The Australian property market has been recording a fall in housing prices amidst rising interest rates. CoreLogic’s national home index recorded negative dwelling value growth for the first time in 20 months in May 2022. Across both houses and units, property values fell by 0.1% as consumer sentiment declined, global uncertainty rose, and inflation surged.
ALSO READ: How did Albanese government respond to RBA’s warning against pay rise of 4-5%?
Most jarring results were seen across Sydney and Melbourne, with these outcomes weighing heavily on the national result. According to CoreLogic data, Sydney and Melbourne collectively made up 71.4% and 55.8% of the unit markets, respectively. The monthly declines were progressively larger in Sydney, while in Melbourne, units depreciated 0.1% over the year to date in May.
At the same time, national units recorded the strongest rental growth since July 2007 due to strong overseas migration. The ongoing rental shortage drove a rise in national unit rents. These factors have clouded the outlook for the housing market, especially as it sits amidst increasing interest rates.
ALSO READ: Is a housing market crash in the offing in Australia?
Impact of interest rate hikes
The Reserve Bank of Australia’s interest rate hike cycle has started at an unusual time when consumer sentiment has been at such a low level. Thus, the market forecasts suggest a gloomy picture for the economy. With more interest rate hikes expected ahead, consumer confidence could fall further.
ALSO READ: Will Australia’s fight against inflation end anytime soon?
The cost-of-living crisis in Australia has taken a massive toll on consumers’ spending capacity. Almost everything has been hit, from food prices to rents to power bills. However, wages have not shown an increase at par with rising inflation levels. This has worsened the cost-of-living crisis.
Economists expect the official cash rate to be raised to 2.5% by the end of the year, meaning the average monthly mortgage repayment on the median-priced Australian home could increase by AU$781 or around 28%. Experts expect mortgage holders in Sydney to see a larger burden of this increase in mortgage repayments on median-priced homes.
At the same time, futures market forecast suggests a grim picture, much harsher than that projected by economists. The futures market expects the official cash rate to be raised to 3.5% by May 2023, meaning the average monthly mortgage repayment on the median-priced Aussie homes could increase by about 42% or AU$1,174.
Can high savings rescue borrowers?
RBA governor Philip Lowe has himself acknowledged that the cash rate is expected to rise throughout the year as the central bank aims to curb inflationary pressures. Though the rate hike was largely expected, the magnitude of the hike was a shocker for many.
Borrowers have been putting aside extra money and building up a savings buffer to manage the cost-of-living crisis. A larger amount of savings has been generated by households over the past year. Some borrowers also have the option of refinancing to help ease the loan pressures. Borrowers have felt that they are paying more than they need to be paying. Thus, refinancing could be a helpful aid during this time.
RBA minutes: What is Central bank’s stance on future interest rate hikes?
However, those belonging to lower-income groups could face a tougher test as they would have to manage higher prices with rising interest rates. While medium borrowers might be able to manage the current crisis, many others could have a very skinny buffer.
In a nutshell, household consumption is an important driver of economic growth. Thus, any fears related to a decline in household consumption could weigh heavily on the Australian economy as well as the property market.
The ongoing energy crisis and rising inflation have been fuelling uncertainty in the housing market. Thus, the RBA could take an even stricter approach with interest rates and might over-tighten. This could further dampen consumer confidence and potentially reduce economic growth. However, the latest bump to minimum wages might offer some relief to low-income households.
There has been a lot of chatter recently about the possibility of a recession.
Yet what exactly does that mean — and what would a potential downturn look like?
A recession is defined as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months,” according to the National Bureau of Economic Research.
More from Invest in You:
Suze Orman: Every person should have series I bonds
Strategies to pay off credit card debt as interest rates rise
What the Fed’s rate hike means for you
It’s also ultimately inevitable during the course of the normal economic cycle, said Mark Hamrick, senior economic analyst at Bankrate.
“It should not be shocking that they occur,” he said. “It is usually the timing, the cause and the depth and duration of them that catch people by surprise.”
The risk of a recession
Economists are watching the economy closely and many are boosting their odds of a recession occurring in the near term. Citigroup, assessing global economic growth over the next 18 months, sees a 50% probability of a global recession happening, while Goldman Sachs has put the odds of a recession for the U.S. in the next year at 30%.
However, not everyone is convinced a recession will happen.
UBS, for example, has a base case forecast of “no recession.” Mark Zandi, chief economist at Moody’s Analytics, also thinks as things stand now, a recession is unlikely.
“The economy is slowing and it will be uncomfortable over the next 12 to 24 months, but I think we will make our way through it without a recession,” he said.
Of course, something could happen to change that projection.
“We are very vulnerable to anything else that could go wrong because things are so fragile,” Zandi explained.
‘The economy comes to a standstill’
Still, Zandi’s current prediction still means some economic pain ahead. “The economy comes to a standstill, meaning months where we are getting little job growth or negative job growth,” he said.
Unemployment would start to notch higher, perhaps hitting 4% or 4.5% and inflation, while moderating, will still be high, he said.
He doesn’t see stock prices going anywhere and housing values remaining, at best, flat or even declining in some markets.
“For the average American, it is not just going to feel great,” he said.
What happens during different types of recessions
Jim Young | Bloomberg | Getty Images
The duration and depth of recessions are characterized by shapes.
For instance, a V-shaped recovery is quick, with a sharp decline to a bottom followed by a dramatic rise. In a U-shaped recovery, on the other hand, the economy spends longer at the bottom and then gradually rebounds.
A W-recovery is when the economy passes through a recession and into recovery and then immediately enters another recession, and K-shaped means some parts of the economy recover more quickly than others.
What a ‘typical’ recession looks like
A post-World War II typical recession lasts about six to 12 months, although some were longer and one was shorter, Zandi said.
The most recent recession occurred in 2020 and was brief — only two months long. The longest recession occurring after 1948, the Great Recession, spanned 18 months, beginning December 2007 and ending June 2009.
In a garden variety recession, the economy typically loses 3 million to 4 million jobs, and unemployment can get as high as 6%, Zandi said. The stock market may fall another 5% to 10% and national house prices decline about 5% to 10%, he said.
That doesn’t necessarily mean that’s what will occur if the economy does fall into recession. Right now, the fundamentals of the economy are good, Zandi said.
“There is a good chance [if] we do suffer a recession, [that] it will be less severe than a typical one,” he predicted.
‘Prepare for the possibility’ of a recession
Whether a recession happens or not, you should be ready just in case.
“I counsel people to prepare for the possibility, to pay down debt, to save money, to consider deferring large purchases,” said Hamrick.
He anticipates that Bankrate’s Second-Quarter Economic Indicator survey will put chances of a recession in the next 12-18 months higher than the 1-in-3 odds in the first-quarter survey.
Still, that doesn’t mean the worst-case scenario.
“If there is a downturn here, I think that there is a possibility that it could be relatively short and shallow,” Hamrick said. “It need not be ruinous.”
SIGN UP: Money 101 is an 8-week learning course to financial freedom, delivered weekly to your inbox. For the Spanish version Dinero 101, click here.
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.
The scorching pandemic-era US housing market is on the verge of a “coast to coast” price correction as the Federal Reserve hikes interest rates, a prominent economist warned this week.
Mark Zandi, chief economist at Moody’s Analytics, said his firm expects home prices to sink in key competitive markets that are the most “juiced” or overvalued. The projected price drops coincide with a massive surge in mortgage loan rates that have sapped the buying power of prospective homeowners.
The downturn will likely impact the cities of Phoenix and Tucson in Arizona as well as North and South Carolina and parts of Florida, according to the firm’s analysis. One key city set to be affected is Boise, Idaho, which Moody’s has identified as “the most overvalued market in the country.”
Zandi warned of the looming correction in the real estate market while speaking at a bipartisan housing policy summit in Washington DC, according to Bloomberg.
Cheap mortgage rates, a lack of housing inventory and surging interest during COVID-19 lockdowns drove a steep spike in home prices over the last few years — a trend that is expected to slow as the Fed tightens policy and mortgages approach 6%.
While the Fed’s benchmark interest rate does not have a direct impact on mortgages, all forms of credit and borrowing are becoming more expensive on the expectation of tightened fiscal conditions. The central bank is sharply increasing rates in an effort to combat inflation that has reached its highest level in decades.
Rising interest rates “have already caused the housing market to slow down,” Lending Tree senior economist Jacob Channel told The Post.
“Fewer people are getting mortgages, homes are sitting on the market for longer and some sellers are cutting prices,” Channel said.
“With that said, we’re coming off a period of time through 2020 and 2021 where the housing market was extremely hot, so this current “correction” is neither unexpected nor necessarily a bad thing – especially as it will give some buyers a bit more breathing room when they’re housing hunting,” Channel added.
The 30-year fixed-loan mortgage rate hit 5.81% this week, up from just 3.02% the same week one year ago, according to Freddie Mac data.
As mortgage rates rise, demand for loan applications among prospective buyers or homeowners looking refinance has hit a 22-year low.
So far, the rising rates have yet to reflect a major impact on prices.
The National Association of Realtors said the median existing-home sales price was $407,600 in May, up 14.8% from one year ago. However, existing home sales declined by 3.4% for the month — a sign of abating demand.
Larry Botel, a senior real estate advisor at Solomon Partners, said a housing correction is inevitable and “has already started to happen.”
“Your average home buyer cannot afford to pay the same amount as they could so prices need to adjust,” Botel said. “The same math will also continue to benefit the rental market as it will continue to be an option for price conscious homebuyer.”
A drop in housing prices would align with the Fed’s plan to bring down prices. Shortly after the Fed hiked its benchmark interest rate by three-quarters of a percentage point for the first time since 1994, Fed Chair Jerome Powell acknowledged the rapid changes in the housing market.
“I’d say if you are a homebuyer, somebody or a young person looking to buy a home, you need a bit of a reset,” Powell said. “We need to get back to a place where supply and demand are back together and where inflation is down low again, and mortgage rates are low again.”
While a price decline in key markets is likely, Zandi downplayed the possibility of a sweeping crash in housing on par with what transpired during the subprime mortgage crisis of 2008 – when risky lending practices led to a collapse in the market. The price drops are expected to be relatively low.
Zandi noted that available inventory is still historically tight, with housing vacancies are at all-time lows this time around rather than the all-time highs posted during the last crash. Mortgage lending is also far more stable than it was a decade ago.
“I just don’t see the the kind of mortgage defaults and distressed sales that would be necessary for big declines in housing values. That’s when you get crashes, when you have lots of foreclosures and a lot of distressed sales,” Zandi says. “That’s just not going to happen.”
LEXINGTON, Ky. (WKYT) – Buying a house is part of the American dream, but experts continue to say it can be a tougher dream to achieve right now in Lexington – especially for first-time home buyers who find themselves in a competitive market with rising prices.
“It is a little bit harder for a first-time home buyer right now,” said Susie Basham, a Realtor with The Agency, “because they’re competing against a lot of other first-time home buyers, as well as investors.”
With home prices ticking up, analysts say investor demand is strong, allowing them to charge higher rents or to sell for higher prices homes they have renovated.
Investors bought more than 18 percent of U.S. homes purchased in the fourth quarter of 2021, according to another real estate brokerage, Redfin. Their analysis found the share of investor purchases in 40 large U.S. metropolitan areas ranged from 6% in Providence, Rhode Island to 32.7% in Atlanta.
Using Redfin’s methodology – which defines an investor as any buyer whose name includes at least one of the following keywords: LLC, Inc, Trust, Corp, Homes – a WKYT Investigates analysis of two-and-a-half years of Fayette County home sale records posted online shows investor demand remains strong in Lexington.
The share of homes purchased by investors in the fourth quarter of 2021 was roughly 30%, which would rank Lexington near the top of the metros analyzed by Redfin. A similar share also carried over into the first quarter of 2022.
(Note: This is an approximate calculation, as this methodology does not account for individuals purchasing real estate as an LLC for financial, legal or personal protection or for other purposes such as parents helping their children buy their first home.)
Basham says the large investor demand here in Lexington stems from the city itself, its proximity to other large cities and the quality of life here.
“That makes the housing market a little more competitive, a little bit harder for somebody to get into their first-time house,” Basham said of the impact of this, “but if you have a strong credit rating, you’re working with a lender, you’re working with a Realtor, you can combat that.”
Sales here leveled off in April, according to the Lexington-Bluegrass Association of Realtors. Analysts believe that some buyers have moved back to the sidelines with home prices and interest rates on the rise. LBAR says the median home price rose to $245,000 – up 16% from last year.
But all these factors leave an impact not just on those looking to buy, but also on those who rent. Amid months of rent increases, experts say renting is still not getting any easier.
“What we’ve noticed here at Community Action Council is that housing has become less affordable, and harder and harder to find,” said Patrice Muhammad, communications manager with Community Action Council, “especially for those who are low-income and extremely low-income.”
Fewer vacancies and not enough supply makes their searches more difficult and take longer, Muhammad explained. She said they have also seen that landlords have the luxury right now of being more selective, perhaps raising rent or requiring more income to qualify.
Lexington had the country’s largest month-over-month rent increase in May, according to Apartment List rent estimates – a nearly 18% jump.
Community Action Council’s efforts right now are focused on housing stabilization – helping people stay in the current homes by paying past-due rent and a few months going forward. It is a mission that, given the current market, may be more important than ever.
“Because, as we know, if you have to leave your current residence, it’s not going to get any better,” Muhammad said. “You’re going to have to find another place, hopefully comparable space, comparable rent; it’s almost impossible to find.”
Advocates continue to say the city needs more housing and more affordable housing, especially as inflation drives up prices on nearly everything. (Rent costs make up about a third of the Consumer Price Index used to measure inflation.)
Realtors say new construction has not been able to keep up with demand, and, despite a 3% increase in the number of listed homes compared to the same time last year (according to LBAR’s report), there are not enough existing houses to keep things affordable, Basham said.
Interest rates are rising, but experts say they still expect demand to outpace supply in Lexington – especially on the affordable housing front.
Copyright 2022 WKYT. All rights reserved.
Markets have been on a wild ride recently, swinging between gains and losses. However, the brutal selling has meant the S&P 500 is still in a bear market.
When asked whether markets have hit a bottom, Wall Street veteran Ed Yardeni said he doesn’t think “we’re gonna climb out of this thing very quickly, not in a fundamental sense.”
“I think investors have learned this year — ‘don’t fight the Fed,'” he told CNBC’s “Street Signs Asia” on Monday. The mantra refers to the idea that investors should align their investments with, rather than against, the U.S. Federal Reserve’s monetary policies.
What changed dramatically this year is ‘don’t fight the Fed’ now means don’t fight the Fed when it’s fighting inflation.
Ed Yardeni
president, Yardeni Research
“For many years, the idea of don’t fight the Fed was if the Fed was going to be easy [on monetary policy.] You want to be long equities,” said Yardeni, president of consultancy Yardeni Research. “But what changed dramatically this year is ‘don’t fight the Fed’ now means don’t fight the Fed when it’s fighting inflation. And that means that that’s not a good environment for equities on a short-term basis.”
‘Too late to panic’
With inflation soaring to new highs this year, the Fed raised interest rates by 75 basis points last week — its biggest since 1994 — and signaled continued tightening ahead. Fed Chair Jerome Powell said another hike of 50 or 75 basis points at the next meeting in July is likely.
However, the economy now faces the risk of stagflation as economic growth tails off and prices continue to rise.
Wall Street has tumbled in response to the Fed’s tightening and rapidly rising inflation. The S&P 500 last week posted its 10th down week in the last 11, and is now well into a bear market. On Thursday, all 11 of its sectors closed more than 10% below their recent highs. The Dow Jones Industrial Average fell below 30,000 for the first time since January 2021 this past week.
Yardeni said it “isn’t going to be over” till there are definitive signs that inflation, brought on by soaring food and energy prices, has peaked. Market watchers have also blamed rising prices on the Fed’s fiscal overstimulation of the economy amid the Covid-19 pandemic.
“We’ve got to see a peak in inflation before the market will be substantially higher,” he said, adding that point could come next year.
Still, Yardeni believes that markets “are kind of at an exhaustion stage” in the selling.
“At this point, it’s a little too late to panic. I think long-term investors are going to find that there’s some great opportunities here,” he told CNBC.
A recession that will ‘hurt the rich’
Rumblings of the possibility of a recession have been getting louder, as doubts surface about the Fed’s ability to achieve a soft landing. A bear market often portends — but doesn’t cause — a recession.
“This will be the first recession that hurts the rich probably for a pretty long while, more than it hurts the ordinary person on the street,” said Mark Jolley, global strategist at CCB International Securities.
“If you look at what’s happened to bond and equity prices and look at the combined decline in bond and equity prices, we are on track to have the worst year already of wealth destruction since 1938,” he told CNBC’s “Squawk Box Asia” on Monday.
As interest rates go higher, the value of people’s assets bought with borrowed money will fall, Jolley said, suggesting that mortgages are at risk.
“Anything in the economy that is leveraged and long, which is basically private equity, your collateral has gone down 20%,” he said. “Imagine what would happen to the banking system in any economy if your house prices fell by 20%.”
OTTAWA – New research shows house prices in Canada’s suburbs grew faster than in downtown areas during the pandemic as remote work spurred a preference for bigger homes.
The Bank of Canada says in a study released today that the closure of many downtown services coupled with a desire for more living space increased demand and prices for homes in suburban areas during the pandemic.
The central bank says this shift weakened the so-called proximity premium typically associated with homes in more urban areas, which tend to be more expensive due to scare land, shorter commutes and better access to services.
The research shows that while house prices increased strongly in most neighbourhoods during the pandemic, the growth was strongest in the suburbs.
As a result, the bank says the real estate price gap between Canada’s suburbs and downtown areas — already narrowing steadily pre-pandemic — shrank considerably.
Yet the bank warns that if the preference shift is temporary, house prices in the suburbs could face downward pressure.
This report by The Canadian Press was first published June 20, 2022.
JOIN THE CONVERSATION
Conversations are opinions of our readers and are subject to the Code of Conduct. The Star does not endorse these opinions.
Hi, MarketWatchers. Don’t miss these top stories.
Sen. Cory Booker still believes this bill could narrow the racial wealth gap, help people buy homes and afford college
Baby bonds are ‘a powerful way to deal with the wealth inequalities in our country by also empowering our economy overall,’ Booker tells MarketWatch. Read More
IRS unveils new chatbots to help taxpayers as agency churns through backlog of 10.5 million tax returns
The Internal Revenue Service has expanded the use of bots to answer taxpayer questions. Read More
‘4 companies have gained control over the formula market’: Lawmakers and women’s health advocates debate solutions to baby-formula shortage
An overly consolidated market and lack of support for breastfeeding moms are some of the factors contributing to the formula shortage, experts said. Read More
‘I feel bad that I’ll be taking most of his income’: I make twice what my boyfriend does. He pays me $300 in rent, but I want him to pay $800. Is that fair?
‘It’s not like I need the money. I just think it’s fair that he pays his way.’ Read More
Weekend reads: Your guide to bear markets for stocks, crypto and, soon, housing
Also, what you can do to protect yourself as interest rates rise. Read More
‘Juneteenth is tricky’: Companies and consumers reckon with how to observe the new federal holiday
‘It’s not about Juneteenth. It’s about what happens the other 11 months of the year.’ Read More
Five boozy Father’s Day gifts for dads
From The Rock’s tequila to a cocktail kit, here are the Weekend Sip columnist’s picks. Read More
‘These are not my ideal living arrangements’: My husband and I live in his mother’s home. She will leave it to him when she dies. Do I have a claim on this home?
‘It’s not wise to put money into a house that is not in my name.’ Read More
Don’t be fooled by these myths about travel insurance and what it covers
While travel insurance is important to have for most trips there’s a lot about it — from what it covers to how you get reimbursed — that gets misinterpreted. Read More
Chase is giving customers one extra day before charging overdraft fees, which still yield billions of dollars for banks
JPMorgan Chase is among several big banks that are changing how they charge overdraft fees amid pressure from the Consumer Financial Protection Bureau Read More
By Raghavendra Kamath
The Reserve Bank of India has been increasing key rates to tackle inflation which has led to mortgage rates going up. Despite this, Anshuman Magazine, chairman and chief executive, India, South East Asia, Middle East, Africa, at global property consultancy firm CBRE, tells Raghavendra Kamath that home sales would see a strong momentum in FY23 due to government measures in affordable housing and rebound in economic activity. Excerpts:
The RBI is increasing rates to tackle inflation. Do you think home sales will take a major beating this year due to higher rates?
The RBI’s decision to raise the repo rate by 50 bps to 4.9% was a well-anticipated move, considering the steep rise in global inflation levels as well as the monetary tightening measures being adopted by central banks worldwide. We believe that this decisive action will go a long way in curbing mounting inflation levels in the medium term. With the government’s sustained policy push, particularly in the affordable and mid-end segments, enhanced vaccine coverage, as well as a rebound in economic activity, the residential sector is expected to continue to witness a strong momentum in sales in FY23 as well. Moreover, rising input construction cost coupled with sustained demand amidst low housing mortgage rate could result in further appreciation in housing prices. Hence, we believe that continued interest from both end-users as well as investors will help the sector maintain its strong sales pace in the medium term.
Real estate IPOs are on a halt to shaky markets. Do you think it will affect developers fundraising abilities in general?
The capital markets are flush with liquidity in the past two years on account of a low interest rate regime across developed and emerging markets, with leading developers raising over Rs 18,700 crore ($2.4 billion) through the QIP and IPO routes since FY2019. The trend is anticipated to get stronger in 2022 with the expected launch of around 3-4 IPOs, and with developers looking to raise funds through the QIP route. However, with the recent volatility in the stock market and record high crude oil prices, there could be some realignment or deferment of these plans.
Not many REITs have hit the markets in recent times. What could be the reason for it?
Due to Covid-related uncertainty, listing of REITs was momentarily impacted. However, increased public participation in the equity market, a low interest rate on deposits held with banks and an accelerated pace of digitisation has created a positive ecosystem for listing of more REITs. Developers such as DLF, Panchshil Realty, amongst others, have already assessed/planning to assess their portfolio for a listing in 2022.
The year 2022 could also see the launch of REITs for sectors other than office, such as industrial and logistics, and retail; largely on the back of increased availability of quality portfolios in such segments and strong fundamentals supporting their growth. Over the past 18-24 months, investment-grade I&L assets have witnessed significant interest from large foreign institutional investors and asset owners who have acquired these assets on the back of an uptick in space take-up and continuous policy push from the government.
How are global investors looking at Indian real estate as an investment destination in the context of rising rates, falling rupee and so on?
In 2021, investments into real estate experienced growth on the back of a strong rebound across asset classes, with total capital inflows of about $ 5.5 billion. Development sites/land dominated overall investments with a share of 37% as developers acquired land parcels by leveraging the reduction in stamp duty charges and lower cost of financing. This was followed by the acquisition of built-up office (25%) and industrial & logistics (17%) assets.
The trend is anticipated to continue with total investments in 2022 expected to rise by about 5-10%, to reach around the pre-pandemic levels of 2019. Capital flows are expected to continue to be led by development sites/land and the office sector, whereas the I&L and residential sectors could also see higher equity inflows.
How is the office leasing scene in the country? What is your outlook for office properties this year in terms of leasing and rents?
The office sector in India continued to witness a robust recovery in Q12022, as leasing activity grew by 97% Y-o-Y to touch 11.4 million sq ft. Bengaluru, Chennai and Delhi-NCR dominated absorption during the quarter, accounting for almost two-thirds of the transaction activity. Technology corporates drove leasing with a share of about 34%, followed by BFSI firms (17%), flexible space operators (13%), engineering & manufacturing (12%) and research, consulting & analytics (11%) firms. With the government’s evolving Covid-19 protocols and the recovery in office leasing in 2021, we expect the positive momentum to further strengthen in 2022.
As the affordable housing crisis deepens, it’s now threatening the ability of middle class Americans to keep a roof over their families’ heads.
Home and rental prices continue to surge nationwide and 49 percent of Americans consider housing costs a significant problem in their area, according to a Pew research study.
Roughly seven out of 10 Americans living in Western states, or 69 percent, consider housing costs a problem.
This compares to 49 percent living in the Northeast, 44 percent in the South, and 33 percent in the Midwest.
“Housing affordability challenges are impacting Americans across the income spectrum,” George Ratiu, the manager of economic research for Realtor.com, told The Epoch Times.
Ratiu says that record breaking home prices, surging mortgage rates, and inflation—which is at a four-decade high—are curtailing buyers’ ability to afford a home in 2022.
He explained the monthly mortgage payment for a median-priced home jumped more than 50 percent higher than just a year ago. This has effectively pushed millions of buyers out of the market, as their incomes could not keep up with rising prices and rates.
“The affordability squeeze has resulted in declining transactions, with sales of both new and existing homes dropping for several consecutive months this year,” Ratiu said.
Moreover, households within the middle-class income bracket are now feeling the squeeze of the inflated housing market, which was short 5.8 million single-family homes at the beginning of 2022.
“It really depends on where you are in that middle class range, but if you’re making the median income, you’re in trouble,” Alex Kaiser told The Epoch Times.
Where Kaiser lives in the Minneapolis–Saint Paul metropolitan area, housing costs have skyrocketed since he and his wife moved there in 2013.
The Twin Cities metro area set a record this year on median sales price for single family homes, hitting $353,000, according to data from the Minneapolis and Saint Paul Area association of realtors. This represents a 7.5 percent increase from March 2021.
Kaiser said when he and his wife moved to Saint Paul nine years ago, they bought a three bedroom, 1.5 bathroom house for $179,900, which sold for $225,000 in 2019.
Earlier this year, the new owners sold the same house in Saint Paul for $305,000.
Kaiser pointed out that their first home is in an area that, despite surging housing costs, has experienced a considerable spike in violent crime over the years. This is what prompted him and his wife to move to the outskirts of the north metro area. Nevertheless, Kaiser’s old house in Saint Paul sold for a 69 percent increase since their original purchase.
With home and rental prices in the area climbing, Kaiser and his family, which now includes two small children, moved to a suburb on the outskirts of Minneapolis–Saint Paul.
The average middle class household in the United States brings home roughly $70,000, according to one research study. It exemplifies the trend of a persistently shrinking middle class over the course of five decades. Adults living in middle income households fell from 61 percent in 1971 to 50 percent in 2021.
Kaiser maintains that for a family of four, a household in the greater Twin Cities area would need to make at least $120,000 per year to live comfortably.
When asked about buying a home just before the housing crunch went critical, Kaiser said, “We got lucky and made the most of our opportunities. You need to be smart and lucky.”
In February, a list of 20 cities in the United States where middle income earners can no longer afford housing was released based on data from the Joint Center for Housing Studies at Harvard University.
The study revealed that nationwide, 24.5 percent of middle-class households spend more than 30 percent of their income on housing.
Some of these cities on this list include Reno (Nev.), Austin (Texas), Baltimore (Md.), Portland (Ore.), Fort Lauderdale (Fla.), and Newark (N.J.).
In some states like New York, California, Washington, Colorado, and Connecticut, housing costs can exceed 50 percent of middle income household earnings.
This is also the case in Las Vegas, where the price of housing has made it nearly impossible for a family of modest means to live in America’s entertainment capital.
“We’re right behind California [on housing costs], it’s really bad. First time homeowners don’t stand a chance here,” Tammy Huffman told The Epoch Times.
Huffman moved to Las Vegas with her husband in 2015 and has watched both rental, and home prices continue to climb beyond the reach of the working class for years. She noted that though her house is worth three times what she purchased it for, selling doesn’t make sense unless they move somewhere else.
“I could sell my house today, but I don’t have anywhere to go just yet. Not sure where we’ll move next. It’s just crazy,” she said.
Kaiser came to the same conclusion on selling his family’s new home in White Bear Lake, just north of the Twin Cities.
“You can cash out on your equity, but people are reluctant to do that now. We’d have to buy into the same market,” he explained.
Huffman also pointed to the fact that rentals in Las Vegas are extremely expensive even for people with well-paying jobs like her daughter.
She explained that to rent a 1,500 square foot home can cost $2,800 per month. Her daughter, who rents a 900 square foot one bedroom apartment, pays $1,850 in monthly rent.
When asked if middle income earners could find anywhere to live in Vegas, Huffman was candid, “No, it’s not even possible anymore.”
Ratiu noted that inflated housing costs have less to do with the pandemic and stem primarily from a lack of construction for years.
“Housing markets have experienced a significant shortage of homes for over a decade, the result of consistent underbuilding,” he clarified.
Stemming from the 2008–2009 great recession, Ratiu says fewer construction companies survived, and the ones that did weren’t prepared for the wave of Millenials who now want to buy homes.
“Many construction companies absorbed the narrative that younger Americans—particularly millennials—were different than prior generations and not likely to buy homes. The end result was that, despite a growing population … the number of new homes remained low, leading to a significant gap in housing,” Ratiu said.
He added the pandemic only exacerbated existing shortage issues. Lumber mill production cutbacks in 2020 drove price hikes in wood while supply chain disruptions compounded the scarcity of materials.
Ratiu thinks real estate markets will continue to struggle with affordability in the coming months, but the worst of inflated housing costs may soon be in the rearview. Much of this is due to rising interest rates curbing the demand for new mortgages.
“The frenzied pace of the past two years is behind us, and we are seeing the signs of a more rational market ahead,” he said.
Follow
Autumn is a South America-based reporter covering primarily Latin American issues for The Epoch Times.
The Federal Reserve Bank announced a 75-basis point interest rate hike on Wednesday, a 50 percent greater increase than the central bank had initially signaled it was going to make for June.
The move comes after inflation hit a new, 40-year high last week, with consumer prices reaching an 8.6 percent mantel over where they were a year ago.
Fed watchers predict that the bank’s benchmark Federal Funds rate will continue to rise throughout the year, perhaps at a quicker pace than originally expected if higher prices don’t go down.
Even with the rate hike, interest rates will still only be around 1.6 percent, close to all-time lows.
Here are five ways that an environment of increasing interest rates will affect Americans’ wallets and the economy:
Mortgage, car and credit card payments are going to increase
The Federal Funds rate sets the rate at which banks and credit unions can lend money to each other as they determine their need for capital to make investments across the economy.
Banks that borrow money at the Federal Funds rate then need to charge a comparable rate to the people and institutions that borrow money from them. So an increase in the Funds rate translates down to higher rates in credit markets, mortgage markets and any industry that relies on financing plans to make payments.
This means higher monthly house and car payments and a bigger price tag on outstanding credit card debt.
Mortgage rates are already seeing sharp increases. Interest payments for the U.S. benchmark 30-year-fixed rate mortgage made the largest one-week jump in 35 years, hitting 5.78 percent as of Thursday, up more than half a percentage point since only the week before.
That means a mortgage payment on a median-valued $400,000 home, after a 20-percent down payment, would now be about $1,875 dollars. Last year, the monthly payment on the same home would have been $1,335. That’s more than a $500 dollar-a-month difference.
Stock markets are falling and seeing dramatic swings in prices
Those increased prices that consumers are paying mean that people tend to rein in their spending, which brings down the demand for goods and services. The consequence for companies is diminished earnings, which means investors become less willing to pay for ownership shares, and this causes stock prices to fall.
Since January, most major indices of U.S. stocks have fallen around 20 percent, entering what’s known as a bear market, or an extended period of shrinking share prices.
The Dow Jones Industrial Average has fallen 18.6 percent this year, dipping below 30,000 on Thursday off a January high of 36,800. The S&P 500 index has dropped beneath 3,700 off a high of 4,800, a decline of more than 22 percent, over the same period.
The technology-heavy Nasdaq, whose companies tend to hold extra debt making them particularly sensitive to interest rate increases, has fallen more than 30 percent.
Since March, when the Fed first started raising interest rates with a modest 25 to 50-basis point target range, the Dow has fallen 12 percent, the S&P has fallen 16 percent, and the Nasdaq has fallen 20 percent.
It’s going to be harder to find a job
Price increases that shrink demand also have the effect of forcing companies to cut costs, and one of the first places they look to do that is in the labor force.
The housing market provides a clear example of this process, according to Desmond Lachman, an economist with the American Enterprise Institute (AEI), a right-leaning Washington think tank.
Mortgage rates that “used to be a little bit over 3 percent at the start of the year are now around about 6 percent. That means people who could afford a $100 house at the start of the year can only afford a house now around $70. That means there’s a whole lot less demand for houses, so house prices begin leveling and coming down, and so builders don’t want to build so many houses, and then people aren’t employed,” Lachman said in an interview with The Hill.
While this may sound like a bad thing, it has positive longer term effects for the economy, which has been experiencing some of the highest employment levels in decades, with around 96.4 percent of job seekers currently employed and 11.4 million jobs currently open, according to the Department of Labor.
Having a looser labor market means companies don’t have to keep charging higher prices in order to turn a profit for their investors, and this can drive down inflation and stretch the value of a dollar.
So even though higher rates will mean an end to the nominal wage gains that have benefited workers during a period of labor scarcity, the increased purchasing power of the dollar should add real value to paychecks.
The likelihood of a recession is growing
While the Fed has been pursuing a “soft landing” for the economy –lowering inflation toward 2 percent without triggering a recession – many market commentators are viewing recession in the next year or two as increasingly likely.
“I’m not as worried about a return to the inflation levels of the 1970s as I am about a deep recession that is going to bring inflation way down soon,” AEI’s Lachman said.
The fears of a serious recession, or the combination of slowed growth and weakly valued money known as “stagflation,” are compounded now by geopolitical issues that extend beyond the reach of the monetary policy levers held by the Fed.
These include the war in Ukraine, which has had an effect on global food prices, as well as lockdowns in China, which have affected production pipelines. Broader issues with supply chains, which have been stymied by sky-high energy prices and congestion at ports, are also powerful forces dragging on the global economy.
A recession for Americans following interest rate hikes will be a double-edged sword. While it will bring down prices in the medium-term, it will also mean a period of reduced economic activity. This will translate into lesser returns on investments in the stock market and other securities markets, worse performance in retirement plans like 401Ks and lower nominal wages.
The national deficit is going to cost (taxpayers) more
With interest rates at or near zero, economists tend not to worry about the federal deficit, the value of which stands now at about a year and a quarter’s worth of productive output, or gross domestic product (GDP).
The resounding economic recovery experienced by the U.S. economy after the near-total shutdown of the private sector due to the pandemic took a bite out of the U.S. national debt. The latest projection of the deficit from the Congressional Budget Office was $1.7 trillion lower than expected.
But with interest rates on the rise, pleasant surprises like this one will be fewer and farther between, as paying off the national debt will require more taxpayer money.
“The government is going to have to pay out more in interest payments,” Lachman said. “On top of that, what’s going to happen in the progress that we’ve been making in reducing the deficit is also going to go, because as the economy tanks and goes into recession, it means the government’s going to collect fewer taxes.”
Lachman added: “The wrong thing for the Fed to do was – especially after the Biden package of $1.9 trillion, 8 percent of GDP, the kind of fiscal stimulus that we’ve never had before during peacetime – the Fed just sat with interest rates at zero and then kept convincing itself that inflation was transitory and had nothing to do with the fact that the money supply had increased by 40 percent over two years. That was insane.”