One of my favorite macro pundits, Alfonso Peccatiello (former $20 billion fund manager who goes by “Alf”) recently tweeted this:
“The biggest group of consumers in the US owns houses, not stocks. And this is why taming the animal spirits in the housing market is paramount important for the Fed. And they will succeed…”
He then pointed out how housing is the top asset holding (by far) for lower-income Americans, while stocks are the primary asset class for the wealthy. Here is the full tweet.
The Wealth Effect
What Alf was referring to is called the wealth effect – where people spend more as their asset values rise because they feel more financially secure.
The Fed is well aware of the wealth effect, as it is something that we have seen play out (and then some) over the last several years. Picture your favorite crypto acquaintance living in Costa Rica like a rockstar, with minimal income, solely because his crypto portfolio exploded in value by 100x. Now picture that same friend trying to get a job at Starbucks because his crypto portfolio shrank by 99x.
In any case, the wealth effect is a major contributor to spending and overall demand, and that has been a major driver of inflation in the face of supply shocks (because of COVID, port issues, wars, etc.).
The Fed desperately wants to tame inflation and thus desperately wants to squelch wealth effect spending.
Will The Fed Succeed In Crushing The Wealth Effect?
I don’t think the Fed will succeed when it comes to housing for the same reasons I have been repeating over and over and over and over: there is a housing shortage.
And fortunately and coincidentally the WSJ corroborated my point today with this headline: Home Prices Continue To Rise
This is from the article:
“Rapidly rising interest rates are rippling through U.S. markets as the Federal Reserve tries to combat inflation. Stocks entered a bear market this month, consumer sentiment has taken a hit, and economists are forecasting an increasing likelihood of recession as higher rates threaten to choke off growth.
But home-buying demand continues to exceed unusually low levels of supply and propel prices higher. The median existing-home price rose 14.8% in May from a year earlier to $407,600, a record high in data going back to 1999.”
The article points out that higher rates are pushing many buyers to the sidelines, but the supply and demand imbalance and the desire to buy now before rates go up further – is keeping housing prices up.
The article also said that economists largely expect home prices to continue to rise even if the rate of growth is likely to ease.
The National Real Estate Post also just shared a video explaining why our housing shortage is so acute – in case readers (OR THEIR CLIENTS*) need even more evidence as to why we remain bullish on housing. *As a quick reminder, we love it when readers share our blogs!
So – is one of my favorite macro pundits (Alf) wrong? Probably yes, as he is a big picture guy and I suspect he has never dug into the housing data like those of us in the mortgage and real estate industries have.
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