Housing market data continues to point to a situation that is getting worse and worse. Interest rates are going higher. And, even Federal Chairman Powell stated that he wants to see a housing market reset. Mostly, he wants to see the bidding wars end. Most analysts are becoming more and more wary that any chance of a soft landing is no where near possible. I wanted to continue my analysis on the housing market as well as the broader economy. With interest rates heading higher to stave off 40-year inflation, I believe that we are very likely to see continued declines in all asset prices. The housing market will be yet an additional victim of this.
One of the big fears for the housing market is if a recession hits, and individuals lose their jobs, this could make paying mortgages untenable. This could also hit the housing market and potentially destabilize prices even more. The housing market has already seen a significant drop in prices lately. And, we are still at full employment. What happens if the employment situation deteriorates?
For now, the job market is at an all-time high with full employment. Full employment is one of the many reasons for the demand pull inflation that has occurred since the onset of COVID, subsequent lock down and then stimulus checks. With the worldwide lockdowns, the supply chain was effectively locked down. But, with the stimulus checks, Americans shopped heavily during a period when the on-demand supply chain was effectively shut down. This created the demand-pull inflation.
At the same time as the stimulus checks, the Federal Reserve sent interest rates to the floor. And, massive amounts of liquidity was pumped into the system. This is where the housing market got its fuel. This amounted to an artificial imbalance.
Now, it is time to correct some of the imbalances.
Mortgage Rates Hit 20-Year High
The most recent data on mortgage rates is showing that the 30-year fixed rate is increasing more and more. With the interest rates heading upward as they are in all of the interest rates, this is having an immediate effect on the housing market & real estate in general.[1]Trading Economics 30-Year Fixed Mortgage Rate
Granted, these rates are at levels that were last seen just prior to the housing market. But, the terms on which one could get a home then were quite different. This is having a seismic affect on the overall housing market.
Already, we are seeing sharp declines in the rate of growth of housing prices as well as the overall price index.
YoY Price Index Starts Declining
The Housing Price Index is starting its long slow decline.[2]Trading Economics Case Schiller Price Index The above chart is the YoY change in the rate of price growth. The pace upward was exacerbating. Now, the pace downward is being equaled. For now, the rate of growth of prices is still positive. But, this is likely to shift downward and negative price rates are likely to appear just as they did after the housing crisis.
Home Sales Decline
The above chart is the total number of home sales.[3]Trading Economics Home Sales Data And, as we can see there has been a sharp decline from the hyper-increase we just witnessed. We will always see a positive number here. But, we are likely to see a decrease that drops below the numbers seen after the collapse of the housing market.
And, there is even more inventory on the way.
Inventory Increasing
There is something else occurring in the background as well. Below, this is the chart from the US Census Bureau[4]US Census Bureau Building Permits showing the total number of building permits less the units with just one unit:
Apartment supplies have been trending higher as you can see in the chart above. Data has been trending higher for the number of apartment buildings being built are at all-time highs. When this supply hits, this is going to provide increased supply and opportunities for renters. This, again will push the rental prices lower with the increased supplies.[5]Trading Economics Building Permits
If you factor in the continued increases in the supplies of apartments available, this is going to have a very negative effect on the rental prices available.
Foreclosures and Evictions are Rising
Remember how the government stepped in to stop foreclosures & evictions? Knowing a lot of individuals would be sitting in an untenable situation, the government stepped in and made foreclosures and evictions impossible during the COVID pandemic. But, we are now no longer in a pandemic but COVID is now endemic. And, foreclosures and evictions are mounting. This is going to significantly change the landscape the rental landscape.
The above chart shows that the ratio of price for a home versus the rent it can bring in is at historical highs. Looking at this chart, you would pay $140 for ever $1 in rent you would get. Normally, this number is closer to about $95 – about 60% higher than normal. This will create a massive selloff if landlords cannot get the rent they need.
Combining evictions and foreclosures, there will be a deluge of inventory hitting the market. And, this is going to negatively affect prices paid for these properties.
This could be a start of a long term trend lower.
Employment is Still Robust
The US is still experiencing a robust employment picture as you can see in the above picture. The most important thing about all of what is occurring is that it is occurring during a period of robust economic growth with ultra-high employment levels. The Federal Reserve is raising interest rates.[6]Federal Reserve To Raise Interest Rates This is to combat inflation. But, it will be at the expense of full employment.
By bringing down full employment, demand for the basics are going to be declining substantially. The economy will see declines in oil prices as well as other basic commodities. But, real estate is also very likely to decline during this period.
The Federal Reserve Will “Correct” The Housing Market
The Federal Reserve stated that they want to see a correction in the housing market. The Fed wants to see the bidding ward go away. At the same time, the Fed wants to see inflation decline. This means continually increasing interest rates. And, this also means taking massive quantities out of the balance sheet that the Fed is carrying.
The dual moves of raising interest rates and reducing liquidity from will contract the overall markets. This will have extreme ramifications for the economy and the markets within them.
How to Make Money In A Falling Real Estate Market
So, how does one make money in a falling real estate market? The easiest way is to sell short real estate ETFs or REITs. Either will work.
Above is the chart on the Real Estate Select SPDR – 1-week chart. There have been considerable declines already in real estate as this chart shows. I have been dabbling in-and-out of these moves. But, the move lower in this particular ETF was pronounced significantly over the past few trading weeks.
By shorting this ETF – or, any other real estate ETF or REIT – you are taking advantage of the price declines in the markets. My expectations are that this is going to get so bad we will see these indexes drop below the lows we saw after the financial crisis. The amount of inflation and the broken system we are in now is going to be a disastrous mess to work within.
Taking advantage of these price declines will enable someone to hedge any positions they may have within the housing market and capitalize on a signifiant move lower.
I will continually update this as time moves forward.
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References
| ↑1 | Trading Economics 30-Year Fixed Mortgage Rate |
|---|---|
| ↑2 | Trading Economics Case Schiller Price Index |
| ↑3 | Trading Economics Home Sales Data |
| ↑4 | US Census Bureau Building Permits |
| ↑5 | Trading Economics Building Permits |
| ↑6 | Federal Reserve To Raise Interest Rates |
Nice article David, Thanks.