Rising mortgage rates, inflation, holding back the real estate market

If you look back at history, even in biblical times, there have been two main ways in which people accumulate wealth: through the acquisition of precious or immovable metals. While the wealth basket of precious metals has evolved, ownership, as a store of wealth, has remained essentially the same.

In modern times, owning a property, such as a home, has become an ambitious goal for most Americans. So much so that owning a house is now an integral part of the classic American dream.

From rural farms to urban skyscrapers, Americans, for generations, have parked some or most of theirs wealth in their homes.

Given the emotional significance of the American dream, the real estate market receives considerable media attention. As a person who has covered the industry for decades, I have had a front row seat during several business cycles. From the savings and lending crisis of the 1980s to the global financial crisis of 2008, the real estate sector – and construction in particular – has seen ups and downs.

With that historical perspective in mind and today’s difficult economic climate, I find myself asking (often on live television) if we’re headed for another crash. I say no. As a history student, I compare where we are today to the past boom-bust cycles I have witnessed. If I have learned anything about history, it is that it repeats itself. So, what better place than history to find answers about the future?

Stagflation period of the 70s and 80s

The current economic climate, for those of us old enough to remember, is strangely reminiscent of the environment in the 70s and early 80s – rising gasoline prices, record inflation levels and rising interest rates. The big difference between then and now, however, is unemployment. For much of the Jimmy Carter administrationthe unemployment rate was just under 8%, while todayit is below 4%.

To combat uncontrolled inflation at the time, former Federal Reserve Chairman Paul Volcker aggressively raised the federal funds rate, which peaked to a high of 20% in June 1981. The Fed’s hawkish stocks were designed to fight inflation by essentially putting the US economy in a self-induced coma. One would think that a stagnant economy coupled with high interest rates (and mortgage rates) would cool the housing market. While the housing transition activity has surprisingly slowed down median domestic prices increased considerably from $ 38,100 in the first quarter of 1975 to $ 78,200 in the first quarter of 1984. Inflation played a role in this, as material costs increased, however, the economics of supply and demand for homes was the main driver of the price increase. With demographic growth since the baby boom, there has been a increased demand for homes at a time when inflation made their construction more expensive.

Real estate boom and financial crisis

When analyzing today’s housing market, you can’t help but look in the rearview mirror at the most recent boom-bust cycle of the past two decades. I would like to note that not all rapid price increases are created equal. Many factors contribute to the rise in house prices. Some are fundamental concepts of Econ 101, such as high demand versus low supply.

However, in 2008 the real estate market exploded due to an external factor: the reckless availability of credit. Mortgage underwriting standards had deteriorated to the point where anyone could get a loan and buy a home. This “free money” artificially pushed demand and higher prices followed. It is worth noting that during that time, the inventory of existing homes amounted to more than 14 months of supply, while today it is a miserable three months.

And now?

Mortgage rates have almost doubled in the past year. Inflation is devastating the economy, and with some measures we are already in recession. Under the circumstances, some might think: This must be a bad omen for housing. While this is a seemingly logical thought, it is a conclusion that I, for example, am not jumping to.

Let’s pretend for a moment we’re freshmen in college. Between games in Pong – or the video game of my day, or today’s red variety of Solo Cup – we pretend to study history and economics.

As mentioned above, the housing climate today looks very similar to that of the 1970s and early 1980s – and remember, at that time, house prices went up (story). How come? Basic supply and demand (economy).

Currently there is a cumulative deficit between family training and housing development of 5.8 million homes. In other words, the demand for homes far exceeds supply. In addition, supply constraints are expected to continue as inflation has made construction more difficult for builders.

If we look at history and consider similar economic conditions 40 years ago, it is fair to say that house prices could rise once again. While the pace of price hikes is likely to slow slightly as the economy slows, I personally don’t see an impending slump – more likely, we will experience the elusive soft landing.

Mitch Roschelle is the founding partner of Macro Trends Advisors LLC, a real estate investment and macro market strategies firm. Additionally, Mitch is an adjunct faculty member at the University of San Diego’s Burnham-Moores Center for Real Estate.

The views expressed in this piece are those of the author and do not necessarily represent those of The Daily Wire.

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