It’s almost impossible for first-time buyers to afford a home, top analyst says

Mark Zandi of Moody's
Mark Zandi is chief economist of Moody's Analytics.

  • It's virtually impossible for first-time buyers to afford a home today, says Mark Zandi of Moody's.
  • The surge in house prices and mortgage rates since the pandemic is pricing them out, he says. 
  • An expanded low-income housing tax credit could spur building and help buyers, Zandi suggests.

Sky-high house prices and mortgage rates have dashed many Americans' dreams of owning their own home, the chief economist of Moody's Analytics says.

Prices rose about 5% last year, and are up nearly 50% over the past four years or so, Mark Zandi said in a X post on Sunday, citing his firm's repeat sales house price index.

St. Louis Fed data shows about a 27% rise in the median US home sale price, from below $330,000 in the first half of 2020 to $418,000 in the last three months of 2023.

Meanwhile, 30-year mortgage rates have surged from historic lows of 2.5% during the pandemic to nearly 7%, Zandi noted.

Their rise is primarily due to the Federal Reserve lifting interest rates from nearly zero at the start of 2022 to more than 5% in an effort to curb inflation. Raising mortgage payments is a key aspect of how the Fed's rate hikes fight inflation, as homeowners are left with less disposable income to spend and drive up prices.

Aspiring homeowners face not paying more for goods and services, but the prospect of paying a near-record price for their property, and covering hefty monthly payments.

"For the two-thirds of Americans who own their home, the higher prices mean a massive increase in their wealth," Zandi wrote on X. "But of course, this is a massive problem for potential first-time homebuyers. Given the collapse in affordability, buying a home is not even remotely possible."

The so-called affordability crisis has been fueled by the lock-in effect, where homeowners on cheap mortgage rates don't want to lose it by selling. They've also balked at paying top dollar for their next place and taking on a far more onerous mortgage.

Stand-off

As for prospective buyers, many have been priced out and are waiting for mortgage rates to fall, as they're reluctant to settle for a worse home than they could have afforded just a few years ago. The stand-off between buyers and sellers, and a shortage of available homes, has pushed up prices while reducing transaction volumes, effectively freezing the market.

Indeed, sales volumes of existing homes slumped by 17% between February and December last year, from 4.6 million units to below 3.8 million, per the St. Louis Fed.

The US needs to create a lot more housing inventory to normalize the market and help first-time buyers get on the property ladder, Zandi said. He called for an expanded low-income housing tax credit to encourage developers to build more affordable homes.

Zandi has previously warned that several things need to happen for sales volumes to return to normal levels.

"The only way out of the box, the only way to get sales back up is mortgage rates have to come down, incomes have to continue to improve, we have to avoid a recession, and I suspect we'll have to see some house price declines at some point here," he told Yahoo Finance in November.

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Original source at: Business Insider | https://www.businessinsider.com/zandi-moodys-house-prices-mortgage-interest-rates-affordability-crisis-market-2024-1

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Donald Trump claims he’s responsible for stocks hitting record highs

Donald Trump, Trump
Donald Trump.

  • Donald Trump claimed credit for the stock market's surge to record highs this month.
  • The former president said investors are betting he'll be re-elected this year and stocks will rise.
  • Trump predicted in 2020 that a Biden presidency would cause a devastating market crash.

Stocks have surged to record levels this year, not because of potential interest-rate cuts or recession relief, but because investors are betting on Donald Trump to be re-elected — at least according to the former president.

"THIS IS THE TRUMP STOCK MARKET," Trump said in a Truth Social post on Monday. "BECAUSE MY POLLS AGAINST BIDEN ARE SO GOOD THAT INVESTORS ARE PROJECTING THAT I WILL WIN, AND THAT WILL DRIVE THE MARKET UP."

"EVERYTHING ELSE IS TERRIBLE (WATCH THE MIDDLE EAST!), AND RECORD SETTING INFLATION HAS ALREADY TAKEN ITS TOLL," he continued. 

The benchmark S&P 500, tech-heavy Nasdaq Composite, and venerable Dow Jones Industrial Average have notched record highs in recent days.

Trump appears to be taking credit for the market boom, in a bid to prevent it from boosting Joe Biden and the sitting president's reelection campaign.

The reality-TV star took a slightly different tack in December, however, complaining the rally was "making rich people richer."

Trump repeatedly boasted about rising stocks during his time in office, and warned in 2020 that electing Biden would trigger a "stock-market collapse the likes of which you've never had."

In contrast to Trump's claims, many experts have attributed the striking rally to a brightening economic outlook.

Stocks tumbled in 2022 as historic inflation spurred the Federal Reserve to raise interest rates from virtually zero to more than 5% within 18 months. The hikes fanned fears of slower growth, a spike in unemployment, corporate bankruptcies, and even a full-blown recession.

However, stocks rebounded strongly last year as the US economy proved resilient to steeper borrowing costs, the pace of price growth slowed, and joblessness remained historically low.

Rate cuts loom

They've notched further gains this year as new data has shown the economy grew by a surprisingly strong 3.3% in the fourth quarter, annualized inflation has cooled from over 9% to 3.4% in December, and unemployment held at 3.7% last month.

Moreover, the Fed has penciled in several rate cuts this year, which could encourage spending over saving and reduce borrowing costs, making a recession less likely and boosting companies' profits and stock prices.

Trump is presumably aware of the key drivers fueling the stock market's advance, and knows they probably don't include his possible reelection. He may be laying claim to the market's gains under Biden, and dangling the prospect of further outperformance if he retakes the White House, to give him an edge ahead of November's election.

Several experts have echoed Trump's warnings about the damage already done by inflation and the threat posed by foreign conflicts.

JPMorgan's Bob Michele has flagged the impact of higher prices on poorer households, while hedge-fund titan Ray Dalio and bank chief Jamie Dimon have warned of fallout from the fighting in the Middle East.

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Original source at: Business Insider | https://markets.businessinsider.com/news/stocks/trump-biden-stock-market-record-rally-recession-inflation-presidential-election-2024-1


Stagflation is engulfing the UK economy, showing what could lie in store for the US and Europe

UK railway strikes
UK railway workers have gone out on strike over pay, jobs and working conditions.

  • Talk about stagflation is growing in the US, but it's the UK economy that's likely to stall soon.
  • Britain already faces the highest inflation rate in the G7 — and it's predicted to climb even higher.
  • Soaring energy prices, rising interest rates, tax hikes, and Brexit are battering the UK economy.

Talk of "stagflation" — the dreaded combination of stagnant growth and rampant inflation — is growing louder in the US after the economy shrank for two quarters running

Sure, inflation is red-hot, and the economy is dangerously close to a recession. Yet many still expect the next two years to deliver relatively strong growth, and that's after a rapid rebound from the coronavirus crisis.

Over the pond in the UK, however, things are different. Economists say Britain is barreling towards a period of stagflation, with growth expected to slow to a crawl next year.

UK inflation rocketed to a new 40-year high of 9.4% in June as fuel prices surged, official data showed. That's higher than in any of the other G7 countries — Canada, France, Germany, Italy, Japan, and the US. It's likely to top double figures before the year is out.

 

Soaring prices, rising interest rates, tax hikes, and Brexit are all hitting the UK economy at once. The country's gross domestic product will grow just 0.7% next year, for the worst performance in the G7, private-sector economists polled by Bloomberg predict.

The Bank of England is even more pessimistic. It thinks GDP is likely to shrink slightly in 2023, and grow just 0.25% the following year.

Meanwhile, economists expect the US economy — which fared much better during COVID — to expand 1.3% in 2023. And they think eurozone GDP will increase by the same amount.

The UK's leaders are under pressure

For policymakers in the US, and the better-performing European economies, Britain contains a warning of what could be coming if things go wrong.

Leaders in the UK are under growing pressure over the bleak outlook. Rail workers, lawyers and mailmen are striking as the cost of living spirals higher. Consumer confidence has plunged.

In fiery TV debates this month, Boris Johnson's potential successors as UK prime minister inadvertently trashed the government's economic record.

"All your bills, every month, they're going up and up and up," said Rishi Sunak, who led the UK's economy ministry over the last three years. The other candidate, Foreign Secretary Liz Truss, said the UK faces "the worst economic crisis in a generation."

Energy bills reach eye-watering levels

At the heart of the UK's woes is an inflation rate that is outstripping that in other rich countries, and is likely to keep rising this year.

The country's energy price cap, designed to ease the burden on utility bill payers, is now adding to the pain.

The cap jumped 54% in April, and is set to rise by a similar amount in October to reflect a surge in oil and gas prices driven by Russia's invasion of Ukraine.

"Energy prices go up and stay there for a more prolonged period of time, rather than come down with the market," Sanjay Raja, chief UK economist at Deutsche Bank, told Insider.

A sharp drop in the British pound has made things worse, Raja said. It's fallen around 11% this year against the dollar, as the Federal Reserve's rate hikes have sucked money back into the US. The UK imports much of its food and energy, and a weaker pound is making those purchases even more expensive.

The workforce has shrunk

On top of a European-style energy shock, the UK is suffering from a problem more familiar to the US: a shortage of workers. More than 400,000 people have dropped out of the workforce since the start of the pandemic, economists estimate, with around half because of long-term illnesses.

Companies are putting up wages as they compete for a smaller pool of workers, adding to the pressure on prices, according to Ruth Gregory, senior UK economist at consultancy Capital Economics.

 

"You've got these acute labor shortages, which have held activity back in some service sectors, stoking rises in pay growth and higher inflation," she told Insider.

Brexit has also cut the size of the UK workforce by making it harder for people to move to the country, Gregory said.

Brexit and tax rises aren't helping

Deutsche Bank's Raja said Brexit is also causing other problems.

"Firms are telling us [about] additional paperwork, logistic costs, and in some cases higher tariffs as a result of leaving the European single market," he said. "Those things have also driven up imported goods prices."

Tax rises, which came into force in April in an effort to cut the budget deficit, are also adding to the squeeze.

"As far as I know, we are the only advanced economy to have pushed through a tax rise this year in the midst of the cost of living crisis," Raja said.

It's the stuff of nightmares for the Bank of England, which is hiking interest rates hard and seems resigned to a sharp slowdown in growth. "Its path to achieving a soft landing is narrower than the Fed's," Gregory said.

But it's even worse for millions of Britons struggling to get by during the worst cost-of-living crisis in a generation.

In real terms, wages are falling sharply. More and more people are turning to food banks, and discontent among workers is growing. Whoever succeeds Boris Johnson faces a daunting task.

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Original source at: Business Insider | https://www.businessinsider.com/uk-economy-stagflation-recession-energy-prices-brexit-taxes-us-europe-2022-7

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