The housing market is showing signs of freezing up, indicating a potential crisis similar to what occurred in 2007, according to Peter Reagan, an executive at the Birch Gold Group. He compares the housing market to a frozen rose being hit with a hammer, explaining that frozen markets lack liquidity, making transactions slower and more difficult. One worrying sign is the historic rate at which mortgage applications are being rejected. In 2022, lenders denied applications due to insufficient income more frequently than in any other year since records began in 2018. This suggests that the housing market’s reliance on credit is on the verge of freezing up.
Reagan also highlights the issue of higher prices and mortgage rates compared to stagnant wages. He explains that a mortgage is considered affordable if it accounts for 25% or less of a family’s income. However, the home affordability index is currently at a historically low level, with the median American household needing to spend 43.8% of their income to afford the median priced home. This is worse than during the peak of the last housing bubble. Rising home prices, which have increased by 40% over the past three years, and doubling mortgage rates since the pandemic began, means that home buyers have less purchasing power.
The overall housing market is slowing down, going from a liquid state to becoming slushy and potentially frozen solid. Pending home sales have reached levels comparable to the worst of the pandemic panic, indicating a similar pattern to the lead-up to the Great Financial Crisis in the mid-2000s. This is concerning for renters as well, as the rent-to-income ratio has reached 40% at the height of U.S. inflation, making it one of the least affordable rental markets ever.
Reagan places some of the responsibility for this affordability crisis on the Federal Reserve. He argues that their expansion of the money supply by 28.8% between February 2020 and March 2022 has led to significant inflation. In response, the Fed has raised interest rates by 5% over the past 18 months. As a result, American families are struggling to afford necessities and find credit, and when they can obtain credit, they are paying higher financing costs.
Reagan warns of the potential consequences of this crisis. He states that prices on necessities like food, gas, and housing have surged at a historic pace, and mortgage rates sit at 25-year highs, along with other forms of consumer credit. The purchasing power of the dollar has decreased by 16.4% since the beginning of the pandemic. Reagan contends that planning for the future in times like these is incredibly challenging and advises considering diversifying retirement savings with physical precious metals, such as gold and silver, which have intrinsic value and tend to surge in times of crisis.
In conclusion, Reagan suggests two potential outcomes for the housing market crisis: a complete freeze leading to a plunge in prices and another wave of defaults, followed by more money printing from the Fed and a spike in inflation, or a slow adjustment to tighter credit and lower incomes, resulting in falling prices without a drastic decline. Regardless, American families’ wealth, tied largely to home equity, will suffer. Reagan argues that diversifying retirement savings with physical precious metals is a smart move to protect against these potential risks.