The Fed: “Welcome to the Housing Recession”

by Andrew Zatlin December 16, 2022 11:00 am ET

The Fed’s latest rate hike has confused many of the so-called “experts.”

But it hasn’t confused me.

To me, it sends a clear message:

The recession in housing is about to start.

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

The Fed: “Welcome to the Housing Recession”

The stock market recently created its Christmas wish-list:

It wanted smaller rate hikes from the Fed…

It wanted a sign that hikes would end sometime soon…

And starting next year, it wanted to see rate cuts.

But in the end, the Fed decided to play the role of the Grinch:

Sure, it gave a smaller rate hike, at just half a percentage point.

But when it came time to grant the other two wishes, it said no way.

To me, the Fed is sending a clear message to all investors.

Let me explain what it’s saying — and more importantly, how to take advantage of it.

Where the Fed Stands

Everyone’s still trying to digest the latest Fed news.

But to me, it’s clear as day what the Fed is saying. And it’s not what the “experts” are thinking.

Basically, the Fed believes we’ll need higher interest rates, for longer, because inflation’s still running rampant. And higher rates for longer will slow the economy.

The Fed is showing us that it’s willing to inflict pain on us. In particular, it’s willing to tolerate:

A rise in unemployment.
And a weakened housing sector.

Sound crazy? Don’t just take my word for it…

From the Horse’s Mouth

Here’s what Fed Chairman Jerome Powell said earlier this week:

“We understand that our actions affect communities, families, and businesses.”

In other words, our actions are going to mess you up.

Powell also noted that the Fed is “seeing the effects on demand in the most interest-rate sensitive sectors of the economy.”

And what’s the most sensitive part of the U.S. economy of all? Housing!

Remember, housing represents a whopping twenty percent of our economy.

And now the Fed wants this sector to slide.

In other words, welcome to the upcoming housing recession!

So now let’s talk about what’s been happening recently, and what’s in store…

A Lot Changes in a Year

Last year, your payment on a thirty-year mortgage for $500,000 would be about $2,250.

This year? That same mortgage will run you $3,500 a month.

That’s a jump of more than fifty percent.

Let’s say that, after taxes, you’d need an additional $1,000 a month to cover the higher mortgage. That’s an extra $12,000 a year.

If your annual salary is $100,000, that means you’d need a twelve-percent raise at work just to cover the extra cost. I don’t know about you, but I don’t hear about a lot of twelve-percent raises these days.

Where the Experts Get it Wrong

This is another place where the “experts” get it wrong. They look backwards, and they see that the impact of soaring mortgage rates has been minimal. (There’s another reason they’re always mistaken, which I’ll get to in a moment.)

You see, back in July, when rates were first zipping up, experts thought there’d be little to no impact. Even today, they see the impact as minimal — a tiny drop in housing prices, perhaps.

For example, Morgan Stanley believes the worst-case scenario will be a five-percent drop in housing prices. (Tell that to people in San Francisco, an area that’s experienced a double-digit drop in just a few months.)

As for the second reason…

Timing is Everything

Time and again, experts forget that timing is everything. They often ignore the mechanics of what’s happening and misread the situation.

You see, there’s a lag effect. In this case, rate hikes started after the housing-market boom ended.

Rate hikes started in March, at 0.25 percent. Then in May, they went up half a percentage point. But mortgage rates didn’t really move up much.

Fast-forward to today and mortgage rates are at seven percent, and they’re likely to hit seven-and-a-half percent by the time we get to March 2023.

Soon, a rise in unemployment (the Fed’s first concession) will create even more problems for housing affordability, leaving even fewer buyers in the market.

And keep in mind…

Homeowners Will Take a Hit, Too

If you own a home, and you want to sell, this situation is problematic for you, too…

Sure, you might find a buyer willing to pay a good price. But then you’ll have to pay up to move somewhere else!

Borrowing money from your home’s equity will be more expensive, too. And it’s possible the value of your home will have fallen, leaving you with less equity.

Folks, a hit to the housing sector is also the kiss of death for other industries, including durable goods.

For example, I recently got a letter from my local Heating, Ventilation, and Air Conditioning (HVAC) company. It’s offering financing now. People aren’t rushing out to spend $15,000 on a new air conditioning system. Business is slowing, and homeowners don’t have enough equity to pull out and invest in large purchases like this.

Bottom line, the Fed’s moves will usher in a housing recession.

And while the “experts” may not see it coming, I sure do. And now you do, too.

Are you a Moneyball “Pro” subscriber? If so, I’ll share an idea on how to profit from all this madness. If not, what are you waiting for?

In the meantime, we’re in it to win it. Zatlin out.