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It’s been 13 years since the housing crash of 2008, and since then, the average home value has more than doubled. Owning a home is part of the American dream, a dream that is getting increasingly harder to achieve as the years go on.
Those that were lucky enough to buy a home before prices shot up are surely enjoying the boon. But many hopeful homeowners are discouraged by surging real estate prices. Some younger adults have even given up on owning a house.
Many current real estate owners think prices will never go down again. Many believed that in 2008 as well. Will the tide turn soon, or is it different this time?
Why Are Home Prices So High?
Several factors are causing the housing market to rocket throughout most of the US. Currently, interest rates are at historic lows, which increases demand due to lower monthly payments and obtainable financing. COVID took many homes off the market as more people work from home and are fleeing urban city apartments.
The CDC banned evictions and plans to extend the moratorium through June 30th. Supply chains have crippled, causing home construction costs to soar. And if all of that wasn’t enough, the Federal Reserve is on a trillion-dollar mortgage buying spree (mortgage-backed securities or MBS).
It’s a perfect storm for unaffordable housing. No one is getting evicted, inventory is shrinking, demand keeps rising, material prices keep rising, and central banks are in overdrive propping up mortgage bonds.
Lumber Has Gone Parabolic
The price of lumber keeps breaking all-time highs and is five times higher than it was ten years ago. The Federal Reserve is calling the near hyperinflation “transitory.” Of course, this doesn’t help lower the price to build a home. Home Depot will be the new Ft. Knox if this continues.
What Will It Take for Home Prices to Fall?
Rising interest rates. That alone will crash the housing market and the stock market. Other potential headwinds can be looming evictions, deflation, collapse of demand, and resurgence of COVID.
If interest rates rise, debt becomes more expensive, and an avalanche of defaults will wipe out the economy. The housing market in the 1980s had interest rates well over 10-16%, but the value of homes is a fraction of what they are now. The average mortgage payment would go from $2k to over $5k if rates rose that much. Are debt-stricken economy is so underwater that even the slightest rise in interest rates could have catastrophic effects.
How Likely Will the Housing Market Crash in 2021?
Highly unlikely. The Fed doesn’t plan to raise rates this year or taper from quantitative easing. The money printer is going to brrr on. It’s even unlikely rates will rise in 2022. However, inflation is getting worse, and eventually, the Fed will have no choice.
Other black swans are possible in the next seven months, but I wouldn’t hold your breath. Forecasting is difficult, and my crystal ball has been on the fritz lately–so keep in mind anything could happen.
April 2021 US Market Performance
April 2021 Market News Highlights
No more menthols and high nicotine smokes. The Biden administration is expected to ban menthol cigarettes and lower nicotine levels. The news struck big tobacco stocks such as British American Tobacco and Altria. However, won’t smokers need to smoke more to obtain the same level of nicotine? Investors are taking the proposed rules as a threat to the industry.
SafeMoon and Tokenomics. Crypto is raging on with Etheruem breaking new highs and Bitcoin holding steady around $50k. Alt-coins are rising in popularity, and the unique token SafeMoon is gaining a lot of attention. The coin is putting a twist on De-Fi that rewards holders. Each time a coin is sold, a 10% fee is taxed, 5% is burned, and the other 5% is redistributed to existing holders.
Highest capital gains tax rate in 65 years. President Biden is proposing a capital gains tax rate for wealthy individuals as high as 43.4%. The attempt to “tax the rich” could cause more damage to the middle class as the wealthy find legal ways to avoid the tax. The higher rate could increase prices, damage employment, and stifle wages.
Big tech earnings blowout. It should be no surprise that our tech overlords are making money hand over fist. Google reported Q1 earnings with overall revenue growth of 34% and announced stock buybacks of up to $50 billion. Microsoft reported Q3 earnings with operating income growth of 31%. Apple’s Q2 earnings posted record revenue of $89.6 billion, a 54% increase year-over-year. Amazon beat with EPS of $15.79 vs the expected EPS of $9.69.
Coinbase IPO. The highly anticipated listing of Coinbase hit Wall Street in mid-April. The stock had wild swings reaching a high of $429. The share price has since cooled down significantly. Cathie Wood of ARK invest bought over 500,000 shares of the crypto exchange company. The purchases put Coinbase as the 15thhighest holding the in ARKW ETF.
US Economic Indicators Recap
GDP. The US economy grew slightly higher than the 6.1 percent forecast by an annualized 6.4% in the first quarter.
Personal Spending. A decline of 1 percent hit consumer spending month-over-month. The data missed the 0.7 percent analyst expectation and was the largest decline since April 2020.
Pending Home Sales fell -11.5 percent month-over-month, drastically missing 5% expectations. The fall is likely due to constrained housing supply.
Fed Interest Rate Decision. No change was made to the 0-0.25% Fed rate. The central bank stated it would continue to purchase bonds at a rate of $120 billion a month.
House Price Index. The average price of mortgage-backed single-family homes climbed 12.2 percent year-over-year from February 2020 to February 2021.
Consumer Price Index rose 0.60 percent month-over-month meeting market expectations.