I hear it is a great time to buy stocks; I also hear we are heading for a crash, and you should sell stocks, we also are headed for a recession, and the economy is going to sink, and rates are heading back to the level of the 1980s, what to think about all the noise? Well, let’s break it down together.
First, where are we now? With extremely low employment, the economy is doing fine except for the inflation situation, the consumer is in good shape and continues to spend at a lower rate than several months ago, but they are still going out, taking vacations, and buying stuff. Companies are still making money, perhaps less than last year, but have you heard of any government bailouts needed for banks, insurance companies, or financial firms? Heck, even Fannie Mae and Freddie Mac needed a lifeline during the last recession. Corporate America is in good shape, even if its stock price is low. Our last recession was bad, but we are nowhere near that situation. Today, the economy is at a different starting point than any other recession, which should help us to avoid a long-term recession.
We have inflation; the whole world has inflation, but I think we are in better shape in the USA than the rest. The government has stopped all the stimulus it produced during the pandemic; due to that alone, we had to take a step backward. The war did not help with gas and food costs. The Federal Reserve Chairman and the Treasury Secretary both have admitted they missed on inflation, but that does not mean they cannot deal with it going forward, and they are. Inflation over the last few months has been somewhat stable; inflation went up relatively quickly in the first four months of the year. I think the interest rate increases will slow consumer spending and cooperate spending, and inflation should start to come down by the end of the year, fingers crossed.
We will go into recession, but it does not need to be a long-drawn-out situation, and I do not think it will be long and drawn out because the economy is in a much stronger position than it has been in past recessions. Companies will stop hiring or potentially lay some people off, and unemployment will go up, but we are at such a low number today that it should not have a massive impact on the economy. Corporations will spend more on interest and employment costs, reducing their profits and, thus, reducing the stock price. The stock market is forward-thinking, around six months forward; what we see in the stock market today reflects corporate earnings and a recession down the road. The stock market typically goes down in a recession. Are we at the bottom? IDK, but I would not be selling at this point. The markets do come back and go higher than before the sell-off. The talk is if we have a soft landing or rough landing, I am going with a bumpy landing, we are going to be in this choppy situation for the next 12, and we will feel the bumps, but I do not think it will be as rough as some people think.
Mortgage rates are higher, almost twice as high as at the beginning of the year. This is because the Fed considerably reduced its buying of mortgage-back securities at the beginning of the year. They came up with another reduction plan that started in June. They increased the demand at the beginning of the pandemic by buying a boatload of MBS, bringing rates down with increased demand. Now, they have stopped buying, and the lack of demand has caused rates to go up. I hope they are done adjusting their balance sheets, but I do not have a direct line to Jerome Powell to confirm. The Fed does not like to surprise markets, so for now, I think they are done removing the demand for MBS and hope rates will settle in this 6% for outstanding credit and low LTV loans to 6.5% for ok credit and lower down payment loans. The media reports rates all over the board; the 5.5% average rate I sometimes see reported is with points; they do not tell you that you must pay points; you can have any rate you want, depending on what you are willing to pay for that rate.
Housing – can we get over the bubble talk that home prices are coming down? They may be in some markets, but not ours.
I heard last week from someone who thought home prices would be coming down because there would be so many foreclosures due to higher rates. However, current homeowners’ rates will only go up if they have an ARM. In the last ten years, I bet I have only done a handful of ARM loans; Ellie Mae says only 4% of mortgages are ARMs, meaning 96% of mortgages are fixed, and the payment is not changing due to rising rates.
I read something the other day about home equity, only 2% of all homeowners with mortgages have negative equity, and most homeowners now have over 20% equity in their homes. The average credit score of all homeowners with a mortgage was around 730, which is excellent credit. The last recession had so many foreclosures that the court system was backed up for years trying to get to all of them. Today we are at an extremely low delinquency rate for mortgages, and the homeowner is at an all-time high for home equity. Inventory that is not going to increase due to potential future foreclosures.
27% of all homebuyers last year were first-time homebuyers. If you are not familiar with the new down payment assistance program, Hometown Heroes, give me a call, and I can give you the details.