What goes up, must come down. The old adage holds true for almost every single chart in human history. Companies, empires, markets, all of them rise and subsequently fall. We’ve already talked about the falling stock, crypto and other markets. And all of these are inexorably tied to the housing market.
The COVID-Fueled Market is Cooling
The U.S. has had a record-breaking housing market for the last two years. Fueled by work from home, COVID concerns, and an exodus from city living, houses were snapped up within hours of being on the market all over the country.
While the housing market is still hot, there are signs that it may be starting to slow. The most obvious reason for this is the Fed raising interest rates. Traditionally, when rates go up, home sales go down. Middle class families looking to balance their debt-to-income ratio can be thrown off kilter by even a half-point swing in interest rates.
Compounding Factors
It’s not just interest rates causing the slow down. Housing affordability has reached an almost critical milestone where the average American is being priced out of the market. Compounding this problem with highest-ever gas prices and staggering inflation numbers, the middle class family might be thinking twice about getting into a $400k home at interest rates above 5%.
For high-net-worth clients, a primary home likely isn’t a problem, but for second homes and vacation properties, they too might be pumping the brakes on buying more than they need. Make sure your clients are aware of the impact these market factors may have on upcoming purchases and how they can maximize their resource deployment in these turbulent times. It might be worth a meeting where you can use your chosen RIA software to review different scenarios and model options for your clients.
A Less Aggressive, More Stable Market Ahead
Despite these potential signs of a housing downturn, we’ll still point to strong fundamentals that will keep the ship afloat.
Demand is still quite high and inventory is incredibly scarce and will remain so. We never fully caught up after the 2008 downturn and a constrained labor market with high material costs will likely keep the inventory low for the foreseeable future. Likewise, Millennials, the second largest generation, are aging into their peak earning and home buying years.
The housing market is a critical sector of the economy and props up other parts as well. Even if this retracts, all signs point to a stable, but strong housing market. This is good information to communicate to clients if they start to read too much domesday reporting about the economy.
It’s a tumultuous time in general for the U.S. stock market and subsequently those invested in it, but the longview of the economy is strong. We have much to be optimistic about in the next few years. Clients will always fret about investments, it’s part of the job, but knowing how to take their mind off the chaos and recenter their vision is what separates the good advisors (you) from the mediocre ones.
