My 6-year-old son has picked up an interesting hobby — following the weather.
In his kindergarten class he became famous as their weatherman, informing them every day of the extended forecast. To be honest, I think he does a better job than the guys on T.V.
The other day he posed a question about a weather forecast: What is the difference between partly cloudy and mostly sunny?
Being a life-lesson type of moment, I explained to my son that it’s merely different perceptions of the same weather forecast. Partly cloudy is a bit gloomier while mostly sunny is more upbeat … but they essentially mean the same thing.
I’m sure for a 6-year-old this is hard to grasp, and it doesn’t get easier as we get older.
The forecasts flowing from the most recent housing stats can puzzle anyone, but this perception has a reality that could unravel the sector…
Mainstream media has concluded that recent housing starts show that demand is strong, and housing is on sound footing — this is a dangerously wrong perception.
This forecast for mostly sunny skies glosses over actual results depicting something much gloomier — a storm is already brewing.
Rise of the Renter
Even though housing starts plummeted 11% in May, the media is focused on the only glimpse of positive news in the housing segment — building permits jumped 12%. They completely brush off the 11% slump in actual housing starts and only briefly mention that the 12% surge in building permits is for apartment buildings — not single-family homes, which are the pulse of the U.S. economy.
The problem with having a positive outlook based on permits, starts or anything related to multi-family homes is that those actually increase in times of a weak economic environment, much like we are seeing today.
The recovery has been uneven for most Americans. While the unemployment rate has steadily dropped, so has the quality of jobs that have been created, leaving too many workers without the income needed to buy new homes.
Student loan debt is a big contributor to this as well. College students graduating today are the most indebted in history, causing them to push back starting families and buying homes.
This helps explain why rent prices are soaring — up 15% and 11% in places such as San Francisco and Denver.
Even though mainstream media outlets continue to give us a rosy forecast, mostly sunny with a chance of a cloud, we are actually heading into a darker time, cloudy with a chance for a storm.
These are the facts that show you the underlying health of the housing market and the U.S. economy — an economy that is clearly not prepared for a normalized rate environment.
Balanced on the Edge
Normalized rates would put an already weak housing market into a crisis — one that would be worse than the housing crisis we experienced in 2008.
That’s because higher interest rates make purchasing a home less affordable and less attractive to current homeowners.
If a current homeowner has an interest rate of 3.5% locked in today, why trade that loan in for an interest rate north of 5%, which would cost them hundreds of dollars each month? Instead, would-be buyers delay potential home purchases, leading to even higher rent prices due to rising demand.
But, without new demand for housing, the housing market would crumble. Heavily-leveraged builders and developers would go bankrupt, housing prices would plummet and millions would be forced to foreclose on their homes once again. Once again, the U.S. economy would be put into a tailspin.
While the media continues to forecast sunny skies, make sure you are paying attention to the actual data on the U.S. economy that is rolling out — we are in the midst of a storm, and interest rates may be the very thread that is holding it together.
Editor, Pure Income