One’s net wealth extends beyond just the stock and bond markets, and that’s where housing comes in. According to the Fed, housing wealth equates on average to about one-half of household net worth. Consumption patterns tend to align with changes in household net wealth, which is important since consumption makes up roughly two-thirds of the U.S. gross domestic product (GDP).

Housing wealth is obtained primarily by price appreciation gains, and the U.S. housing market has seen prices accelerate at a rapid rate during the last decade, particularly during the past two years.

Home Prices Have Soared Since 2020 

According to a study by the National Association of Realtors, U.S. households amassed $8.2 trillion in housing wealth from 2010 through 2020. The study also found that among middle-income homeowners, total housing wealth jumped by $2.1 trillion. It should be noted that those figures exclude the staggering 20% home price appreciation seen during 2021. This rise in housing wealth means more potential spending power for consumers who choose to use that wealth through home equity.

On the supply side of housing, high input costs and a record low lack of supply have contributed to rising housing prices. A sharp rise in lumber prices last year also contributed to the recent surge in housing prices.

Lumber Prices Reached Record Highs in 2021 

Housing Inventory Is at a Record Low 

Total Housing Inventory, Including Rentals, Remains Low 

On the demand side, low interest rates and new opportunities from the lack of available housing have attracted both traditional buyers and investors. According to Redfin, investors bought nearly one in seven homes sold in the top U.S. metropolitan areas in 2021. In certain areas, majority of the rental units are owned by companies such as private equity firms. 

Above all, people simply had more money to spend, with some of that coming from government stimulus checks during the pandemic. 

Personal Savings Spiked in 2020 

The excess savings rate allowed more people to become homeowners, as bidding wars likely drove home prices higher.

The Homeownership Rate Also Spiked in 2020 

The Fed 

Currently, we are dealing with a more hawkish Fed that is set on hiking rates to quell inflation. The last time the Fed rose rates to fight inflation was during the prior housing boom in the mid-2000s. During 2004 and 2006, the Fed steadily rose the fed funds rate from 1% to 5.25%. This ultimately was followed by a significant correction in the U.S. housing market.

Home Prices vs. Rising Interest Rates 

Declining Housing Prices in 2007–08 Preceded a Recession 

As risk assets have come under pressure thus far in 2022, many investors wonder what is ahead for the economy, especially as the Fed prepares for further rate hikes. The key difference between the 2004–2006 rate-hike regime and the current one stems from the type of mortgages that were taken out. Between 2004 and 2006, roughly 30–35% of the loans were adjustable-rate mortgages (ARM), making them vulnerable to rising interest rates. But in the current cycle, ARMs represent a much smaller percentage of total mortgage loans.

ARMs Have Declined Since Last Housing Boom 

This would suggest that the housing side of the economy may be less sensitive to rate hikes than it had been in past cycles. Not only are the loans less sensitive to rate changes, but most of the loans made during this cycle were of high quality rather than subprime ones.

This would suggest that the housing side of the economy may be less sensitive to rate hikes than it had been in past cycles. Not only are the loans less sensitive to rate changes, but most of the loans made during this cycle were of high quality rather than subprime ones.

Conclusion

The housing market has had a healthy runup during the past decade, which has allowed net wealth to grow along with other investments such as stocks and bonds. Despite the recent stock market volatility, net wealth remains relatively robust as the U.S. housing market continues to remain relatively strong. If employment conditions remain robust, mortgage defaults should not become an issue. Furthermore, since ARM loans represent a very small percentage of the market, future interest-rate hikes should only have a limited impact on existing borrowers. The housing market is in a vastly different and healthier condition than it was prior to the Great Financial Crisis, which should help absorb the downside effects of a stock market correction and avoid a recession in the near-term.

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Performance data quoted represents past performance, which does not guarantee future results. 

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This material is educational and intended for an audience with financial services knowledge.

Pacific Life Fund Advisors LLC (PLFA), a wholly owned subsidiary of Pacific Life Insurance Company, is the investment adviser to the Pacific Select Fund (PSF). PLFA directly manages certain PSF funds-of-funds.

This commentary represents the views of the portfolio managers at Pacific Life Fund Advisors LLC as of 6/14/22 and are presented for informational purposes only. These views should not be construed as investment advice, an endorsement of any security, mutual fund, sector or index, or to predict performance of any investment. Any forward-looking statements are not guaranteed. All material is compiled from sources believed to be reliable, but accuracy cannot be guaranteed. The opinions expressed herein are subject to change without notice as market and other conditions warrant.

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