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What to make of the Economy & Housing Market

Housing Market - Game Stop

Written January 28th, 2021
If you have been paying attention to the headlines, you might start to feel very confused as to where the economy stands today. There is a war on Wall Street between amateur Reddit stock investors and multi-billion dollar hedge fund managers making it near impossible for average investors to know where to place their bets. Riddled with uncertainty the stock exchange is a daily roller-coaster ride of peaks and valleys. Yet in spite of the anarchy on Wall Street, the markets are trading at record levels.

Meanwhile unemployment claims are not coming down fast enough, and fallout from the pandemic continues to annihilate local businesses around our area. Approximately 70% of US families say they are struggling financially – many of who live in the metro region. Yet the seemingly endless sea of construction in the DC region appears to go along without a hitch, and local companies large and small continue to move forward with expansion in 2021.

To top it all off, while the average hopeful home-buyer is trying to stay employed, healthy and sane, local housing prices are through the roof and unrelenting bidding wars between buyers are again commonplace.

So what the actual fuck is happening? Are we destined to live through an imminent bursting of an all – to – obvious (in hindsight) housing bubble? Will we look back at 2021 and ask ourselves “why the hell did I spend that much on my house, when one year later it’s worth 20% less?” Or is the overheated real estate market a natural iteration in our area’s inevitable growth?

Time will tell, but here’s the sober truth from my prospective….

What we have experienced in the economy – most specifically the housing market – is predictable, understandable, and should not be a surprise to anyone. And no, we’re not (necessarily) hurtling towards economic disaster. Here’s why..

Deficit spending & The Fed:

The Federal government spent a record $6.5 trillion dollars in fiscal 2020 – $3.1 trillion of which was in red ink. For context, the Federal government ran an unprecedented deficit of $1.7 trillion to combat the failing economy during 2009’s Great Recession – a fraction of this year’s spending. Remember when that amount was controversial and going to ruin the markets? Yeah me too.. There are trillions upon trillions of new unearned dollars circulating in the economy that were simply printed months ago, and the effects of these freshly minted dollars will take many more months to unpack. Our national debt has exceeded our entire county’s GDP for the first time since WWII which should raise some eyebrows. The sheer volume of government-printed dollars circulating in the economy is like nothing we have experienced before in the history of our country. The impact of inflation is indeed a double edged sword.

Interest Rates:

In March of 2020 the Federal Reserve cut the benchmark interest rate to zero and at the same time spent nearly 1 trillion dollars on “quantitative easing”. Not only did that bring mortgage interest rates below 3%, it slashed rates on credit cards, auto loans, and other consumer debts.

Common misconception: Home sellers do not set real estate prices. Buyers do.

What that means for the average homebuyer is that they can now afford prices that just 1 year ago were out of reach. In our area where prices are already high, a 100 basis point (1%) drop in mortgage interest usually leads to hundreds of less dollars in monthly payments for the same house. If your home buying budget was $800,000 last year, with zero changes to salary or savings, you can likely afford something closer to $900,000 with these new shiny rates. Plus your auto loan is cheaper and the credit card payment is lower which presumably means squirreling away more money in savings. Buyers are willing and able to pay more – and according to the data, they are. By doing so they are rapidly driving up the prices for houses in their own neighborhoods and sellers are happy to oblige. Compounded only by the fact that thousands of homes in 2020 never came to market given COVID lockdowns and health concerns, delayed relocations and job transfers, and people’s general uncertainty of the future. Extremely low inventory, plentiful inexpensive money to borrow, and a relentless effort by the federal government to keep the economy afloat is the perfect equation to end up in a red-hot real estate market.

My take:

We are exactly where we are supposed to be given the market forces at play. Should the government decide to back off from their heavy intervention in the markets, we would eventually experience a cooling off period and return to normal. Until that happens – which I predict won’t be soon – we should expect a consistent, hot real estate market.

My Opinion – stop reading if you don’t care. I don’t blame you..

We need to stop the madness and realize printing more money may feel good in the moment because it defers today’s pain and suffering. Yet in the not-so-long run it just completely fucks over the vast majority of people (sans the uber wealthy). Your dollars don’t mean as much because prices of your goods increase while your wages don’t. At best, your stock portfolio (if you have one) and real estate assets are barely keeping up with the increases in your housing and living costs. But again, that’s best case and history proves good times never last.

Bottom line: markets (housing specifically) function when there are bull and bear years. It’s a balancing act of progress that allows all to participate, and most importantly keeps the whole system afloat. If the government intervenes every time there’s a downturn – with the goal of stopping said downturn – we never really experience the necessary relief from hyper growth and continue on down the path of devaluing your money and shrinking the prospect of a robust middle class.

Jonathan fox

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