These are strange times we are in now. My notifications on my phone are going crazy with alerts that stocks are down 5-10% then a day later they are up 5%. I just learned that if the stock market drops 10% that there is a 15 minute “time out” for investors to stop and think. If it happens 3 times in a day, they send everyone home. In the last week, they have had a few times where they have stopped the stock market for 15 minutes. A lot of people have mentioned how the market feels a lot like it did in 2008 right before the big crash. We have heard from a lot of people worrying that it means we are headed for another crash. We can’t predict the future but here is why things are very different.
Every other time we have gone into a recession (not to say we are headed to a recession or not), we have had an abundance of homes to buy. That was one of the biggest problems in 2008… If you remember (or if you have seen the Big Short), it was easy to get loans (we’ll talk about this more in a minute) so everyone was buying homes and got into trouble with being about to pay. So homes were foreclosed on or the owners did a short sale. What this meant was the banks had a ton of homes that needed to sell plus all those other people that just needed to move. The result: Too many houses for sale which caused home prices to drop like crazy.
The Now: We have an inventory shortage. That means prices should go up. The below graph shows Salt Lake County having around 1 month of inventory. We would say a balanced market it at 6 months. If less people go out to buy houses this could case the inventory to go up.
Here is your economics 101 lesson: If you are selling toilet paper there is a certain number of people that need or want it. If you price it at $100 a roll, you won’t get many people that want it (well maybe some would now). If you price it at $0.01 you will have a lot of people want it. So you need to strike a balance. If you try to sell it for too much you have a surplus and too much inventory. If you sell it for too little, everyone will buy it and you will have a shortage. With homes it isn’t too different. We have too few homes for sale (a sellers market) so we are able to price them higher. If we have too many (a buyer’s market) then prices tend to go down.
When things look like there is going to be a problem in the economy the Fed have a couple of options. 1st they lower interest rates. This gives the bank money for cheaper which means they can loan it out for cheaper which means more people should want to borrow money which then stimulates spending which helps our economy grow (pause to catch breath). This is a pretty good plan but in 2008 doing that didn’t help because no one trusted the secondary mortgage market (very complex, which also effect mortgage rates). So this time they have also announced they will buy Treasury securities so everyone can trust that we won’t have another 2008 problem caused by banking.
The Now: The Fed has lowered their interest rate to zero and announced they are injecting billions into Treasuries. They seem to be doing everything right. This might help the interest rate a little but from 2010 until 2016 the rate was zero. So unless we get a negative interest rate from the Fed, this might be as low as they go. If you are wondering, this is historic type lows:
While things might look or even feel like 2008 we are living in different times. A lot of the worry about the market is driven by fear. The biggest issue is that fear is sometimes all we need to shift the market. So think like Warren Buffet and take advantage of the fear in people: “Be fearful when others are greedy. Be greedy when others are fearful.”