2022 has given people a lot to worry about.
The painful bear market in stocks. Inflation at a 40-year high. Shortages of essential items like baby formula. Even, at one point, nuclear war.
And, while this probably doesn’t come as a shock, the media hasn’t helped ease these worries.
Barron’s recently said people are getting “squeezed” by the state of the economy.
Associated Press says the growing popularity of “buy now, pay later” plans are one of the causes. (These are the “subprime borrowers” Amber pointed out in Sunday’s Options Arena.)
CNBC tells us this is leading to mental health concerns.
It’s a cascade of problems leading into other, increasingly serious problems. All making it seem like there’s nowhere to hide — or to invest your money and get ahead.
But there is a bright spot in this economy that you must understand.
Lots of people already benefit from this bright spot, and will continue to. Meanwhile, many others are actively rooting against it.
However, no matter what your situation, there’s a way to directly benefit, and be happy about this bright spot. I’ll show you how today.
Don’t Bet on a Housing Crash
Wounds from the 2008 housing crash are still fresh.
Many people lost their homes to foreclosure. Others suffered devastating financial setbacks as the stock market cratered.
But — knock on wood — this time is much, much different.
The main thing telling me this is the low number of subprime mortgages. Subprime mortgages are for borrowers with low credit scores, generally under 600. These loans have higher risks of default.
Anyone who saw The Big Short knows subprime mortgages contributed to the global financial crisis. Back then, banks were making these risky loans on the assumption home prices would always go up. If prices continued rising, creditworthiness didn’t matter because they would quickly build equity in the home.
In 2006, almost 30% of all new mortgages were subprime. Many buyers didn’t even make down payments. So, when prices turned down, homeowners walked away since they had almost nothing to lose. It was the bank’s problem.
We aren’t seeing that now. A quick search at BankRate.com found exactly zero subprime lenders in my area. You have to go up to a credit score above 620 to find a willing lender, and even then, they require a minimum 5% down payment.
Fewer subprime loans means we should see fewer defaults in the next recession. On top of that, current delinquency rates are near historic lows. Unlike in 2008, people are clearly only buying homes they know they can afford.
Source: New York Federal Reserve
(Click here to view larger image.)
Lower defaults mean fewer distressed sales — a forced sale as a result of missed payments or foreclosure. And distressed sales are what ultimately lower property values.
A Federal Housing Finance Agency study showed these sales lowered prices of nearby homes by as much as 30%. Drops like that create stress for other owners and lead to more distressed sales.
That’s not happening this time. Just 1.8% of mortgage holders have negative equity in their homes.
Of course, real estate prices are based on local conditions. Some states show signs of stress.
(Click here to view larger image.)
This all indicates home prices are unlikely to fall much. In some areas, parts of Louisiana and Iowa, distressed sales could have an impact. But in most places, home prices should hold steady. Zillow’s home value forecast shows prices should rise 2.4% by July 2023.
This is good news for homeowners, who can depend on their homes to preserve wealth as the recession hits.
If you’re looking to buy a home and are waiting for another housing crash, you shouldn’t. If you can afford it, you should consider taking the plunge before rates and prices climb higher.
And if you’re neither a homeowner nor a home-shopper, you can still benefit.
The SPDR S&P Homebuilders ETF (XHB) and home building companies are beaten down, but showing signs of strength.
As the sector fares better than expected in the upcoming recession, the stocks could rally. Now could be a good time to consider long-term calls in the sector.
Michael Carr, CMT, CFTe
Editor, True Options Masters