Get Ready: The Fed Is Going After Housing

by Andrew Zatlin

The Fed’s recent actions have already crushed stocks, bonds, and cryptos.

But now they’re about to crush one of America’s biggest industries:

Housing.

Here’s what you need to know…

For a transcript of this video, see below. This transcript has been lightly edited for length and clarity.

Get Ready: The Fed Is Going After Housing

There are two reasons the Fed is obsessed with inflation:

First, inflation erodes spending power.

And second, inflation creates uncertainty. And uncertainty creates instability — in the markets, in the lives of consumers, and in the overall economy.

That’s why the Fed is hellbent on bringing inflation down.

And now, to achieve its goal, it’s going after one of America’s biggest industries…

Housing is the Biggest Component of Inflation

There are six main components that go into calculating inflation:

Food, Energy, Cars, Shelter, Medical, and Transportation.

But Shelter — or as we normal people call it, Housing — is by far the most influential.

Housing represents almost one-third of the inflation calculation. After all, we all have to live somewhere. And we spend a huge chunk of our paychecks on it, about 50%.

The inflation rate for most categories (like gas and cars) is trending down.

But housing inflation is remaining stubbornly high.

That’s what's keeping the Fed from reaching its 2% inflation target.

And that’s why it’s going after this industry.

The Problem and the Solution

Interestingly, the Fed’s the one that created this problem in the first place.

It’s been easy to buy a house for a few years because — thanks to the Fed — money was cheap to borrow. As a result, the housing market boomed, and home prices skyrocketed.

Now, to get inflation down, the Fed has to make housing less attractive. It has to make housing prices stay flat, or even start going down.

As you know, the Fed has already started raising interest rates. And those rate hikes are impacting mortgage rates. This can have a huge impact. For example:

Let’s say someone wants a $400,000 mortgage. Last year, that loan would have cost them about $1,800 a month. But today, that same loan will cost them $2,400 a month.

That’s $600 more per month — $7,200 more a year — to borrow the same amount of money, all because of a higher mortgage rate.

And that’s the situation right now

Imagine what it’ll look like next year when rates climb even higher.

A Soft Landing

By raising rates, the Fed is aiming to pop the housing bubble.

It hopes this will curb inflation and create a soft landing — i.e., less inflation without a recession.

A few things to keep in mind, though:

First, this impact won’t be felt overnight…

We’re in the middle of buying season, and many buyers have already locked in their mortgage rates. So we won’t see the true impact of this until next year.

Second, the reach of what’s called the “housing market” is wide…

People use their homes to borrow against. They use their home equity to make renovations (impacting the Home Builders and the Home Furnishing sector), to take vacations (impacting the Travel sector), and to make major purchases like cars.

So if the housing market cools, other huge industries could be negatively impacted, too.

Finally, if people can’t afford to buy, their other option is to rent.

So keep an eye on companies in the Home Rental sector — including one of my favorite investment picks, which I’m sharing with my “Pro” members.

In the meantime, Zatlin out. Talk to you soon.

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Andrew Zatlin
Andrew Zatlin
Moneyball Economics