Power Up Wealth podcast – Episode 113 – Will Housing Slow the Economy?
Jordan Hadfield 0:00
Everyone is looking at the housing market, including the federal government. As housing momentum fades, the pressure on policymakers rise. I’m Jordan Hadfield, Vice President of Wealth Management at Smedley Financial, and I’m excited to talk to our portfolio manager, James Derrick, about what this shift could mean for buyers, sellers, and the broader economy.
Shane Thomas 0:22
Welcome to the SFS Power Up Wealth podcast, where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
Jordan Hadfield 0:38
James, thank you for joining us today.
James Derrick 0:40
Happy to be here.
Jordan Hadfield 0:40
James is the President of Smedley Financial and Chief Investment Strategist. He is a Chartered Financial Analyst chart holder and holds the Behavioral Financial Advisor designation. James, in your article, “Housing Momentum Fades, Policy Pressures Rise,” you outline home value growth. What do you see happening here?
James Derrick 0:56
Well, home sales are down about 9% year over year, according to the latest data, and we all know how unaffordable housing is. It’s just struggling to keep going higher, it’s struggling under the weight of its own growth of the high prices and the unaffordable values.
Jordan Hadfield 1:14
Now, I know you don’t talk about this in your article, but it is a question I want to ask. Do you see 2008 happening again?
James Derrick 1:20
Well, I lived through 2008 both as a portfolio manager and as a homeowner, and it feels very different this time. It looks very different this time. One of the biggest differences that I could point out is that I see a lot more home equity, maybe not at the individual level, because there’s going to be various situations, but when we look at the national level, there’s a lot more home equity, and so I think that that’s much more of a cushion, and people are not going to be in trouble and forced to sell like they were back in 2007, 2008.
Jordan Hadfield 1:50
So the economy has cycles, we know this, recessions and growth periods, they happen, they’re a normal, natural, healthy part of an economic cycle, but you don’t see housing as being the center of any future downturn, at least in the near future. I understand that correctly?
James Derrick 2:04
Well, I think housing could be at the center of a downturn. I mean, that’s very possible, but I don’t think it would be like 2007, 2008 The home equity is one reason, another reason is that there were some changes made, so that lenders, the banks, when they package up the debt and they sell it off now, they keep a portion of it, and so they have skin in the game, and they’re much more interested in making sure that every loan is a good loan, and not that they’re perfect at it, but they’re going to be better at it than they were back then, and so I think that any slowdown in housing, while it could create a problem for the economy, because nothing is more important than housing to the economy, I mean it’s a big, big deal. Not only because of the construction, but the sales prices affect how consumers feel and how much money they’re willing to spend. Also, when you buy a home, you’re buying furniture and appliances, and so it stimulates the economy that way too. And so, the ripple effects of housing are massive in the economy, and so it could be at the center of a slowdown, but I don’t think it would play out like it did in 07,08.
Jordan Hadfield 3:03
So, you mentioned that home sales fell 9.3% nationally. What does that mean? Explain a little bit as to what you think that means for people in the housing market and for the broader economy.
James Derrick 3:14
Just means that consumers were not taking out loans, Americans were not buying the homes, so the homes are still for sale. There’s just fewer people willing to buy them.
Jordan Hadfield 3:22
So the main topic of your article is pressure that’s being put on policymakers due to the momentum in the housing market declining. What do you see happening there with policymakers?
James Derrick 3:32
Well, there are so many ideas out there, it’s just astounding. I mean, I’ve been amazed with the things that people have come up with to try to help the housing market. I mean, one of the first places to start is with supply, so housing is unaffordable, so why don’t we increase supply? And you see a lot of this going on, you, the politicians are talking about it. I even have heard radio commercials talking about trying to increase the supply of housing, that will help. The other side is the demand side, and they’ll try to tackle that as well. One of the, one of the ways that policymakers have looked at this is, well, what if we let people cash out their 401(k)s and put the money into housing? You know, they can buy a home with their retirement savings, and it’s another idea to try to increase demand, so that home prices don’t go down, so that the economy doesn’t go down, and so people, voters, don’t get upset because the economy is slowing down.
Jordan Hadfield 4:24
So as a retirement planning specialist, I see far too many Americans depend on their home equity to help supplement retirement income, and this is not a great financial plan. This feels like it’s the opposite. It feels like policymakers are considering at least allowing people to tap their retirement in order to get into a home. What’s the effect that would have on the broader economy?
James Derrick 4:50
Well, I think it would help the economy initially, because it would be helping the housing market, but in the end it just takes a housing market that is unaffordable and it keeps it unaffordable. I’m not sure that it really solves any problems. The other problem is, is if you’re pulling out of retirement accounts, you’re taking away from the opportunity for compounded interest, and so unless you are somehow going to use that home in retirement to fund your retirement, you’re really hurting yourself in the long term. And while we’re going down this rabbit hole, I’ll just say that one of the problems with taking your home to fund your retirement is, is that couples we’ve seen that do this, or individuals we see that do this, that sell their home. Well, chances are they are downsizing in retirement, oftentimes, but they’re downsizing to a newer home, and that newer home costs more, and so they’re not coming away with as much equity as you might think. They’re really just rolling it into a newer, more expensive small home.
Jordan Hadfield 5:40
Another thing that we’ve heard about often in the news recently is the idea of the 50-year mortgage. What’s your thought on the 50-year mortgage?
James Derrick 5:47
The 50-year mortgage is really interesting, because you think, like, wow, if I didn’t have to pay back this loan for 50 years, I mean, that would be incredible, because the payment would be so low, the monthly payment would be so low compared to a 15-year or a 30 year mortgage be amazing. The problem with this one is that there’s not really a market for it. So, who would buy a 50-year mortgage? You have to have investors who buy this. There’s not even a 50-year treasury bond out there by the US government, and so there’s not really behind the scenes the places that we don’t even think about; there’s not really a mechanism to make these loans and package them and resell them, which is an important consideration. And so I don’t think this one is going to happen anytime soon.
Jordan Hadfield 6:32
Another thing we’ve heard a lot is the federal government stepping into mortgage-backed securities. First, tell me, what is a mortgage-backed security?
James Derrick 6:40
A mortgage-backed security is exactly what it sounds like. This is an investment in mortgages. They’re packaged up and they’re sold off to investors, and the government may get involved here in order to decrease the spread. Okay, so I don’t want to get too into the weeds here. I think this is an idea that we can all understand, and that is that you have the interest rate that let’s call it a risk-free interest rate, you know, and this might be an interest rate that you receive from buying a government bond, and that’s considered mostly safe, but if you’re going to buy a mortgage-backed security, you might expect an interest rate that’s higher than what the US government pays. Two different rates because the risk level is different. The difference between the two is the spread, and if the government jumps in to buy more mortgage-backed securities, they might tighten that spread up, bringing down the interest rate, and this actually worked. Even the suggestion by the President that we would buy some securities brought down the interest rate spread. It brought down the mortgage rates immediately, like within 24 hours the rate had changed and improved, and lower rate is actually a real win-win. I mean, when we talk about all the different ideas and ways to help the housing market, it’s really important to remember that about two thirds of American adults own a house already. They don’t want to see prices come down, most of them.
Jordan Hadfield 7:59
Right.
James Derrick 8:00
So that’s the majority. Making housing affordable is an important consideration for the overall economy and for the rising generations, but two thirds of Americans don’t directly benefit from that. Lowering interest rates actually helps everyone involved, both the buyers and the sellers, and so it can be a win-win. And so tightening up that spread also helps.
Jordan Hadfield 8:21
So, if the federal government were to get into mortgage-backed securities, is that something that you would be happy about?
James Derrick 8:27
Well, they’re actually already involved. So this is the companies that listeners have heard – Fannie Mae, Freddie Mac – they are quasi-government run. They’re already involved, and so the suggestion is just, you know, should they get more involved in bringing it down, and so I think it’s actually a very realistic solution that’s going to have a small impact, but probably a good impact overall.
Jordan Hadfield 8:53
Another thing I keep hearing about is a proposal to stop large investment firms from buying single-family homes.
James Derrick 9:00
Yeah, now there was an executive order on this, and so, whether it has teeth and is actually implemented, I’m not sure. We’re gonna have to watch it, but the idea is, is that if you can keep investors from buying up all the new housing, maybe you can keep housing prices from rising too fast, you know, save some of those homes for other Americans who need them to actually live in, not just to rent.
Jordan Hadfield 9:22
So, is this something that you think is a good idea?
James Derrick 9:25
Well, it’s complicated.
Jordan Hadfield 9:26
Yeah.
James Derrick 9:27
I see why we’re considering it, and I think only time will tell whether we actually do it, and whether it turns out to be a good thing or a bad thing.
Jordan Hadfield 9:36
The last thing I want to ask you, James, is lower rates, lower mortgage rates. Do you see rates coming down? This is the question on everybody’s mind. Are rates going to come down?
James Derrick 9:45
Well, it depends on the economy. If the economy stays strong, then I think interest rates are going to stay high. These are not rates set by the Federal Reserve or rates set by the President of the United States. The rates that go into the mortgages are. Only indirectly affected by those things, the rate that we get on mortgages will be very much determined by the economy overall, you know, and the inflation level. So, what we would need is inflation to come down, and if it comes down and people think that it’s going to stay low, then that will help a lot this year with interest rates. There’s a couple other ideas, if I can just throw them out there real quickly, that also help on interest rates. There’s this idea of boosting people’s credit scores, you know, maybe we could boost people’s credit scores, and this would help a little bit, you know. How would they do that? Well, maybe they would take student loans out. Maybe they would count towards your credit score the paying of utility bills. So these are ideas that companies have been playing around with, you know, like how much would this help, and whether this is a good idea or not. I think it’s a simple idea to implement, but it’s going to depend on a case by case basis whether it’s a good idea. Are you boosting the right people’s credit scores? Another idea is the portable mortgage.
Jordan Hadfield 10:58
Now this one’s interesting. I find the portable mortgage to be very interesting.
James Derrick 11:01
Let’s assume, hypothetically, I have a 3% mortgage on my home, and I want to sell it. Can I have the buyer of my home take over my loan, it’s the same collateral?
Jordan Hadfield 11:12
And keep that same 3% rate?
James Derrick 11:13
And keep the same 3% rate, or could I take my mortgage at 3% and buy a different home and just change the collateral that’s underlying? These are ideas that are being floated. I think that it sounds like a real win-win, but who knows if legally it could actually happen.
Jordan Hadfield 11:32
I think it sounds like a win for the consumer, and I think it sounds like a win for the market as a whole. I don’t know that the lenders would love the idea, they may push back pretty hard on on the portable mortgage.
James Derrick 11:44
Yes, I think you’re right. How does it benefit the lender?
Jordan Hadfield 11:48
As long as, as long as the mortgage rates are higher than than the current rate, you know they’re going to want someone to refinance or to take out a new mortgage at current rates.
James Derrick 11:55
Yeah, and who’s paying the attorneys to figure out all the legality in this? It’ll be the lenders who don’t benefit, so I’ll be really surprised, but apparently there are some mortgages out there, maybe less than 1% of all mortgages that are portable already. We just didn’t know it. It’s possible it could happen, but I think it would be a long, long process. It might take years before something like this becomes mainstream.
Jordan Hadfield 12:19
So, James, you’ve covered a lot of ideas in your article here. What happens next?
James Derrick 12:23
Well, I think most of these ideas are not going to happen as we’ve laid out the reasons why, and the housing market is going to slow down. I mean, it already has slowed down. I mean, when you look at the areas where they built a huge amount of supply, some areas in Florida and Texas, the rate of growth has not only slowed, prices are actually coming down, and I think this is going to continue, and I think it will spread. So, I fully, fully expect housing prices to drop, not 2007 level drops or 2008 but I think this is going to slow down, and I think it’s could slow the entire economy. We’ll just have to watch and see, and what impact does this have on investors, which is my job. We’ll see. We don’t know, but there’s very much a potential for a slowdown in housing.
Jordan Hadfield 13:08
James, this has been very interesting. Thank you so much for your time.
James Derrick 13:11
Yeah, thank you.
Shane Thomas 13:11
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn. The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Osaic Wealth, Inc., member FINRA/SIPC. Investment advisory services offered through Smedley Financial Services, Inc.® Osaic Wealth is separately owned, and other entities and/or marketing names, products, or services referenced here are independent of Osaic Wealth.
