This daily economic journal is written in conjunction with weekly economics updates for our investment clients at nVest Advisors, LLC,

This information is also not a solicitation to do business with me as a financial advisor, though for the right readers, that offer is available. It is intended solely to provide timely economic data and analysis from the vantage point of a 15-year industry veteran (but also, always still a student) of personal finance and economics.

I highly recommend you read the past few weekly economic updates that I write for my financial advisory firm, nVest Advisors, LLC to get brought current on what’s happening in the broader economy, because this journal will be jumping right in without too much of a primer. I will be writing a primer into this blog as we go, but for now, the best place to catch up on what’s happening (and it’s a lot) is to read the macro blog at nVest.

Wednesday, March 22, 2023

Mortgages & Housing Starts

The most recent data shows that existing home sales in February were slightly better than expected, even though house prices themselves have stalled and new mortgage applications weakened. So, a mixed bag. For example, while existing home sales did improve slightly, they were already at at decade-lows and haven’t increased in a meaningful way. Our opinion on this quick uptick in home sales is due largely to the brief period in January and early February when mortgage interest rates fell back below 7% and buyers were able to lock in lower rates, but this period is over and mortgage rates have climbed back up. I do not anticipate that existing home sales have the momentum to continue upward.

Indeed, the number of mortgage applications in the queue now has dropped again now that rates have climbed back above 7% nationally for a 30-year fixed mortgage. As you can see, there is very close correlation between a mortgage application and a home sale. I would expect March numbers to come in lower.

One of the arguments I’ve made for a year or so is that the housing market must crash significantly, even though there is high demand for housing, and the reason is simple: if you can’t afford the house payment, it doesn’t matter if you need or want the house. Demand means nothing if the buyer can’t qualify for the home loan. And because we anticipate interest rates will stay much higher for longer than many market analysts believe, the only way to get a buyer into your home is to lower the asking price. And in fact, that’s what we are seeing now with growing regularity. The green line was the median home price throughout 2022 and the bold blue line is the year so far in 2023. You can see that the asking price of a house peaked in summer of 2022, and has been declining ever since (the second graph is just a long continuing line of the changes from the same month a year ago):

Another reason to believe the housing market is particularly vulnerable during this economic downturn is how much the mortgage payment consumes of a person’s income now.  This shows that it’s virtually impossible for a single person to now qualify for a mortgage since probably early 2021 (mortgage companies typically allow a home loan payment to take up only 30-35% of your income – since 2022, the average mortgage payment has been nearly double that).

This is the very definition of an asset bubble. It makes homeownership far too expensive right now for the average family. It’s eerily similar to what we saw a lot of leading up to the Great Financial Crisis of 2007-2009, when people were placed into homes they could not ever hope to afford, in sketchy loan configurations that often blew up on them 5 or so years down the road. We don’t have a lot of those gimmicky (I’ll call it criminal) loans anymore – most were outlawed after the collapse of the real estate market in 2008 – but the combination of ridiculously elevated home prices over the last few years and the interest rates being higher than many anticipated, will likely cause a collapse just like the last one.

I belief is, current home buyers are expecting (aka being told by realtors and mortgage brokers) that interest rates will come back down soon, so “date the loan and marry the home”. The hope for many of these buyers is that interest rates will drop significantly within a year or so, and they will be able to refinance their mortgages and drop the monthly payment. Rates will come down eventually, but I believe it will be much later than many of these homeowners were expecting. Couple that with a deteriorating economy and job market and high prices on the other household goods and services due to inflation, and we may see homeowners being forced to sell or walk away from homes with declining equity because they simply cannot continue to pay this much for a home.

We may also see residential investors who use these houses for rental income (being a landlord or an AirBnB owner – a big part of why house prices climbed significantly in the first place) simply walk away from investment properties that go “underwater” (house value drops below their potential to make revenue), as we did in 2008. There was a period of time back then when I could not find a bank willing to lend to a client who wanted to buy a beach condo in Texas because so many condo owners had simply bailed on the property when things got really tough.

Analysis is always part speculation, so no one (myself included) is going to get everything 100% right. For instance, I strongly believed the economy would have weakened faster than it has and we would actually have been in recession by the fall of last year. So we may never get the timing or the specific degree of impact correct, but macroeconomic analysis can almost certainly allow us to get the theme right. And our theme is this:

In no way are we in a health economy. It is deteriorating rapidly and always craters after something significant “breaks”, causing investor panic and a wild rush to safety. Serious money is lost – and made – during economic downturns, and the theme of this blog is to help you start to win the money game like a Rich Guy does. The first thing you need to do is be acutely aware of the real situation around you, because that’s where your own strengths and weaknesses and the external opportunities and threats can be found. I hate that I have to matter-of-factly bring negative news to my readers at this time, but it is not bearishness that makes me do so – it is economic reality. We either face it and participate in its opportunities, or we delude ourselves like many others always do, to their peril.

See you tomorrow!

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