May — Is the economic party over? Maybe? Sort of…

The number one question I get asked is “Are we going to see a housing crash or a recession?”

Which I get, the media has had a very negative tone in 2022 and with mortgage rates rising and inflation at the highest levels in 40 years it makes it easy to jump on the attention-grabbing headlines.

While most of us remember the housing crisis and recession of 2008/2009, what we also must remember is that a recession and a drop in home values doesn’t always go hand-in-hand. In many instances it’s the exact opposite, there is historical data to show that during some recessions home prices increased. Inflation data was released for the month and again we saw hotter than anticipated numbers which has been weighing on bond markets and mortgage rates.

The Fed is expected to hike rates in May, June, and July with many believing each hike will be 0.5% to 0.75% per instance compared to the 0.25% hikes we’ve seen in the past. As we’ve discussed in prior newsletters this doesn’t mean mortgage rates instantly go up by this amount and we believe that long term these hikes will benefit mortgage rates much more than hurt mortgage rates.

The fed is using their rate hikes to curb inflation, but we must remember that this takes some time for it to trickle into the economy. I expect to see inflation continue to rise through September and then in Q4 of 2022 I would expect to see a decline in the numbers.

What is Consumer Spending Right Now?

What the media is missing is how inflation impacts consumers by the numbers.

In 2021, the average US household income was $79,000 (which would be in the 22% tax bracket). This means each household would net $61,620 per year or $5,135 per month. The average household has $60,000 in HELOC’s and/or personal loans (which based on the Fed’s rate hikes) would increase these loan payments by $88 per month.

Households on average are also spending $71 per month more on gas and $79 more on food, which means their monthly budget is $238 more than last year.  This is a 5% increase in the cost of living and we’re not considering every aspect of household expenses.

Having less disposable income typically means consumers change their spending habits causing businesses to slow which leads to layoffs. Layoffs leads to higher unemployment which leads to a weaker economy and sets the table for the likelihood of a recession.

While I know this sounds bad, housing currently is at an all-time low as far as inventory available.  Housing is and always will be a supply and demand market and currently demand is 2-3 times greater than the supply.

I also believe there is at least a 50% chance we see a recession in the next 12 months, and unless inventory increases it’s very hard to justify home prices going down anytime soon.

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