It may be time for Millennials to get rid of the “Okay, Boomer” mentality, as they relive their parents’ 1980s housing boom.Thank you for reading this post, don't forget to subscribe!
Although current mortgage rates — which reached 8% this week — mimic those of the early 2000s, according to a new report from the chief economist at Fortune 500 financial services company First American, the overall housing market is actually back in the 1980s. Reminds me of.
“Today’s housing market is nothing like the housing market of the mid-2000s,” Mark Fleming, chief economist at First American, wrote in a report Tuesday titled “Déjà vu of the 1980s for the housing market.” Of course, Fleming was dismissive of this. The ghost of the 2008 housing crash, which led to the Great Financial Crisis, when subprime mortgages and other shoddy lending practices were common. Today is simply fundamentally different, he wrote: “The housing market today is not overbuilt, nor is it driven by loose lending standards, sub-prime mortgages, or homeowners who are excessively leveraged.”
“However,” he adds, there is another precedent: “The current housing market is very similar to the market of the 1980s.” This may be a tough pill to swallow for the Millennial generation, given that they largely blame the Baby Boomers for their inability to purchase a home in today’s market because they held onto homes for so long out of fear of higher mortgage rates. Maintain – and are swooning with – cash offers that cannot be compared with their younger counterparts.
Fleming cited three key ways in which today’s economy and housing market seem to “rhyme” with the 1980s, noting that both periods featured high inflation, rising interest rates, and an aging population of home buyers. Bounce is involved. Fleming argues that these three factors could create a “housing recession” similar to the one four decades ago – one where home sales remain low in a frozen, untested market, but home prices remain simply stagnant.
Fleming wrote in the style of Mark Twain, “History doesn’t repeat itself, but it often rhymes.”
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In the late 1970s and early 1980s, demographics helped keep the housing market afloat despite the harsh inflation and aggressive interest rate increases called for by then-Federal Reserve Chairman Paul Volcker. Millions of baby boomers came of home-buying age, creating a wave of steady purchase demand during the decade.
Now, in a strikingly similar pattern, millions of Millennials are reaching the prime age for home buying this decade, and Fleming believes that could help support home prices.
“Demographic demand outweighs the severely limited supply of homes for sale,” he wrote on Monday. There doesn’t seem to be any incentive to sell.”
As Redfin says, Millennials are now the largest part of the “homebuying pie”, purchasing nearly 60% of the homes purchased with a mortgage during the past few years.
and as Luck As previously reported, Fleming is not alone in concluding that this demographic wave should support home sales and prices despite rising mortgage rates. Fleming’s point sounds almost identical to that of US economist Jessio Park of Bank of America Research, who wrote earlier this month: “Some sales activity should be supported by millennials reaching prime home-buying age, and singles. -Family construction permits are continuously stalled. “This could help the housing market maintain some of its momentum without collapsing.”
Inflation and high interest rates
After taking office in August 1979, Fed Chairman Paul Volcker struggled to control inflation through aggressive interest rate hikes, causing the average 30-year fixed mortgage rate to reach a peak of nearly 18% by the end of 1981. Went. Home affordability and sales declined in the early 80s due to rising borrowing costs. And after years of rising home prices, the housing market stalled, but it didn’t crash — largely because of demographics.
At the beginning of Volcker’s tenure as Fed chairman, the average US home sale price was $64,700. And even after mortgage rates nearly doubled, that figure rose to $69,400 by the second quarter of 1981.
Similarly, the Fed has raised interest rates sharply over the past 18 months to tackle inflation, after hitting a four-decade high of more than 9% last year. And despite a sharp decline in inflation this year, central bank Chairman Jerome Powell has taken the stance that inflation remains “very high” and that interest rates may need to remain high for a longer period of time as a result.
“Although inflation has fallen from its peak – a welcome development – it remains very high,” Powell said in late August. “We remain prepared to raise rates further if appropriate and intend to keep policy at a restrictive level until we are confident that inflation is moving steadily downwards toward our objective.”
As a result of Powell’s arrogance, some economists and housing experts fear mortgage rates could remain at or above 8% this year and early next year.
The impact on the housing market from rising mortgage rates is reminiscent of the 1980s. Then and today, housing affordability and existing home sales have declined amid rising borrowing costs and higher home prices.
For example, according to the Office of Policy Development and Research, existing home sales fell nearly 50% between 1978 and 1982. Today, at their current pace, total existing-home sales are projected to total 4.1 million in 2023, a significant decline from more than 6 million home sales in 2021, according to data from the National Association of Realtors.
And according to Morgan Stanley’s calculations, rising mortgage rates have raised the average monthly payment on a median-priced home in the US by $670, or 38%, over the past 12 months.
In turn, the housing market today faces a potential recession similar to that of the early 1980s, according to First American’s Housing Recession Indicator. Still, this doesn’t mean home prices will fall precipitously. Experts expect the housing market to become more stable then potentially suffer a collapse similar to the 2008 disaster.
First uses factors such as the average hourly earnings of American construction workers; Total number of employees in residential buildings and real estate rental and leasing; Number of single-family housing starts; Existing Home Sales; And to determine whether the housing market is currently in a recession or not.
Based on bearish indicators, Fleming concluded, “Since mortgage rates increased further in October, we expect the housing recession to persist in the near term,” Fleming said, adding, “The housing market has seen its lowest levels since the 1980s.” “But inflation took some time.” And mortgage rate stabilization were key.”
Beyond Park & Fleming, the Morgan Stanley team led by strategist James Egan, also warned in a research note Tuesday that if mortgage rates remain high for too long and home inventory increases even slightly, it could send home prices down. There may be a decline of 5%. In recession by the end of 2024.
“The long-term impact on demand if rates remain at 8% should not be ignored,” he wrote.
This story originally appeared on Fortune.com