How the CPI and the Fed’s Fight on Inflation affect the U.S. Housing Market

(Disclaimer: The content of this article is not intended as financial or investment advice but rather information for educational purposes only.)

Recently, the Consumer Price Index (CPI) has displayed fascinating trends crucial for understanding the real estate investment landscape, and savvy investors must understand how it shapes their potential opportunites.

Understanding the CPI and its Components

The CPI, a critical economic indicator, measures the average change over time in prices paid by urban consumers for a variety of goods and services. This data is especially interesting when tracking thinks like the cost of food and energy, both of which significantly impact the overall cost of living.

For real estate investors, the “shelter” category is particularly crucial. It accounts for rents, lodging away from home, and owners’ equivalent rent of residences. When investors begin to understand this part of the data, they can better predict market shifts and make more informed decisions.

November CPI Analysis: A Detailed Examination

One of the most essential insights from November’s 2023 CPI data is the significant increase in housing costs compared to November 2022, with rent rising from 6.87% and the owners’ equivalent of rent increasing by 6.68% These figures are critical indicators of the shifting landscape in the housing market, signaling potential opportunities and challenges for investors.

While housing costs increased, the overall CPI this month came in slightly lower than last month’s, down from 3.2% to 3.1%. Additionally, while the overall food index rose by 0.2% in November, it showed a slight decrease from October’s 0.3% increase.

These fluctuations in food and energy costs, alongside housing expenses, play a significant role in shaping the economic environment for real estate investments.

The Role of Shelter in CPI

Shelter costs, accounting for about a third of the CPI, are directly linked to the real estate market. These costs have shown a monthly increase of 0.4% and an annual rise of 6.5%. Although there has been a gradual decline in the annual rate since early 2023, these numbers have substantial implications for real estate investors. Understanding how shelter costs correlate with broader economic trends is crucial for strategic investment decision-making.

Federal Reserve’s Interest Rate Policy and Its Implications

The Federal Reserve’s interest rate policy, crucial in shaping the economic landscape, has seen 11 rate hikes since March 2022 in an effort to combat inflation.

Many real estate experts  are anticipating a potential shift in this policy starting 2024, with a move towards lowering rates. This possible change could herald a new era for the housing market, influencing affordability, buyer sentiment, and investment strategies.

Impact on the U.S. Housing Market

The relationship between CPI trends, Federal Reserve policies, and the housing market creates a dynamic environment for investors.

Changes in CPI reflect shifts in consumer spending power, while Fed policies affect interest rates, thereby impacting the housing market. Lower interest rates typically increase housing affordability, leading to heightened demand. For investors using Equity Trust Self-Directed IRAs (SDIRAs), these market dynamics offer unique opportunities to expand and diversify their portfolios.

Opportunities for Equity Trust SDIRA Investors

In the current economic climate, investors with Equity Trust SDIRAs are ideally positioned to benefit from emerging trends. With potential shifts toward lower interest rates and evolving housing market dynamics, astute investors can find lucrative opportunities.

Key strategies involve focusing on markets with strong growth potential, leveraging compound interest in a tax-advantaged IRA, and diversifying investments to mitigate risk. Understanding the interplay between CPI, interest rates, and housing market trends can provide a competitive edge in identifying promising investment opportunities.

Preparing for the Future: Tips and Strategies

As the economic landscape evolves, it’s crucial for real estate investors to stay informed and adaptable. Keeping up-to-date with changes in CPI, Federal Reserve policies, and housing market trends is vital. Additionally, building a diverse portfolio that includes various property types and locations can help mitigate risks.

Regular consultations with financial advisors and active participation in investor communities can also provide valuable perspectives and strategies for optimizing Equity Trust SDIRA.

Conclusion

The intricate relationship between the CPI, the Federal Reserve’s monetary policies, and the U.S. housing market presents both challenges and opportunities for real estate investors, particularly those using Equity Trust SDIRAs.

By comprehending these dynamics and maintaining a proactive approach, investors can position themselves to capitalize on market shifts and achieve their investment goals.

The Truth About the 2023 Housing Market; Is a Crash Imminent?

(Disclaimer: The content of this article is not intended as financial or investment advice but rather information for educational purposes only.)

This article is based on the episode of the Building Equity podcast “Economist Explains the TRUTH about 2023 Housing Market Crash! | US Economy + Real Estate Break Down” with guest Simon Caron of the Uneducated Economist YouTube Channel, available on YouTube right now. Click here to watch the episode. Check out Simon Caron’s channel here.

For 2023, there are many questions surrounding the housing market. Pundits and economic experts range in their suggestions; factors such as inflation and low housing inventory are used liberally to espouse either an anticipated crash or correction. While the industry is shrouded in uncertainty and worried investors continue to sit on the sidelines, it’s also important to consider that a record high number of investors who bought properties from 2009 to 2015 with self-directed IRAs have sold those properties in the last several months.

This means that while many have missed out on opportunities, there’s also a substantial number of investors who have capitalized, harvesting profits that have flowed back into their tax-free self-directed retirement plans. As we navigate through a high-inflationary environment, it’s more imperative than ever for investors to deploy their capital in meaningful ways. 

Looking at the Price of Lumber to Predict What’s Next for the Housing Market 

To get a better understanding of micro- and macroeconomics and its impact on the housing market as well as foresight on the upcoming year, perhaps one of the best examples of a commodity experiencing similar unpredictable fluctuations in recent years is lumber. Starting with a rise prior to the 2020 pandemic, the price of lumber peaked at $1,700 per thousand board feet in May of 2021, surging over 50% in a year. While there were indications in late 2019 of an impending rise in price with mill closures, mill curtailments, and overall inventory depletions, all signs pointed to a supply chain breakdown as the major impetus and not so much the Fed printing more money, even though they went from $850 billion on their balance sheet to $4.3 trillion.  

Entering the pandemic, we saw the price of lumber start to shoot up. After people started spending their stimulus checks on lumber to build new decks, fences, and remodel their homes, there was a sharp depletion in inventory, very much like the low inventory rates seen in the housing market. As a response to the sharp decline in lumber inventory, mills began firing up, pumping out loads of lumber, only to see the price dip back down to $400 per thousand and then back up to $800 as the industry attempted to keep up with supply and demand. With lumber production being a multi-faceted operation, it’s difficult to see where the demand should be according to the inventory levels.  

Areas across the U.S. are seeing inconsistency with lumber inventory as some pockets are adequately supplied while others are not. Until inventory can be fulfilled evenly across the country, it’s expected that these fluctuations in prices will continue before an equilibrium is found. 

Now juxtaposing the housing market with the lumber industry, you’ll see a similar trajectory as the demand for homes increased; we witnessed a huge jump in home prices, which also started climbing as the 2020 pandemic ensued, reaching epic rates into 2022. But as mortgage rates continue to rise and builder sentiment falls, just as the price of lumber starts to come down, the cost of homes will follow, creating a more opportunistic landscape for investors in the real estate industry.  

Signs of a Housing Correction, Not a Crash 

With builder sentiment falling and existing home sales down around 15% compared to last year, there’s major concern regarding the future of the housing market. Many builders do not wish to get stuck on a project that will result in selling for less as construction costs rise, which can then contribute to low inventory rates. Most speculate that this overall disposition indicates a looming crash, but the most critical component of a pending crash is an increase in foreclosures. For foreclosures to take place, the economy would have to see a rise in unemployment, which would be a major catalyst for people being unable to make mortgage payments. But even in the current economy with talk of a pending recession, we are not seeing a rise in unemployment, which is currently at 3.5%, nor are we experiencing a jump in foreclosures. Foreclosures in general are still relatively low. 

A more realistic outcome for the future of the housing market would be a downturn in home prices. Homes that saw an increase in price of over $100,000 this past year could see their purchase tag reduced by $60-$70,000, which theoretically wouldn’t be a crash but more of a return to normal. Even with a third of homes being purchased by all cash buyers, as mortgage rates teeter around 7%, it’s reasonable to believe buyers will be deterred, resulting in the eventual reduction in home prices. Especially since mortgage rates are no longer increasing at the exponential rate as they were before, it’s more likely to estimate that a reduction in house prices is inevitable, pointing to an eventual housing market correction. 

The Federal Reserve’s Role in the Housing Market 

One of the key strategies implemented during the financial crisis of 2007 to 2009 and the start of the 2020 pandemic was called quantitative easing. The Fed purchased longer-term securities on the open market, including U.S. Treasuries and mortgage-back bonds. The perfect metaphor for a mortgage-backed security is if a bunch of mortgages are thrown into a box and that box is sold off to an investor; everybody’s paying their mortgages and the investor receives the capital investment back plus interest. Because this practice nets significant profits, the Fed created a huge demand in the market for these types of securities, given that it’s guaranteed a buyer and there aren’t concerns about who to sell to. This results in the mortgage rates climbing, security prices falling, and the yields rising, which increases overall mortgage payments due to the interest rate jump. 

These mortgage-backed securities (MBS) are not the toxic asset that they once were; there was a time when people received these mortgages when they really shouldn’t have: either they didn’t have a job, any viable income, or they owned more than one property. Today, these borrowers are much more qualified, making these types of investments much safer. 

The Federal Reserve’s Impact on Inflation 

As the Fed influences interest rates, they also seek to control inflation by raising rates to slow the economy and bring inflation down. Beginning in 2018, the Fed began looking to set an average inflation rate. The biggest misconception surrounds the 2% target; many confuse the 2% average inflation rate with a 2% target rate. It’s anticipated that we will see interest rates low when they shouldn’t be, and we will also see them high when they probably shouldn’t be as well. But it’s a 2% target inflation rate over time, meaning that monetary policy can be adjusted to a lower or higher rate, but over time, the Fed is still aiming for that 2% average inflation rate.  

Interest rates were artificially low for a significant amount of time, causing asset prices to rise dramatically, like the housing prices. This practice is carried out so when prices do drop or when interest rates rise, the Fed can bring those asset prices back down to where they should have been prior to the artificially restricted interest rates to control inflation. 

Based on this information, it’s plausible to believe we’re going to see interest rates stay elevated for a longer than anticipated amount of time. Even after the inflation comes down, the interest rates will stay high to achieve the average inflation rate of 2%. 

Smart Investing in a High Inflationary Environment

As interest rates continue to tick upwards and inflation weighs on the economy, the pressure is on investors to make heathy, safe investments. Many people are still cautious, waiting for a good opportunity to deploy their capital, whether it’s in stocks or real estate. The most challenging aspect for investors is knowing when to engage, finding the right entry point into any market. It may seem like the safest option is to save your dollars, especially since the U.S Dollar Index is the highest it has been in 20 years, but holding onto money over time results in erosion, reducing purchasing power. It’s not unreasonable to predict a deflation scenario as the demand for dollars could explode. On the contrary, it’s also not irrational to predict that over time the dollar could completely lose its value; either way, investing right now is the smartest thing to do.  

One of the benefits of a real estate investment over others, like a stock at $100, is having control of your investment strategy. With real estate, chances are if you have a good tenant, you’ll be getting paid over the next few months. And even if you purchased recently, over time, you’ll be able to increase rent which changes the financials of your return on investment, allowing you to stretch your money even further. Whether it’s high yield mortgage-backed securities or simply a rental property, it’s more imperative than ever for investors to get into the game and deploy their money for long-term gains. 

Explore Resources, Gain Insight, and Make a Better Investment

Whether it’s understanding markets, intrinsic value metrics, or the ins and outs of the real estate industry, smart investors are turning to IRA Title Pro for all their needs. If you’re using your self-directed IRA to buy and sell real estate, then you NEED to know about IRA Title Pro and their countless programs, tools, and educational sources that can help take your investing to the next level. 

Our amazing closing team and national title company provide incredible resources for investors every step of their journey, whether they’re buying, selling, or lending. Our title company caters to self-directed IRA transactors so they can close real estate transactions faster in a streamlined fashion. 

Get in touch with us today if you’re serious about getting off the sidelines and making smarter investment decisions. 

The Latest Real Estate Guide to Investing in the U.S. Housing Market

(Disclaimer: The content of this article is not intended as financial or investment advice but rather information for educational purposes only.)

This article is based on the episode of the Building Equity podcast “What’s ACTUALLY Happening in the US Housing Market | A New Real Estate Investors Guide in 2023” with guest Jason Hartman, CEO of Empowered Investor and Real Estate Tools, available on YouTube right now. Click here to watch the episode. Check out Jason Hartman’s work here.

Investing in real estate may be tough for some to consider with asset prices being so high. It can be extremely discouraging when potential investors see the costs associated with completing a real estate transaction, so much so that it may deter people and they miss out on an incredible opportunity to generate long-term profits.

It’s crucial to understand the metrics behind real estate investing when looking at both cash flow and asset prices versus other hard assets, like investing in gold and silver as well as notes and mortgages that are secured by real property investments in private businesses. It’s tough to grasp the worth of an asset without getting perspective on how valuable it actually is when compared to others.

Understanding the Current Economic Climate as it Relates to Real Estate Investing

Recent data suggests that we are on the cusp of a recession. While the Federal Reserve is trying the best they can to stop inflation for our centrally planned economy, had they raised interest rates sooner and at a more gradual pace, the idea of a soft landing might have been more plausible.

While inventory in the housing market is higher than it was before, it is still historically low. As of February 2023, there’s about 625,875 homes for sale in the United States. Experts suggest that a normal market would contain anywhere from 2 to 2.5 times that amount, leaving the current market with approximately 6 months left of inventory at current absorption rates. This isn’t the only deviation; we’re also seeing current property owners with incredibly cheap mortgage rates.

Many homeowners with mortgages have rates far below today’s level, and recent data reveals that 37% of all homes in the United States are paid off, meaning overall, people are not under financial duress with mortgage obligations. To technically have a “crash”, there should be both distressed owners and distressed sellers.

Note: At the time of this writing, we are seeing consumer credit card debt and subprime auto loan delinquencies surge. How this affects the 37% of homes that are free and clear we don’t know, but figured it worthwhile to include as it seems likely we are transitioning.

Based on current data and trends, it’s safe to assume that the rest of the country also has relatively low existing mortgage rates, so there is no evidence or indicators of an imminent crash as of right now.

The Biggest Mistake Investors Make

The first mistake that most investors make is that they don’t invest. People find all types of justifications and reasons to avoid investing in real estate, whether it’s overall hesitancy or attempting to time the market. However, as with any asset class, market timing has historically been proven to be an ineffective strategy. The most successful investors are those that make smart, value-oriented decisions, buying and holding their assets.

A perfect example of this is the great recession of 2008: this was an anomalous instance, an occurrence that happened once in seven decades, and as the economy rebounded, prices began to rise and people began to worry, thinking the metaphorical “bubble” was on the verge of bursting any minute. As many people anticipated this being the peak of the market, they waited for a cool off period, preserving their cash for a “right time” to invest, creating even more doubt and missed opportunities. Had people remembered that we are in a centrally planned economy, they would have had more confidence to capitalize.

As the central planners react to the market, it’s not just a matter of supply and demand or basic economic fundamentals. When things get bad, the Fed makes changes and specific adjustments while the government does the same. During the COVID-19 pandemic, when many chose not to invest or change their current investment strategy, some lost out on appreciation. And that’s the thing about investing, you actually need to invest if you want to reap the benefits.

Furthermore, research has shown if people hold onto their money without investing, it is guaranteed they will lose 9% a year just to inflation.

Using the Right Measuring Stick to Understanding Intrinsic Value

Many people may have trouble assessing value because they’re using the wrong measuring gauge; they compare the price and the value of real estate to one thing: the U.S. dollar. The U.S. dollar is a moving target, meaning it’s constantly being debased by inflation, which makes this metric a huge mistake in terms of determining value. It’s smarter to compare with other commodities and asset prices to understand the concept of intrinsic value.

In November 2022, the National Association of Realtors is claimed valuations could rise, year over year by 1%. Yet larger institutions like Morgan Stanley and Goldman Sachs  are predicting 5-10%, claiming over 2023, we’ll be seeing a 5-10% drop in valuations.

Looking at a country as large and diverse as the United States is, there are almost 400 MSAs (Metropolitan Statistical Areas). There are 50 states with over 3,100 counties and 9,000 cities, meaning lumping these all together is not the correct metric for an accurate assessment.

To get a more precise estimate, the Hartman Comparison Index (HCI) was created by Jason Hartman. This tool compares the price of real estate over the last 52 years to other commodities with intrinsic value that people need to live that are not attached to any one currency.

Commodities such as lumber, concrete, copper, and petroleum products all have intrinsic value, meaning it doesn’t matter what currency they’re being traded in because they’re traded worldwide. They’re needed by everybody.

Hartman Comparison Index (priced in gold)

This HCI example compares the prices of homes to gold. Billions of people consider gold to be money, and up until 1971, the United States operated on a gold standard. But let’s look back to 1970 for some insight when the median price house was $23,000 and gold was $35 an ounce. If you wanted to buy the median price house, you would need 654 ounces of gold. Just 10 years later, as we experienced inflation from the 80s, the median price house tripled to almost $63,000. The gold price went way up to $653, and it would only take 97 ounces of gold to buy the median price house.

Fast forward to 2010 as the country is coming out of the Great Recession; the median house price for a home is $171,000, and gold is almost at $1,100 an ounce. It would take 158 ounces of gold to buy the median price house. Today, the median price of a house is $390,000, and gold is about $1700 an ounce. It would take 227 ounces of gold to buy the median price house.

Priced in gold, housing is certainly not the cheapest it’s ever been, but it’s also not the most expensive it’s ever been either.

Hartman Comparison Index (priced in oil)

Looking at oil, arguably one of the world’s most important commodities, back in 1970, the $23,000 median price house priced in oil was at $4 a barrel, so it would’ve cost 6,400 barrels of oil to buy the median price house. Ten years later in 1980, the house prices almost tripled, and oil was up to $37 a barrel, meaning it would’ve taken 1700 barrels of oil to buy a house.

Looking at today, the median price of a house is $390,000, and oil is at approximately $94 a barrel, meaning it would require 4,100 barrels of oil to buy the median price house.

When assessing whether housing in oil is cheaper or more expensive, it’s clear that it’s not the cheapest it’s ever been but certainly not the most expensive either.

Hartman Comparison Index (priced in rice)

We can look at other popular commodities like rice, which is the food stock of more than half the world, and priced in rice, housing is rather cheap today. And we can keep going.

Hartman Comparison Index (priced in shares of S&P)

We can price it in shares of the S&P 500 index. Priced in the S&P, housing is relatively cheap; it’s only 98 shares of the S&P to buy the median price house. According to the chart, back in 1970, it cost 249 shares of the S&P to buy the median price house, and in 2010, it was 136 shares, meaning price in shares of the S&P for housing is rather cheap, not the cheapest it’s ever been but still affordable.

The best way to comprehend the measurement of what an asset is worth is by comparison/relation to other hard assets. Understandably, most people don’t denominate their lives in gold or oil or any other commodities in the Hartman Comparison Index, but they have a choice, a major one that involves their money and, essentially, their future wealth. When people get paid every two weeks or every month, they do something with their extra money; they either put it in the bank or in a savings account, or they buy stocks or commodities, and they decide on a way to store their wealth until they save enough for a down payment on a house. If people save it in dollars, they can expect that over time because of inflation, they will lose money. Based on these revelations and empirical data, it’s clearly smarter to have money invested in things rather than currency units to maximize their IRA potential.

For more information on the Hartman Comparison Index or any of Jason Hartman’s teachings/strategies, visit his YouTube channel(https://www.youtube.com/@JasonHartmanRealEstate), JasonHartman.com, or listen to his podcast Creating Wealth(https://www.jasonhartman.com/tag/creating-wealth-show/). Investors are also encouraged to check out his Empowered Investor Pro membership(link) and his formal coaching program(link) for further guidance.

Start Getting Serious About Investing Before It’s Too Late

Whether it’s understanding markets, intrinsic value metrics, or the ins and outs of the real estate industry, smart investors are turning to IRA Title Pro for all their needs. If you’re using your self-directed IRA to buy and sell real estate, then you should know about IRA Title Pro and their countless programs, tools, and educational sources that can help take your investing to the next level.

Our closing team and multi-state title company provide incredible resources for investors every step of their journey, whether they’re buying, selling, or lending; we can close up to 11 days faster than any other service out there. Get in touch with us today if you’re serious about getting off the sidelines and making smarter investment decisions.