On this episode of the Retire Once Show, Johnathan and Melissa discuss the current housing market. We have gotten a lot of questions from clients about whether or not the housing market will crash like it did in 2008. What is going on with the housing market 2022? With a recent CNBC article discussing the Case-Shiller Index recently showing some slowdown in the housing market, we discuss the current state of the 2022 housing market and the outlook moving forward. We also discuss how the actions of Jerome Powell and the Fed have impacted the mortgage market and how falling house prices might impact your retirement. We also go through a retirement planning exercise to see what happens to a retirement plan if the value of a house drops by 50%.
There are so many concerns about how the housing market will impact the economy and someone’s individual retirement plan. Our goal is to help alleviate those concerns through comprehensive retirement planning.
Today we're talking about the problems in the housing market and how that could impact your retirement. Stay tuned for this episode of The Retire One Show.
Hello and welcome to The Retire Once Show the show designed to help you get to retirement, but most importantly, stay retired. I'm your host, Jonathan Rankin. I'm the founder and CEO of Theor Wealth Management, and I'm joined as always by my lovely co-host. Hi, I'm Melissa Rankin. Thank you so much for joining us.
Boy, do we have a lot going on right now in the world. One of the things that we are talking about today is what's going on in the housing market, most specifically, how it affects retire. Yeah, we saw, I saw this, uh, article a couple weeks back, I think it was last week, and it was from cnbc and the title of the article was one of those, Grab your titles where it was Oh, the Gotchas.
It was, it was one of those like, it's gotta scare you type articles. It was Home Prices Cool. In July at the fastest rate in history of the s and p case sheller index. First of all, anything that cools in July, you have my attention. That's a very good point. Uh, but that I, I think a lot of people look at that and go, Okay, what's going on with housing?
You know, we're hearing a lot about it, and I think there's still so much leftover feelings from 2007, 2008 that people go, Oh boy, is housing gonna crash? You get that question quite a bit and a lot of those alarming, uh, headlines. They're, they're not fun to read. But really when you look under the hood and you go, Okay, what's actually going on?
And then you relate it to you, how does that impact you? So let's dig into that headline of what's going on in the housing market. So, but first, You're forgetting one main thing. Oh, that's right. First, what? What do we want people to do? We want you to subscribe. We want you to like us. We why you fall along.
That's right. Geez. We're gonna get to, He's very excited to talk about the housing market. Yeah. I am very excited to talk about the housing market. We will get to the case SHI index and what's going on there. But do us a favor, hit that subscribe button, follow us along on this retirement journey and. Okay, now we can jump right in.
Now that we got that part covered. So the cooling market. That's right. So the, uh, the s and p core Logic case s Chiller 20 City House Price Index. Okay. First of all, I just have to say that sounds like a net like documentary or something. I mean, I don't know if it's, cuz it has case in there, ORs chiller or something, but it sounds like, And next the case s chiller index.
So that index, it rose. 16.1% year over year, which is a lower rise than the 18.7% jump in the previous month. Yeah. So what's this? 16 is lower than 18. Yeah. So this is showing that the price of housing has gone up at a slower rate. Okay. And that is obviously lower than where it was at its peak in April of 21.2%.
So we're seeing the rise in housing prices go from scorching hot to kind of warm. At this point. So in their opinion, the slightly cool off in July, that's, that's what they're referring. So, Well, I mean, they said it cooled off at the fastest rate, so it's, you know, it's a big deal for her. And this is looking at the 20 city index.
So if you don't live in one of those 20 cities, how much does it really impact you? You know, if, uh, I, I don't really know. I think that's something you gotta take with a grain of salt and look at your individual. But they do look at, there is a national index in the national index. This is the composite of home prices for the nine US regions that is based on the US census.
So this one might actually, this one be worth, you know, looking into. So the national index is at 3 0 7 0.45 and that fell by 0.33%. It did come down. And just to put that in perspective, where has this thing been in the past January of 2000? This index was at a hundred. So if you look at it, if you bought a house, if your house was worth a hundred thousand dollars in January of 2000 and it followed along that national trend, it just, it fell right on that line.
It would be worth $307,450. Touching. So that's the way you wanna look at that, that index. And so, but why is this happening? I mean, what's, what's the deal? Well, what's going on with the Fed? The Fed is trying to crush demand everywhere they are. Their goal is to fight inflation. And housing was part of that inflation.
I mean, for the most part, housing shouldn't go up 20 or 30% per year like it has. And they are doing their best to slow down inflation. And to do that, they need to crush demand. So that brings us to, I mean, you just look. Look at the 30 year fixed mortgage rate that was at 7.54%. It started the year around three.
Now, that is a massive rise, and I know people who are watching this that bought a house back in the eighties were saying, Well, wait a minute. My first house, I had a 15% mortgage rate. Yeah, this is still a lot. This isn't like that. This is. It's still a lot and it's still a big rise, but also housing prices have gone up so much and now we're start, we are starting to see that cooled.
A lot of it is going back to that interest rate. I, you just look at this chart from Redfin, pending home sales also. You're welcome. More charts. More charts. That's right. Pending home sales is down 21% year over year and you see how this compares to 2020 and 2021. , you know, looking at the next chart, new listings, so people who are starting to want to sell their home, new listings are down 14% year over year.
And that trend is, is at a, I would say, a bigger drop than we've seen in previous years. And now the, I think the big one, the percent of listings that had a price drop. This is something, this one's crazy, as you could see back in 2020 and 2020. You list your house, there's gonna be a bidding war. And the next thing you know, it's off the market within a couple days and it's probably gonna go for over ask.
And you're gonna get multiple offers. I mean, that's the ideal seller scenario. That is the ideal seller scenario. I mean, that's why our realtor kept calling us saying, Do you wanna sell your home? No, we, we don't. We didn't wanna sell own. Especially not now. Not with those rates. No, not with rates right now.
But if you are looking for a uh, hundred and two year old, Home with charm. Uh, feel free to so much, so much character. So much character. Um, feel free to reach out. Uh, but 7.6% of listings had a price drop, so that's a lot. 7.6 I think is, I mean, you just look at the chart and you see, okay, it's looking back for the previous years, this is the highest, more than double almost of what we've seen in the past couple years.
But a lot of it was, I think, unrealistic seller expectations. You know, you think, Well, I could sell my home at whatever price I want. I list it, and if it's not off the market within a week or two, then you know you want to start moving that thing. So you start seeing those price drops a week or two. I, I mean, I thought it was like a month.
Well, prices were dropped. Prices or Helms were flying off the shelf, flying off a week or two. Get your home today. They are flying off the shelf. We have two left for you in the whole city. Um, yeah, that's, it's like a back in the day infomercial with like, these things are flying off the shelves and it's a microwave.
It really was. I mean, there was a point back during the pandemic where there were more realtors in the US and there were homes for sale. I feel like you couldn't go anywhere and meet somebody new without them being like, Oh, and also I'm a realtor. That's right. I do real estate and just, here's my card.
You go, Well wait a minute. But you also. Do our lawn
and you wanna sell our home So you're gonna maintain a beautiful lawn and sell our home. Uh, that is a very true story and I hope he's not watching this. Okay. Uh, the next chart I think was lost our landscaper slash I think we did too. Uh, the next chart, this is really the big one. This is where we're starting to get into, why we're seeing housing starting to roll over.
This is a look at mortgage payments. Up 50 over 50% year over year. And so you think about that affordability. This gets into if you were able to afford a home two years ago, that home now because of where rates are and that the increase in prices that we've seen, of course mortgage rate and mortgage payments are up over 50%.
In fact, when looking. More of a affordability issue. Uh, Liz Ann Saunders, who's, uh, one of the economists with Charles Schwab shared this chart which shows cities with the biggest change in annual income that is needed to afford a home. So what is this looking at? This is looking at the minimum household income needed to spend 30% of your monthly earnings on a mortgage payment.
And you look at some of these cities, I was just gonna say, I, I have to just stop you. Shocked at some of them, but not like California obviously, but Salt Lake City. Oh yeah. I didn't know that place was so hot. . Well, it, I mean, you know, theoretically speaking it's cooler, but you know, but it's hot with, but still that's, I mean, wow, you look at some of these, you've had to, you would've had to double your income more than double your income just to be able to afford a home and spend 30% of your earnings on your house.
I mean, I don't know anybody's job that you're able to just double your home in two years. I mean, this is not looking at 2008, 22, um, I'm gonna need a raise because my house costs a little bit more. Thanks. Yeah. So you need to double my income over the next two years so that, that at at least double that usual 3.2% raise that you usually try to have, No, that's not gonna work.
We need to 30, add a, add a three on the front of that. 33% per year might get us there over the next couple years, might, might. And you know, when looking at it a little further, uh, Scott Galloway shared this chart. This shows how much you can afford. So if you wanted to spend $2,500 a month on your payment, and that is, that's your budget, my monthly budget is $2,500 a month, you're gonna put 20% down.
You look at this, back in early 2021, you were able to afford a $759,000. Now because of rates that $2,500 is only going to get you $476,000 worth of the house. Half the house, you're getting half the house. I mean, yeah. So just take a, you know, if you on a four bedroom now you get a, you know, a two bedroom with a den maybe.
maybe you could squeeze in a third bedroom there, or you put a closet in, or you put a blowout mattress and then boom, you got a multi-use room. There you go. So problem solvers, that's what we do. We are problem solvers, especially for retirement, but that is, that's why we're seeing this start, this drop in housing is because it's just not affordable.
It hasn't been affordable for a. So do you think we're gonna see another crash like 2007? Is that where we're headed? Oh, now I Did you get the dramatic voice there, ? I mean, I feel like I've been practicing my news anchor. Is that where we're headed? And next on No, we're, we're, my opinion, I don't think we're going to see another crash like 2007, 2008, around that timeframe.
Because we've got a couple different things. We still have a lack of supply that is, uh, enough to cover the generational demand of the millennials who are still wanting to own a home. So there's still a large millennial population that does own a home and still wants to, We just, we do need affordability to be more realistic.
At some point, prices have to come down a little bit and they should be more realistic in terms of going. Not 20 plus percent per year, but you know, in that five to seven range, like they historically some affordable, attainable, they shot up too fast and they need to be brought down to, you know, a realistic level.
And you think of rates as well. Rates have to cool down just to make that affordability picture come together. I don't think you're gonna get one side of rates going back down to two and a half percent and prices staying where they're at. You're gonna have to see. You know, I would say combination there of rates coming down a little bit and prices coming down a little bit to make things more affordable.
They're gonna have to meet in the middle. They are at some point, But the big difference with this year and 2008 is the quality of buyer Over the past couple years, you don't have the subprime buyers like you did in the financial crisis. You know, your lawn guy had four homes and he was flipping him and doubling his, you know, his, uh, his income every single year, or is returned every couple years.
That just isn't the case now. Financial institutions are much more stringent on who they're lending to. I mean, you have to give all the documentation in the world, your left arm, a pin of blood and probably two teeth just to get, Or you're first born. Or you're first born, sorry, Harvey. Um, that is, that's the di the big difference between now in 2008.
So I don't think we're going to see a major crash like we saw then, but it does make sense for prices to cool down a little bit just because they've got way too hot and the affordability is just a big issue. Let's bring it back to kind of what we. kind of focusing on, anyway, how does this actually affect retirees?
It really, they're not out there looking for a new home. I mean, well, depends on the, you know, what are you doing right now? Are you renting? Are you owning? If you're a renter, are you a long term renter? Like this is what you want to do forever. You want to rent forever? Well, if that's a case, then. I would imagine at some point you're hoping that rents would come down a little bit just because those have also risen quite a bit over the past couple you years, of course.
But there's no guarantee for that. Just because housing prices come down doesn't necessarily mean that we're going to see, uh, we're gonna see rents come down. I mean, data from the Bureau of Labor Statistics show that rent actually increased from by half a percent from June to July, and then actually rose 0.7% in August.
It's continuing to increase on a year over year basis. And this is the largest spike that we've seen since 1986. I was just gonna say, not that I don't pre-read all of this great material we're going over, but rent prices have increased 6.7%. Yeah. And it's, and I would say that's on the low side of, uh, of some markets where it's a lot hotter and you think of your, let's say you've locked into a lease.
A year ago or two years ago, and you signed a 24 month lease, Well that landlord is eventually, or that owner of the property eventually wants to be able to lock in a higher rate. So it's going to take some time for prices to peak out and then eventually for prices to come down. If you're retired and you're a long-term renter, then you, it's gonna take some time for rents to come down and that's, that could be a cycle process.
That could take some time. I wouldn't necessarily count on that initially. You think of rents, they're based on a couple of different factors. You've got higher home prices, that that's a big factor. You've got growing demand because affordability issues in the housing market. Let's say you were a buyer and you wanna buy, but you're priced outta the market for the past couple years.
Well, what are you doing? You're going back to renting. And not only that, but lower rental inventory. So we're seeing that inventory squeeze on the rental side as well. That's causing rent prices to continue to go up, which is not the case in Dallas. I've, I swear every street you turn down there's a new apartment complex coming up.
That is because they are trying to build for that, trying to, you know, match supply with the demand. Well, yeah, but I'm just saying there's no shortage here. So let's, let's take a step further. Let's say you're a renter and you're either retired or you're thinking about retiring, but your goal is to eventually buy a home.
So you're renting to buy or so you're not the forever renter anymore, lease to own, as they say in the furniture. Or the rental world, I guess, or the rental world. Well, in this area you're, you're likely locked into a lease for hopefully a period of time, and this gives you the ability to let things hopefully cool down.
I do think rates got ahead of themself and you listen to any economist, the expectation is that the Fed is eventually going to do in about face and rates are gonna have to come down if we go into recession. So we can hope for that. And we can also hope that prices do level out to a little bit more of an affordable level.
So you can. A home that you want by the time that you're ready to buy. And it's just, it might take a little time, and I would say for that person, operate with patients. We've covered both sides of the rental party, if you will, if you're gonna be a forever renter or if you're gonna rent until you wanna buy.
But what if you already own your home? Okay. So this could affect you in a few different ways, depending on the perspective that you have when owning your home. Now, are you planning on selling your home or were you planning on selling your. Because if that's the case, you probably locked into a lower rate in the three, maybe even the 2% range.
If you were selling your home and you're eventually gonna buy a home, that how much home you can buy is now less if you wanna keep that same payment. So that might deter you from selling. And I think we're, you probably should we're, I think we're gonna see that quite a bit. Why would you sell a home if.
Say your home is $700,000. You wanna sell that, And you're thinking, I'm gonna buy another 700,000 home, but my rate's gonna go from 3% to 7%. Well, that $700,000 new home is gonna cost you a lot more. It just doesn't make sense. Doesn't make sense. So that's gonna be one way that that could affect you if you're planning on selling your home.
The other way is, are you the type of homeowner that looks at your home as a savings account that you use, like a home equity line of credit to tap into? Not saying we recommend that, but we do see a lot of people that do that, and that is, that's going to be impacted, especially with rates. You look at the 10 year HeLOCK rate hit a new high of 6.62%.
It's 52 week low was two and a half, a little over two and a half percent. That's crazy. So just the cost of being able to access the equity in your home has gone up. And now because we're seeing prices come down, you're likely to see the amount of equity you could tap into be a little less and a lot less.
All of that is leading to that negative wealth effect. This is. When your home is at a higher value, people typically feel more wealthy. There was a study done by Harvard that shows as the housing prices go up, or housing values go up, consumers spend more because they feel more wealthy. Now that housing prices are starting to go down, there's this thought, I'm not as wealthy as I once was, so I'm going to start really spending less.
I'm gonna just start tightening my my wallet, and I don't wanna spend as much on other things in life because I feel like I'm. That sounds like a very depressing way to to phrase that. It is. I mean, even with the stock market off, you know, down about 25% from its high, the wealth effect doesn't really even happen in the stock market.
It really comes from the housing market because you know, Robert Shiller, our, our friend from the case s Scher Index, looked at this and said that people don't have this negative wealth effect in stocks because they typically aren't borrowing from their stock portfolio. Live life. You know, they're not taking money outta their stock portfolio to put a pool in their backyard or go on a lavish vacation or just upgrade everything they want in their life.
I mean, a lot of people that I've seen that take out a home equity line of credit and go out and buy a new car or pay off all their debt, it just makes 'em feel wealthier. And you don't see that necessarily in the stock market. And that's why, you know, that's the one thing where if you own your home and you're starting to feel less wealthy because your home is decreasing, The question you have to ask yourself is, does that really matter?
You know, does it actually affect you? Yeah. Which it does. If you're planning on doing something like you said, home repairs or a new car, I guess, I mean, then yeah, it definitely affects you. What if you're planning on retiring and staying in your home? Does it really matter? This is now looking at the practical side of everything.
Now I wanna run everybody through a actual exercise on the financial planning front and what we're looking at here. This is John and Linda. Sample clients as last name, uh, entails they are 61 years old and they each have $600,000 in their retirement accounts. A hundred thousand dollars in a brokerage account that's joint $60,000 in cash and a home that's worth $720,000.
Their goal is to retire at age 65 and have a lifestyle of $135,000 of after tax income in retirement, and the only income they're going to have in retirement is social. This is a realistic look at what housing prices do to your retirement. Now, if their house fell by 50% and then it only increased by about two and a half percent for the rest of their life, how does that actually impact their retirement?
Well, as you could see, it does impact how much John and Linda can pass their beneficiaries. Because their net worth later on in life is lower. But does it actually affect their retirement? And, and that's the question is how does it impact your lifestyle, what you're doing to fund your retirement, and how does that impact that?
Well, let's look at that. With a house valued at $720,000, as you could see, they have a hundred percent probability of retirement success with the assets lasting until age 90. Now let's drop that housing value down by 50%. As you can see, guess what? They still have a hundred percent probability, retirement success.
Their success in retirement is not dictated by their value, the value of their home. That's nice to hear, and I think this is a very big thing that Retirement Savers should really consider is that your home is, yes, it does have value, and if you're planning on tapping into that and all those other things we talked about, you're planning on relocating, yes, it could impact you, but if you are.
Just saving. You're planning on staying in your home for the next 25 or 30 years. You're not going anywhere. You're not taking money outta your home. It's just you're paying your payments and you want to get, eventually get this thing paid off. I don't think it does impact you. It impacts you on paper.
That's great news, but it shouldn't impact your thought process about how successful your retirement's going to be and how you feel about your, your wealth because you weren't planning on tapping into it in the first place. So that negative wealth effect. Shouldn't. It shouldn't affect you. It shouldn't affect you.
Just don't look at Zillow anytime soon, . But I would say if you do question what your retirement looks like right now with asset values down, whether that's your investment portfolio, your retirement accounts, your home, reach out to us. There's a link in the bio or link of the description below that you can click, where you can schedule some time where we can go.
A detailed retirement analysis just to show you if you're on track based on asset values today, it's gonna look a little bit different than where they were at the beginning of the year because asset prices are down. So do yourself a favor. Do us favor, click that button. Let's schedule some time to go through that detailed retirement analysis before we get out here, what do we want everybody to do?
We want you to subscribe. We never want you to miss an episode. Never join us every single week. I am Jonathan Rankin. I'm Melissa Rankin. Thank you so much.
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