Love, Money + Real Estate #014
Recession scares: Inflation, interest rates, housing sales, stock market and more
Greetings. Is it May already?
Is a recession looming?
For those of us who have lived through several recessions (2001, 2008-09), the thought of another is terrifying. Still, the economic clouds seem to be darkening, indicating stormy time ahead. In fact, Q1 GDP came in at -1.4%, surprising many who thought we’d be able to hold off on a contraction until 2023.
Sometimes, weather forecasters will predict a spring storm, only for it to dissipate before it causes any issues. And, sometimes a tornado can whip up out of nowhere.
Clearly, we’re facing some headwinds:
Inflation. Now running at a 40-year high, everyone is feeling the pinch, whether you’re paying more for groceries, gas (I just paid $6/gallon in San Diego a couple of weeks ago), rent, clothes, restaurants, and a host of other items. The biggest problem with inflation is the fear factor. Not knowing how long it will last, and how painfully high prices will go, is even worse than comparing food prices at Costco week to week. What can you do? Buy I-Bonds. They’re now paying 9.62%.
Interest rates. Mortgage interest rates doubled from last year, and as of this publication date stand at 5.41%. That, combined with home prices that are climbing out of sight, means it’ll cost you around 40% more to buy a house this year compared with last year. If you already own a home, or have paid off your loan, you’re in good shape unless, of course, you have to sell and buy something new. Interest rates on credit cards, auto loans, and other loans are rising, too, which is causing pain for anyone who needs a loan or carries debt. On the plus side, if you already own I-bonds or have money in a savings account, you’re in a (slightly) happier place.
Housing market. Higher mortgage rates are already slowing the market, according to the latest numbers from Redfin, Realtor.com, and other housing industry participants. Redfin noted that homebuyer competition dropped for the first time in six months, but still found 65% of home offers were multiple bid situations. Realtor.com agreed that there were signs of “lessening competition as cost hurdles grow higher.” Still, home prices rose a smoking 19.8% year-over year in February, 2022, according to the latest S&P CoreLogic Case-Shiller home price index, up from 19.1% the prior month.
Stock market. There’s a whole generation of investors who, aside from the quick dip at the beginning of the pandemic, have been conditioned to believe that the stock market only goes in one direction: up! Sadly, this turns out not to be the case, and some market strategists predict that prices will drop into bear territory (a bear market is defined as a “20% drop in equity prices”) before all is said and done.
The Dow is down 9.02% in 2022
The S&P 500 is down 12.82% in 2022
NASDAQ is down 19.87% in 2022 (which is pretty darned close to a bear market)
The Russell 2000 is down 16.14% in 2022.
If you don’t need to cash in your chips anytime soon, you’ll be fine. If you’re retiring soon, these numbers seem downright scary. Also scary? What Warren Buffett had to say about investing in today’s stock market:
“You can have monkeys throwing darts at the page, and, you know, take away the management fees and everything, I’ll bet on the monkeys [over the advisors],” he said.
And, I’ll leave you with one more Buffett-ism from his recent stockholders’ annual meeting:
Buffett said Berkshire was able to take advantage of the fact that Wall Street is largely run like a “gambling parlor” with many people speculating wildly on stocks.
“Occasionally, Berkshire gets a chance to do something, and it’s not because we’re smart. It’s because we’re sane.” Buffett said.
And the answer is…
I ran this poll on twitter the other day. I was surprised that the number of people who think we’re already in a recession is exactly the same as those who don’t think we are. I’m sure someone can calculate those odds.
What do you think? Are we in a recession? Leave your vote (and any reasoning) in the comments section.
Where are you buying?
According to Realtor.com’s latest Cross-Market Demand Report, more people are looking for homes out of state. More than 40% of Realtor.com listing viewers are shopping for out-of-state homes. A mix of varied trends are driving demand to Sun Belt states, from affordability to remote work. What else is fueling these searches? Apparently the desire to return to normal life in downtown areas.
Is remodeling a leading indicator?
One thing’s for sure - a lot of homeowners are remodeling their digs instead of moving. Or, they’re remodeling after buying their new home.
According to the Joint Center for Housing Studies at Harvard University, remodeling is “red hot” and it’s going to stay that way through 2022, slowing down through 2023.
“Massive increases in house price appreciation and the resulting levels of tappable home equity will continue to support remodeling activity this year and into next,” says Carlos Martín, Project Director of the Remodeling Futures Program at the Center. “Many other market indicators including existing home sales, renovation permitting, and retail sales of building materials also continue to grow at high, albeit slowing, rates.”
The Leading Indicator of Remodeling Activity (LIRA) projects year-over-year increases in residential renovation and maintenance spending will peak at nearly 20% in Q3 2022, before dropping back to 15.1% in Q1 2023.
Remodeling Futures Program Abbe Will says homeowners will spend nearly $450 billion by Q1 2023. With demand that high, it’s no wonder there’s a huge backlog for everything from appliances to windows.
How much does it cost to own a home?
This week, I answered a question about how much it costs to own a home - and how to estimate those costs. The writer is a senior who has never owned a home, but is in the fortunate position of having a sister who plans to leave her a fully-paid off home.
Studies show that we often underestimate the true cost of homeownership, especially when it comes to maintaining a house. Industry experts will tell you to plan on spending at least 1% of the value of the home on maintenance annually. So, $5,000/year for a home worth $500,000.
The hard thing about averages? They’re just that. An older home may need a lot more maintenance, as might a new home that’s been sorely neglected. If you’re buying, hire an excellent professional home inspector, and then tag along for the actual inspection. Videotape your inspector walking you through the mechanicals. Trust me - you’ll learn a lot of invaluable information about how your new home works.
How much does your home cost to maintain vs. it’s actual value on today’s market?
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Don’t miss a single episode - your retirement depends on it.
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On a personal note…
I love flowers. I love having fresh-cut flowers on my kitchen counter, something my mother always had (and still does). My favorite thing to do on Mother’s Day is to plant my planters, window boxes, and organic keyhole garden. On a late-night trip to Costco this week, I found pretty good deals on some gorgeous flowers for the planters on our driveway. Although it’s been a chilly, wet Spring in Chicago (as opposed to last year, which was dry and hot), these colors were bright and cheery.
I’m not sure what your plans are for Mother’s Day, but I hope you’re as happy as I’ll be, with wet knees and dirt clinging to my gardening gloves.
Thanks for joining me this week.