The Fed Hikes Rates .75% – Will it Crash the Housing Market?

Rising mortgage rates and the Fed’s actions this week to combat inflation continue to stretch homebuyers’ budgets, encouraging more homeowners to stay put. Unfortunately, the US media has become more of a daytime talk show than a truth outlet in recent years. This is why twice a month I spend half my day writing this newsletter to over 50,000 subscribers across the U.S. All I ask in return is to share this with as many people as possible to get the truth out there.

Are we going to see a housing crash as we did in 2008, or will the housing market behave more like the recessions of the 1980s and early 1990s? This is the question on everyone’s mind. With the stock market in an official bear market (down more than 20%) and the Fed revising its economic forecast dramatically over the last 3 months, what can we all expect?

As a student of history, I choose to focus on data rather than emotions. Our emotions are signaling fear, causing us to recall the last time we were scared like this for the economy. The most recent memory in our minds is the horrible housing and financial collapse of 2008. So it’s human nature for us to think this time it will play out just like last time right?.. Well look at some data together, and we can draw some conclusions together… that sound fair?

• At the start of the 2008 crash, a homeowner’s average mortgage rate on their primary home was 6.16%, and 6.97% on their investment property.
• More than 50% of all mortgage loans issued between 2003 and 2007 originated without true income verification. This means income was not actually verified but was rather able to be “stated” on an application. As a loan officer since 2004, I cannot recall the number of applications where we just stated a monthly income amount based on someone’s profession. This was not illegal but rather a mortgage product offered by all major banks in the U.S., everyone from Flagstar to Wells Fargo to Countrywide.
• Over 40% of all mortgage loans originated in 2005 were used to purchase investment properties.
• Between 2000-2009 there were a total of 15 million new homes constructed for a generation of individuals of 48 million (people between the ages of 25-43 years old at the time). 1 new home for every 3 people of first-time homebuying age. This compares to only 6.3 million homes built between 2010-2019 for a generation of individuals 65 million strong. 1 new home for every 10 Americans of First Time home buying age (25-43)

Now let’s look at today's statistics to compare:

• The average mortgage rate an American has on their home today is 3.78% due to mortgage rates ranging between 2.5%-4.75% for the last 10 years. 80% of Americans have a mortgage rate below 4% today.
• 90% of all mortgage loans originated in the last 10 years were qualified mortgages, thanks to the Dodd-Frank Act, which required a bank to verify a buyer’s income via pay stubs, W2s, and tax returns before issuing a mortgage. Only 10% of all loans originated using alternative documentation or stated income compared to over 50% in the previous decade.
• Only 17% of all homes purchased in 2018-2021 were investment properties compared to 40% in 2005. This is important because a homeowner is much more likely to default or sell their investment home during tough times compared to their primary home.
• Over the last decade, we built 60% fewer homes than we did the previous decade, yet the population of first-time homebuying individuals increased by 30%. This means we now have 13 people looking for a home compared to just 10 a decade ago, and we only now have 4 homes for sale compared to 10 homes available for sale.

Now, if I could summarize all my thoughts from spending countless hours studying all of this data, here is what I think will happen to the housing market in the next 12 months.

1. Because nearly all homeowners in America have a fixed-rate mortgage at an interest rate in the 3% range, providing an unbelievably low payment, they will stay put in their homes for longer. Their ambition to sell their home and move was killed by mortgage rates doubling in the last 6 months and home prices that have increased 35% over the last 24 months. Buying a home that is $100,000 more expensive will cause their mortgage payment to double whereas just 1 year prior their payment would barely change if at all due to mortgage rates in the 2%.
2. Investors have no interest in selling the majority of their rental homes because rents will continue to rise as tenants want to renew their leases due to a completely unaffordable housing market. Since landlords with mortgages on their rental homes, like myself, all my properties have rates no higher than 3.5%, are cash flowing like never before. Rents are up 50% in 3 years, yet my mortgage payment has remained the same or even dropped due to a refinance.
3. Homebuilders have already dramatically slowed down their building due to rising labor costs, borrowing costs, and material costs. There will definitely be a supply of new construction homes that will be discounted likely by 20% just to move the inventory, but this will be released slowly. Housing inventory will slowly rise back to levels we saw in 2018 over the next 12 months, which is still less than half the homes we had for sale back in 2009. We still need to double the number of homes currently listed today, to get back to 2018. As inventory levels were less than 20% in 2021 compared to 2007.
4. Home prices in markets with a heavy tech population will get hit the largest due to the dramatic decrease in tech stock prices in layoffs. Cities like Austin, San Francisco, Seattle, Charlotte, Boise, Phoenix, and Nashville will likely see home values drop by 20% over the next 18 months. Markets like Baltimore, Richmond, Virginia Beach, Washington DC, and Akron will see only minor drops due to economies that have traditionally done very well during recessions.

Now, no one has a crystal ball however, I was one of the only people that correctly stated at the beginning of COVID that home prices would skyrocket in the next two years. I knew this due to a lack of building for a decade and the largest group of Americans reaching the homebuying age in US history.

The next 6 to 12 months will not be fun, but they will not be like the depths of 2009. We will likely see mortgage rates remain high, but once the unemployment rate edges over 4.5% the Fed will step in and begin buying mortgage-backed securities, something they stopped in March. This will cause mortgage rates to fall by 1.5% over the course of 2023. This combined with home prices in most markets, softening 10% to 15%, will reignite a slowing housing market, and we will resume a healthy housing market in the coming years.

The Key Right Now is Preparation

If you have consumer debt greater than 15% of your mortgage balance and good home equity, look at accessing it to reduce your monthly payments. Get yourself into a cash position through a home equity line of credit or pay off debt because there will be generational lifetime investment opportunities in stocks, crypto, and real estate over the coming 18 months.

If you have questions, do not hesitate to contact me at decker@modernteam.com as I personally answer all emails, even if it takes me a few days to get back to you.

Also make sure to follow me on Instagram @thebriandecker where I post daily content on all things investing and housing.