Rising mortgage rates and inflation dampen the housing market

If you look back through history, even in biblical times, there were two main ways people accumulated wealth: By acquiring precious metals or real estate. While the basket of precious metal wealth has evolved, ownership, as a store of wealth, has remained largely the same.

In modern times, owning property – for example, a house – has become an ambitious goal for most Americans. So much so that owning a home is now an integral part of the classic American dream.

From rural farms to urban condominiums, Americans for generations have parked some or nearly all of their wealth in their homes.

Given the emotional significance of the American dream, the housing market receives considerable media attention. Having covered the industry for decades, I’ve had a front-row seat through several business cycles. From the savings and loan crisis of the 1980s to the global financial crisis of 2008, real estate – and housing in particular – has had its ups and downs.

With this historical perspective in mind and today’s tough economic climate, I wonder (often on live TV) if we’re headed for another crash. I say no. As a student of history, I compare where we are today to past boom and bust cycles that I have witnessed. If I’ve learned anything about history, it’s that it repeats itself. So what better than history to find answers about the future?

Stagflation period of the 1970s and 1980s

The current economic climate, for those of us old enough to remember, is eerily reminiscent of the environment in the 70s and early 80s — soaring gas prices, record inflation levels and rising interest rates. The big difference between then and now, however, is unemployment. For a large part of the AdministrationJimmy Carterthe unemployment rate was slightly below 8%, while todayit is below 4%.

To combat runaway inflation at the time, former Federal Reserve Chairman Paul Volcker aggressively raised the federal funds rate, which sharp to a high of 20% in June 1981. The Fed’s hawkish actions were designed to fight inflation by essentially putting the US economy into a self-induced coma. You would think that a sluggish economy coupled with high interest rates (and mortgage rates) would cool the housing market. As housing transition activity has slowed, surprisingly, median house price increased significantly from $38,100 in the first quarter of 1975 to $78,200 in the first quarter of 1984. Inflation played a role in this as material costs soared, however, the economy supply and demand for homes has been the main driver of rising prices. With population growth of the baby boom, there was a growing demand for homes at a time when inflation was making them more expensive to build.

Real estate boom and financial crisis

When analyzing the housing market today, one cannot help but look in the rear view mirror at the most recent boom and bust cycle of the past two decades. I should point out that not all rapid price increases are alike. Many factors are contributing to rising home prices. Some are core concepts from Econ 101, like high demand versus low supply.

However, in 2008 the housing market exploded due to an external factor: the unconsidered availability of credit. Mortgage underwriting standards had deteriorated to the point that anyone could get a loan and buy a house. This “free money” artificially stimulated demand, and higher prices followed. It should be noted that during this period, the stock of existing dwellings amounted to more than 14 months of supply, while today it amounts to a derisory three months.

And now?

Mortgage rates have almost doubled Last year. Inflation is wreaking havoc on the economy, and by some measures we are already in a recession. Given the circumstances, some may think: Must be a bad omen for housing. While that’s a seemingly logical thought, it’s a conclusion I, for one, don’t jump to.

Let’s imagine for a moment that we are freshmen in college. In between playing Pong – either the video game of my day or today’s red single-player cup variety – let’s pretend we’re studying history and economics.

As mentioned above, the housing climate is very much like it was in the 70s and early 80s – and remember that around this time house prices went up (historic). Why? Basic supply and demand (economics).

Currently, there is an accumulation deficit between household formation and housing starts for 5.8 million housing units. In other words, the demand for housing greatly exceeds the supply. Additionally, supply constraints are expected to persist as inflation has made construction more difficult for builders.

If we look at history and consider similar economic conditions of 40 years ago, it’s fair to say that house prices could still go up. While the pace of price gains will likely slow somewhat as the economy slows, I personally don’t see a crash looming – more likely we’ll experience the elusive soft landing.

Mitch Roschelle is the founding partner of Macro Trends Advisors LLC, a real estate investment and macro market strategy firm. Additionally, Mitch is an adjunct faculty member at the University of San Diego’s Burnham-Moores Center for Real Estate.

The opinions expressed in this article are those of the author and do not necessarily represent those of The Daily Wire.