Cheer Up! This Is a Garden Variety Pullback

Everyone is a pessimist these days.

I’m seeing comments like this all over Twitter:

Source: Twitter

People are fretting about war, civil unrest, hyperinflation, an economic depression, the nationalization of various industries. On and on it goes.

Look, all those things are possible. There have been some terrible stretches in our history. Things got pretty rough from 1929, when the stock market crashed, to 1945, just after World War II ended. 16 years is a long time for economic misery to gnaw away at you. But the country made it through. And there was still great art and culture. The stock market stayed open, and some people did, in fact, make money.

Another Housing Crisis?

One of the things everyone’s negative about right now is housing. As an August 16 Forbes headline put it:

Housing Market Faces Growing Risk Of Multi-Year Collapse
As New Home Construction Craters

For sure, the housing market has hit a wall. New housing starts dropped 9.6% in July. But that doesn’t mean the housing market is going to collapse like it did in 2007/2008.

It simply means the housing market is cooling off. This is largely because the Federal Reserve has hiked interest rates four times this year, beginning in March. And it plans to keep hiking rates indefinitely.

Still, the situation is not as bad as you might imagine. The last housing collapse is fresh in many people’s minds, and humans have a recency bias—they think things that happened recently will happen again.

The housing market collapsed in 2007/2008 because banks and other lenders gave countless mortgages to a sea of subprime borrowers. The situation is radically different now. For one thing, around 40% of homes in this country are owned free and clear. In those instances, the owners aren’t worried about paying the mortgage every month. Plus, the average US home is 67% paid off.

Meanwhile, mortgage lenders have much stricter standards than they did leading up to the housing collapse. They’re not lending to people who can’t afford to pay back the money.

In short, the housing market is healthy. It got smoking hot during the pandemic, and now it’s cooling off. This is a garden variety pullback… a correction. No one is under water this time around. We are not going to sink into an economic depression.

If you are thinking about buying a house, maybe now is not the best time. But it’s also not the worst. Prices have come down a bit. Interest rates are high but not egregious. And it’s turned from a seller’s market into a buyer’s market. So, you can squeeze them on the price a little bit.

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What You’re Betting On

The only reason I follow all the doomsday stuff on Twitter is because it helps me read market sentiment. But I cut myself off after 10 minutes or so. All that pessimism—whether it’s on social media, on television, in print, or coming straight from the person sitting next to you—can take root in your brain and fester there. If you’re not careful, it can change your whole outlook on life.

I have been following the economy closely for the past 20 years, and there have been points when I’ve been concerned. I am not concerned now.

Buying a house is an act of optimism. You are betting you won’t lose your job—or that if you do, you can find another. You are betting the economy will stay strong… betting the government will remain stable. Ultimately, you are betting on yourself. And you know where I stand on that.

Jared Dillian
Jared Dillian