Hey There Income Hunter,

I have been renting for a year now since moving to Tampa and am ready to buy a house … but this rise in rates has done a job on housing affordability. 

Homeowners have had an easy time keeping payments low for decades via the adjustable rate mortgage (ARM) …

However, the spike in rates are going to hit ARMs and credit card rate resets, which is going to take a serious bite out of disposable income.

Meanwhile, Powell and Bullard continue to talk about how high inflation is, which is pushing rates ever higher. 

Today, we’ll take a look at its impact on consumers.

Supply of Existing Home Sales 

Existing supply of homes has been decreasing and this has helped home prices rise for the past couple of months ….

But on the flip side, new home supply has picked up, balancing out the supply/demand impact on prices …

Housing Affordability 

In yesterday’s newsletter, I touched on the insane trend of higher fixed rates, with 30-year fixed rates above 4.2% after reaching 2.75% … 

The 30-year fixed rate is back at mid-2019 levels and is up more than 30% YTD.  Financial conditions are tightening for the average consumer and rather quickly.  

Monday’s mortgage applications data is showing the impact of affordability with the total market index down -8.1% week-over-week and the refi index falling off a cliff -14.4% week-over-week.

The main problem is people live on cash flow now with little savings. 

For the housing consumer, ARM payments react to a percentage increase in rates, so if rates move 30% then the interest component moves 30% higher. 

The payments work into consumer finances as a set percentage of income. If the interest component increases 50%, it changes the payment significantly. 

The median house payment has gone from 24% to now somewhere around 35%+. For reference 2006 that series got to ~40% heading into the housing crisis so this must be watched for a sign of rising mortgage defaults.

5-year/1-year Adjustable Mortgage Rates 

Bring It Home

Housing and stock prices have a huge impact on Americans’ wealth effect. Consumers tend to spend more when widely held assets like real estate and stocks are rising. 

The notion that the wealth effect spurs personal consumption makes sense because paper profits make consumers feel wealthier so they spend more. 

So far, Street estimates say the wealth effect has taken off around 0.20-0.50% from consumer spending. 

This weakness in consumer spending growth will weigh on economic growth (GDP). A 1% to 2% drop in consumer spending would take around 0.6% to 1.2% of GDP.

Jerome Powell can say anything he wants … I would rather let the numbers do the talking.

The stock market may chop around a bit, but once the growth numbers show the declines in spending and earnings, we will revisit the lows …

Live and Trade With Passion My Friend,

Griff