Raging inflation knocked out the “Fed put,” and banks are no longer on the hook for mortgages; taxpayers and investors are (you can also download the WOLF STREET REPORT wherever you get your podcasts).
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Just posted your Wolf Street Report to my FB page, Wolf. During the past year a niece and stepson purchased homes over my strenuous objections, saying they had to buy now or become renters for life.
There are three options for the shelter: a) a high price with low mortgage interest rate or a low price b) a lower price with high mortgage interest rate c) rent
If the monthly from a) is almost the same as rent option c) , and one can stay in a place for at least 7 years. It’s no brainer to buy with option a). This is probably what you niece and stepson were thinking.
Most likely, option b) is more costly than rent option c). Many people just can not afford to execute option b) due to the debt to income ratio limit.
Option b) is probably only making sense for the people who have cash around or buy a smaller house compared with the same rent money he can get. With option b), there is a chance of refinancing, which is not guaranteed and can not be betted on
Inflation is being and will be used for years, because they inflated so many bubbles and only inflation can slowly drive prices up and make those bubbles less dramatic. Of course, real estate prices will keep going down, but through years of inflation and, if they can keep inflation high, the banksters will avoid the blame for their reckless pursuit of profit. I contend that most of the “Federal” Reserve bankster cartel’s actions for decades have primarily been to generate gigantic profits for the banksters and not to benefit Americans, starting with the ultra-low interest rates from the early 2000s.
A courageous channel on youtube called “coldfusion” presented the history of this dating back from the repeal of the Glass Steagal Act, because that caused the banks to become among the most valuable of assets and led to the financial disasters that have afflicted the US since then. I wonder how much each of the banks would be worth now if you added back in all of the stock buy backs, dividends, and ginormous salaries paid to its banksters and their cronies.
These economic games are actually scams run on the American people, e.g., the low interest rates that enabled them to defraud pensions (often through obviously corrupt rating agencies and corrupt pension administrators) and other investors with subprime loans, for which the poor borrowers could never have even attempted if interest rates had been normal. Before they sold the garbage subprime loans to others, they had made huge profits on them.
Similarly, they have been selling garbage CCP-linked, Ponzi scheme-like, Chinese companies to gullible investors often via corrupt pension administrators. As in 2008, the banksters just got burned because they had too much of the CCP garbage that they were trying to shove into pensions and other investors to again defraud them. Americans have gotten scammed, then they got scammed again; then they are getting scammed; and you can be sure that the banksters will keep scamming them again and again and again, as long as they are allowed to scam. Like leeches, tapeworms, and fleas, the banksters are parasitic organisms and have turned the banks into enormous funnels via their gigantic parasite on the world economy: their “Federal” Reserve.
The cherry on top for the banksters in selling the CCP-Ponzi-scheme-companies is that they and the CCP managed to exempt these corrupt companies from the weak disclosure requirements that forced other, non-CCP companies to disclose their financial disasters after a few years, even if they could hide them temporarily. The changes to those rules caused those Ponzi-CCP companies to run back to their own markets, because disclosure would reveal their frauds on American and other countries’ investors. See “It’s ‘game over’ for U.S.-listed Chinese companies, global asset manager says” (scam over is the better title-LOL) in CNBC. See “U.S.-Listed Chinese Companies Worth $1.1 Trillion Face Risk Of Delisting” in Forbes. See “SEC imposes new disclosure rules on Chinese companies seeking IPO” in Fortune.
Thank you for identifying the Glass Steagall repeal as the primary factor creating this out of whack economy. Been trying to point this out in previous posts here but no one seems to pay any mind.
The repeal happened in 1999 and the 2 largest bubbles in the US economic history (all within 22 years!) happened. And all this was predicted when the debate over the repeal was going on.
I’ve tried every rent vs. buy calculator I could find. Under the most conservative tool I could find using ridiculous assumptions (8% annual rent appreciation per year for a decade with 4% home appreciation for a decade), it would take take me 13.6 years to break even. The less conservative tools said around 17.5 years. Assuming 8% annual rent appreciation for a *decade* is a bit ridiculous, so this shows just how out-of-whack the market is right now
Right now, not much price decreasing and very high mortgage interest rate, compared with renting, buying does not make sense, so very few buyers.
However, last year or two years ago, many people were able to afford to buy due to very low interest rate even with the initial price increase and buying was a better option than renting, so a lot of buyers rushed in.
In many high living cost regions, buying is always much more expensive than renting.
What a difference a year makes. Last year low mortgage rate, rising house prices and 1% on savings. This year high mortgage rates, falling house prices and 4.5% on savings. I think Fed is going in for an emergency landing.
Ah, but did you factor in the tax write off into your calculation?
My mortgage payment (including tax and insurance) is less than I’d pay to rent a comparable home, and I also get to write off about $800 a month from my taxable income every year.
That puts me well ahead of most renters in my age group.
Then again, I don’t live in a market as insane as NYC or the Bay Area.
Option D) Save your money and pay cash. My father always told me if you can’t pay cash you can’t afford it.
If the mortgage product has never existed, option D would be a viable option.
Due to the supply and demand, many other people are using the mortgage to buy, which pushes housing prices much higher.
Very few people can afford option D).
option d) car
New House owners and house flippers can file a class action lawsuit against zillow. The text would go like:
1. Zillow provided highly inflated Zestimates for our houses that were far from market reality.
2. We priced our houses for sale based on these Zestimates. However ours houses failed to sell as the market kept correcting at 3% per month to 18% in 6 months and Zestimates lagged these corrections.
3. We have still not been able to sell our house and lost the opportunity to sell at peak and this has resulted in millions of dollars of cumulative losses.
4. We, the people, believe that Zillow manipulated Zestimates way over actual appraisals and hid the real appraisal figures with malicious intent to value its own inventory higher. This act caused us tremendous losses and we would like to Sue Zillow to recover our losses.
“We, the people”
The formulae Zillow use are the same as an appraiser from the bank uses. The value they post is the current market value. They have no business commenting on the craziness or overpriced numbers. Back in the Eighties, some appraiseers in CT were sued for issuing appraisals that did not reflect current market value because the appraisers believed the market to be in a bubble. The appraisers lost. If a buyer wants to pay a given price and a seller accepts that price, and both do so of their own free will, that is the market value.
No if you are a bank and lending the money you have the right to decide what is a market price. If a buyer wants to overpay why should the bank take the credit risk.
The bank doesn’t take the credit risk…. they ask for more equity from the buyer. If the buyer no can do, then the bank can pass for loan underwriting reasons – but the banks have zero say in the price paid.
To me, Zillow is much like the Kelly Blue Book for homes. As in “I wish my house was worth that much”.
@roddy6667 appraisers will be pushed aside by AVMs – Automated Valuation Method or Model. I was at a seminar many years ago and an appraiser in the audience offered up her home address for valuation by the machine. The property was a semi-rural home on a nice chunk of land; certainly not a cookie-cutter tract home and when the number popped she agreed it was pretty accurate. They can tell statistically how accurate the value estimate is… then the mortgage brokers and crooks will tweak the algos and cut corners, but that is another story.
Zillow lost millions trying to buy and flip houses so it’s safe to assume the have zero ability to determine the value of a property.
Zillow has the absolute crappiest data on values of houses. It’s a complete joke to go by their estimates.
The data that Zillow has that actually *is* useful must be estimated by yourself or an agent. That is; true comps – the *sales price* data of houses which are very much like yours- same relative size, lots, neighborhoods, building materials used, craftsmanship, taste, condition of *everything* and maintenance. PLUS the biggest variable that is missing from that data is TIME. The most useful data Zillow has is generally about a month behind because it takes escrow that long to close and data to become available after the deal is made. It is completely useless to compile all sales data in a downward trend – it should what data is available for the past month, or better yet the past week.
No. The bank does not arbitrarily determine the price of housing. Supply and demand, capitalism, does.
No sir, you do not know what you are talking about. What appraisers do and what zillow does are 2 very different things. Does zillow use an algorithm? Yes. Do appraisers? No. Does zillow inspect a property to then analyze applicable income approach, cost approach and sales comparison with market based and supported adjustments? No, but appraisers do. If there was just a “formula ” then there would not be an appraisal industry. Perhaps you are unaware that there have been a few new laws and regulations implemented since the 80’s.
“Market value” is illustrated by sales between two independent and WELL INFORMED parties. If someone is relying on Zillow or your opinion they are not well informed.
As I listened to your dispassionate delivery of the bad news for speculators in the housing sector, one point you made, stimulated my subconcious to verify the concept of what exactly is a bank, these days.
Zero liability for the financial outcome to society that results from the private sector banks issuing trillions of dollars of loans and packaging them into MBS. The risk has been passed to the taxpayer. Quite a divorce from the working definition of the local bank as portrayed in the propaganda.
The made men of wall street have established for themselves a perfect con.
And through visible money (Citizens United, etc), dark money, and tons of lobbyists have captured most all of “the government of the people” and made their con perfectly legal…even admired while teaching people to hate government….using “the prejudices of the people”.
EXACTLY like Lincoln predicted.
The democracy experiment is very weak now, money is the governing power, not “deriving it’s powers from the consent of the governed”.
Does anyone recall voting for insane wealth inequality?
If Zillow valued old cars, they’d never mention what a mess some are inside with the headliner drooping down and the engine burning a quart of oil a week.
They would all be worth the same, right?
Zillow does not know the interior condition of a house. They are appraised for tax purposes every ten years. TheZillow price is dertermined by an algorythm that includes house size, age, location, based on other similar properties. A bank appraiser will walk through the house and make notations about condition, obsolensence, and other factors. Zillow is not an appraiser and does not determine value.
property tax ”market valuation” appraisals in some states are updated every year by law,,,
assessments are another story, and they vary tremendously from state to state, and sometimes even from municipality to municipality within the same county
If you also notice, Zillow and the rest of the market sites have ceased to post sales prices on sold units. They began thins as soon as prices began to drop. Now they have stopped even posting the date houses sell. Control the information and you control the narrative.
Yes, I also noticed that Zillow was only showing list price on houses sold in last month. Not pending, but sold.
I still get them. Are you clicking the red “for sale” button then choosing “sold”? you can also click “more” and filter by time. Or scroll down to “price history” on any house and expand it.
“Or scroll down to “price history” on any house and expand it.”
You can expand it, but previous price changes and sold prices will very likely be scrubbed. You’ll see the dates that they happened but no price.
That way, prospective buyers aren’t confronted with the fact that the house they’re looking at–the ADORABLE GEM in the UP AND COMING NEIGHBORHOOD with the MOTIVATED SELLER that WON’T LAST!!!–sold for one third its current asking price in 2013. Or that it’s already 10% below its asking price three months ago.
Texas, being a non-disclosure state, makes it hard to get a sense of comps or histories. There is no data.
This is not true. It’s exactly same as it was before. Something is probably wrong with your settings.
It thought comps are what determines house prices?
Sounds to me you were greedy and didn’t take the reasonable offers presented to you. Your house is only worth what someone is willing to offer, NOT what Zillow says.
Zillow loses money on Zestimates. Even their CEO joked about the inflated value on his own house. The purpose of Zestimates is to get the contact info of sellers and sell it to real estate agents for Billions of dollars. Everything else they could care less about.
I worked in real. Estate back in 2013 and people were suing Zillow over thief zestimates – specifically homeowners that were listings thief homes way over the median home value in the area. Ultimately Zillow ended up changing their algorithm to reflect the price a home was listed at to be the new zestimate value because it was based on the “professional” opinion of a realtor.
Unfortunately it only encouraged the insanity over the last couple of years.
Anyone experiencing a loss at this time is their own fault because they did not have a good agent. Any realtor worth their weight would have told you not to trust Zillow. My husband and I are both realtors and we could “feel” the top of the market shift. It was the end of May and we pinned the very week it hit in our market (Louisville, KY).
We have so many buyers and so little inventory that all of our clients are cash but there is still zero inventory. Our market is not depressed and in 2008 we only had a 20% decrease. Nevertheless, we too are affected and the “freeze” / “standoff” is REAL. We have sold over 100 homes in the past year and we have almost ZERO business looking forward. Luckily, we knew what was coming the week it hit and stopped investing in real estate….because we know from our defrauded (unwise) clients – Zestimates are a fraud.
Every one of our sellers who listened to us had their homes appraise and never felt lied to. Only three of those homes did not appraise – because they did not listen to us. Two appraisers we spoke with last week said they expect a 20% decrease. I believe it will be worse…but they can’t see that yet. The moral of the story? Zillow and appraisers are NOT the market experts – that is a good agent’s job! Our job is to accurately interpret what is currently happening in the market. But agents can’t still can’t predict the future so we need moral economists (thanks BTW Wolf). BUT agents can and SHOULD be able to feel market shifts and determine CURRENT value accurately, and EVERY house listed and appraised should be accurate. So far, our recommended prices are banking 100%.
Moral of the story, dont trust Zillow and find a good ethical agent – who sells A LOT of homes so they know the market. They know what is happening FIRST and are the only ones loyal to YOU.
It is clear from big-tech earnings this week that Mass Layoffs will come way before Fed Pivot. So, those hoping to sell houses at the peak that was 6 month ago, will suddenly see desperate sellers dropping prices way below their expectation.
I think that if you need to sell your house in next 3 years, sell it early by pricing your house today at 2019 value, as even then it costs 67% more to buy it today, thanks to the 7% mortgage rates (vs 3% in 2019).
Delays will just fetch you lesser and lesser on your house.
Correction 57% more and not 67% more.
Agree with your general point, but rates were not 3% in 2019. They were closer to 4%. The 3% was reserved for the 2020 and 2021 craziness.
1) The primary banks want normalized rates, not zero rates.
2) They have plenty capital, but the dealers in the o/n market are constricted, forcing the Fed to raise rates, to change it’s diet.
3) The primary dealers clog the system when they smell troubles. They have been traumatized after Sept 2008 “event”.
4) Zero rates encourage malinvestment that end up as zombie loans and NPL. The FANG feasted on zero rates for over a decade.
5) NDX plunged since Nov 2021. Common wisdom didn’t work. DM #9 failed. Central banks and the blue zone saved us from an Oct 1987 “event” ==> to save themselves.
Like smelling salts! I have a nice amount for a down payment and was going to throw in the towel in the next few months, as I am weary of renting. (And my realtor is finally paying attention to me again…couldn’t give me the time of day as a buyer a year ago, but now is so responsive, lol!) Tried to buy in 2021, but got spooked by people paying absurd money over asking. It took me 15 years of scrimping and saving to have a down payment and I was terrified of making a wrong move. Prices are now flat in my market, with the occasional over asking sale. I could afford some of the houses, but it would be tight.
This report reminded me to be patient a while longer. After all, my New England market fairly imploded after 2008. I can’t help but think it won’t fair too well after this bubble pops, even with the wfh folks coming in droves from Boston and NYC.
Though, what do you all think about the new, more inclusive credit scoring model Fannie and Freddie are moving to? The one that will replace the classic FICO. Is this an attempt to prop up the markets? Along with student loan forgiveness? I know Wolf has said the student loan money has already been spent, but $10-20,000, along with the reduced payment program, might bring forth a few more buyers.
Just thinking of how state and federal governments might defy the Fed and continue to support these absurd prices…
In the big picture it fits in with the credit cycle. You run out of people with good credit and keep having to lower the bar to keep the debt bubble expanding til you get to guaranteeing the loans by the government to anyone who can sign their name.
Vantage 4 has nothing to do with running out of good credit people.
Vantage 4 is a really nice blended data algo, we consider it better than fico. Fico is pricing themselves out of market. Vantage 4 is bureau algo. Bi merge is all they need instead of trimerge rmcr, it was about time they figured it out.
I recently read that the company that issues FICO scores has issued bonds that are rated BB. Very marginal bond rating.
Fannie Mae stock was worth $60 a share 15 years ago in the first housing bubble and now goes for a whole 50 cents a share.
Frankly, since you threw it out there, I would say that I suspect, without proof, that the whole choreography of the loan approval process as a verification of the affordability of the proposed purchase by the client, is a lot of whooie.
In my heart, I feel that all the versions of the software that rejected good people with marginal credit histories was itself was rejected as inaccurate.
@Grubstreet I know a couple with 2 chillrens that rented in coastal Southern California. By the time they saved $125,000, prices had increased too much for them to buy. The husband commuted over 1 hour each way and they had daycare costs – not sure on wifey commute. They continued to save and then along with being priced out of the market and faced with continuing to pay $2,500 a month in rent, plus daycare, they relocated to SE USA. Wifey was allowed to work remotely and when husband told company of move, they let him work remotely, so both make good Socal salaries plus bennies. Last I talked to him, they were looking to buy a huge home on acreage with a payment of $700/Mo. and no daycare. Just food for thought
Thanks for sharing this. I’ll keep this in mind, because it is one of my biggest fears: home prices here going ever up. If I don’t see a dip within the next three months, I just might pull the trigger and buy something. Hard to believe this state, which is one of the most business unfriendly, is now rocketing upward as far as home prices are concerned…
My guess is it’ll stall before it dips. Then it’ll go slow for a little while until it really drops. That’s what’s happening in my state. We’re in the last stages of the slowly dipping stage I think.
Case Schiller already shows prices falling now
Ah yes Realtors. I think there’s a class action against them for their fixed 5% fee that the buyer pays, don’t kid yourselves. When home rise in price 15% a year for 5 – 10 years does their work increase as well. Indeed, no, it’s easier. advertise a fake low price have an open house and ask for highest and best offers by 5 p.m. that day. #1 Bullshit
When a home was a place to raise a family and become part of a community life was better, it’s pathetic when society only see’s residential real estate as an investment vehicle. Its just another sign of how immoral and degenerate society has become to focus on growing GDP while no one ever worries about quality of life.
Supposedly cheap money causes people to lose their head and make bad decisions instead of doing something productive. Not that different than old gold rush days when people got gold fever.
This is so true- the HGTV fix and flip and a dollar amount increase in home value applied to every door knob and switch plate replaced in a house helped start this craziness.
in the 70s and 80s no one at Xmas or Thanksgiving family parties was talking about equity in their house
…and now that’s all anyone talks about. I travel a lot throughout the country and I breeze through many a breakroom, Airport gate, lobby area etc., and 8/10 times there’s been HGTV on the set with some halfwit gawping at one of the house flipper shows. The collective fetish for turd polishing is really something. It’s like 2008 never happened.
Your comment reminds me of how great America was when I was growing up.
I fondly recall being eligible to be selected to honor our country by fighting in Vietnam.
It used to be so good when the world had 67% fewer people in it and the citizen protests were more, acceptable. At least they were dealt with like Fred Hampton.
Let us pray.
Also, I’m getting too listen to another of those Bay Area musical geniuses that created that aura of expression.
A period of social media reflecting and codifying the reality of every day society.
Big Brother and the Holding Company.
“and the citizen protests were more, acceptable”
Referring to the Kent State protests? (protestors gunned down by the National Guard on May 4, 1970?)
Fred Hampton was also gunned down. In his bedroom. I couldn’t tell if the poster thought this was a good thing or not
Nobody remembers Kent State, Wounded Knee, or Bonus Army … and other EU protest events that were also bloody. Tiananmen one is well known tho as they are in the textbook, and news once a year to remind people what a “bad” government looks like. The irony.
Some of us who were in the streets in the early ’70s remember Kent State, etc., all too well…
Folks were shot and killed a TON more than was ever reported from what I heard from some of the black folks in the streets and on campus for the “Third World Movement” in Berkeley during late ’60s early 70s…
Never heard of the set up of the Black Panthers, some killed some jailed by the FBI?
Never heard of the kid on the roof top shot by the cops in Berkeley?
Never heard of the folks ”down south” who were quietly killed and buried during the long struggle, still ongoing there?
C’mon folks, USA might be better than some places these days, but we too have our genocides, totally illegal killings by ”strikebreakers” etc.
Think possibly as many as 80 million ”savages” just killed for nothing except stealing their lands.
Think all the hundreds of ”treaties”,,, solemn agreements that were totally ignored by USA GUV MINT when they turned out to be in the way of ”development.”
Ya had to be there…sounds like dang was. Free concerts in the panhandle. Pay concerts at SR Vets Memorial, where Janis wore no bra. Nice. Lost my Free Huey T-shirt. FTA.
Not sarc, more like acid flashback, which weren’t true, either……I think.
Should have said GOV Reagan for time clarity…..and there was one AM station, KDIA “Lucky 13”.
Don’t know who Reagan hated worse; us hippies or Spades.
Yeah, and those Negroes knew their place, which all too often was swinging from a tree. Ah, yes, the good old days, eh, dang?
Seriously, while things might have been better for some people, it was a whole lot worse for a lot of people, including women and minorities.
Also, if you thought it was such an honor to be tossed into a senseless meat grinder that had nothing to do with our nation’s security, why didn’t you volunteer, rather than wait for your draft number to be called?
Across the street from us is (was) the only empty block in our new neighborhood. All the lots sat vacant for about 6 months while the housing market rolled over even though they are owned by a big builder. Then about a month ago they started building like mad except they had gotten building approval to put up 3 story townhouses instead of the two story ” starter houses” that had originally been planned on these small ” alley loaded” lots. My guess is that with costs increasing the builder needed to be able to sell more expensive houses to get any profit. Too early to tell if any of them have sold, but my guess is that trying to sell even more expensive houses in this high ( and rising) interest rate environment is going to turn out to be a big mistake. But to look on the bright side, my new granddaughter can use the empty unsold houses as a play fort when she gets old enough.
Well I’ve not thought about it from that perspective where the costs too the builders of single family homes has risen above the current selling price of 10% lower than the peak. It doesn’t seem natural. weird.
Maybe there is another explanation for why would builders suddenly rush to complete their existing contract obligations as the looming construction loan role overs will be at a much higher rate than the original loan. I’m not sure about anything anymore like I used to be.
In the seventies we lost ARAMCO. In 2022 US + European oil co lost their assets in second market in the world.
I opened up Zillow while I was listening to this and I noticed something in my city. Many of the houses have a rental value much lower than what a standard mortgage on the house would be. What to make of that? The price is way too high right? I’m seeing mortgage payments that are $1,000-1,500 higher than what Zillow says you can rent it out for.
That’s the normal lifestyle cycle as we rotate from renters to owners. Rents will define the market bottom for home prices. Rents will grow till it pushes home prices higher, then the cycle starts over with rent affordability vs mortgage affordable. Same concept happens as cities move to suburbs, and suburbs to retirement zones, thus the cities become the new entry point for younger renters and home owners, as those in the city have escaped to the suburbs over the pandemic.
That’s why inventory is exploding on the mls. These things never penciled out as rentals, so they were doing the STR thing and riding the appreciation wave up. Once they start depreciating, these house horny speculators rush for the exits like roaches towards the cupboards when you flip on the lights.
Makes sense. AirBnb reports on Tuesday, we’ll know more then.
The Flippers will also die when the appreciation stops.
Yes, the price is way too high. We’re just off the peak of a massive housing bubble.
Absolutely Waiting to buy will pay off bigly no doubt
Hopefully near the bottom rather than just on the way down. The longer people wait to buy, the lower prices will go.
Another great episode Wolf, I love the podcast format.
I particularly like the argument about move-uppers or downsizers being net-zero inventory impact, it absolutely torpedoes the “people with low mortgage rates will never sell” talking point. I recall arguing this on Reddit a couple years ago and the housing permabulls mostly don’t even comprehend it.
I like to call it marginal inventory, it’s where the true growth in housing inventory comes from after filtering out all the one-for-one trades, the sum of things like:
– New construction
– Old person dies with multiple inheritors and they sell the house to cash out
– Couple gets divorced and both go to rent
– Rate of change of first time buyer demand (right now, declining, ergo inventory continues to grow)
These are the transactions that have a true net impact. It doesn’t matter whether the 3% mortgage buyers hold like a crypto bro; their actions are simply irrelevant to the market.
Also important to note how few homes need to change hands to set new comps, during the pandemic frenzy under 10% of total US homes were sold, these set the new comps at elevated prices. This cuts both ways as people will find out when only 2 or 3 of their neighbors selling homes tanks the comps for the neighborhood.
Nice comment and I agree with a number of your identifications as the sources of future supply of available housing. Especially the second one, the old persons expire.
Personally, being an old person myself, that is a hopeful criteria, believe you, me.
I have trouble accepting the precepts of transhumanism philosophy as being sought by the billionaire class.
Preparing for immortality is a fantasy of current wealth, incapable of seeing themselves in context.
Yes, the billionaire tech libertarians are living in there own will-to-power fantasy world. Heaven help the rest of us as they reengineer our real world.
Like many, you misunderstand Fred, if you even read him, which I find doubtful.
Insanity in individuals is rare, BUT………
I am not a perma-bull on housing, though others on this site allege that I am (don’t own any rental real estate anymore – sold it all off in 2020).
I will not argue there are lots of 2nd homes out there owned by those who wanted to ride the bubble. Back in 2008-2012, I knew a couple friends who did that and they both turned their “spec” house into a rental instead of catching the falling knife by selling. At that time, I WAS into rentals, paid cash for everything I had, so falling prices meant ZERO to me – the cashflow (rents) continued (for me).
My friends became reluctant landlords and I helped them with some guidance on tenant selection etc. They surely lost $$$ in the first couple years of renting their places out, barely making their mortgage after CapEx was paid BUT they made an informed decision to NOT sell in a falling price market. They later sold when they could payoff their mortgage plus a little extra.
I mention this because those who are predicting a massive crash may not be considering many homeowners, especially 2nd home “owners” might be considering the rental option, which is also why I think rents will not drop as much as they did in the 2008-2012 timeframe.
A 40-45% correction in prices of SFH over the next 3 years is a correction – bringing prices back to 2019 / early 2020 levels. A “crash” would send prices back to 2014 /2015 levels – not gonna happen.
Let’s see how one theoretical investment does against a real investment.
3/8/21 theoretically invested $400,000 in LTRY, it is now worth $11,437 IF a buyer can be found.
3/8/21 Bought my house and 10 acres on a lake, invested $400,000. It is now arguably worth $415,000 likely more.
At the end of the day 10/30/22 what do I have to show for my investing?
LTRY: Stock that is close to worthless, without residual worth or non financial value.
HOUSE: Even it it drops to $11,437, or zero, I still have a very comfortable and enjoyable home. Its core value remains unchanged, and arguably in uncertain times, of immense non financial value.
Just some thoughts from the side of the parade route.
Perhaps change the pick to ExxonMobil buy at 2020 lows, quite different
When you measure investments by that short of a time-frame it’s called speculation. Every single investment I had from 2009 – 2014 made like bank. Even if had held some investment properties until this late they still would have made out like a bandit.
The Everything Bubble was a huge bloom in financial (alongside other) assets, propped on expansive money and credit. Contraction (or even plateauing) in the latter means a risk of a run on those assets and a fallback to tangible (analog in digital lexicon) collateral and assets, real equity in things other than flim-flam and dreams. Late arrivals into any of these markets have a disadvantage as they have been building smaller wedges of equity, on froth.
My worry, being overweight in SoCal real estate bought 30-60 years ago, is the vengeance of have-nots at the ballot box, late arrivals voting themselves sustenance out of my tangible equity. Plenty of Boomers will sell off equity, transfer it soon enough, me included. People still want houses in nice places, with good communities to raise families in, if the Stalinist mass-block-apartment-erectors and social engineers don’t erase that. Look what Robert Moses did to NYC. Thriving minority neighborhoods became wastelands. Soft Stalinism.
Are we suppose to know who Robert Moses is?
Surprisingly, Yes! On a short list of about 20 of how we got here, he would be a prime candidate. Colis Huntington, Henry Huntington, Edward Harriman, J.P. Morgan, J.C. Fargo (AMEX), & actor/entreprenuer Reginald Denny (Drones) among top contenders. Add Vanderbilt & Giannini. Most of it was laid out long before the tech names speeded it all up. Oh, and don’t forget Walter Disney for a lot of reasons. But Moses is a great example of how to take a city and f*ck it all to hell with “good deeds”.
Yes you are He created the parkway system in New York metropolitan area in the 50s I guess if your from the deep south you can be forgiven
Yes. The name is not an obscure one.
However, if you somehow managed to escape learning about him, I have good news for you: there exists a massive system of networked computers, some of which host things called ‘search engines,” and you have access to those engines via the computer you used to post your comment. You can ask one of them.
He meant Amos Moses.
Let me assure you so can grab eight hours, that SoCal real estate is not likely to go on sale at rock bottom pricing in the foreseeable future. If it does, call me.
Vengeance against the wealthy is the last thing that homeless people are thinking about, right now. They’re just trying to survive. Invisible, yet obvious.
“SoCal real estate is not likely to go on sale at rock bottom pricing in the foreseeable future”
I could swear I heard somebody, or perhaps a whole lot of somebodies, saying something like this before.
I thought the same about so cal real estate in 2009 or HB1.
May be this time is different as every one in so cal is saying the same thing and also add that so cal is special .
Your worst nightmare will be when 40% renters + 11% young people living with their parents vote out prop 13. The real estate dump when that happens will be a sight to behold, pushing prices down to the merely “unreasonable” level from the current “WTF” level.
Old people actually vote. There is zero percent chance this will happen.
If one has bought home as primary residence and can afford to pay mortgage then absolutely no worries.
I have many friends who owns 3 or 4 properties.. and stocks as well.
Its gonna painful for them to see all of their asset classes going down in unison including 401ks.
Hmm. Wouldn’t say *absolutely* no worries; especially if they need to sell or if inflation makes affording that monthly nut more of a challenge. As it is, a lot of the buyers I know in the last 7 years sunk their life savings into a house out of FOMO and rental fatigue but they were still stretched thin/house poor — a reality ameliorated in part by the hope of moving up or near future price gains.
If you ant pay your mortgage then it is worrisome for sure.
Else your primary residence value goes up or down it should not really matter.
But for your other investment properties its a different story.
In socal real estate is a religion as we can observe by some comments here w.g. it can never go down.
My friends think the same.
The following is a Boston metro area report. I live in the “inner suburbs” (right next to the city).
A brief Zillow scan showed a couple of properties in my blue collar suburb with substantial price reductions in the past few weeks. One saw a drop from 1.4M to 1.2M and the other a drop from 800k to 700k.
I expanded the search to another town, which is home to many white collar professionals – biotech, software, Harvard University etc. Again, a single family house:
– on sale in June, 1.8M
– July: price drop 100k
– September: price drop 100k
– September: second price drop 50k
– October: price drop 200k
All in all the price went down by 25%. This is in a very desirable part of the metro area, in a very wealthy part of the country, where no significant economic distress has occurred yet, no layoffs hit so far and the 401k balances only went down to where they were one or two years ago.
Assuming a 20% down payment you’ll have to shell out $10,000 each and every month, for the next three decades, to cover the interest, principal, property tax, property insurance, utilities and a bit of maintenance fees.
The housing market is comatose. I am seeing houses reduced by well over $100k – sellers who have big equity since they bought many years ago and can “afford” to cut their prices – and still no offers.
The higher rates just eliminated a large percentage of potential buyers because they literally have no way of getting a loan even if they wanted one. They don’t have the income to carry the properties.
Now consider that the stock market is back in “fight the FED” mode, CPI and core PCE show no signs of abating, and we are in for much higher rates than currently. Over 10% on mortgages seems to be in the bag at this point. An 80% price correction is needed in many markets for the median income to afford the median house at those rates. It’s curtains.
I noticed a lot of buyers renting out rooms and illegal rental units to get the funds to pay these huge mortgages. Even the crooked RE agents look the other way.
Craigslist is littered with these cooked speculators. They have been running boarding house operations – renting out rooms – for years. The massive price meltdowns will divest these broke-asz losers of their speculative shacks in quick fashion. They could never afford them in the first place.
That latest property we went into (a 2 unit) had one unit with no electricity and the other had electricity. I couldn’t figure out why the owner would allow this to happen. Now it dawned on me the reason. The property was abandoned and some squatter occupied the basement unit. They paid the electric bill while the other unit was empty and the bill went unpaid. The utility company cut off the electricity in the vacant unit but kept it on for the squatter. I think with the corrupt government in DC the next thing you will see is legislation to create a “Squatters bill of rights”
Squatters in some SF Bay areas ARE getting ”rights” SC,,, and some are actually getting titles…
Won’t be long until DC and some of the other cities similar come up with a uniform policy and procedures, similar to what has happened in other countries, eh?
One of the reasons I am not considering RE mkt in any city, blue or red, these days.
Only CDs and GUV MINT bonds, at least for now.
The scenario you lay out is likely not the one that will come to pass. While I agree with the basis of your rant, if I understand it correctly your point of view is summed up by the following quote:
“An 80% price correction is needed in many markets for the median income to afford the median house at those rates. It’s curtains.”
I can’t say that that is a foolish point of view. The most I can say is that particular extreme point of view, seems premature, given the basic stability of the real economy.
While I agree that the Fed is likely to destroy the architecture that has been institutionalized over the past 30 years, in their fight against the very same architecture.
Our host, of course, is reticent to quantify the extent of his predictions, which are not predictions as much as they are intonations.
Tomorrow is a new day, the sun will come up as trading resumes. The direction of the markets rarely captures the trend. What happens tomorrow is notable only in the sense of it’s insignificance.
If rates can reach and hold 8%+ for three months, that should be enough to start seeing cracks in the panic selling dam in some metros.
When did 800k became “blue collar” neighborhood.. try 400k
Around the same time the house prices went up by 40% in two years, the average price of a new vehicle went from about 35k to 48k in 2-3 years, when the stock market shot up, when the mortgage rates went to 2.85% per year etc etc etc.
I got to know personally some of the locals. They have relatively modest jobs – construction work, firefighter, public school teaching, government public pension admin, retired at 40 from a gov job and working part-time for a bit of extra money etc. The houses, let me assure you, are not at all fancy. They’re clean but also modest – pretty small, built on small lots, and, of course, in need of constant repair.
For comparison, one of the neighboring towns has very good looking houses, wonderfully landscaped and maintained, that cost between 1.5M and 3M.
400k is plenty frothy at that.
Anyone who has to sell a house in the next few years in completely screwed. I see a whole new set of people realizing the best choice will be to just give the keys to the bank holding the mortgage and walk away, but on a much larger scale than we saw in the 2008-2012 time frame.
You mean, give the keys to the company servicing the loan. Banks don’t really hold mortgage loans anymore.
Actually, long time owners who want to sell can still get a very inflated price which will look like a gold mine in hindsight. Alas, greed will prevent most of them from cashing out since they are “waiting for the market to turn around.” I saw this last bust. They rode it all the way to the bottom, then were kicking themselves. It’s a thing of beauty.
Eventually, the deterioration in house prices will more closely resemble a crypto plunge than suggested – well, not exactly like that, but more rapid and severe than HB1.
No asset class more than housing has been responsible for the condescending and platitudinous response citing “supply and demand” as the basis for its inexorable rise and sustainability.
A more accurate framework is “supply and supply”. The supply of housing stock and the supply of credit allocated to housing.
Or, if we must include an element of demand, let’s go with “supply of housing stock and demand for MBS”.
1) In the lame duck period between Carter and Reagan, in Dec 1979, Paul Volcker raised EFFR to 21%, before new oilfield from Alaska, the Gulf of Mexico, the N. Sea, Russia ==> created a glut.
2) TY weekly – 10Y note futures – is down from 130 in Oct 2021 to 110 in
Oct 2022, down 16% y/y, the largest drop since 1788 two hundreds
thirty years ago.
3) TY weekly : a support line coming from Oct 1987 low to Jan 2000 low supported Oct 2022 plunge.
4) There is no oil glut in the horizon, but the blue zone stopped the bonds and stocks plunge, in their own casino.
5) Gold was down in 1987 on the way to 256 in 2000/2002.
“…in Dec 1979, Paul Volcker raised EFFR to 21%…”
No worries. Jerome “Turkey” Fowl assures us he’s the 2nd coming of Volcker, but he’s cooked up a magical “soft landing” whereby he will be able to avoid those massive rates altogether.
Soft landing coming in at 45 degree angle. Things will start blowing up outside the USA pretty soon, but Powell can help with swaps and the like until something too big has the Minsky moment.
Financial entities are like animals in nature, once they are wounded they become prey and the end can come very quickly.
“1) In the lame duck period between Carter and Reagan, in Dec 1979, Paul Volcker raised EFFR to 21%, before new oilfield from Alaska, the Gulf of Mexico, the N. Sea, Russia ==> created a glut.”
Marvelous conspiracy scenario which I was convinced was probable at the time. Since that time humans have continued to be dependent on the combustion of fossil fuels for our way of life. If I were being honest with myself about more energy rather than less. I prefer the former.
Always learn something insightful and valuable when listening.
It’s an upside-down world. You increase interest rates and slowdown construction. This exacerbates the preexisting shortage of affordable housing.
In the podcast, Wolf mentions that a census report says about 10% of the current housing stock is vacant.
Nevermind the half a million AirB&B’s who can’t float thier monthly if there are no vacationers.
Wolf, you need some theme music on your reports.
Something dazzy? Cha cha?
Good idea, but not cha cha.
Symphonic music would be the best choice.
Trump has already added Symphonic music to his rallies, especially at the end.
Au contraire, the correct background music for Wolf’s narrative would be ……
Whatever. The current silence of the sound booth limits the discrepancy between what the presenter says and what the listener hears. A consideration.
My recommendation is to select an appropriate music that represents what one would like to be rather than what one to sell more tickets.
I vote something by Lalo Schifrin’s circa ‘67.
“…and the fed can let it rip”.
I’ve heard many acquaintances complain about how they have “lost” money in their investments this year. I always reply they technically never gained the money because they didn’t have the courage to take profits when the market was up. I will be adding this piece of advice from Wolf to my future discussions with these same people.
Greed over came the common sense.
Beside, psychologically the pain of LOSS is always higher than pleasure from GAIN.
You guys might think this is interesting. Front page of WSJ online today–same author as the “pivot” article, now calling for rates of 5.5% or higher. Basically undoes the pivot rumor and moves it in the other direction.
WSJ title: “Cash-Rich Consumers Could Mean Higher Interest Rates for Longer”; “Buoyed by pandemic-fueled savings, consumers and businesses are proving less sensitive to tighter credit—complicating the Fed’s job”
Yep, that’s what I’ve been saying for a while… consumers still have a huge pile of excess savings to work through (and use to absorb inflation). As such, the pivot ain’t coming anytime soon. A pause maybe, but an outright reversal seems highly unlikely.
L.K. Thanks for the heads-up… here’s a pertinent snippet…
…“This is not the earnings season the [Fed] wanted to see,” said Samuel Rines, managing director at Corbu LLC, a market intelligence firm in Houston. “For now, the consumer is too strong for comfort.”
The Commerce Department reported Friday that consumer spending adjusted for inflation rose 0.3% in September from August, a pickup from prior months.
The upshot is that cooling the U.S. economy might require even higher interest rates. The household savings buffer “suggests to me we may have to keep at this for a while,” said Federal Reserve Bank of Kansas City President Esther George in a webinar earlier this month.
Ms. George is among a handful of Fed officials who have argued in favor of slowing down the pace of interest-rate increases. But she also said the central bank’s ultimate rate destination might be higher than anticipated and that the Fed might have to stay at that higher rate longer….
I wonder if the MSM and the pundits mention THIS article from “The Fed Whisperer”, Nick Timiraos..
Less sensitive to tighter credit? This has nothing to do with being flush with pandemic fueled savings. Essentials are essentials. People will spend as much as necessary on necessities as long as access to credit holds up. Too many are profiting well beyond what inflation would indicate and the market can’t respond because the demand is inflexible.
As some pointed out, the stock mkt and Housing industry are closely interlinked. Changes occur with some lag period.
TWO most things which are affecting both mkts the rate increase, amount of DEBT and LEVERAGE (+ marginal debt) and the corresponding derivatives especially SWAPS related interest rate. Inflation will be stickier than most will assume.
USA DEBT to GDP is over 130%. Annual deficit continues to be 1 Trillion or more. Interest payment on 31 Trillions of National debt will be 1 trillion or more when the rates hit 4.5%-5.25%.
Global debt to GDP is over 200%. China (2nd most GDP) index has lost more than 55% and still losing. Japan has it’s own problem with their debt and currency devaluation. Europe is virtually in recession. UK is sliding towards status being developing country. The whole global economy is contracting except USA whose 3rd Qtr was 2.6% growth mainly b/c of Govt spending. GDP numbers become murky, when you consider ALL based on DEBt/Credit based consumption and Govts’ spending.
Without further increase DEBT/Credit, global mkts have no where to but down. Front running after a ‘over sold’ mkt, along with hopium for pause or pivot are the only rainbows, now.
Perfect storm brewing. Could Fed/CBers can handle them, without more QEs?
Seems crazy you can buy a house with so little down when 15 years ago houses lost half their value. Not having much skin in the game is going to encourage excessive risk taking. Fed basically wanted us all risk on for more than a decade. Now they want us risk off.
Too much sugar put in hands of 70 percent of the US economy for too long, makes for a tough U-turn, from the perspective of the Fed. It created this party and now is going to tell the intoxicated to shut it down? It is like turning the biggest aircraft carrier in the world, with wet spaghetti and salad tongs for hands. The structure is biased toward easy instant looseness. THAT switch is easy to pull.
For people with good credit who can’t come up with the 3.5% down, banks are offering unsecured loans for the DP.
8% interest, peak bubble, with an unsecured loan on top. Nothing to worry about here.
The only link is the valuations of stocks makes home prices look cheaper than free.
The housing ‘crash’ is very location dependent. In my Florida market (not Miami/S. Fla.) price per square foot has experienced a meager drop of about 3% from the early July highs to the end of August, and has been holding steady for the past couple of months. During this time, inventory is up nearly 40%, while median days on market has nearly doubled. This points to a disconnect between buyers and sellers. We’ll see how long sellers hold out. So far the Florida housing market has probably been the most resilient in the nation, as can also be evidenced from the graphs in Wolf’s bubble update posts.
Watch the days on market. It’s an important indicator. As DOM increases, people have to lower their asking prices to move the houses. In Feb of 1988 DOM in CT was about 18 days. As the number grew, prices plummeted, eventually reaching well over a year. Most home prices dropped 50%, and took another ten years to reach 1988 levels. I never believed that it would happen, but it did. I had been a Realtor and an appraiser. I left real estate.
Understood, but you didn’t have half the freaking country moving there, either.
At this point, I believe real is not only grossly over-valued but also un affordable.
Half the country moving there is a myth propagated by real estate lobby.
@jon. Re: folks moving to Florida – it’s not a myth, there are migration stats that back this up.
Real estate is definitely local. I met someone who rents a nice, but older house that’s part of a farm in rural farming country. About 1400 sq ft. It’s $600 per month with a barn for her to park her car in and store stuff. Nearest neighbor about 1/4 mile away.
Not many people want to live so remotely and farms can smell sometimes and $600 is the market price and that’s probably all she can afford.
> Old school,
Other costs in that rural farming country can explode when any of certain risks or needs materialize. Any extensive medical care? Fixing heating or cooling systems? Distance and location suddenly matter. We all have to take what we can afford, but I prefer being 1 mile from a vast medical complex and 5 miles from extended family (I provide care for).
My philosophy has always been, make all the parts as simple and short as possible. Then if anything breaks, it is the cheapest/smallest it can be.
There are a ton of people moving to Florida. That said, a lot of people have moved to Miami and Tampa expecting to “work remotely” forever, and they’re finding that their employers expect them to be back in their offices, at least part time.
So while I do think Florida’s decline will be somewhat less than the rest of the country, it’s not going to be 100% insulated either.
Ha.. that will stop when they see home insurance rates skyrocket.
Depending on which source, latest numbers are ”net” of 800 to 1100 people PER DAY increase just for FL.
OTOH, 38% of respondents said last week that they regretted moving to FL after seeing and/or experiencing hurricane Ian last month. Reported WINK, a Fort Myers TV station.
Understandable considering the recent reduction in supply.
This is just the beginning.
Wait for few more quarters.
The cheap money was available to all the locations and all the locations would fall down.
One more hurricane and the Florida market will be toast.
In your dreams. Florida is more than the barrier islands.
in 20 years lots of Florida will be underwater, that coupled with lax building standards will seal it’s fate.
I don’t disagree about Florida immigration, but people were moving to Florida in 2008/9 and it didn’t prevent FL from being one of the worst hit markets back then.
You need to balance demand with supply. Florida builds like crazy. Very little of the environmental and zoning restrictions that stifle CA builders. Miami is growing but also puts up massive condo towers like they’re nothing.
Also, long term, lots of coastal property will no longer be insurable. Unlike politicians, insurance companies face consequences if they deny the climate change happening right now. And they’re leaving the market in droves.
Overall there are plenty of reasons why Florida is likely to repeat its role as one of the epicenters of the real estate meltdown this time around too.
Well, here in Denver the flipped house next door has had its asking price lowered by 8.3%, and that took effect 40 days ago. Still no sale.
Another ~8% reduction and the flippers will be looking at their breakeven point.
Flippers needs to get it gooder and harder.
16.3% profit on sales price is a very healthy profit margin. Few flippers make this.
I hear a lot these days about how high interest rates depress home values (which is true, of course), but I hear nothing about how inflation influences housing costs in the opposite direction. If inflation is raging, improved property, especially income property, is a hedge against it. In times of inflation, smart money moves out of cash and into appreciable assets. This can’t help but be of some support to home values, even if interest rates are working in the opposite direction.
High inflation means high interest rates. High interest rates means that the sky-high home prices are out the window.
When home prices are already low, they might rise with inflation, despite high interest rates. But now we’ve got the opposite scenario.
I see a lot of home remodeling projects cropping up all over here. When people can’t move because they are locked into 3 1/2% loans they stay put and remodel. Home Equity loans, and HELOCs are going to explode. I’m getting offers from Home Depot for zero interest rate loans to finance big home improvement projects. That’s the new trend.
“When people can’t move because they are locked into 3 1/2% loans they stay put and remodel”
Most people don’t make life decisions based on rates. That’s a speculator mindset. Death, jobs, downsizing are all the reasons people will sell or buy. This will continue.
Be careful with the zero % loans. I see many now have terms of only equal payments right up to the payoff deadline, designed to catch you off guard.
I can’t believe the government allows this BS. Thanks, guys.
>>(…)downsizing (are) all the reasons people will sell or buy. This will continue.
I’d say “downsizing” for empty-nesters or widow(er)s is realistically aimed at making the house less of a financial burden and freeing up extra resources for other pleasures in life (or even necessities), thus it is almost implied that “smaller house in a less expensive location” = “lower cost of owning and maintaining it”.
If rates keep going up, this whole concept of “downsizing” may cease to exist, at least temporarily. You can already see this even in some popular “mainstream” online discussion boards when someone asks what to do with a house in a difficult financial situation – if a person has a good mortgage rate and his monthly payment is in the same ballpark renting something similar would cost, the most universal advice now is to hold onto that house at all costs, simply because almost ANY alternative would be worse financially and likely will not lead to any “savings” (increased affordability) at all.
Look at it this way — inflation will be dropping slowly for the next few years, but interest rates won’t, at least not until inflation stays solidly below 4%. That is going to take longer than the Fed is letting on to. Meanwhile, people will continue their “pay whatever” mindset until the mass layoffs get going, and that may be six to eight months away still. Until then, packed restaurants and crazy spending will continue, while interest rates continue to march higher every six weeks.
Although interest rate increases cause home prices to trend lower, inflation causes hard assets — especially income producing assets — to trend higher. I don’t think housing is going to fall as fast or as hard as some think. There’s a ton of cash getting eaten alive by inflation right now that will need to flow into a hedge positions, and improved real estate is a good hedge against inflation.
CDs probably give you a better return than a rental
Treasuries from treasurydirect.gov or direct treasury auctions through your online broker give an even better returrn because they are not taxable by states.
Not in general. Multifamilies with 4 or more units might do that, IF they are not dogs and IF the math works. Granted, I’m not looking for that, but I havn’t seen anything that matches both qualifiers.
Correct, lots of foreign investment in real estate, distressed asset funds, and an insatiable appetite by corporate real estate investors for SFRs — all of them will be poised and ready to buy distressed assets in bulk. I just saw Abu Dhabi’s biggest wealth fund has raised its target allocation range for North America to between 45% and 60% and expect activity levels for real estate investments to remain high this year and next year.
My view is that all the tax cuts and tax cheating inflated all asset classes. The pandemic just lit the fuse.
You forgot to add speculative greed
So far this has not been proven correct.
We are experiencing 40 year/double digit inflation with record/bubblicious home prices.
Also, there is a myth that cash on the sidelines. Just think about it, it is not true. If you have sold something to someone to get cash, the other party has used his/her cash to buy that.
Home prices has increased 40% plus in last 2 year,, it can go down easily more and is actually going down faster than it appreciated.
Also, when the CDs/ other fixed deposits starts paying good hassle free/risk free returns, a lot of people would rather be in these than be a land lord.
Also remember, home prices are fixed at the margins.
Yup, I see non-callable CD rates of 4.9% at my brokerage today. Been nibbling all the way up. I asked my wife about this trend and we decided if rates hit 7% we start taking big bites and above 10% we start selling everything else to lock those in. She also just bought a billion $ powerball ticket so our investing is diversified.
CDs are state taxable. Treasuries are not.
No — not in this environment or at these still hyper-inflated prices in most regions. Besides, it’s the land that’s mostly valuable — not whatever subjective improvements (gray floors anyone? Maybe a sliding barn door?) you made to the biodegrading shelter sitting on it
Land value varies a lot. Where I live raw land is still relatively cheap unless close to town. Even a suburban lot with water and sewer might be $40-50K definitely less than the home built on it.
Interesting. Not the case in my experience where I’m at; people buy at premiums only to scrape the slab bare & start over with a fresh Garage Mahal to their liking. School districts also have more to do with value (even if you don’t have kids, since whomever you sell to next just might).
Bulfinch, ‘Garage Mahal’ had me choke on my coffee. Brilliant.
I never understood the basis of HGTV valuation. Ignoring the actual property aside from its location to the local shopping center or ‘curb appeal’, pulling out perfectly refurbishable cabinets, and all the god foresaken shiplap. Trendy cosmetics don’t matter when the roof and foundation are leaking, the well needs redrill, sewer main has tree roots invading, septic needs overhaul or the oil tank was interred 50 years ago. They should start teaching this stuff in schools given how much it matters in actual life now a days.
Thankfully I grew up watching the original This Old House and Holmes on Homes instead of junk like Love It or List It. If buyers AND owners were less interested in throw pillows and Live Laugh Love signs, and more interested in actually maintaining their investment, the market would have actual value to perhaps justify prices. Not THESE prices, but enough to say ‘well maintained’ without the listing agents lying through their teeth.
I actually wonder if anyone looked into a detailed breakdown of how much it costs to obtain all permits, prep the land and build a house from start to finish (and obvioulsy even labor costs may vary significantly depending on the region, time of the year etc.) and then compared it to the actual price similar new houses sell in that market.
I think it should be an interesting kind of analysis looking into how much “inflated air” is sold along with the house in one or another region.
Just as an example, this is the quote from some article in 2021: “According to (…), the national average cost to build a new house comes in at $286,365, which would put a 2,000 square foot home costing about $143 per square foot”.
So when I open my county sales data and see that a year ago my neighbor bought his ~2200 sqft house for $350k, I can probably come to a naïve conclusion that my neighbor “overpaid” only ~11% vs what it costs on average to build such a house. Of course, this ignores plenty of factors in play, but to me it feels like a decent measure of how much the market is “inflated”, especially if labor costs are region-adjusted and not just national averages.
I bet DR Hortons, Pulte and other building conglomerates have all such data for each house they sold.
1) There might be a chip glut but no petrodollars and oil glut.
2) The Fed is fighting inflation, but Anti inflation checks are coming
3) TY breached a support line coming from Oct 1987 to Jan 2000 lows,
showing signs of weakness.
4) TY weekly backbone : Apr 14/June 2 1986, 105.25/95.59.
5) We don’t know what will happen next, but if TY cont to plunge under the BB
==> China might depose us.
BB? Definition please
Will be interesting to see how many law suits, class action and individual, will start to appear against these real estate brokerages that pushed their buyers to purchase properties with no appraisal requirements, to waive all property inspections, etc. I know one couple that was pressured to waive inspections and appraisals only to find out the house was sinking! Yes, buyer beware, and indemnity clauses, were def signed but it won’t stop the wave of law suits.
Great video post, thanks.
Unless I misunderstood, you mention that the banks are no longer on the hook for mortgages.
Would you mind expanding on that a little further please?
It’s been my understanding that Fannie/Freddie were the primary holders of MBS before Housing Bust 1. They got their clocks cleaned, as we know, and now fashion the tag GSE.
Now they’ve been delegated as Master Underwriter (if you will) for Conforming / High-Balance Conforming loans as they securitize them into MBS that are safe and sound for the FED to load up on – until 60 days ago – taking over for the banks, etc.
Meanwhile, the DTS published their “Collateral Haircut” document last year and MBS were listed as an asset class that would be getting a trim.
This leads me to believe that there must be banks, HF’s, and other investors out there still buying and using some for leverage.
I know the big banks will hold some mortgages on their books for their affluent clients who fall outside of the cookie cutter underwriting guidelines, but it’s a small percentage, and shouldn’t cause concern.
So, I agree that they are not nearly as exposed as before. They may not be bulging from an unhealthy MBS diet, like pre-Housing Bust 1, but their hands are still in the cookie jar, aren’t they?
Lastly, when Bust 2 unfolds, and the taxpayers bark, I could envision a GOV investigation creating a “passing of the buck” scenario where the FED kicks the blame to Fannie / Freddie (GSE’s) who then pull their pre-scrubbed list of loans from the banks that were submitted improperly, in some way, but were permitted anyhow — eventually pointing the finger at the banks.
Maybe they will still be held responsible to a certain degree? Or it’s just for theater? Or it doesn’t happen?
I have a few more thoughts.
Essentially, curious about your POV since I don’t see the banks coming out of this spotless.
If there is any fraud is scandal you can bet Wells Fargo will be in on it.
“ The mortgage origination market experienced one of its largest quarterly declines that I can remember, and it will take time for the industry to reduce excess capacity,” Charlie Scharf, Wells Fargo’s CEO, said analysts in April. ”
“If there is any fraud is scandal you can bet Wells Fargo will be in on it.”
If there is any fraud is one of those questions that answers itself. Victims routinely point out the institutionalized fraud embedded in the monetary system.
Like you, perhaps, I cling to the dream of a completely different America in which the people were too dumb to realize they were being fleeced.
In terms of the banks, they originate mortgages, and sell them to Fannie Mae, etc. The banks continue to services the mortgage (you send your payment to Wells Fargo, which forwards the payment to Fannie Mae). Fannie Mae securitizes the mortgages into MBS and sells them to investors. If the mortgages are outside the rules of the government sponsored enterprises (GSE), the banks securitize the mortgages into MBS that are not government guaranteed (“private label” MBS) and sells them to investors.
In other words, banks slough off the mortgages and their risks to taxpayers or investors. Either one. But the banks got rid of the mortgages and their risks. They’re just earning fees as servicer of the mortgages.
Wolf Weren’t the banks sloughing off the mortgages to investors prior to the GFC?
I thought The liquidity crises that evolved for banks was because of their exposure to CDO’S & CLO’s.
I also thought that home buyers we’re duped into thinking that Fannie & Freddy mortgages were backed by the government which they were not.
Just saw an article that said there’s 20 billion a day available for equities until the year end and these are same people screaming for a pivot. If 20 bil os true, there’s too much money…no pivot any time soon. May be a pause in 23, but no QE…hopefully never.
That was Goldman out there trying to pump up the markets. And yes, the more of this stuff we hear, the more we know that rates are going higher than expected. 5% is the new 4% :-]
Wolf – do you think (given the current situation) that ffr rates might not be reduced in 2024 and remain at that same (highest) level as they will be in 2023?
Also if the 5% is the new 4%, how quickly (feb?) do you think we will get there (5%)?
I wish I knew :-]
In terms of timing, for example: This week 75 will get the top of the range to 4%. Another 50 in Dec will take the top to 4.5%. Another 25 each in January and March will take the top to 5%. Another 25 (in May?) will take the bottom to 5%. So if they take it to 5%, it would happen by next spring. The rest really depends on how inflation is going.
My guess is that they’ll hold for a year, and if inflation behaves nicely, meaning heading toward 2% core PCE, they might lower it a little. But if inflation does what it has been doing for 20 months, which is surprise to the upside, this would be a mess, and we’d be looking at higher rates.
The rising rental rates in desirable neighborhoods will keep a floor under house price depreciation. One of the approaches to appraising a house is the income approach. That is rising. Another approach is the cost approach. That is also rising. The third is market approach. That may be falling now because of the tightening of the Fed leading to higher mortgage payments. But if enough people take their homes off the market then there is a housing shortage and hence higher prices. Investors who have huge Cap gains won’t sell either because they will have to pay a lot of taxes on their gains. They don’t get any break like homeowners do.
I don’t think rising rental rates would keep a floor because home prices are fixed at the margins.
You may have all the homes in neighborhood wanting to keep the homes, but just few homes sold in the neighborhood would bring the prices down.
Are you a land lord or realtor ?
Well, theres an idea. Rents supporting prices. And maybe they will for a short while. But people are still dying. And there’s little preventing a renter from sliding over a zip code or two for better terms.
In Ontario and British Columbia, Canada rents support home prices at the low end of the housing market. The low end of the housing market in 2/3 of Canada population wise has fallen the least in price due to high and rising rents.
I don’t quite understand. You believe that investors will refuse to sell high?
Inflation and high mortgage rates are both putting pressure on real home values. A seller can sit out the cycle, but inflation is eroding the real value of the home even if the price stays high while mortgage rates keep demand down. I would guess this is the Fed’s strategy – remove mortgage funds from the market, keeping borrowing rates high, while inflation erodes real values while being passed on to incomes with higher wages. This helps homeowners deal with declining prices without defaulting. I would also argue the Fed will not let the housing market rip because the political pressure becomes too great. The price declines will vary greatly among bubble markets and changing fundamental values.
I have nothing to add except to say that tomorrow is not today and that the prediction of a single market point value in the future is supposed to be impossible.
The prediction of the quantitative value of an entire economy seems to be a stretch, fundamental values and all.
The star dust that creates day traders. A fraternity of which I was a member 25 years ago, making a fortune and subsequently losing it.
It is not my intention to dissuade anyone else from walking the financial high wire that I did. Making and losing millions.
Trying to front run the market is, of course, gambling. One certainly hopes that the market is a fair game which it isn’t. The NY brahmans know what your bets are before they are filled.
The only hope for an efficient market is the long term
Inflation is like Japanese knotweed. It has been allowed to infest buildings, roads, bridges, drains and flood defences and continues to spread.
The Fed has a giant bulldozer (monetary tools). It has so far bulldozed SPACs and profitless tech and there is plainly still a knotweed problem.
Feel free to talk about nuanced policy and soft landings or similar. You might once have spoken about transitory knotweed.
My own view is that the bulldozing effort will cause a fire that will have no trouble removing the invasive weed. Until then, it’s a knotweed problem.
Anecdotally, the Treasury Direct website crashed this week due to an unprecedented number of people buying I-Bonds.
These are inflation-indexed bonds with a $10k annual limit designed for small investors, currently paying 9.62%.
I feel like the housing market is far too intricate to make any specific predictions regarding future prices. Beginning with supply, builders will continue facing significant headwinds which will reduce future new construction of single family homes. Existing homeowners will also be less likely to list and “trade-up” due to high interest rates and a many will opt stay in place instead. These factors may mitigate the velocity of home price declines, but forced sales via death, divorce, etc will always exist and will continue to support home price declines of at least some magnitude.
The largest unknown regarding future supply will be the trajectory of the job market. It seems the general consensus on these threads is that the job market will eventually implode in spectacular, visceral fashion. If this were to occur, far more sales will take place which will further accelerate home price declines. On the contrary, a persistently tight labor market would keep people in their homes longer and continue restricting supply.
From a demand perspective, homes are unequivocally unaffordable and price declines must continue for there to be some balance in the market. However, to the chagrin of many wolf street participants, demographics alone support a large source of future buyers, with many millenials sitting on the sidelines waiting to achieve homeownership. The two largest generations by population (boomers and millennials) will be homeowners concurrently.
Arguably the largest factor impacting the demand side of the equation (interest rates) will presumably remain high for the next several months and potentially year(s) ahead. This will continue suppressing demand until prices correct appropriately.
Compared with the 2008-2012 bust, I’d expect significantly more regional variation in the magnitude of home price declines as an explosion of pandemic-induced remote work disproportionately impacted housing demand. The final destination of home prices over the next few years will be dictated by an amalgamation of all these factors. Long story short, who knows what the F will happen.
You’re making this too complicated. Once the incredible distortion of super-low interest rates, QE, fiscal insanity from the US Congress etc is diminished, if not substantially eliminated, we’ll see drastic changes. Of course, no one can tell exactly how and when but perhaps that’s irrelevant.
Wolfman, I was looking on Zillow at 135 Neptune in Irvine, CA.
Sold in November 2016 for around $550,000.
Then sold in May 2022 for $1 million. Congrats to the seller netting about $400,000 on that sale.
Now on the market with an initial list price of around $1.1 million in June 2022. Currently listed for $938,000.
this is what we call: chasing the down market.
1) The Fed is raising rates aggressively, but next year JP will be in harmony with madam ECB.
2) US gov real rates are 3% minus 9%, or minus (-)6%. The gov is paying $1T on interest, but making $2T for a total of (+)$1T.
3) The banks want higher rates. When rates are zero they cause clogging
in the o/n market, dump mortgages to the gov, but when rates are normal, risk on. The banks will issue businesses and mortgages loans and keep them, instead of servicing them.
5) Since 2020 gov payroll dropped the most, but lately it’s rising : road works like in 1958.
6) The Fed is behind the curve, every curve. It’s a system control with a negative feedback loop. The front end is the worst. TY indicate that it might be behind us. TY had a spring, ready to popup for few years.
7) The Fed won. But what if they don’t…
Unless this time is different we will be in a recession very shortly as 3 month to 10 year just inverted. Last three times that was a timely indicator. Usually recessions kill inflation, but the future is yet to be written.
The current market is laying a foundation for the old adage “Cash is King.” Cash amount all controlled by Inflation more or less depending up >down
With Mortgage rates Hi and Deflation set in actual buying lays a foundation for a Cash Market upcoming no doubt .
When you can’t Sell your house except for a discount
A buyer can’t afford a Loan
Foreclosures looming or set in place
Along comes ” Cash is King ”
Perhaps Cash is King raises the Value of Cash
Who doesn’t want to live on the California coastline? It’s always going to be where the action begins and ends in RE. Florida is beautiful but humid as hell along with most of the south and east coast.
It has been a brutal year in weather in my area of Oklahoma and Arkansas, bitter heat and cold. You can’t enjoy the outdoors much. I would move back to the west coast in a heartbeat if I could afford it. Just saying, no wonder RE out west is off the charts and always will be.
Screw the scenery. Live where the friends and family are.
I grew up right ON the Mendocino/Sonoma coastline. Even poor loggers had million dollar ocean views. From self built shacks.
But coming back from St.Louis I decided I wanted a Muskogee T-shirt…..never found one there, but driving back though your area I thought it was beautiful…including the bridges set in the green rolling wooded hills. Anyway, the closer I got to Norman (where I was living) the crappier things got….late 80’s early 90’s.
Sorry to hear fast moving climate change has messed it up, Brant, but no way I could afford to live where I grew up now, either.
Learn Portuguese and move to Lisbon. You even get a Golden Gate Bridge.
I follow south Florida very closely. Boca raton Delray Beach etc. prices have not dropped in the slightest. Just go on Realtor.com. The data is not applicable to their priced homes where mostly cash buyers. Same holds true for westerly- Narragansett ri area. Prices still going higher.
Hi Wolf, I value your view and you say the banks are not exposed like the GFC many say the banks wont go bust this time around because they shifted the risk but what about the derivatives exposure which is one of the key risks for a bank in a volatile environment, since there is a high chance of a counterparty default risk.
Most of the largest banks can fail and in a major bear market like the one we are heading into we can see the banks go bust this time and lead us into a depression.
What I said is that mortgages won’t sink the banks. And that a housing bust won’t sink the banks. I didn’t say that nothing will sink the banks. Derivatives are always an option. But many banks hedge some of their interest rate exposure, and those derivatives are not the issue. Other derivatives might be.
You did, correct, Agree thank you!