Fed Pivot = Lower Home Prices?

When Jerome Powell cuts Interest Rates in early 2023, it will be a signal that the US Housing Crash is about to get even worse.

Fed Pivot = Lower Home Prices?

The Fed is gearing up to pivot and cut Interest Rates by early 2023. The US Housing Crash will get even worse after this pivot. Expect more inventory. More price cuts. And lower Home Prices overall.

That's because, historically, the Fed pivoting to more accommodative monetary policy is a signal that the economy is tipping further into Recession. And a Recession is BAD NEWS for the Housing Market.

To understand why, let's take a trip back to 2007. That was the year that the last Housing Crash began. It will also the year that the Federal Reserve, headed by Ben Bernanke at the time, pivoted and cut interest rates. Specifically, the pivot occurred in August 2007.

Historically, a Fed Pivot and interest rate cuts indicate that the Housing Crash will get worse.
The Fed pivoted and cut rates in August 2007. Home Prices went down for another 5 Years (Source: Zillow / Federal Reserve St. Louis)

The pivot took place roughly four months after Home Prices peaked in March 2007. And occurred more than one year before Lehman Brothers in September 2008. And most importantly, Home Prices declined for nearly 5 years after the Fed pivoted. Eventually bottoming out in February 2012 at -25% Nationally and up to -60% in markets like Phoenix and Vegas.

Now this is interesting. Because the conventional narrative suggests that a Fed pivot should be good for the Housing Market. Because after all, lower short-term interest rates will mean lower mortgage rates, which should theoretically boost housing demand and prices.

But it didn't work out that way in the 2008 Crash. Nor did it work out that way in the early 1990s regional crash that hit cities like Los Angeles and Boston. And the reason is simple. The damage done to the Housing Market by the Recession that accompanies the Fed Pivot far outweighs the "positive" of lower mortgage rates.

Recession: destroying Demand, Increasing Supply

On the demand side, a Recession takes away the ability of many people to buy a house due to layoffs and job insecurity. Moreover, the negative sentiment accompanying a Recession causes many other would-be homebuyers to wait on the sidelines. And as Home Price declines worsen, a vicious circle begins, where even more homebuyers wait to buy because few want to buy in a declining market.

On the supply side, a Recession will usually result in a big increase in mortgage defaults and foreclosures. Pushing more and more supply onto the Housing Market at precisely the time when demand is getting destroyed.

Currently default rates are near record lows. But that's largely a function of a near record low unemployment rate (3.7%). History shows us that when the unemployment rate increases, defaults will increase as well. And don't forget - we have about three years of "backlogged" foreclosures to work through due to the Foreclosure Moratorium during the pandemic.

Supply Increases from Home Building

Just as the Recession destroys demand and increases supply, another force in the Housing Market is also at work promoting lower home prices and rents. And that's Home Building.

During the run-up of a Housing Bubble, home builders typically go nuts and pull an insane number of housing permits. Because they're reacting to the sky-high demand that occurs during the Bubble. However, there's a lag between a permit being pulled and the delivery of the home.

And that lag often results in builders finally delivering their permit backlog into the Recession and Housing Crash. Causing supply to increase even further at exactly the wrong time.

When Powell Pivots, Home Prices Will Crash

It's for these reasons that I'm predicting the Housing Crash to get even worse in early 2023 after Jerome Powell pivots and cuts interest rates. History says that this is what will happen. If you want to learn more about this history, and my projection for different Housing Markets around America, make sure to watch today's Livestream on YouTube. This is exclusive to YouTube Channel Members, so make sure to hit the JOIN button and sign-up as a Channel Member if you want to receive this content.