Home News With 6% Mortgages, The Housing Market Looks Set To Implode (BATS:ITB)

With 6% Mortgages, The Housing Market Looks Set To Implode (BATS:ITB)

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brian lever

Investing in a home is a classic way to build wealth over time as a homeowner or landlord. Generally speaking, if the local economic fundamentals are sound, it’s a sound strategy. Unless, of course, he has invested in the housing bubble twice in his lifetime.

US house prices Soaring over 33% It has been fueled by surging demand from homeowners and investors since the pandemic began.housing starts steadily increasing (until now), but post-pandemic population growth close to zeroResidential institutional investors are now go quietly For the exit, realtors are clamoring on social media. As of this writing, the iShares US Home Construction ETF (Bat:Bat:ITB) has declined by about 28% over the year, after booming early in the pandemic. Housing is the most interest-rate-sensitive sector of the economy, making it a zero point in the global central bank’s ongoing fight against inflation.

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ITB data by Y-chart

ITB is hotly debated among bullish and bearish investors because the stock looks very cheap on a futures price/earnings basis. ITB’s largest holding, DR Horton (DHI) – trade at 5.3x earnings next year Estimate. Renner (Len) will also trade at a 5.3x return next year. Homebuilder NVR (NVRs) teeth big winner in history exchange with 10.8 times revenue in 2023. pull group (PHM) Trade at 4.3xand high-end Tall Brothers (TOL) trades at 4.9x.

These are the value pitfalls of the year as the buy of the century if analyst earnings forecasts are correct or the price/earnings ratio turns into a “price to loss ratio”. I think it’s the latter.

Mortgage interest rates soar

Not “housing shortage” The myth that people move All in all, the real problem is that from the start of the 2020 pandemic until the beginning of this year, the Fed essentially fixed mortgage rates at 3% by buying nearly all mortgages issued in America. This was done instead of letting the market decide the interest rate.According to classical economic theory, governments Price manipulation inevitably leads to shortagesEveryone who has ever wanted to buy a home took advantage of the cheap mortgage interest rates to buy the largest house they could afford, so here it was. Then some mob psychology kicked in and it was all about YOLO (you only live once!) and FOMO (fear of missing out!). This was also completely unsustainable, as the only thing that kept mortgage rates so low was the aggressive purchase of all mortgages by the government.Earlier this year, when the Fed finally stopped doing this, mortgage rates were went from 3% to 6% in a few months. A big rise in prices and a big rise in interest rates means that the number of qualified buyers is melting like ice cubes and trying to reverse price gains by brute force.

mortgage interest rate

Mortgage Rates 2022

30 year fixed mortgage (Mortgage News Daily)

Well, inflation, which reached 9% earlier this year, has taken away the Fed’s quantitative easing ammunition. The resulting tsunami of rising interest rates quelled the housing market rebellion.

Basic math: A household with an annual income of $100,000 at a fixed mortgage rate of 3%, a down payment of 20%, and a debt-to-income ratio of 36%. can qualify for a $721,000 home. It was November and December.

4% off a $649,000 home. This was March.

At 5%, you are eligible to purchase a $587,000 home. It was April and May.

6% to buy a $533,000 home. It is now.

for About 75% of US homebuyers Consumers with mortgage loans have seen a 26% decline in purchasing power since the beginning of the year. Unless wages go up or interest rates go down, house prices will need to drop significantly. And why? If it can go up 33% in two years, it can go down 25% or more in two years.

Prices are falling and will fall further

Selling price in San Francisco 17% down from peakSouthern California is improving, but still down about 4% from its peak. texas is down almost the same.And what is happening in America is nothing compared to what is happening in other English-speaking countries. Canada, Australia, New Zealand etc.The widely quoted Case-Shiller exponent There is a time lag of several months Therefore, by the time Case-Shiller sees a price drop, it will be too late. Some markets like Miami are still up, but probably not for long. They all fall in price as interest rates stay high and inventories grow.

If you take a step back and think about it, it’s insanity. Hundreds of thousands of amateur buyers borrow money at 6% to bet her five to seven times her annual income in the housing market. They are buying from amateur sellers and are often supported by amateur realtors. And, of course, their loans are guaranteed by taxpayers.

Many of these buyers are dual-income and absolutely need the income of both to qualify and pay off their debts.and electricity bill More than 50% increase It’s a cruel joke for many of us here in Texas year after year who have trodden as far as they can to get into their homes. This is especially true if closings (and thus locking mortgage rates) are delayed, forcing interest rates to rise.Property tax assessor I can smell the blood in the water as well, hitting young families with brutal property taxes and increasing to pay for ‘inflation’. like that, Click here for active list It rose from a very low level to almost the same level as in 2019. But the factors that affect interest rates are national and even global.

Click here for the latest information on America’s craziest graph.

housing market

Workers (red) vs. People who own or rent homes (blue) (Yardeni Research)

About 49% of Americans own or rent a home, while the labor force participation rate remains at about 62%. Proportions are important, but trends are important here. Since COVID, housing demand has increased while labor force participation has declined. This correlation was approximately 1:1 from World War II to pandemics. These should converge. how do i pay the rent Or your mortgage? Unless you have massive incentives, are making money in stocks/cryptocurrencies, or can benefit from a moratorium on evictions and foreclosures, you won’t.

Interesting times indeed…

Conclusion

The housing market has been completely out of control during the pandemic, and without the Federal Reserve pouring gasoline on it, there will be a sharp correction to restore sanity to the market. It has a lot of implications for everyone considering it and for investors in housing stocks such as home builders.

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