Several indicators point towards a significant housing market correction, said Eric Basmajian, Founder and Editor of EPB Macro Research. As the Fed raises rates and incomes decline, consumers will struggle to make mortgage payments.
“I don’t think that higher mortgage payments are something that the consumer is going to be able to absorb until the Fed gets inflation down,” Basmajian told David Lin, Anchor and Producer at Kitco News. “The catch-22 is that they’re not going to be able to get inflation down without inflicting some pain on the economy, which will raise the unemployment rate.”
Although he cautioned that a “severe downturn” in housing is possible, Basmajian said that this is unlikely to evolve into a banking crisis like in 2008.
“In the leadup to 2008, the debt buildup was very concentrated in the banking sector and the housing sector in the form of mortgages,” he explained. “There is much less of a debt buildup in [those sectors today], which would indicate that there is significantly less chance of a banking crisis.”
Signs of a Coming Housing Correction
Basmajian focused on supply and demand fundamentals when analyzing house prices.
“New home sales, for example, are down 51 percent from August of 2020, and volume leads price,” he said. “Whenever you see a huge decline in volume, something to the tune of 50 percent, that is generally forecasting declining home prices.”
The months’ supply of new homes, another leading indicator for housing markets, is 10.9 in July. Basmajian said, “a balanced market is about 5, and we’re at about 11.”
He also highlighted the spread between mortgage rates and U.S. Treasury rates. When the spread widens, as it currently is, mortgage lenders are pricing greater risk into their lending decisions, and “want to build in a buffer of lending above the risk-free rate.”
“We have declining volumes, increasing months’ supply of new homes, and widening mortgage spreads,” said Basmajian. “All of those things, to me, would suggest that home prices are going to start to fall.”
Demographics and Housing
In a March 2022 YouGov poll, 65 percent of Millennials (those born between 1980 and 1999) identify home ownership as a sign of success. However, the typical home requires eight times the median income to purchase, suggesting home affordability is at its worst levels since World War II.
“The younger population, the 25 to 54 year old cohort, is really the engine of economic growth because they consume housing and durable goods,” said Basmajian. “If this generation… are saddled with debt, then they have low income relative to inflation. And they can’t afford to advance. That’s going to put downward pressure on the economy.”
Basmajian said that there is a risk of a “baby bust,” as young people delay getting married and having children, and that this could portend ill for long-term economic growth.
To find out Basmajian’s predictions for housing prices, as well as whether he thinks it is better to rent or own a house, watch the video above
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