The recent rate hikes will have an impact on mortgage payments, specifically 30 year fixed mortgage, and the era of free money from taking out equity in homes is coming to an end.
Low interest rates combined with higher wages allowed many millennials to purchase their first home. As a result, there has been an increase in mortgage applications to buy homes, rising 5% week over week and 18% year over year.
The cost of capital for debt in the market has risen to 14%, leading to a discussion on mispricing and a potential looming credit crisis. While labor participation is low post-pandemic, companies are focusing on maximizing short-term free cash flow which leads to cutting operational expenses and taking on credits, likely leading to a consumer credit bubble.
The Federal Reserve Bank raising interest rates is a better indicator of the housing market outlook. If interest rates keep going up, mortgage rates will increase and buying a home will be more expensive.
The speaker predicts a massive recession for next year due to the current interest rate increases by the Fed and the high mortgage rates. The previous mild technical recession was caused by nominal GDP growth not keeping up with the inflation rate.