Housing Recession but Rents Still Rising

U.S. Housing Market Enters Recession, the Economy Is Following

The U.S. housing market has entered a recession because of tighter monetary policy from the Federal Reserve (Fed) and persistently rising construction costs. General recession fears have prompted well-known investors like Peter Boockvar and Michael Burry to warn of this recession and counsel drastic actions be taken. The investment bank Morgan Stanley expects the S&P 500 to drop to 3.400 points or below.  In this newsletter, we will uncover the latest developments in the housing market and discuss recession claims. 

U.S. Housing Market - Builder Sentiment Turns Negative

Builder sentiment in the market for single-family homes fell into negative territory in August 2022, as builders and buyers struggle with higher costs.

The National Association of Home Builders (NAHB) & Wells Fargo Housing Market Index (HMI) dropped 6 points to 49 this month, its eighth straight monthly decline. Anything above 50 is considered positive. The index has not been in negative territory since a very brief plunge at the start of the Covid-19 pandemic. Before that, it had not seen a negative rating since June 2014. See chart “Housing Market Index” for details. 

“Tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession,” said NAHB Chief Economist Robert Dietz.

Of the HMI index’s three components, current sales conditions dropped 7 points to 57, sales expectations in the next six months fell 2 points to 47 and buyer traffic fell 5 points to 32. Despite higher costs for land, labor, and materials, about 1 in 5 builders in August reported lowering prices in the past month, all in an effort to increase sales or limit cancellations. The average drop reported was 5%.

The biggest hurdle for buyers right now is affordability. Home prices have been climbing since the start of the pandemic, and the average rate on the 30-year fixed mortgage, which had hit historic lows in the first part of the pandemic, is nearly twice what it was at the start of this year. Home price growth has cooled somewhat in recent weeks, while mortgage rates have come down a bit from recent highs. However, 30-year fixed mortgages rates remain above 5%, where they have been since April 2022. See chart “30-Year Fixed Mortgage Rates” for details. 

Regionally, on a three-month moving average, the HMI builder confidence in the Northeast fell 9 points to 56 and dropped 3 points in the Midwest to 49. In the South, it fell 7 points to 63; in the West, where home prices are highest, it declined 11 points to 51.
 

Recession Claims & the Federal Reserve

Peter Boockvar, the Chief Investment Officer of the Bleakly Advisory Group, believes that the downturn in the U.S. housing market will rapidly spread into other parts of the economy, particularly for corporate earnings and profit margins. A long-time critic of the Fed, he also predicts the central bank is making a serious error as it raises interest rates and tightens monetary policy to battle inflation. According to his judgment, “now we start getting into dangerous territory where things are at risk of breaking.”  

Michael Burry, the famed investor of “The Big Short”, is known for his actions rather than his words. Consequently, he has sold all his holdings from his US stock portfolio, barring a single holding in the second quarter, as a Securities and Exchange Commission filing showed in mid-August 2022. See chart “Scion Asset Management, LLC” for details. 

On Twitter, Michael Burry briefly explained his rationale for slashing his portfolio. He believes that the 18% gain in the tech-heavy Nasdaq Composite Index since the start of Q3 2022 is likely to reverse. Thus, investors should not get too excited about the recent rally in stocks as previous downturns have seen many temporary rebounds before spiraling.

Morgan Stanley is particularly bearish on the stock market in the coming months. In early September, a team of analysts led by Mike Wilson, wrote in a note to investors that “while acknowledging the poor performance of equities year-to-date (S&P 500 down 14% year to date), we do not think the bear market is over if our earnings forecasts are correct.” The analysts expect the S&P 500 to fall to 3,400 points by year-end 2022. Should a recession hit the U.S., they say the benchmark index could even drop to 3,000 points. Considering that the S&P 500 sat at 4,000 points at the beginning of September, Morgan Stanley’s projection implies a further downside of 15% to 25%. 

On Wednesday, September 21, 2022, the Fed delivered a third big rate increase in their struggle to contain the most rapid inflation in 40 years. In addition, the Fed signaled a more aggressive path ahead for monetary policy, one that would lift interest rates higher and keep them elevated longer. The Fed raised its interest rate by 0.75%, boosting it to a range of 3 to 3.25%. That’s a significant jump from as recent as March 2022, when the federal funds rate was set at near-zero, and the increases since have made for the Fed’s fastest policy adjustment since the 1980s. 

Stock markets around the world have reacted strongly to the actions taken by the Fed. The S&P 500 fell from its high of 3.907 points on Wednesday, September 21 down to 3.756 points on Thursday evening. That’s a loss of 4% in two days with more losses likely to be ahead, as indicated by the Morgan Stanley team of analysts. 

Famous investors and Morgan Stanley strongly believe that the markets will continue to drop, and the economy will most likely slide into a recession in the very near future. This sets the stage for the type of safe investment strategy that we offer. 

What Does it Mean for Investors?

Investors should look for low-risk and high-yield projects, such as first trust deed lending options secured by residental rental properties. 

Safeguard offers short-term construction lending options that pay between 10% - 12% and are on 6 to 12-month terms. We also offer 3 to 5-year loans on fully renovated properties with tenants in place. Lending options start as low as $35,000 and we never pool funds. One lender, loaning to one borrower, at an LTV 70% or under. 

Real estate lending is an attractive and easy way to earn an income above the inflation rate. Our team has specialized in recommending investments that minimize risk while maximizing returns in today challenging investment climate.