ago. The Lennar sales lady called my friend screaming about how “everybody’s cancelling!”.
Housing may be an asset, but that isn’t its purpose. We are so deeply confused about the meanings of things that we can no loger recognize what they are any longer. The valueof a house is that it shelters you, keeps you warm, gives you a place to keep your things, serves as a nest to raise a family. The value of those features never change. People look at a home now like they would a 401K. Huge misconception.
The world is about to prioritize things for us if we don’t do it ourselves.
Until a house is sold and the check is in hand, the “value” is just on paper. If a person’s house value declines, they should have the property reacessed for property taxes. We bought the little place with the intention of being here 30+ yrs. I will worry about “value” when it comes time to sell. Happy Thanksgiving HSF!
Couldn’t agree more. Except that “fee” that we pay every quarter for the privilege of using it.
Gold? Pffffft!
In this year of massive inflation, Gold is DOWN.
Gold? Pfffft!
If you’re calculating the investment utility of a gold purchase based on a timeline of one year, you might be doing something wrong. It isn’t a get rich quick scheme or a paper derivative, it’s a saver’s long term insurance asset prone to government manipulated currency exchange rates.
The owner’s time perspective on ROI shouldn’t be one year, it should be longer – as in decades. It’s a hedged bet AGAINST banks, the government, and paper money.
Gold and silver is an alternative savings vehicle you buy gradually with paper – when you can afford it, with cash you never intend to spend. IT’S LONG TERM INSURANCE, simply because it will ALWAYS hold some sort of monetary value against inevitable paper derivative devaluations.
Nonsense. Gold? Pfffffft!
“For nearly every American family, their home is their single biggest asset.”
Gotta REALLY feel for those who are STILL paying off their ‘Asset’.
Look, non of this crap matters. This country is being dismantled. By 2030 you will not own a home, if your still alive. Think critically folks. All systems of government and private industry are being intentionally broken in order to make way for a new one world order.