From Peter Reagan at Birch Gold Group
Have you ever watched a video of someone who takes a perfectly normal rose, flash-freezes it in liquid nitrogen and then hits it with a hammer? Here’s what happens:
Back in 2007, the housing market froze up. The combination of a speculative bubble in home prices nationwide collided with a 5.25% Effective Federal Funds Rate. The housing market shattered, throwing the world into the second-worst financial crisis of the 20th century.
History is repeating itself before our eyes. Today, the housing market is definitely in the freezer, and it sure looks like it’s on the verge of shattering again.
Here are the warning signs.
Mortgage applications rejected at a historic rate
What do we mean when we say a market is “frozen” exactly? It’s a useful metaphor. We use the word “liquidity” to describe how easy it is to buy or sell something.
When a market is frozen, its liquidity isn’t so liquid anymore. Maybe it’s turned to thick slush, so transactions can still happen but are just slower and more difficult than before. When the liquidity vanishes completely, we’d describe the market as frozen solid.
Just like the rose, in the moment before the hammer strikes.
Now, with homes as with any large purchase, credit is an absolute necessity. Only the top 2-3% wealthiest households in the U.S. likely have the cash on-hand to purchase a home outright.
Credit is an absolute necessity for working, liquid markets.
Thus it’s alarming that mortgage applications are being denied at a historic rate:
Last year, lenders denied loan applications due to “insufficient income” more often than any other point since records began in 2018, according to a new report from the Consumer Financial Protection Bureau.
Overall, 9.1% of home purchase applications among all applicants were denied in 2022, the consumer watchdog agency reported, higher than 8.3% in 2021 but a marginal decrease from 9.3% in 2020. Refinance applications were more frequently rejected, at a rate of 24.7% in 2022 — up sharply from 14.2% in 2021.
“I think people are feeling squeezed on all sides,” Bankrate senior industry analyst Ted Rossman said. (Well, everybody except Paul Krugman.)
You don’t have to be a senior industry analyst to understand that families really are being squeezed between higher prices and flat wages! This isn’t rocket science.
Even so, some people will try to purchase a home they can’t afford, gambling on its future value.
The fact that mortgages are being denied due to “insufficient income” is probably a good thing! Hopefully it keeps people out of the kinds of trouble we saw during the mid-2000s housing bubble.
On the other hand, it’s a sign that the liquid credit the housing market relies on is on the verge of freezing up.
Let’s explore why…
Higher prices and higher mortgage rates vs. stagnant wages
A mortgage is considered “affordable” if the principal and interest payment is 25% or less of a family’s income.
As you might expect, when prices and financing costs rise without a corresponding increase in income, homes are increasingly out of reach. Today, the home affordability index sits at a historically low level:
Charlie Bilello explains in just a few words:
The median American household would need to spend 43.8% of their income to afford the median priced home. That’s the highest percentage in history, worse than the peak of the last housing bubble.
Part of the problem is the astronomical surge in home prices – which rose some 40% over the last three years.
It’s not just home prices that are problematic, though – mortgage rates have more than doubled since the beginning of the pandemic panic.
With mortgage rates so high, home buyers inevitably have less purchasing power. Those of us who are currently locked into a sub-3% mortgage definitely don’t want to refinance given today’s much higher rates.
So the overall housing market is definitely slowing down, going from liquid to slushy, nearly frozen solid.
As a point of comparison, pending home sales today have plummeted to the same levels as the worst of the pandemic panic. Back when everyone thought the world was ending and global economies were in turmoil.
We saw a similar pattern leading up to the Great Financial Crisis back in the mid-2000s, hence my concern.
Unfortunately, renters aren’t any better off these days either:
For the first time in decades, the rent-to-income ratio has reached 40% at the height of U.S. inflation, marking one of the least-affordable rental markets ever.
This is not a good place to be! Who’s responsible for the fact that the average American family can’t afford to own or rent a home?
This affordability crisis is sponsored by your friends at the Federal Reserve
By expanding the money supply a staggering 28.8% between February 2020 and March 2022, Powell’s Fed created the massive surge of inflation we’re still dealing with now.
Eventually, they tried to solve that problem by raising interest rates by 5% over the last 18 months.
Now, American families are struggling to afford necessities and struggling to find credit at the same time! When they can find credit, they’re paying much more in financing, too.
Today’s disaster is a perfectly obvious consequence of the Fed’s panicked response to the covid panic.
So here we are. Prices on necessities including food, gas, and housing surged at a historic pace (and are accelerating again). Mortgage rates are sitting at 25-year highs, along with virtually every other type of consumer credit.
All in all, your dollar’s purchasing power has lost a staggering 16.4% since the beginning of the pandemic panic in 2020. Don’t forget – higher prices on necessities don’t magically go away when inflation eventually returns to normal.
Unless a market freezes up completely. That’s when prices go into free-fall.
So those are the options we face.
Times like these make planning for the future incredibly challenging! Ask yourself whether your long-term savings are robust enough to withstand a shattered housing market, or permanently higher prices… Even both.
Shatterproof your savings
There are basically only two ways this developing crisis could play out.
Either the housing market will freeze up completely (like it did in 2007), prices will plunge and another wave of defaults will sweep the nation. The Fed will ride to the rescue with yet another multi-trillion-dollar money-printing spree. Like they always do. Net result? Another spike of inflation that erodes the value of our savings.
Or the slushy but not-quite-frozen housing market will slowly adjust to an era of tighter credit and lower incomes. Prices will fall without plummeting until they reach stability. That could take years – and, the whole time, smoldering inflation will continue to destroy our purchasing power. More slowly, granted, but nevertheless permanently.
For most American families, home equity is their single largest asset. That means, whether we see another crisis, whether it’s rapid or gradual, their wealth will suffer. That’s one big reason it’s smart to consider diversifying your retirement savings with another tangible asset – physical precious metals.
Gold and silver are assets whose intrinsic value has stood the test of time for centuries, regardless of their price. Both are widely recognized as store of value assets. True, you can’t live in them. You can’t eat them. Other than housing, though, physical precious metals are the only investible commodity you can easily own. Their value isn’t based on a government’s promise or the accuracy of a balance sheet. That’s one reason their price tends to surge during times of crisis.
Learn more about the benefits of diversifying with physical gold here.