U.S. Housing Market Doesn’t Go Up Just Because of Low Mortgage Rates
The mainstream media isn’t talking about it, but it shouldn’t mean investors should ignore it: the U.S. housing market could be headed for a lot of trouble. Home prices could fall a lot.
If you listen to opinions from real estate experts, chances are you will hear that mortgage rates are falling off a cliff, and that this is great for the U.S. housing market.
The experts in the industry will cite the following chart of 30-year fixed mortgage rates and extrapolate that, as mortgage rates go down, the U.S. housing market will see lots of buyers and home prices will increase.
(Source: “30-Year Fixed Rate Mortgage Average in the United States,” Federal Reserve Bank of St. Louis, last accessed August 14, 2020.)
Look Beyond Mortgage Rates
Surely, mortgage rates in the U.S. stand at historical low levels, and in a normal economy, as interest rates go down, home prices will increase.
Here’s the thing: the housing market isn’t just based on mortgage rates. There are other factors involved as well. You also need income, credit scores, and people’s willingness to buy.
At the moment, those three factors that could cause the U.S. housing market to soar aren’t there.
Look at income: a lot of jobs have been impacted by the coronavirus-related economic shutdown. Scores of Americans are unemployed and have applied for unemployment benefits. As per the most recent data, over 15 million Americans are on government benefits. (Source: “Continued Claims (Insured Unemployment),” Federal Reserve Bank of St. Louis, last accessed August 14, 2020.)
Could you imagine these 15 million Americans going to the bank and asking for mortgages? Will the bank lend them money? Put yourself in a bankers’ shoes; chances are you won’t lend to unemployed people. Your risk of not getting your money back would be high.
Also know this: just prior to the pandemic, Americans were already highly in debt.
We saw all sorts of debt go up, be it credit cards, auto loans, or student loans. During the pandemic, it’s not an out of-this-world idea to assume that many Americans have missed their debt payments.
This could hurt their credit scores, and those scores are an integral part of qualifying for a mortgage.
Therefore, many Americans may not be willing (or able) to buy homes at this time. Who could make a big decision such as buying a house when they know their health could be at stake, their jobs may not continue to be there, and their savings are their last resort?
Dear reader, the U.S. housing market isn’t getting much attention these days because the mainstream media is too excited about what’s happening in the stock market.
You should know this: the U.S. housing market is a several-trillion-dollar ticking time bomb at the moment. Those who own homes may want to sell or even default because they can’t afford their mortgages. At the same time, there may not be too many people who are looking to buy. This could be really bad for home prices.
Look at the chart below. It plots an exchange-traded fund (ETF) that tracks the performance of homebuilder stocks.
Chart courtesy of StockCharts.com
Since the stock market hit lows in March, this ETF has surged 100%. But if the housing market doesn’t do well, will homebuilder stocks do well? It’s hard to see that happening.