Is the housing market in trouble or poised for more gains?

While some financial experts suggest we're poised for a housing market crash akin to that of the 2008 financial crisis, a review of housing price data from the 1970s and ‘80s, a period of similar inflationary pressures and macro-economic trends, tells a very different, and much better story — one that financial advisers should be prepared to tell their clients.

During the 1970s, inflation headed to the highest levels in modern history, peaking at approximately 14% in the early 1980s. Home prices increased significantly during this period, with median home prices rising approximately 9% per year, according to the National Association of Realtors.

The Federal Reserve instituted an unprecedented monetary policy between 1979 and 1982, nearly doubling short-term interest rates, which directly affected mortgage rates. The increased cost of mortgages cooled home price gains somewhat, but median house prices never dipped into negative territory.

From 1983 to 1989, the Fed lowered interest rates and, combined with the actions of other regulatory and government agencies, engineered a soft landing for the economy. During this period, which was marked by massive economic growth and a sustained bull market, house prices surged another 100%.

THIS ISN'T THE 1970S OR 1980S

The data from the first half of 2022 suggest the U.S. economy has entered a recession, in part as a result of similarly persistent levels of inflation. However, there's no political, institutional or household will for a prolonged period of interest rate hikes, and we believe the Fed may be forced to cut rates more quickly than it raised them if it becomes clear we're in a deep recession spanning more than a few quarters.

The stock market volatility adds to fears of a deep recession, as the three major indices are negative for the year. The S&P 500 has dropped more than 12%, and the Nasdaq 100 has suffered an almost 20% decline this year. However, consumer spending is not yet negative, and unemployment remains healthy at 3.5%. Recent shifts in inflation projections suggest increasing costs may have peaked earlier this summer.

SELLING AT THE TOP

The current market environment presents an incredible opportunity for homeowners to take advantage of a new investment vehicle to tap into the value of their homes while house prices — and interest rates — are at all-time highs without selling their homes.

Historical trends suggest that while home values may grow more slowly over the next few years as a result of the recession, the housing market should remain stable. Instead of the 20% increase in housing price appreciation, or HPA, that we saw before the pandemic, the housing market will likely see a 1% to 5% HPA increase for the next few years, locking in meaningful gains during this period..

Industry experts currently estimate there's $21 trillion in tappable home equity, split almost equally between mortgaged and outright homeowners. As these homeowners consider ways to access capital during this uncertain period, a likely source will be their most valuable asset.

However, even as homeowners require liquidity, they also need a place to live. So selling properties to raise capital won’t appeal to most homeowners. Home equity lines of credit, second mortgages and reverse mortgage volume may rise, but with interest rates at decade highs, the volume will likely be muted.

That leaves non-debt home equity agreements as an optimal solution for homeowners seeking liquidity. With HEAs, property owners can sell a small fraction of their property’s equity to an institutional investor for a lump sum of today’s present value.

HEAs are not loans. Homeowners make no monthly payments, and when rates fall in the future, they can refinance their first mortgage, using the proceeds to buy back the fraction of the equity they sold through an HEA years earlier.

Instead of taking on more debt at record-high interest rates, HEAs enable homeowners to tap a fraction of their home equity while house prices are still elevated.

Even if we're not headed to a housing market crash similar to what we saw at the height of the financial crisis, the impact remains top of mind for many homeowners. Fear and confusion can lead to bad decisions.

Yet with the guidance of a well-informed financial professional, homeowners and investors can take full advantage of this unique period in history, assess all aspects of an HEA, and potentially tap into the value of their homes and be in a stronger liquidity position as the economy recovers.

Ashley Bete is chief investment officer at Leap Analytics.