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Housing Won't Back Down

Housing Won't Back Down

June 03, 2024

"I Won't Back Down" was released in April 1989 as the lead single from Tom Petty’s first solo album, Full Moon Fever.

Source: YouTube

The song was co-written by Petty and Jeff Lynne, of ELO fame, who also produced the album. The song reached number 12 on the Billboard Hot 100, and the album topped the Album Rock Tracks chart for five weeks and became a multi-platinum best seller. The song is very well known and has been used in multiple political campaigns by people from all sides of the political spectrum. It was also used as a rallying cry after the 9/11 attacks. It is also played at many sporting events and athletic competitions.

Most people are not aware that an arsonist set fire to Tom Petty’s L.A. home in May 1987, burning most of the house to the ground. Tom rebuilt the house on the exact same plot of land, using his basement recording studio – one of the few rooms to survive the blaze – as the foundation. He wasn’t going to back down to any firestarter. “I Won’t Back Down” has become an anthem for anyone who is enduring some sort of struggle. The song isn’t really about a house fire. It’s about resilience. 

Well, I know what's right
I got just one life
In a world that keeps on pushin' me around
But I'll stand my ground
And I won't back down

Hey baby
There ain't no easy way out (I won't back down)
Hey I will stand my ground (I won't back down)
And I won't back down

For those of you who would like a musical reminder of this great song, a YouTube link is included below. George Harrison and Jeff Lynne also appear in the music video along with Harrison's former Beatles bandmate, Ringo Starr, playing drums; however, Starr did not play on the recording. I may have mentioned this in a previous blog post, but I am very glad that Rachel and I got a chance to see Tom Petty’s last Cleveland concert shortly before he unexpectedly passed away. By the way, fellow Ohioan Joe Walsh opened for him at that show.

Tom Petty & The Heartbreakers - I Won't Back Down

If you are a young person in America today, you may also feel that the housing market Won't Back Down. The combination of rising home prices and rising mortgage rates has seemingly put affordability out of the realm of many people under age 40. Since the beginning of 2020, housing prices have risen nearly 40% nationally. This means that if you were looking to buy a $300,000 home four years ago, the price of that same home has likely risen to more than $400,000 today.

Add in mortgage rates that have risen from below 3% to above 7%, and mortgage payments have doubled in a very short period of time. This is leading many young families to rent instead of buy. However, from a historical basis, there are significant reasons to try to obtain homeownership.

First of all, as you can see in our first chart below, young families tend to accumulate most of their wealth in two places: home equity and 401(k) plans. The reason for this is simple. Both give people the ability to systematically build wealth on a month-by-month basis. Consider that whether the market goes up or down or sideways, most employees continue to contribute and accumulate shares in their 401(k) investments every pay period.

Likewise, as home prices have historically gone up, people build wealth as they make their mortgage payments, and the differential between the value of the home and what they owe on it continues to grow. If young people give up on the American dream of homeownership, they will also likely give up one of the two pillars of wealth creation. As both parents and financial advisors, we continue to encourage them to pursue both avenues of wealth creation.

Based on population demographics and housing inventory, we believe the trend of growing home prices over time is likely to continue, as you can see in our second chart below. You will note that the inventory of homes for sale reached a record level in 2007, around the time of the subprime mortgage crisis and the only sustained downturn in housing prices in the US since 1941. 

As you can see, since then, our US population has grown by nearly 40 million people while the housing inventory has dropped by nearly 75%, from 4 million homes for sale in 2007 to just over 1 million homes for sale today. Basic economics tells us that if there is more demand and less supply, prices will rise.

There are many people who believe that the housing price collapse we saw in the United States from 2007-2011 is likely to happen again. As we look at our final chart, we will see that over the last 80 years, that time period was an anomaly. Even when we went through similar times of price increase in the 1940s and 1970s, these were not followed by a subsequent housing collapse. As a matter of fact, you will note that there was only one other year housing prices dropped ever so slightly.

It appears that, just like Tom Petty sang, housing prices won’t back down anytime soon based on supply and demand dynamics. As we want to encourage our young families to establish good financial habits that lead to wealth creation, we should remind them of this dynamic. Many young people also feel that they would not have the 20% required for a home down payment in today's higher-priced marketplace. However, in recent conversations with mortgage lenders, they have reminded us that there are programs that allow young and first-time homebuyers to purchase a home with a down payment as low as 3% to 5%.

I thought this was an important perspective to share with you, our trusted friends and clients. I would like to thank real estate and mortgage expert Barry Habib of MBS Highway for sharing this information with us at a recent conference. Please feel free to pass this information on to your younger family members who may be struggling with these real estate market dynamics today. Please encourage them to give us a call if they have questions. We are here for you and your family as we continue “Moving Life Forward.”

© 2024 Jesse Hurst

The views stated are not necessarily the opinion of Cetera and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.

Neither Cetera Advisors LLC nor any of its representatives may give legal or tax advice. This information is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.

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