In a recent Twitter thread, financial analyst Nick Gerli (@nickgerli1) shared his insights on the U.S. housing market and why he believes higher interest rates will ultimately lead to real capitulation in the market. Gerli explains that the unprecedented era of low borrowing costs, with the Fed Funds Rate averaging only 1.0% for the past 20 years, caused home prices to rise way above fundamentals.
However, now that the Fed Funds Rate has been hiked back up to 5.0%, Gerli expects that it will take some time to deleverage the madness that occurred in both housing and stocks, due to the interest rate lags. He asserts that the mentality of real estate investors will shift over the next several years as they begin to lose money on their investments, experience evaporating rent growth, and see vacancies rise. This will lead to the housing market no longer being viewed as a “good” investment.
Despite some arguing that a housing shortage will keep prices high, Gerli believes this is a misperception. He notes that inventory is low for other reasons, such as government foreclosure moratoriums during the pandemic, $5 trillion in money printing, and a record-low 3.5% unemployment rate. Gerli emphasizes that these factors are temporary and a result of 20+ years of interest rate suppression.
With interest rates now on the rise and recession clouds looming, Gerli points out that the Conference Board’s Leading Economic Indicator (LEI) Index is showing further contraction, which is well into recession signal territory. He predicts that job losses will ultimately lead to more inventory in the housing market, causing a significant shift in the market’s dynamics.
As we enter a new era of higher interest rates, Gerli’s analysis suggests that the U.S. housing market will face significant challenges, and investors should be prepared for the potential consequences.