These are the good old days

Our capitalist Macro economy has been cyclic since the U.S. was a country. Booms are followed by busts, expansions by recessions. The height of an expansion becomes “the good old days” when nostalgically recalled during the following recession.

It’s not surprising that “these are the good old days,” since both the Federal Reserve and Congress pumped $trillions of monetary and fiscal stimulus during 2020-2021.

https://www.nytimes.com/2022/05/10/business/economy-boom-tim…

For Tens of Millions of Americans, the Good Times Are Right Now

Their houses are piggy banks, their retirement accounts are up and their bosses are eager to please. When the boom ends, everything will change.

By David Streitfeld, The New York Times, May 10, 2022

This has been a time of great financial reward for a large number of Americans.

For the 158 million who are employed, prospects haven’t been this bright since men landed on the moon. As many as half of those workers have retirement accounts that were fattened by a prolonged bull market in stocks. There are 83 million owner-occupied homes in the United States. At the rate they have been increasing in value, a lot of them are in effect a giant piggy bank that families live inside…

There are 22 million U.S. millionaires, Credit Suisse estimates, up from fewer than 15 million in 2014…In the last six years, prices have risen by the total value of all housing in 2000, according to the Case-Schiller index. People own much more of their homes than they used to, while the banks own less. In many areas of the country, it has become practically impossible for renters to buy a house…

Households have more cash than debt for the first time in decades, which is theoretically good. But all that money is encouraging spending, which is propelling inflation, which is forcing the Fed to push up interest rates. The result: a recession late next year… [end quote]

I love the “golden mean” because it’s stable and predictable. Extremes cause the pendulum to swing.

The next 12 months will be a good time for investors who profit from volatility. Everyone else should plan for ways to shield themselves from the predictable outcomes of this unique Fed-caused recession – rising interest rates, falling stock prices, job loss.

If you have an adjustable-rate mortgage, consider locking in a fixed-rate mortgage now. Even though mortgage rates have already risen significantly, they could go higher as they did in the late 1970s- early 1980s.

Wendy

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If you have an adjustable-rate mortgage, consider locking in a fixed-rate mortgage now. Even though mortgage rates have already risen significantly, they could go higher as they did in the late 1970s- early 1980s.

Wendy

I painfully remember back in 1977, returning to CA, and having to settle for much less house than we were hoping for, with a best available rate fixed mortgage of 8%. I remember thinking that used to be the kind of interest banks charged folks who lived in trailers, who could disappear “overnight”.

The past decades of low interest has been a real eye opener.

I remember in 1977 thinking that I’d never have a house of any kind, and that home ownership was the only way to avoid poverty in old age.

Fortunately, I was wrong about never having a house. But my kids wouldn’t have one if we hadn’t decided to all buy a house together. As it is, their mortgage will be paid off in five years (at age 45 for them). I see their friends all struggling to buy housing or find affordable places to live, doing everything from sharing apartments to living in vans.

I suspect that over the next few years an oversupply of housing will develop, but unfortunately it won’t be an oversupply of single-family starter homes. I see tons of luxury condos and townhouses and apartment complexes being built, instead.

Anyhow, I don’t know what real estate is going to do, but it all makes me very uncomfortable. I think a crash is much more likely than a boom. I think a lot of people have bought much larger, fancier homes than they can afford.

I painfully remember back in 1977, returning to CA, and having to settle for much less house than we were hoping for, with a best available rate fixed mortgage of 8%.

Only 8%? Cheap.

We bought our first home in 1982 and paid over 14% for a fixed rate. Refinanced that bad boy more than a few times over the following years.

40 years and we are still in the same home, mortgage free. Funny how the stairs have gotten steeper.

AW

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< a best available rate fixed mortgage of 8%.>

I bought my first house at age 29 in 1983, a tiny 1927 in a marginal area of Staten Island across the street from the city bus night garage. NYC had a gentrification program offering the low, low mortgage rate of 9.75% to first-time home buyers in marginal neighborhoods. The conventional 30 year fixed rate mortgage was 12% at the time.
https://fred.stlouisfed.org/series/MORTGAGE30US

Wendy

Anyhow, I don’t know what real estate is going to do, but it all makes me very uncomfortable. I think a crash is much more likely than a boom. I think a lot of people have bought much larger, fancier homes than they can afford.

I think it is location dependent. I live in the 3rd fastest growing county in the country where 62.5 people are moving in each day. There is still a housing shortage and according to my agent still a strong demand for homes even with the increase in mortgage rates.

PSU

I suspect that over the next few years an oversupply of housing will develop, but unfortunately it won’t be an oversupply of single-family starter homes. I see tons of luxury condos and townhouses and apartment complexes being built, instead.

I think there are a few reasons for this:

  1. Supply chain issues are really slowing the “stuff” needed for building houses.
  2. Inflation is making the “stuff” more expensive (for example, copper wire is ridiculously expensive now, but many other things as well).
  3. Per housing unit, multi-family structures need less “stuff” on average, so it makes sense to build this kind of housing right now.

As far as luxury versus starter, it’s the same issue as cars. If you can only build 100,000 cars a month (due to supply issues, etc), would you build ones that produce a $2000 profit, or ones that produce a $5000 profit? Same for homes. If you only have enough material to build 1,000 homes, would you build ones that produce a $30,000 profit, or those that produce a $100,000 profit?

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