Terry’s Columns Housing Recession

Housing Recession

By Terry Savage on November 11, 2022

Americans may be excused for wondering where this recession talk is coming from. Economic growth (GDP) turned nicely positive in the third quarter. The stock market has rallied, regaining some, though not all of this year’s losses, on hopes the Fed will declare victory and ease up on interest rate hikes.

Consumer confidence dipped a bit last month, but consumer spending increased 0.6% in October for the second straight month even after adjusting for higher prices. Much of that is going on credit cards, with outstanding balances rising to pre-pandemic highs.

Jobs are still plentiful, though there is more news of potential layoffs. Corporate earnings are in line with lowered expectations, also giving stock prices a boost. And savers are finally getting rewarded with higher rates on Treasury bills and I-bonds.

Could we have escaped the economic penalties for all that unprecedented spending and money creation during Covid? Not really, according to a market seer I have respected for years.

Housing – The Achilles Heel
Jim Stack of Investech Research (www.Investech.com) thinks we are in for another huge housing bust. To quote him precisely from his latest newsletter, Stack says: “The evidence inside this issue is so compelling that it would be difficult to argue that the U.S. housing market isn’t heading for a hard landing.”

A chart in his newsletter compares the “parabolic” increase in U.S. home prices to the 2008 bust, and also to the Japanese housing bubble that peaked in 1991 – showing the current decade-long rise in home prices far outpaces those spectacular previous booms (each of which ended in a huge collapse).

Stack says the downturn has already started. “We have seen a record 10th consecutive decline in Builder Confidence – fueled by the persistent downturn in “Traffic of Prospective Buyers”. The size and rate of this decline confirms that confidence in the U.S. housing market is on a crumbling foundation very similar to what followed the peak in the 2005 Housing Bubble.

Just days after receiving Stack’s newsletter came this headline: Pending home sales fell 10% in September, much worse than expected. Economists had predicted a 4% drop but sales were down 31% year over year!

Making prospects even worse, is the huge increase in mortgage rates. Stack says: “the dramatic upturn in mortgage rates from sub-3% levels during the pandemic to nearly 7% today is like taking a wrecking ball to the housing market.” He points out that the median mortgage payment as a percentage of monthly income has surged to 30% — its highest level in nearly 40 years.

The Impact on Your Finances
This scenario reminds me of the mild winds and sunny weather before a hurricane arrives. Millions of Americans are being lulled by a stock market rally and election-year political promises. But housing constitutes 17% of the American economy directly, and has an even greater indirect impact. With mortgage rates now over 7%, the market is slowing and prices are leveling off or even declining in some areas. Home builders are cutting prices on finished inventory and even those anxious to buy cannot easily sell their current home.

Mortgage rates will move higher as the Fed persists, so 7% won’t be the peak, despite the current dip in mortgage rates on hopes the Fed will pivot. In 1981, mortgage rates rose to double digits – amidst a Fed tightening and a major recession. But the cost is steep. The increase in mortgage rates from 3% in January means the monthly payment on a median-priced home, with a 20% down payment, is now almost $1,000 higher than it was at the start of the year.

What to Do
If you have a home equity loan, do your best to pay it down now – before monthly payments rise next year. Making extra payments on that floating home equity loan will lower your burden. And if you have a balloon payment coming in the next year or two, ask your banker to extend that loan now.

I realize this is a gloomy forecast, written just as it seems the economic and stock market clouds are clearing. But the Fed isn’t done yet, no matter what the market pundits hope. I won’t mind being wrong with this advice. If I am, you’ll just be in better financial shape. But if the housing market does create a downside surprise, you’ll be in better shape to get through it. And that’s The Savage Truth.



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