We’re in the beginning of the bust phase of what has been a truly breathtaking economic cycle. What got us here and how long will this last?
With the assistance of the Federal Reserve’s aggressive interest rate policy, the air is being let out of the balloon.
Record low inventory drove prices up 40% since the start of the COVID-19 pandemic…
Record low interest rates fueled home buying and inflated asset values…
Don’t forget about Putin’s barbaric, senseless, tragic war with Ukraine that’s destabilizing geopolitical relations and stoking inflation with commodity supply disruptions, shortages and spiking prices.
And here we are.
The Federal Reserve has been caught flat footed with inflation out of control.
As a result of tightening monetary policy, interest rates have skyrocketed over the span of 6 months since the start of 2022.
You want to know what will cool a housing market real quick? The 30 year fixed rate conventional mortgage doubling from 3% to 6%.
While rates have spiked, the pool of irrationally exuberant buyers has whittled down but still exists. Home prices have continued to rise but that is about to change. Especially if interest rates take another leg higher.
What happens when you have inflation? Consumers can’t spend as much. The economy slows down. Businesses stop hiring and start laying off workers. Public companies report lower earnings which results in lower stock prices. Lower stock prices means lower brokerage and retirement account balances, less money for down payments, less money for discretionary spending.
Here’s what we should be looking at:
Will home prices decline? Everyone seems to think home prices are immune from decline. A perfect storm can prove those people wrong.
“That hurricane is right out there down the road coming our way. We just don’t know if it’s a minor one or Superstorm Sandy… You better brace yourself.”Jamie Dimon, CEO of JPMorganChase
The cycle can be brutal, let’s hope it’s not.