How the next housing bust might unfold – the best-case scenario.

“THE WOLF STREET REPORT” is my new podcast. It’ll appear weekly right here on WOLF STREET. It’s where I discuss a topic in depth for 10-20 minutes.

In this inaugural edition, I ask: As higher interest rates hit the housing market over time, what will that do to banks and in particular to shadow banks that now originate over half of all mortgages? And what will the Fed do?

“101 new listings, 101 price reductions.” Read…  Red Ink: Housing Inflects Further in Bay Area’s Sonoma County

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  53 comments for “THE WOLF STREET REPORT

  1. Jon says:

    “will not last!”

  2. Crysangle says:

    That was very clear and fluid to listen to .

    Two questions come to mind. The first is that shadow banking works something similar to mbs, how sure can regulators be that it is separated from commercial banking and the wider market given investment itself (as in the market) does not work in isolation but has some tendency to be interrelate. I don’t expect an answer to that because I think it is a known unknown.

    The other question is basically a repeat of previous one, that being that the money supply, the addition to GDP, from most recent years, is said to be largely via the housing market. In that case I just question what will happen if the housing market dives, and more specifically if those who are set comfy in their mortgage arrangements might not still be indirectly affected by a resulting wider downturn in the economy. I would hope most households have some margin, but there will also be those that have little, and not much free equity stored in their property, and no refinancing on better terms to look forward to. I imagine they will be the ones caught out, which would be something of a shame as that would be those who just entered the market, or so far scraped through, or who left and re-entered, as a guess. If a housing downturn really does affect the whole economy, I expect it could sink further than expected as fewer will take the lower prices while surrounding circumstance seems to be uncertain. This I have watched elsewhere, basically positive mood just goes and takes a fair while to come back.

  3. Stan Sexton, Broker says:

    Just replacing that ancient wood shake roof with comp shingle or tile is going to cost a lot of money. Here in San Diego County, it’s illegal to install a wood shake roof for fire reasons. I wonder how much water damage has already occured. Probably 80% of this home’s value is in the lot. Blink and this will be a McMansion.

  4. Werner says:

    Hi Wolf —- A question for you I am very curious bout :

    If the real estate market is in trouble, and by many of your articles it looks like this may be the beginning of trouble — why do we read an article recently that Wells Fargo is re-entering mortgage-backed securities?

    • Wolf Richter says:


      Wells Fargo was once the largest mortgage originator in the US. It has given up this rank to the shadow bank Quicken Loans. WF has been laying off people in its mortgage unit for years, mainly because the refinancing business has fizzled. These layoffs include an announcement earlier this year of 163 layoffs and another one in August of 638 layoffs. There layoffs are specifically in its mortgage unit.

      In September, WF’s CEO said that there would be 10,000 layoffs across the bank over the next three years, though he didn’t say where those cuts would occur, but it looks like the mortgage unit is going to get its share.

      On the other hand, securitizing mortgages is a way of raising funds and getting rid of mortgages. WF sells mortgages it has on the books by packing them into MBS. The market for MBS that are not GSE (Fannie Mae, Freddie Mac) guaranteed had died after the financial crisis. And now the GSEs totally dominate this market. Now WF is wading into it again as a way of selling mortgages to investors and raising funds.

      This tells me that investors have once again the hots for non-GSE mortgages and that WF needs the funds (we know it needs the funds because it has been very aggressive in its rates for brokered CDs).

      • alex in san jose AKA digital Detroit says:

        Quicken Loans has several “heads” too, for instance Rocket Mortgage is them.

        A lot of US companies do this. Dreyers and Breyers are both the same frozen Styrofoam fake ice cream by the same dishonest company. Chevy and Chrysler? Both GM. (Several finance/loan companies are also GM so that brings this post back around to financial chicanery.)

        • RD Blakeslee says:

          “Chevy and Chrysler? Both GM.”

          Evidence, please.

        • Prairies says:

          Chevy, Cadillac, Buick, Pontiac are all under the GMC. Chrysler is under Fiat and was formerly under Daimler AG. Chicanery seems to have fooled you.

        • Crysangle says:

          Prairies… had to look this up…Chrysler is merged into Fiat Chrysler Automobiles, which is a multinational listed on NYSE and Milan … so it is not under Fiat… but the Agnelli family hold a high control. There is talk of possible merger with Ford or Hyundai or other.

  5. 2banana says:

    Higher interest rates + DJT new tax laws + QE unwind + Mel Watt retiring = end of housing bubble

    • Mike R. says:

      Interesting reference to Mel Watt. Most people don’t know that angle. Want to expand on it?

  6. Stan Sexton, Broker says:

    The real estate market peaked in July, but the stats on Sold Prices take 60-120 days to come out. Contract prices from July show an increase but since then, listings have increased and Pendings are few. This means increased competition for fewer buyers and eventually lowered prices. Once the speculators smell blood, they will all try to get out the door at the same time, clobbering asking prices. The cash buyers – the Chinese, the Top 10%, Flippers and Wall Street Hedge funds will hold off and wait for lower prices to strike again. As we learned in 2008+, few people buy on the downslide in prices. Then as unemployment climbs, the people who bought recently will be underwater, sending their keys to the bank (“Jingle Mail”). Foreclosures will start and unlike 2008+, it won’t take 9 months for the Banks to figure out how to do a Short Sale. FNMA and the Banks will end up selling those discounted properties to those 4 aforementioned cash buyers. This will result in more inequality and compound the already 50 year-low in owner-occupied properties. Your children will rent from the Chinese and Wall Street. As the Amazon book explains : “They Own It All”.

    • Todd H. says:

      Sales are down 18% year over year in my town for the month of September. Sooner or later prices will fall in response to the gap between bid and ask.

    • MF says:

      What are the chances of Chinese non-resident owners being forced to sell in large numbers, crowding the same door as speculators?

      And are you assuming that CRE never rolls over? My operating assumption is that rental prices in large buildings slowly get crushed over the next five years as oversupply comes online. This would put a ceiling on condo prices, at the very least, no?

      • cd says:

        I expect Chinese market margin calls doing exactly what you say….
        its almost a given..tariffs are all about disrupting chinese markets….
        interesting to note Geithner and Paulson now say rents are killing the american economy….expect lower house prices…..

    • alex in san jose AKA digital Detroit says:

      It’s only been a recovery for the top 10%, and for them it’s about to be like that golden time when they bring out all the new platters at the buffet.

  7. This is what we all want to believe and have the numbers and common sense that dictates that the market is so completely overvalued. But nothing ever works the way you would think. In early 80’s interest rates went up and prices did not drop. There are many other factors that determine housing prices.
    We were buying a fixer in Southern CA last week for a price range of $750k, needed another $50k in repairs. We thought we could get it and fix it and occupy for a few years. We got bit out by over 28 offers. Many all cash. Thats over $21 million in cash seeking a return. Investors are smart and they are not buying the stock market but seeking more assets that might be overvalued be at least a house has intrinsic value. Thats the only thing I can think of. And what are those investors going to do rent the house out for a 2% cap rate. Its confounding.

    • two beers says:

      “investors”? Multiple all-cash overbids…hmm, sounds more like foreign capital flight and/or money laundering…

    • Nicko2 says:

      Money laundering does not require a return on investment. They can sit on the house, keep it empty.

      • MC01 says:

        While we all agree that money laundering is a depressingly common issue in any real estate market, it’s a symptom, not the underlying cause.

        Cash payments are not merely the result of illicit activities half a world away or capital taking flight from destructive monetary policies, but also the result of other lines of credit than conventional mortgages. Italy, Spain and other Club Med countries already have financial products which allow potential customers to have “cash waiting” for a real estate purchase even before choosing a house: European creativity knows no boundaries when it comes to real estate speculation. Albeit I’ve heard the good folk of Australia, Canada and China are giving us a run for our money. ;-)
        There’s also the good old Bank of Mom and Dad, which is getting increasingly raided by people my generation (I am 42) or even younger who finally succumb to the homeownership brainwashing. At the top of the market.
        I only hope my own savings don’t get raided again to save this new generation of victims/fools from their own choices…

        • Average joe says:

          Is it really brainwashing to aspire to homeownership? All it takes is having some part of your lifestyle undesirable to being a renter – such as having pets, or an odd hobby – and the security of not being able to be thrown out of your home is very appealing. Average Joe doesn’t always have years to wait for the market to be just right to purchase – Average Joe just needs a place to live.

        • JZ says:

          Average Joe, here is the brain washing for you. Home ownership means freedom. Borrow money and “pretend to” to own home is slavery.
          There is nothing wrong with home ownership, it is the source of the money that traps lots of people, lots of people.

      • Unamused says:

        Money laundering does not require a return on investment, but wealth preservation does. And an empty house is a depreciating asset. Wealth cannot be preserved by buying up empty houses. Buying up empty houses to constrain supply and raise prices on occupied houses is ultimately self-defeating.

        For that matter, the planet itself is a depreciating asset, due to depletion and a severe lack of conservation. OTOH, debt continues to mount – corporate, government, and personal – and blew past $250 tn this year. This can only be sustained by real economic growth, which accelerates planetary depreciation and is compromised by an entrenched program of misallocation in any case.

        So the resort is to even more debt, which is dependent on permanent cheap credit and which further compounds the problem. Central banks are trying to limit debt growth by raising interest rates, which pressures the ability to service existing debt and threatens the bubbles generated by excessive debt.

        There is no way out.

        • Setarcos says:

          The depth of your analysis that enable you to make your comments is very impressive. At the end of the day though, it is pessimistic, it a scarcity model. There is model based on optimism that is more admittedly more elusive, but it is real and you can prove it to yourself.

          Resources (and knowledge) that are fundamental to enhancing the economy and living standards are scarce because the resources are selected and made scarce intentionally. If supply constraints are lifted without managing the process, the profit goes away. Everything is a business model. You can say this reflects flaws in human nature and you would be correct, but these flaws have also propelled living standards forward in some areas …which allows more people the time away from toil to make amazing new discoveries.

          Living standards change based on new knowledge. Knowledge is not constrained, but the ability to monetize knowledge into a business model is constrained at levels almost unimaginable.

          For example, if you developed a source of energy that beats existing energy cost by 90%+ your finding would be outright stolen, co-opted and/or your life might be cut short if it presented too great a threat to those with power (or some combination of these outcomes). But the progress of humans has always found a way to break through these constraints. It is not pretty, but it always happens. Therefore, there is cause for a model that includes this optimism. Knowledge is what makes other resources valuable and knowledge is not limited, especially in the longer run. Optimism and pessimism are both self-reinforcing beliefs.

        • Unamused says:

          ->knowledge is not limited

          Oh my.

        • Setarcos says:

          I meant that Knowledge is not limited in the same way as some specific resource, such as gold. And I will add that any limitations a reasonable person would have placed on knowledge at any given point in time would prove foolish in retrospect.

          Think about the larger concept rather than just seeking to discredit me. I admittedly need to write better, but just trying to share ideas here in the confines of time/space.

          Let me also add that groups are simply aggregations of individuals. At either level, a belief of scarcity/pessimism is self-reinforcing and self-fulfilling.

          The wright brothers learned how to make airfoils using hack saw blades. Everybody who watched them thought they were crazy. They flew nevertheless and the world was never the same again.

        • Unamused says:

          I have no interest in discrediting, humiliating, or debating you, Setarcos.

          Apprise yourself of the plan facts, starting with the ascending $250 tn in global debt, and multiply that with trends in economic predation, resource depletion, pollution, climate change, militarism, and political reaction and expediency, and it becomes clear that your optimism simply lacks any real foundation.

          The advances of knowledge and capability you so admire only serve to accelerate these trends while failing to provide any actionable insight into their solution. Even without the debasements of aggressive agnotology, the expansion of intellectual and technological prowess you espouse brings no motivation to pursue any saving direction, and no invention presents itself which shall or can. There will be no happy ending.

          You are certainly welcome to any opinions you care to entertain, but reality is under no obligation to respect them, and cannot be gainsaid.

          This site is all about pessimism. I just prefer not to go about it piecemeal or to restrict it to mere considerations of finance.

        • Setarcos says:

          Individuals incapable of successful resolution of their own individual problems, do not deserve to be heard when offering solutions for a group. They are inherently hypocrites. A pessimist always creates fundamental problems and groups of pessimists create even greater problems. When they view the human condition through this lens of pessimism, taken to its logical end game, every person deserves bondage. Destroying what makes living worthwhile in an attempt to save it is appealing only to those who are arrogant or rich enough to think they can separate themselves from the destruction.

          The problems you see may be real and when you can also also see the problems in yourself, you can begin to solve them, unless you are in bondage.

  8. Joe says:

    Higher interest rates not only affect the monthly payment amount, but also the opportunity cost of the lost down payment. 20% down on a $1.2 million home (not uncommon around here in So CA beach towns) would require a $240K down payment. $240K broken into 4 chunks of $60K will get you $100 per week from 4 week T-Bills at Treasury Direct. So add a little more than $400 per month to the cost of a home. At some point all these additional costs have to matter.

  9. Mark N says:

    Wolf, this is great, any plans to have a proper podcast feed, so this can can be played in podcast apps, go into the iTunes directory, etc.?

    • Larry says:

      I’ll second this Wolf. YouTube is not the best platform to consume podcasts.

  10. Harvey Darrow Cotton says:

    First AT&T merges with Time Warner, and now this. Is there anything that can slow the growth of these media conglomerates?

    • Unamused says:

      Anti-trust laws.

      Good joke. Everybody laugh. Roll on snare drum. Curtains.

  11. Interesting discussion. There a number of factors in play, with the Fed being the wild card. The economy, and particularly the housing market are suggesting that higher rates will stifle demand. With the Dow Jones home construction index down 31% YTD, builders are certainly having a difficult time adjusting to higher rates, as their expensive product offerings become even less affordable.
    The existing/resale market is suffering from affordability problems as well, but also from the financialization of housing in general with homes that should be hitting the market but are stranded or tied up by flippers and landlords. Moral hazard of market intervention is the order of the day.
    How the situation resolves is anyone’s guess, but I suspect the recent drop in sales across various markets is just the beginning of the mean reversion, a reversion that could likely end up being a more lengthy process, barring a real “accident”. Dallas-Fort Worth just saw the biggest sales decline in 7 years, and it appears we’re going to get more of the same next month based on pending sales, yet local economists, Realtors and sell-side housing pundits don’t see any recessions on the near horizon. Of course they never mention QE and the stimulus that drove the latest boom/echo bubble. Quelle surprise!
    As Hoisington mentioned in their latest Q3 review, Japan provides some interesting clues, comparisons that are looking increasingly relevant.

  12. Wisdom Seeker says:

    I’d like to put in a plea to also post the script (or a transcript – any written version) to accompany the podcasts. I’m not a video person, and reading speed is 2-3x faster than speech (and even more so with skimming). So a transcript saves time for those who don’t want to spend a full 20 minutes on a topic. Perhaps more importantly, having a transcript makes it much easier to comment thoughtfully on a presentation without having to try to hunt back through the video for the right sound bites.

    • Wolf Richter says:

      Wisdom Seeker,

      I understand. But the podcast is a change of pace, so people can sit back and listen. This site is full of dense, fairly long, and complex articles. So the podcast is designed to relieve this situation a little, and to offer readers and me a different kind of contact point. Also, the transcript would be much longer than my normal articles ;-]

      • GK says:

        > so people can sit back and listen

        I can’t hear so this isn’t an option. Your content is pretty good so I hope not too much of it gets locked away behind an audio-only barrier.

        (I don’t have anything to offer in exchange, just making you aware of your audience.)

        • Wolf Richter says:

          Thanks. A commenter said about a week or two ago that he is “half blind” and that’s why he is commenting in all caps. I understand that we all have our preferences, so I’ll try to broaden my offerings. Don’t worry, I publish about 10-15 written articles a week, including charts and all. Written articles will always dominate here. But now there is a little something for people who like to listen. That’s all.

        • Tom Ratliff says:

          One can use the closed captioning option (“cc” button) to view a pretty accurate subtitled transcription of this podcast.

          And if you go to the YouTube website to “watch” the podcast (on a computer, anyway — not sure about phone or tablet), it is possible to toggle on/off a separate, non-subtitle transcript, which will be located to the right of the video. By default, the transcript advances with the progress of the video, but one can also manually scroll through the entire transcript.

          Much trickier to download the transcript, apparently.

        • GK says:

          Thanks, I just get a bit nervous about these things because of the number of interesting blogs that have gone 100% podcast in recent years.

          Auto-captioning is… well, a BIT better than it used to be, but still terrible enough to not be worth the effort to decipher unless it’s something very important. In fact I’ve just come from one such outing on youtube and let’s just say I’m glad that experience is over. :-)

      • alex in san jose AKA digital Detroit says:

        I hate video and love transcripts. Not only are they faster to absorb but I live in San Jose California, a place that invented the “digital divide”. Videos are often just a series of stills for me.

  13. You’re making the case for another mortgage crisis, same point: Loan originators were thought to be sterilized through passing on loans to bigger banks. [Who currently assume the liability for selling overpriced RE at the top of the business cycle] Subprime trouble works the same for qualified buyers in a rising rate environment. The global banking system is more interdependent, putting banks at risk for problems in the EM, and the EU. Housing valuations are even higher than 2008 while wages and income have not kept up. Warren Buffet who owns Quicken is said to have cash ready to buy stocks when the sheeple get their 401K busted down to nothing, [using their money] because he knows the Fed will bail out the system. The Fed’s hands off policy legitimizes the shadow banking system, which is more unregulated loan origination. Everything is okay because the central bank cartel will use QE to reflate ( CBs buying gold is like the catholic church buying guns). The only reason rates are going up is the EM debt denominated in dollars cannot be serviced. There is no rise in inflation and no rise in wages and therein is your mortgage crisis.

  14. TrojanMan says:

    Wolf, one clarification. For some buyers, it won’t be that they are unable to afford being in the market. They simply will not pay the high prices for what they get in return. That is the situation I am in looking around SF. What you get for $1.5 million in the city is pretty insulting already. They have been enough to keep us renting while we accumulate our funds and get ready to vulture swoop.

    A decade? You’re not being aggressive enough Wolf. The next recession and this housing market is going down and that recession is coming far earlier than 10 years.

  15. Tom Pfotzer says:

    Wolf: great kickoff to the new product line. The Q & A format works very well, esp. since the Q’s are the right ones. Points made are well-reasoned, succinct & just-right repetition.

    Separately, I came across a graph of 10-year Tbill rates .vs. FedFundsRate over past 30 years. Hat tip to Aaron Layman Properties’ reference to Hoisington, above.

    The graph is at this location:

    What I noticed from it:

    a. Rate of FFR increases this time around (slope of slant-upwards line) is much more gradual. By about 2x. Not news, but interesting to see it “in person”.
    b. 10-year rate (which drives mortgage rates) is mighty stubborn. Takes a lot of FFR whacks to get the 10 year to move, and it doesn’t move as much as it seems it ought, given the intensity of FFR whacks.
    c. 10-year rate is at the trough of a 30+ year gradual decline.
    d. At the first sign of trouble (recession) FFR course is reversed and drops like a stone
    e. The 10-year stops rising before the FFR does and hence causes the “inversion” that is supposed to herald a recession (and has, according to the referenced chart)
    f. The max FFR rate of each tightening cycle – e.g. max FFR rate before the recession starts – is declining across each successive raise-lower cycle. I think this is what I find most interesting about the graph: 10-year gradual down, and less tolerance to tightening each cycle. Wonder what that means.

    None of this is news to you old-timers and experienced sorts, but for the first time, on simple chart, I can see graphically what all of you have been talking about. Maybe it’ll help some others, too, so I thought I’d point it out.

  16. rex says:

    As always, your work raises the bar a bit in the blog sphere and now the pod cast realm. I only wish the trans script was available for those of us more visually than audio receptive.

  17. KG says:

    We live in the SF Bay and the current prices are ridiculously.

    The stock market will crash, startups will vanish with higher interest rates. Housing have already ballooned too far in price. Then, there will be job loss as Wall Street encourages a cost-saving attitude in tech. H1bs will head home and house prices will fall here by 50% on average.

    It’s not interest rate driven but stock market driven because that’s allowing the huge down payments currently sustaining prices.

    Companies will rethink location during a recession and we’ll see a lot fewer jobs replaced here.

  18. Unamused says:

    The podcast is just fine. This format can allow you to emphasize aspects of your topic in ways which may not be so dynamic or compelling in print. High-powered types are bound to be impatient and will naturally prefer the executive summary, but it’s your show and since they’ll come anyway there’s no real need to appease them.

  19. DK says:

    As the Fed is raising , the economy is cooling. A mortgage rate at 6% would be about the end. So, a recession in late 2019 and then a few month lag for the Fed to start making free money again. To their friends, of course. The rinse and repeat is palpable.

  20. elysianfield says:

    Mr. Richter,
    Would it be possible to generate a printed copy of the podcast? Some of us, deep in the provinces, do not have sufficient bandwidth to access video or podcasts. Where I live we do not even have cell phone service.

  21. jt says:

    I don’t know about this article. In SoCal beach cities, prices seem to be slowly headed higher. Possible we will get a slowdown in sales activity with slowly increasing or stable prices. We have had that before. We can have that again.

  22. micci1332 says:

    Thank you very much for the commentary, Wolf. Very insightful.

    Any thoughts on media claims that big banks are invested in the shadow banks? (e.g. )

    My takeaway from your podcast is that it is your belief that the possible failure of shadow banks will not be of much impact to the big banks.

    • Wolf Richter says:

      Yes, big banks are lenders to shadow banks. That connection is there, and it’s tight. I covered that a few times. Banks are definitely exposed to shadow banks.

Comments are closed.