Housing Stagflation

What happens when houses don't sell?

I’ve been reading a bit about the economics of the 1970s lately. Trying to look at the past to figure out the past is a fool’s errand, but the period of stagflation has some echoes here. We don’t have high unemployment, but we do have the burden of inflation and there are more signs that the consumer is no longer going to be spending like mad to prop up the economy.

One of the things investors are taught is that the stock market hates uncertainty. It’s why there’s often slow growth in election years. The stock market likes big bold signals that it can interpret easily (even if incorrectly). Uncertainty also impacts the housing market. Buying a home is the biggest purchase we make. People don’t do that when they feel that their jobs are at risk or the economy feels uncertain. Home sales have been mostly on pause for the last two years, and it seems there’s little sign of that changing. Sales are down around a quarter from pre-pandemic levels. High prices, increased mortgage rates, and low inventory have kept sales low.

I recently went on the Broadcast Retirement Network to talk about this. The other thing I’m looking at is what is happening with inventory, it’s rising, but a lot of that rise is from homes sitting on the market for longer, not from new homes being listed. The true tell will come in March and April. It’s been colder than average in much of the country, maybe that has delayed some listings.

Many buyers are still waiting for mortgages to hit 5% before getting serious about looking for a home. I don’t think that’s happening this year without a significant change (although at this point, anything might occur and we can’t rule it out). Most forecasts call for home prices to continue to rise in many markets, although prices are starting to fall in parts of Florida and Texas. ResiClub’s post on Friday breaks out state-by-state data using Realtor.com data.

If you aren’t buying or selling a house, does this matter to you? It should, housing is a huge economic driver. Much of that is the rental market, but without a strong demand for homes, builders won’t build, household formation slows, and it’s a general drag on the economy.

Rising home prices have meant that more and more people have a lot of equity in their homes. Mostly they haven’t tapped into this, but if people start to feel the economic pinch at the same time that home prices start to drop, they might decide to either sell if they can or draw out some equity through a home loan or HELOC. Refinancing is picking up a little bit, but most homeowners have a relatively low interest rate compared to current refi offers.

Using home equity can make sense in some situations and it’s a good tool for people to have. When it becomes a prop for maintaining an unsustainable lifestyle, and it happens at scale, it could be worrisome. I don’t believe we will have a massive run on home equity while housing prices plummet, but it could happen. Many homeowners are older (the levels of homeownership over 70 are as high as 81%) and on a fixed income.

Being an economy watcher (I’m not an economist) is often about searching for what could go wrong and trying to determine the probability of it happening. Many of the headlines in the media take out the probability aspect. Saying a recession could happen or an economic collapse is possible isn’t the same as forecasting it. Maybe this housing pause is temporary but there’s a chance that it isn’t and that bears watching.