The end of the middle class.

 

 

if you haven’t seen this recent photo of a graph by Re:Venture Consulting, it marks a massive turning point in the history of America’s middle class. The peak in housing prices indicates to me that the affordability of housing, a basic human need, has accelerated beyond a point that is manageable for the average person in the U.S.

Read more on this graph at Nick Gerli website.

Well if you are not aware but inflation over a long period of time ruins the earning potential and wage increases without value. From 1971 the middle class at 61% shrunk to 50% to 2021. As inflation remains and makes it way through the market such as the housing making prices increased to the point that you have too many dollars chasing too few supply.

Read more on the middle class at Pew Research

Even though you could argue that the population of people experiencing homelessness is lower now (582,462 in 2022) compared to 2008 (647,258), that data could prove inaccurate due to COVID-related issues, as stated by End Homelessness. Although we see a decline in homelessness, that does not negate the real suffering or conditions that this population is experiencing. Higher concentrations of homelessness can be found in urban centers, in West Coast states, and especially high in Hawaii.

We can also notice a pattern, a peak in housing prices often occurs right before a financial recession or crisis. We saw this with the high inflation in the 1980s and the Housing Bubble of 2006, which led to the Global Financial Crisis.

When comparing the rate of price acceleration from the 1980s to 2006 with that from 2022 to 2023, we’ve never seen this type of acceleration before. Prices are so high that they’re squeezing the middle class into becoming a rental class. This creates a situation where home equity and the generational wealth of future generations will likely end where populations cannot pass wealth down, but will be perpetually locked in or tied to rental housing and apartments, without true competition in the housing market to affect their economic future. I do believe now the whole of society will transition into a new class one with less wealth & equity from generation to generation but to a rental class.

Housing market prices are so high that demand is likely to collapse, leading to defaults on home builders’ loans. We can see that existing home sales are on the decline, as people feel less confident about buying homes.

Is there a connection between existing home sales and the monthly cost of buying a house? To determine that, we would need to apply statistical analysis.

The next question you have to ask is, what is the ripple effect? Who funded all these loans and charged high interest rates to push housing prices so high?

If I had to take a wild guess, I would say it was most likely banks and local financial institutions. When the market experiences a collapse in prices, you’re going to see a lot of banks that are exposed to that market implode. This will lead them to retract their investments in the S&P 500 and big tech companies, exacerbating the crisis. Even the federal bank is also part of real estate owning MBS and long-term fixed Mortgages.

https://mishtalk.com/

If these prices collapse, will they affect the Fed’s balance sheet? Will this, in turn, impact the safe haven that Treasury bills provide? Is housing and real estate the new gold, especially given that land and housing are less abundant now compared to the past?

Many pundits have claimed in recent months that housing prices will rise. Experts like Barbara Corcoran, a real estate mogul, believe that interest rates will drop to 5% because the Fed will eventually lower its rates. They argue that this will reduce monthly house payments and entice buyers back into the market, thereby pushing housing prices up by another 10%.

To put it simply, non-homeowners, the lower middle class, and potential buyers are frustrated. Housing has become unaffordable, and it appears that neither competition nor home builders are driving prices down due to a lack of demand. Factors such as the Federal Reserve’s policies, the fact that a quarter of houses are owned by investment institutions, low inventory, and price optimization by companies like Zillow and Redfin are pushing large segments of the population into rental housing.

https://www.youtube.com/watch?v=aUvnKRlbZQk

When prices accelerate so fast we can have series of negative out comes

• Unaffordability
• Market Instability
• Economic Inequality
• Higher Debt Levels
• Interest Rate Reactions
• Loan Defaults
• Investor Behavior
• Government Intervention
• Social Issues
• Regional Disparities

Here’s the math below to figuring out Prive Velocity and some accelerate comparison of today to the past

Calculating Price Velocity for the 1980s:

• Starting price for housing in 1978: $325
• Peak price in 1982: $877
• Time frame: 4 years

Price Velocity = (Peak Price – Starting Price) / Time Frame = ($877 – $325) / 4 = $552 / 4 = $138/year

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Calculating Price Velocity for the 2008 Global Financial Crisis (GFC):

• Starting price for housing in 2005: $1,164
• Peak price in 2007: $1,509
• Time frame: 2 years

Price Velocity = (Peak Price – Starting Price) / Time Frame = ($1,509 – $1,164) / 2 = $345 / 2 = $172.50/year

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Calculating Price Velocity for 2021-2023:

• Starting price for housing in 2021: ~$1,300
• Projected peak price in August 2023: $2,748
• Time frame: 1.67 years

Price Velocity = (Peak Price – Starting Price) / Time Frame = ($2,748 – $1,300) / 1.67 = $1,448 / 1.67 = $866.47/year (approximately)

Acceleration from 1980s to ’08 GFC

This suggests that, on average, the yearly velocity of price increases accelerated by about $1.38 per year from 1982 to 2007.