Physicians' Guide to Wealth

A guide for anyone pursuing financial independence

Next Housing Boom or Bust

Jun 29, 2022

As we have written extensively in this Brief, consumer spending is the backbone of this economy. Consumer spending represents over 66% of all financial transactions in the country and is a dominant factor in the health and prospects of economic growth.
Well Kept Wallet determined the following as the top five most common household expenses:
1. Housing
2. Food
3. Childcare
4. Debt
5. Health Care
Therefore, to track and project the financial health of the economy is to monitor household income and spending. The rise and fall of household incomes and employment will directly impact budgets and spending. Currently, the US economy is at near full employment capacity, and still, there are 11 million jobs available. So good news on the ability for stable household income. However, that doesn’t mean consumers will be spending, and if they choose to save or pay off debts, although a good financial principal, it doesn’t help the economy.
Monitoring potential household spending is to focus on the number one category consumers spend their money on. Housing. 
Analysts have been recently projecting another housing crisis akin to 2005 – 2010 due to the 100%+ increase in mortgage rates since March. We would differ on this forecast.
Although a 100% increase in rates would normally be considered hyper-inflation and a record-breaking rise (it is), remember that rates were ridiculously low to start with as lenders offered sub-2 % fixed rates for 30 years. I have no idea how lenders or anyone planning to make money on 2% locked in for 30 years. Nonetheless, a 100% increase still puts rates well below long-term averages (unknown to anyone under age 30). 
Lending Tree reported this month on the 50-year history of 30-year fixed-rate mortgages for homeowners. Rates at the start of the 1970s averaged 7.2% to 7.7% but steadily rose with inflation to end the decade at around 12.9%. Fixed-rate mortgages ballooned to a high of 18.45% by 1982 and remained at double-digit rates for the rest of the decade. The 1990's experienced a declining trend of fixed rates for a decade ending on average at 6.94%. After a stable previous decade of rates and rising home prices, the 2000’s were the antithesis of the previous years. Devastation hit the housing market as adjustable-rate loans were sold to seemingly unaware buyers with teaser rates that, upon expiration, exceeded the financial ability of the homeowners. Foreclosures soared to the point that nearly 30% of all home mortgages were experiencing inconsistent payment history. The massive housing crash, along with the Federal Reserve slashing the discount rate to 0%, dragged fixed-rate mortgages to 50-year lows. 2010 through 2019, fixed rates plummeted to the sub 2%. That is up to recently. If history is a guide, from this point forward and probably for the next several decades, mortgage fixed rates will be trending up. Many of us may never see again sub 4% fixed-rate mortgages in our lifetime.
Below is a historical chart of 30-year fixed-rate mortgages provided by MacroTrends that illustrates the significant rise of fixed-rate mortgages in the early 1980’s to the recent current uptrend.

First, let me say that the housing market is in better shape now than from 2005 to 2010, even with the sudden rise in mortgage rates. Unlike the previous down cycle of residential properties, very few mortgages are based on adjustable rates, and households have the assurance with fixed-rate mortgages that their monthly mortgage payments will not change. The rise in mortgage rates impacts new buyers, and the decline in demand is not only good for housing but a key to the ultimate growth in housing prices. This week the National Association of Realtors (NAR) reported the decline in the 2022 Year over Year (YoY) pending home sales. Pending sales soared in 2021 primarily due to the great mitigation of people from the downtown housing to the suburbs. Just as cheap mortgage money prompts a hyper-growth of housing sales with demand outpacing supply, the opposite will most like occur as demand declines with the reduction of qualified buyers due to the recent rise of mortgage rates. 

The below chart expands the historical history of pending home sales that illustrates the significant whipsaw of record pending sales in 2021 to this year’s six consecutive monthly declines of pending sales. Interesting to note that pending home sales started to decline in late 2004 and well before the 2008 massive housing crash. 

What Does This Mean to Me?

Consumer spending on housing will probably remain strong as more people switch their spending from trading their homes for a newer or bigger house to remodeling their current house. As a result, consumer spending being the strongest driver of the economy should remain steady due to strong employment and household savings. The stock market is typically trending based on potential events six to ten months in advance. True to form the stock market started its decline on the first day of this year and well before the main media started forecasting a recession and rise in mortgage rates. Not surprisingly six months later mortgage rates have soared, and housing activity significantly slowed. Analysts not discussing potential recession in January are now projecting an imminent recession. We maintain our favorable longer-term view of the economy and stock market. It will be a good commentary for the US economy in 2023 should the stock market bottom and stabilize later this year. We are optimistic about the US economy primarily due to the strong employment market that keeps households financially stable and the ability of consumers to spend.  
Give us a call if you have any questions about this Brief. More importantly, we welcome the opportunity to assist you with improving your probability of achieving your financial and retirement goals.




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