Having enjoyed statistics as a student and earning a degree in economics in college, I have a tendency to look for indications that people are having “fun with numbers”, sometimes to suit a particular agenda, sometimes to make an adjustment for accuracy. For example, raising children, the CDC has a set of “Developmental Milestones” for kids: ages at which kids should walk, say their first word, hold a crayon and so on. If the trend starts to change, it would be reflected in the numbers. Now say the milestones are adjusted, from say being able to count to 10 by the age of 4, to adjusting that expectation to the age of 5. That could be looked at as “oh no, what are the implications of that for every age” Or “oh great, we’ve adjusted so now the data is more consistent”, but either way the adjustment, or lack thereof, can make for mismanaged expectations.
I’ve been reading a fair amount about inflation and the “fun with numbers” perspective has me resonating with data that says the inflation number needs some adjustment…maybe not officially, but at least in our own minds to understand what’s happening in our economy and who it impacts (and for us, here, how it impacts the real estate market and YOU).
Reports recently announced inflation at being 9.1%. HOLY $#!+. But is it really, though?
Inflation is gauged monthly using CPI (Consumer Price Index). That’s built on the concept of using a fixed list of 80,000 goods and services and how those prices have changed over time, and while those goods are weighted to reflect the goods most used versus less used (like Pizza vs. Spam), there are times in our economy were the adjustments may not apply most accurately or appropriately.
I’ve recently read from the BowTiedBull the concept of using “FETCH” to describe the best measurement of inflation during these times for the majority of the population: Food, Energy, Transportation, Clothing, Housing”. Those are the necessities and everything else is a bonus. So what do those price changes look like?
Now I’m not sophisticated enough to suggest what the effective inflation rate is based on FETCH, but given that these are typically non-negotiable necessities, it’s easy to posit that the effective inflation rate is higher than 9.1% for most Americans and is somewhere between “this sucks” and “I’m going to have my car repossessed”. Real pain.
One of the early indicators in a leveling off of the real estate market is car loan defaults, which during the pandemic were extremely low, but Carscoops.com reports that most of those loans were originated in 2020-2021 during the auto price hikes but now default rates are doubling. For a few years, many people “felt like” they were getting raises and bought cars, but time is showing those raises were not keeping up with the cost of their necessities so while people may feel like they have more income, they have more-more expenses.
What does it mean?
As much as ever, our economy is subject to the actions of Jerome Powell and those of our Administration. One signature can alter the course of the market. But as it stands now, it’s my opinion the market will work well for some and hurt others.
Defaulting car loans imply future difficulties for some homeowners and renters. That’s a good thing for increasing housing supply and affordability, but obviously bad for those who must sell because they can no longer support their mortgage payment. Another indicator is the inevitability of rising unemployment (people spending less means less people needed to service customers – think gas, air travel, $5 cups of coffee). This is bad for a lot of people, but again, good for housing supply.
Those that must sell, are likely to be wedged into selling at a lower price thanks to a sense of urgency to relieve themselves of the monthly payment obligation coupled with increased interest rates for home buyers, now settling around a national average of 5.8% versus under 3% in 2021. For a $400,000 mortgage, that’s the difference between paying $1,686/month versus $2,347/month.
Most people who purchased homes during the pandemic are likely to have locked a low interest rate and if they did pay over the appraised price, they typically did so with cash versus 100%+ financing. This group is not likely to sell anytime soon to take a loss on their house and replace their mortgage with a more expensive one.
This suggests the higher valued homes will transact less frequently than the average to below average priced homes. I suspect over the next months and years we’ll see more affordable housing on the market assuming interest rates don’t continue to rise at the pace they have recently. Important to note, housing prices don’t tend to change quickly, it tends to happen overtime, particularly when compared to the stock market which can have a severely emotional week in one direction or the other.
For now, as far as housing goes, I think we’re really only scratching at what the next year or two will bring and it’s a crap shoot what the White House and Fed will do.
My general response to the question “should I buy a house right now” is pretty simple: If you can comfortably afford the monthly payment and don’t have a date you HAVE to move (thereby subjecting your house sale to whatever the market is like at that time), yes, buy a house.
Should I wait to buy a house? Being the son of an attorney, I’ll borrow my father’s common response to answer that question: it depends. There are tons of variables, many of which rely on things we have no control or insight on (Monetary & Fiscal Policy, Geo-political relations, world events, etc) but far more important is your motivation to own a home. There’s no blanket answer that’s correct for every person.
Having been a real estate agent for 17 years, and owner of a real estate brokerage for 10, I have an aggregation of experiences with different reasons to buy or sell a house and I’m extremely happy to introduce my experiences to your thoughts. Call, text or email anytime.
Over the long term, I am always bullish on real estate. I love real estate. I love seeing people buy real estate. It’s my opinion that the ONLY reason to sell real estate is so that you can buy different real estate. Crashes will come and go, but with a long enough timeline it’s an asset that has always gone up in value.