Real Estate

What Does the Fall in Personal Wealth Mean to the Housing Market?

According to the latest Federal Reserve report, total US household wealth dropped to $143.3 trillion in the third quarter of 2022. That’s a slight drop from $143.7 trillion in the previous quarter and $150.1 trillion at the end of 2021. 

The Fed, which determines wealth by deducting total debt from total assets like savings and stocks, identified a drop in stock prices and a rise in inflation as contributing factors.

While investors recorded a $700 billion gain in their real estate worth, there was an opposite and unequal reaction as their stock portfolios lost $1.9 trillion in value. Losses in the stock market in 2022 accounted for almost all the $7 trillion in wealth lost by Americans this year.

Between June and September, the Fed hiked interest rates from 1.50% to a range of 3.00% – 3.25%. The Fed’s efforts to slow the economy and cool down the home price inflation have hit the housing market hard, which is vulnerable to changes in interest rates.

The Fed also reports that the total amount of cash held by households, which they calculated by adding up their savings accounts, checking accounts, and money market funds, remained relatively stable at approximately $18.4 trillion in the third quarter of 2022. Compared to its first-quarter high, that is a decline of over $134 billion.

Consumers saw a slight increase in their money market funds and current account but a decrease in their savings and time deposit accounts. The Fed needs people to cut back on spending to bring inflation down. So, what does all this mean for the housing market?

Impact of Drop in Household Wealth on the Housing Market

American households’ wealth is intrinsically linked to the property market’s health. A fall in household wealth could lead to severe impacts on the market.

Decrease in House Demand

The National Association of Realtors (NAR) reports that the annual sales rate of existing-home sales dropped to 4.4 million in October, down from over 6.5 million in January. That is the ninth consecutive month the market is experiencing a drop.

Potential homebuyers trying to save for a down payment on a house in today’s market will feel the strain even more if their net worth declines, fuelled by the expected rise in inflation and cost-of-living crises.

On the other hand, homeowners with more disposable income tend to look at the big picture when making significant purchases. In economically challenging times when their wealth dips, such as this, they usually delay purchasing homes to protect themselves against economic uncertainty.

Drop in House Supply

Because of a decline in the number of potential buyers, builders naturally slow the development of new properties. That makes it more difficult to find a new home, leading to a rise in the price of the scarce product (buildings), which may be a deal breaker for potential buyers.

The construction of new homes often provides a glimpse into the housing market’s future. A glance at the latest data from the Census Bureau shows that the adjusted annualized rate of housing starts in the US fell 4.2% from the previous month to 1.425 million in October 2022.

That was lower than the 1.41 million predicted by the market. Starts on detached single-family homes decreased by 6.1% to 855K, while starts on multi-family dwellings decreased by 0.5% to 556K.

Higher Mortgage Rates

The Fed continues to increase interest rates to curb inflation, increasing the cost of borrowing, including mortgage loans for potential homeowners.

Mortgage payments can add hundreds of dollars to a household’s monthly budget for a 30-year mortgage loan, and most individuals are hesitant to make such a huge commitment when they see their net worth drop. 

Households might delay their home purchase if mortgage interest rates continue to rise. Valuations firms also believe that getting loans may become more challenging as lenders’ perception of risk increases because of these uncertainties.

Low Home Values

After reaching a record high of $413,800 in June, the NAR reported that the median sales price of an existing home dropped to $379,100 in October. The law of supply and demand states that product prices tend to fall as demand decreases; a weakening demand will lead to a fall in property prices

With less interest in purchasing a property, fewer people are searching for the same number of properties. When the demand drops, sellers would have to accept a lower price than they had hoped for or would have received in a highly competitive environment.

Households are also more likely to feel the effect of outside variables, such as stock market fluctuations, which might lead to hesitation in purchasing decisions. In short, there will be less interest in buying houses, leading to lower pricing.

Rising Foreclosures

According to ATTOM’s Q3 2022 US Foreclosure Market Report, foreclosure filings increased by 104% year over year, affecting 92,634 properties.

Many households usually file foreclosures when their net worth tremendously falls, and they struggle to make ends meet. It will lead to many families losing their homes to foreclosure because they cannot keep up with their mortgage payments.

Moreover, lenders have tightened their requirements for who they would extend credit to in light of increased foreclosures. To qualify for a mortgage today, a borrower needs a strong credit score, a manageable amount of debt to their income, and a sizeable down payment.


What can you do as a Real Estate Investor?

Although the real estate market is currently in the dark, it can provide some stability for investors when household wealth falls. Here are some activities investors can engage in:

  • Shifting to rentals: During a downturn, fewer people will spend their money on a property purchase. However, everyone still needs a place to stay, and their only choice is rent.
  • Buy and hold: Home prices do not automatically decline when the net worth of households falls. However, if a property market crash cools out because of a drop in household wealth, you can buy homes at lower prices and later recover your investment when the market returns to normal.

Final Word

Generally, when the net worth of households falls, it can significantly impact the housing market. It can lead to decreased home demand, low inventories, difficulty finding financing, and low home values and foreclosures. That makes it harder for families to buy homes.

However, there are still meaningful activities real estate investors can engage in, such as switching to rental units and buying and holding, ensuring they score a profit in turbulent times.

By Gurpreet Singh Padda, MD, MBA, MHP