Wolf Richter on the housing market, with Adam Taggart on Wealthion:
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Won’t somebody think of the realtors ?
Nope Theyre mostly parasitic bloodsuckers anyway
Actually ours was a pro and thus our home got full ask in October….
Generalizing get you no where
Yeah. Ask the buyer what they think of your realtor 6 months from now.
Didn’t have time to listen (pay bills day) but had to note mkt right now up almost 5% on Thurs which used to mean guaranteed big down day Fri (by 2007-8 rules). Still time for SDS or even heavier….they probably sell 4x shorts today.
Just a”tip” from another time…..from a non-player….hence worthless…maybe.
At least 1 2/12 -3% down by those old rules.
Bills take me a long time because I pay by check, then shred ALL the crapp they send by hand into tiny bits, envelopes too (figure it’s good anti-arthritis for my hand and arm muscles), put it all in one big bag, then once a year or so dump it all well mixed down chute into dumpster where pieces fly all over…good luck putting it back together….real hard to get started though. My SS comes on 2nd Wed of month.
Full ask…any price reductions?
When interest rates hit 8% come back on here with a different handle & talk about all the bidding wars your 2/1 block house got.
Still, I guess anything is possible. You can usually count on a few hyper-credulous, innumerate souls out there. May they find a greater fool.
CD, Is there more to this story than you are sharing? You listed in June according to one of your previous comments, and then closed in October at full asking. No price reductions. You mind sharing the Redfin/Zillow link to this property? The address would also suffice.
I’m just curious.
in a sellers market, the agent has an very easy job to do.
Nope. I was all wrong. Different mkt now.
The rich of the Gilded Age lamented the skid of tennis down to the “lower classes”. Today’s rich all play in PE, the next lower classes play in the stock market, and the lowest classes play in payday loans, the lotto, scrap metal and parts, and maintaining and fixing older cars and bikes.
The Craigslist stock/housing market exchange.
Great show. No teleprompter or notes needed. Plus no need to appear knowledgeable and authoritative by not moving around dispensing wisdom. Fluid. Easy to spot someone who has nothing to prove to anyone, and enjoys using his body and his mind. Careful with those long workdays, though.
Except in the case of Realtors, which definition of parasite checks out.
Meant not moving around “while” dispensing wisdom. Think of what a financial advisor or banker does to to appear to be wise.
Lol!
Maybe we’ll start seeing commercials with Sally Struthers pleading for the realtors.
Lolz
Most of them are incompentent and dishonest. There are a few good ones out there. I’ve been very unlucky. I’ve hired one loser after another and paid a heavy price.
After hitting jackpots in pandamic.. seriously
South Park’s show on realtors was great!
Local rednecks decided the solution was to declare open hunting season on them, but they had all broken their backs and other internals taking new photos of themselves to compete with one kid who actually worked at selling houses. Upset the “delicate real estate balance” which they had always tried to protect.
‘Need Cash for the Holidays? How to Unlock your Home’s Equity.
Experts Urge Americans To Access Home Equity Before It’s Too Late
Turn Your Rising Home Equity Into Cash You Can Use
Want Cash Out of Your Home? Here Are Your Best Options
Your home value could go down anytime. Borrow now while it’s high!’
A bit late with this but just saw it on CNN from outfit ‘Lending Tree.’
Note contradiction of 3 with others: 3 says equity rising, 2 and 5 warn going down.
I’m practically now certain that nothing has screwed this society up more than advertising.
The fact that it just “naturally” became a tax write off like any other cap ex really pisses me off.
Corps should have to pay the professional PR BSers and the media used and NOT get a tax write off……it’s just market manipulation, or worse yet, market creation….and all on the Gov’t tab. Talk about it being wrong to use OPM! Sheesh!
But if you recognize it for what it is, you can learn a lot about manipulating people….and unfortunately many your fellow citizens.
The math never worked (since 2000)
The math (historically):
No more than than a third of take home pay should go to cover all housing expenses.
Housing prices should be 100-120x monthly rent.
If you were lucky, housing appreciation barely kept up with inflation.
Typically, this equated to the average housing price being 2.5-3.0 x the average household income.
We are now at 8-10x average household income.
If these are the prices you want then we are going to have to build millions of more housing units.
Where and how? [Cost of land, labor, materials, taxes, fees].
I don’t have any problem with people being able to buy a 4 bedroom 2 1/2 bath 2 car garage house in a good location for $120,000 on a $40,000 a year income.
I just want to know where and how you are going to do it.
This is the one thing that constantly gets left out of the debate.
For homes outside of high cost of living areas, material costs vs wages are keeping homes from being affordable from any one besides folks with parents with wealth (and whom are willing to give money to their children).
Add in Wolf’s Hedonic Quality Adjustments for new homes (surge protectors, gas lines, internet lines, additional inspections, plumbing code upgrades, etc.), and there is a real affordability problem for young families.
EL,
And here I thought me and ME had the lock on vague or outright stupid comments here….welcome!
This right here is as simple a way as can be shown what’s wrong.
Let’s see how things shake out if we have a real interest rate for a few years. Will put a stop to some stupidity.
Nah. New 250 year mortgages with no payments for the first 85 years. It’s time we became honest with our children and grandchildren.
This ^
LH:
You mean there’s no Santa Claus?
Lisa,
When the USD really enters its *full Weimar” phase (the final “solution” for 250% G Debt to GDP) and nobody with a choice wants to hold USD, DC will go full Rentenmark and claim a currency-backing mortgage lien against all US real property…
Lisa,
Great can kick from 65yds and right through the uprights! You really get bean counting!
The rest here are still using ALL their expensive golf clubs from only 20 yds and no 3 pts for years now.
Yeah, but the side hustle will pay for the extra expense!
Toronto employers seldom pay more than C$40,000 a year, and then a few thousand gets taken off for taxes.
The average Toronto bungalow goes for C$1.5 million, and condos start from C$700,000 with C$5,000 a year on average condo fees.
They can keep them Never cared for Toronto myself but Im from NYC Same goes for the West coast
According to Poly Sci relative that teaches college in So Cal, Gen Z really turned out to vote and saved democracy….for now. Their studies break things up into Boomers, and then X, Y, and Z.
She’s an X.
Thanks, even if you are in Canada.
Take YOUR world back before the old farts here destroy it.
Sooo, the fact that there are twice as much intelligent apes walking the earth than 40 years ago had Notting to do with shelter riding costs?
I was able to get a VA mortgage based on 5 times my income when the 30 year mortgage rate was 3% in summer 2016.
I would say the 2.5 to 3 times household income for a home price would apply with a 30 year rate around 5.75%.
Freddie Mac shows a 7% rate for the 30 year mortgage.
As CPI continues to drop, I hope the 30 year mortgage rate drops and steadies for 2023 at or below 5.5%.
No worries. FANNIE and FREDDIE will devise a mortgage that will accommodate onerous market conditions. Such as, maybe another negative amortization scheme, 50 year term, etc. They always do. Absurd!
Fannie Mae has pre-priced in the downfall, as it now trades for the princely sum of 47 cents per share.
Raise the ask to $1 per. Hold a digital coupon BOGO sale, and give ’em 2% back on electro-plastic purchasing. They will all believe they’re coming out ahead on this shopping trip. Free “on-line” delivery (of God knows what) for every purchase of at least $100 will have them lining up. Then hit ’em with the news that they’ll have to pay for upgrade tech if they want to accept/hold/cash out/abandon or file for bankruptcy. Don’t forget to ask for their SSN ’cause we all know that was never intended to be used “For Social Security Identification Purposes Only”. What a world..with the “Inmates & Co.” running the asylum.
I knew some loser coworkers who never invested a dime in their lifetime who started putting money in the stock market. during the 2008 crash. They thought they smart assess. They bragged about buying Fannie Mae for $4/share. It’s now 47 cents a share. I wonder if they are bragging now. What morons. I’m glad I retired from that place and don’t have to listen to these whinig dog losers one more day.
It’s great to be so smart, yes?
Why wouldn’t they? A while back, a 4-year car loan was quite normal. By the early 2000s, a 5-year loan was the standard. Now 6 years is the commonly advertised loan term, and the 7-year loan is quickly growing in popularity.
There was a time when the now standard 30-year mortgage was considered crazy. 40-year mortgages are already a thing, and I fully expect that to become the most common mortgage by the end of the 2020’s.
>the 7-year loan is quickly growing in popularity.
Was just looking at a 2015 Honda Accord, and when I asked about the title he said the bank has it. Hmm, living paycheck to paycheck?
Housing prices should be 100-120x monthly rent?
Good to know – looking at my house vs. renting a high quality apartment in my area, my home is well within that range.
Should be is a lot different than what is.
I see the clown show continues apace on Wall Street.
So, comment poll:
At what rate do you think the Fed will ultimately reach in this cycle?
At what level of assets will the Fed stop QT?
5.5% and 5 trillion on balance sheet. ( and do Wolf and William Defoe resemble each other or what ? )
Its uncanny
*Willem
A regular Raven Shaddock duplicate…no doubt.
Though I respect Wolf’s opinion, I am slowly beginning to believe that Wall Street owns God and that the Fed will pivot. Somehow, someway they will convince the world that 82% inflation will be good for corporate profits and that’s all that matters. The Sheeple will run to buy stocks and homes whether they have a job or not because they know even if they default nothing will happen to them. We have entered into a new Kool – aid induced paradigm where there is no accountability and everyone is assured of walking away with a participation trophy.
U-…and far, far in the future,should some planetary archaeologists from a species that managed to become successful starfarers, and who find a bit of interest in this shell of what was once a pretty successful ship of it’s own, will find an intact Wolfstreet mug and go: “…yup…”.
may we all find a better day.
91B20…I hope right along with you. But I don’t pray for it for fear that Joe Granville will show up at my front door and tell me I’m “left behind”.
U-dammit, sprayed my coffee!
may we STILL all find a better day…
4B down, still another 4B years to go. and the very hardest chemical evolution work has already been done. Multi cell is only 1/2 B old….from just being balls of cells that joined up.
Among the present animals, my money is still on the insects. No reason they can’t evolve lungs and big brains in another 100M…plenty time left.
NBay-verily,could be the evolved insect archy’s (hm, what IS that bug in my malt beverage?) rediscovery…
May we all find a better day.
The Fed destroyed the bond market, they’ve transformed the stock market into a national security interest, what do you think?
AB…Whose interest is an interesting question. I find it interesting that Fed governors are allowed to run their mouths about upcoming Fed direction and policy without their comments being considered market manipulation. Is nothing improper?
Hence the new 250 year mortgages with no payments for the first 85 years.
Your post is simultaneously sobering and amusing. It’s sobering because despite the presumed humor, it’s not far from society’s absurd expectations and sense of entitlement.
This is a little like predicting how many hurricanes the month of August will spawn. It’s bound in chaos: How effective will the current rate increases be at slowing inflation? What other supply shocks may occur? How susceptible is JPow to pressure from the market, the White House, intestinal bloating? Though if you could know for sure, you could become very, very rich (or richer)!
The higher interest rates go the more money I spend. Bernanke killed my bank accounts.
I still .expect rates in the vicinity of 20%.
The only scenario I can see that might cause the FRB to stop QT, would be if something happened which might bring down the entire financial system (derivatives maybe ?)
The wealthy will do what they will. The small fry will suffer as they must.
hilarious…..20%….
You weren’t around in 1980?
Yeah I was and today is not 1980…..in fact were typing in real time on a blog…..just to get thru the analog phone line would have taken 30 seconds
Yup. It is amazing how the psychology and math has changed over the last 20 years or so. I remember sitting next to a dotcom manager (like myself, at the time) flying out to SF. This was right around 2003 or so…
He was incredibly worried about the house he had just bought in SF, but relieved by the idea that he could rent it out and thereby cover all of the mortgage expenses, taxes, etc. (He had done the math that you reference.) The point was – even buying at a low point and being diligent enough to cover all of his bases – he was still nervous. Because buying housing should be something that is entered into carefully and soberly.
I’d imagine the window to buy with that sort of diligence and ‘math’ in SF disappeared within a few years of that conversation and has never returned.
bought in 2005 and doubled our money in 2022….
I see many posters were not around when 2007 was blowing up banks…..1100 I believe when all said and done.
any banks gone yet
I’m guessing you either didn’t watch or didn’t understand the video. It addresses why banks aren’t at significant risk in this housing bubble.
I did, but banks are all that matters so if they are at no risk, then we just stagnate with some metros taking bath….SF area being one of them..
I agree the scale of the bubble differs significantly from metro to metro.
ONLY 7.7% inflation – so the market rips 5%????
What are these buyers thinking?
Markets need knuckleheads like today so that people like you and I can make a killing when this bear market bottoms next year at this time
It could bottom like in the year 2030 or any year it doesn’t have to been in the next few years the market puts in a bottom.
It’s an improvement so that’s good news. But wait —- I thought good news was bad news?!?!
Especially when you consider that it’s very likely the Democrats maintain control of the government, and will introduce more spending bills. More fiscal stimulus, which is inflationary, would need more monetary tightening to counteract it.
Where are you getting your news? The current results have the Rs taking control of the House at the minimum. The Senate is up for grabs in a Georgia run-off.
Sure, but the House will be a narrow margin, and the Republicans can always count on a Susan Collins, a Mitt Romney, a John McCain, or a Lisa Murkowski. The Democrats are much better at keeping their coalitions united.
I have no doubt that the Dems will be able to get the votes of a few GOP House members on spending bills.
That’s not “control,” bud.
The House cannot pass a bill because the Senate needs the 60 vote majority to pass it and the Senate cannot pass a bill because the House only needs a simple majority to kill it. Therefore, no bills will pass unless it is bipartisan and how many times have we seen a bipartisan bill. I think the stock market rally reflects on a deadlocked Congress which is considered a positive.
TXRancher, how is a deadlocked Congress a positive for stocks? The entire economy for the past few years has been based on government stimulus, whether fiscal or monetary. That being withdrawn (which is what deadlock would do), is a negative.
It shows the grotesque amount of money sloshing around out there, and the fact that we’re in the most absurd mania in the history of mankind. At first is was the “pivot” narrative making its way around, now it’s just “fv*k it, buy anything and everything, it always goes up!”
The FED has done almost nothing to reign in the speculators or draw down the money supply. They should have aggressively started QT. Instead, it’s an embarrassingly paltry amount they are tapering. And now you’ve got Daly burping forth something about one more rate hike and they’re done.
FIRE JEROME POWELL.
> FIRE JEROME POWELL.
That’s too much an admission the emperor has no clothes, and is winging it. That is not something any reigning politicians will do. The messaging is more like, “remain calm, we annointed experts have it in hand, just be patient.” VERY patient.
TINA 2 FOMO
The volatility is a bit concerning. So,because the govt reported slightly cooling inflation all the indices are 3-6% more valuable than early this morning? I have seen gap filling too much in the past couple years to think it won’t retrace. Too far too fast. What makes people think that pharmaceutical services will continue to decline in price moving forward? Outside of used cars, everything else seemed pretty hot. In particular shelter, which continued rising, in spite of the higher rates.
DXY is heading to 102.50 is what they are thinking
It went down to 107.9 today which was a huge drop that propped up the cryptos and precious metals. Let’s see if this knee jerk response lasts tomorrow!
it will find the 50 weekly and be ready for next move higher
CCCB
It is the ‘perception’ that matters most than the reality. Any slight decline in inflation, is celebration at Wall st. What will happen to the rate in Dec for Nov is a different matter. No one cares for the fundamentals. That is/was the way since ’09.
There is a strong build up of hopium that Fed will pause or pivot soon(?) early next year. So front running is a now a bullish mkt strategy, at least in short term. Next comes Santa rally next month, on any pretext. Wall St will make sure of it.
Front running is deadly for any one trying to short this volatile mkt. Roaring re-bounces are expected in the on going bear mkt. This’s one reason one should have ‘reasonable’ hedges against the insane effect of front running. I nibble on div paying stocks/ETFs in various sectors globally, when mkt tanks, like yesterday. Since I am retired my cash is 50-60% to sleep soundly.
None of it’s possible without the trillions Powell and Co. unleashed. They created a speculator’s wet dream. The entire economy is like a giant Ponzi.
This bear ain’t even wounded good yet. Might wanna take the other half to cash.
This gives FED more ammo to hike rates to tame inflation.
So far, things have been going down in a very orderly fashion, thus FED should not be concerned. They need to tamer inflation.
The market was setup to go higher, this just was a catalyst to make it move. It’s very unpopular in the comments here to mention that the actual content of the report was likely irrelevant and we would have made this move anyway (though not all in one day).
The point is, the content of the data everyone thinks matters isn’t all that important to move the market in the near term. It’s just a catalyst to spark the move.
We had a bad CPI report in October that resulted in what is now a 15% move up. Same report, “bad” instead of “good” data, market moves the same direction.
We’ll likely get a pullback now because that’s how sentiment waves work. But everyone’s going to say the market is “coming to its senses”.
I keep hearing that this time is different because there is little risk of negative equity/foreclosures and the creative financing doesn’t exist anymore. I think this will actually make the price correction happen faster than in 08.
Ask your favorite realtor how easy it was to close on a short sale. It took a looong time and slowed down the pace of transactions. Also, without access to creative financing (for now) people are really limited to the 30-yr fixed monthly payments which home prices must come down to meet.
In my local market (suburb of Seattle) I see a lot more listings come up every day than a normal winter and the prices are falling fast.
Thanks for the great interview Wolf.
I see asking and closing prices still way up from the pre-pandemic period — which was bubbly besides — and I look at a broad spread of cities from the pits of Bakersfield to the bucolic streets or Port Angeles. What I do see is houses staying on the market for 8-12 months before selling, which is nuts. It’s a nasty staring contest, and still off from being a buyers market.
Port Angeles is a drug addicted hellhole just FYI
HeavyC
What’s going on in the Captol Hill section of the City? I lived there for 5 months back in the 1970’s.
I lived on Capitol Hill back in the early 2000s before the brogrammers ruined it and so don’t have much current knowledge.
I pay closer attention to the outlying areas that former Seattleites have been pushed to by the influx of x-Cal and tech money combined with terrible housing policy. These areas are showing unseasonable inventory builds and rapid price reductions.
The bad debt from 2008 was moved from the housing market/banks to the .gov balance sheet. The bubble never left or popped, just moved to an even more important balance sheet. So instead of your precious house losing value because you aren’t smart, now the entire nation is on the hook via the dollar going poof. HUZZAH FOR SOCIALISM! for the rich and capitalism for everyone else!
The overshoot on used homes was something to behold, will the undershoot be such that relatively few new homes will be built for some time to come, as they can’t compete on price?
I think building and land costs might be down enough for them to eek out a profit and keep building.
There wasn’t many new homes built from 1929 to 1946 in the USA to give you an idea of severity of the undershoot coming.
This has the potential of being another famously wrong and premature call on Wolfstreet. As soon as inflation wanes and we enter our mini-recession, real estate will have stabilized and may ride up again. In fact, we may be near the bottom now of the real estate correction. By next spring people will have wished they had bought now, and re-financed later at lower interest rates.
What is this nonsense? Prices have started falling, but not nearly enough considering mortgage rates. Even at 5%, today’s prices would be unaffordable for most people.
If we enter a mini-recession, prices will have had to drop, as they have in past recessions. You think they’re going to “stabilize” at today’s high prices?
I have the potential of maybe not agreeing…
With enough qualifiers laced in, almost any scenario is on the table.
Is your name Ku-Neil?
Lol
yeesh, lets put a leash on your comment and walk it through time.
You are delusional.
I’m trying to think of a case where a call can be labeled “wrong and premature.” A correct call can be premature in light of future market events, but if the call is wrong it will always be wrong and therefore not premature. For example, shorting when markets continue to rise before turning down can be the correct call in the long-term but premature. If markets simply continued to rise, the call would be wrong the entire time and would not be premature. In other words, a premature call implies it is correct at some point. Since you’ve said “famously wrong and premature,” you must be able to name some of these famous calls?
The inflation reading, which was cheered by the markets today is a head-fake, because the core CPI has not moved down significantly, it was just back to the level of a few months ago. The Fed will keep tightening rates as long as core inflation remains elevated. There is still way too much excessive money in the system for core inflation to melt down. And honestly, a 5% mortgage rate is normal, not a 3% rate. The Fed still needs to sell a ton of MBS into the market and they have delayed because they dont want to cause too much trouble.
The Fed needs to break the back of inflation so that it can be trusted as an inflation-fighter and that only happens when the Fed actually creates a recession in order to fight inflation.
Many companies have expressed on earnings calls that they are going to keep raising prices next year, as they believe they have the ability to do it.
The acceleration of the inflation rate month to month last year Sept-Oct was the fastest on record. 0.8% for the CPI (5.4 to 6.2). So the year over year increases now start to look smaller due to the way that inflation was taking off last year. September 2022 year over year CPI was up 8.2% from the 5.4% existing inflation level last year. October inflation this year is up 7.7% from the 6.2% increase last year. So if you do the math, inflation is still worse for the past two years including October. It doesn’t yet start to improve.
Put 20 dollars through September 2021 inflation, then add that inflation back to that value and add September 2022 inflation rate ($22.81). Do the same thing with October 2021 and October 2022 rates ($22.87). So based on CPI, inflation has not even started evening out let alone decreasing if you look beyond one year. Yet the stock market made up of finance types cannot do this math.
The most you could conjecture is that the rate of inflation seems to be decelerating this year. Barring worsening of the geopolitical scene (China) and oil supply (OPEC+) at this rate, we could be down to 3% inflation in 2027. And the longer it takes to get there, the more it hurts for the average person who pays a good part of their income for necessities.
I was thinking along these lines, but you said it far better than I could. Nice work.
…or, to paraphrase the immortal Firesign Theatre: “…Everything We Know Is Wrong…”.
may we all find a better day.
There is this thing called ‘the affordability index rate’ Which is the median price of housing in a given area versus the average family income. A healthy market place runs around 30% of that average family can afford to buy. So Cal got down to about %17 prior to the ’08 crash (including ’09 and 10).
I don’t see any RE rebound until we hit near the 30% ratio again.
Dang, Neil, I spit my bourbon on that one.
Neil,
Listen to the interview so you actually know what I said, instead relying on your imagination.
In terms of YOUR call: “As soon as inflation wanes …”
Hahahaha…
https://wolfstreet.com/2022/11/10/services-inflation-spiked-to-second-highest-in-4-decades-would-have-hit-new-high-if-not-slowed-by-biggest-ever-adjustment-of-health-insurance-cpi/
But there won’t be an adjustment for the Fed-favored “core PCE” price index that will come out before the next Fed meeting.
Expect revisions. A 4% drop in annual costs in a one month period is clearly a mistake. If anything, labor costs are increasing.
Neil, if this is what we see in the next year or two then the downturn afterward is only going to be that much worse. That said, I believe anyone who is purchasing right now is going to be woefully underwater from the moment they purchase.
Do the math on housing payments right now, especially in expensive markets. Where I live, in South OC, I would guess roughly 80% of people here couldn’t afford to purchase even a condo right now. 9 months ago, most could’ve purchased a single family home. There is now a massive air pocket below asking prices because VERY few people can even qualify to purchase a home within $400k of the asking price.
Sellers are asking the same prices as 9 months ago, but payments are 50% higher AT LEAST. That may be doable if your house payment went from $1500 to $2250, but it’s a really big deal when the payment of $5600 goes to $8000 in just a few months.
We are entering a totally unprecedented area for housing (from a crazy price run-up sparked by extremely low rates, then a sudden switch to the highest rates in 20+ years). This will not lead to the same old outcome you are used to.
The fixed income consumers in 2008 are stock market investors in 2022. They are out of position again and that will hurt consumer spending, which the FED knows is too high demand, and needs to come down.
Is there a bigger group of parasites than Wall Street traders? I think not.
Hey, whoah WHOAH! Let us not focus on that bunch — we need to reserve spleen for venting at all the work-shy opportunists on Main Street and their #%*% stimulus checks!!
After listening to the interview, I’m under the impression that Wolf does not think there’s going to be a recession because unemployment is not high enough and doesn’t seem to be rising substantially?
Lucca
I tend agree with him. On going demographics will keep the labor mkt tight. Rate of wage growth is slowly increasing. Wealth effect with mkts rise is conducive to control inflation.
As I have said more than once. Mr. Powell is no Mr. Volcker. Mkts are challenging the Fed’s stance now.
Wealth effect with mkts rise is NOT conducive to control inflation.
Not necessarily Sunny. As we saw over the last decade, money that’s going into financial markets is money that is not chasing the consumer goods and services that drive CPI. When somebody buys a stock or a bond or property, they’re locking up that money for some period of time. Those are dollars that will not be spent anytime soon on a new laptop, a new car, or a contractor for a kitchen remodel.
We saw massive asset inflation after the GFC bottom, but surprisingly low inflation in products and services. Most of the GFC’s QE went directly into assets. This time around, a lot more pandemic QE money went directly into circulation, igniting consumer inflation, but I suspect a lot of it will find its way into assets again over time. Stuffing one’s evaporating cash under the mattress may make sense for a short period while markets remain volatile, but it’s the worst possible strategy over the long term. Anybody who thinks the Fed will still be deeply engaged in QT 2, 3, 4 years from now is out of their mind ignoring the entirety of history. Money supply growth may slow for a little while, but that won’t last long. It will resume its relentless upward trend as it always has.
I think we could get a recession, but I’m not convinced. There is still a huge amount of money circulating out there, consumers, state and local governments, businesses, etc. which keeps getting spent. This is just the weirdest economy ever.
I don’t see a single sign of a recession around here. I see massive traffic jams every day on the main roads. My watering hole, an Irish pub was packed the other day, Wednesday night. The waiters were so shorthanded serving up the booze that their heads were spinning. I had to order 2 Bud Lights at a time just to keep up. Houses near me are selling in a matter of days or weeks even at the current interest rates. J Powell has his work cut out for him. So far everything he is doing has not worked and it won’t work. The best thing he could do for the country now is hand in his resignation.
This is my experience.
The Fed needs to increase the pace of QT.
JeffD
The fed has been so slow to increase rates that by the time they do, the markets adjust and it is just like they never did anything. They need a knockout punch, but Powell is such a political coward and incompetent that he will not do what needs to be done. Most of the members of the fed are just as bad. They all need to go.
It’s not something I see many talking about, but seems to me the housing market is entering a scenario without much precedent and it’s very difficult to predict what’s going to happen.
Sure, dramatically higher mortgage rates dry up the buyer pool until prices come down, so lower prices, right?
Maybe, but look at the supply side too. Years and years of purchases and refinances at extremely low rates have now “locked” a huge swath of potential sellers into their current house/mortgage. Who would give up a 3% mortgage right now? How can they afford to move if the new mortgage is going to 7%+?
You can’t even downsize because despite a lower price, payments are still going to be higher. Check the math: 3% vs. 7% implies over 35% less purchasing power for the same payment.
A low rate mortgage is now a valuable asset that one should think very carefully about before throwing away. Just like owning a high-interest rate bond when rates drop, “owning” a low-rate debt when rates rise has significant worth.
What I do think is baked in, is that transaction volumes are going to VERY low for quite a while (sorry Realtors). It’ll be a battle between a very few buyers which can afford the payments and a very few willing sellers who can afford to give up their low-rate mortgages. Indeed, cash buyers and 100% equity sellers are likely to dominate the market and set the prices for the foreseeable future.
Given limited both supply and demand, I’m not sure how this plays out in terms of prices, but should be interesting.
What do you do if you’re one of the 40% of home owners that have no mortgage and it’s time to downsize or move for work? You sell.
What do you do if you own one of the 1.5 million vacation rentals in the US (60% purchased in the last two years) and it doesn’t cash flow? You sell.
What do you do if you bought a new home without selling the old home to ride up the gains? You sell.
What do you do if you’re a builder and you finish a home? You sell.
I think people will be surprised how much inventory manages to come onto the market despite the low rates on existing mortgages.
Yep. If your one of those 1.5 million vacation rentals, you can still sell it and make a $100k, 200k or more.
I bid on a vacation rental for $490k in September of 2021. It was purchased for $340k in 2019. It is not for sale but two identical units are for sale right now for $650k and $699k.
When I last year, the owner wanted $500k and no inspections so I turned it down and he sold a few weeks later for $509k. I think the unit would go for at least $650k right now.
Your math is screwy. Most places are flat to declining year over year, yet you think that vacation rental is UP by almost 30%? Nope.
Locked in rates only work until something happens.
Already starting to see more toys for sale in the car world, larger priced homes sitting for 100+ days with no bids.
The days of 10 – 20 buyers with no financial sense overbidding are gone.
My old mountain neighborhood had 28 homes mostly 2nd home owners, 24 of those people sold between 2021 and 2022.
My neighbors who moved to live abroad their home is back on the market for sale now listed 110k less than the buyer paid earlier in 2022. What happened to them? Most likely a job loss or something that is forcing that sale.
“What happened to them? Most likely a job loss or something that is forcing that sale.”
Or simply an “oh, shit!” moment from a speculator.
It is clear from the factual trend how things are playing out w.r.t. Sales Volume and Price. Both are way down.
People won’t like to sell but they’d be forced to for multitude of reasons.
Home prices are defined at the margins.
“Home prices are defined at the margins.”
Bingo. Once the new comps set in, it’s gonna get ugly.
Agreed. A thinly traded market can be just as volatile. Price is decided by those that participate, not by those that hold and dream for better times.
How many houses do you think are locked into those 3-4% rates? I want numbers. I bet it’s only 10-15% of the entire housing market.
A lot of homes locked in with 3% mortgages = no supply
Inflationary economy, tight labor market = high demand
Add the two together and that equals continued increase in prices of homes in areas that have good jobs and good schools even with the higher interest rates. The rich can afford it. That’s what’s happening here.
In areas where the jobs are disappearing and the demographics are not changing for the better, bad schools, crime etc forget it. Prices will fall over a cliff.
Another thought. Even if the Fed does slow the rate of rate increases, the current rates are nowhere near “baked in.” The S&P could only manage 3400 with the 1.5-2% rates. Why is 4000 legitimate with nearly 4% rates?
Rates are only one factor. You’re forgetting all the QE that happened since that 3400 on the S&P. The Fed’s balance sheet is still nearly $9T so when QT makes a bigger dent it will keep equities down. I don’t remember off the top of my head what 100 basis point on the FFR is equivalent to as far as QE, but I don’t think we’ve done enough to bring it back to 3400 just yet. Way too much liquidity is still out there.
On that I agree. Even if the Fed does stop increasing rates, it cannot stop QT, or we’re in big trouble.
Einhal
“it cannot stop QT’
Why NOT?
They have done imprudent decisions, more than once in the past 20-30 yrs, without accountability and no penalty.
Wolf, great podcast as always. Love your articles. I am curious on your views regarding the commercial real estate market. The cap market for a lot of retail commercial types has still been red hot (4-5 caps on QSR and retail like dollar general for instance). I often seen California investors paying over $2 million for a property in the southeast sight unseen with a 5% return. As you mention the 10 year treasury is near that. Where do you see the commercial real estate market going?
With commercial you really have to give it a lot of time because there are relatively few transactions.
Office is slowly slithering into mega-trouble — there are hardly any transactions right now. No one knows what anything is worth.
Multifamily is doing OK. But the cap rates for multifamily are silly. Everyone in the industry is expecting that interest rates will plunge next year, it seems.
Industrial was red-hot and is just now starting to cool (following the Amazon pullout).
This will take a long time to work itself out.
Housing CPI .8% and food CPI .6% were both high. Big drop in auto prices helped alot, but that merely a reversion to the mean. The core of the inflationary process – housing and food – is entrenched in inflation that is not coming down yet.
The stock market bounce today will reverse as funds that want to lighten up will just keep selling into the buyers.
I am curious how you decrease shelter cpi.
The more you raise rates the more the home value has to drop to make up for the added cost of the higher rate. It doesn’t feel like shelter cpi will go down until we start comparing it to a time where rates are similar. That will be many months from now, depending on how much we keep raising rates.
Even Jim Cramer is telling his folks in his investment club to sell into the rally.
Wolf, near the end of the interview you advised homeowners not to look at Zillow. I’m assuming that advice is for those not looking to buy a home anytime in the near future. But what is your advice for those looking to purchase a home in the next year?
I’d like to know as well.
I will take a stab at this. Watch the core inflation numbers and see what mortgage rates are required to kill core inflation. But the bottom on the housing market is probably a period of time after interest rates begin to descend. By next summer you will be able to see the trend for home prices. Wait for inventories to pile up on unsold homes.
“But what is your advice for those looking to purchase a home in the next year?”
Don’t
I’ll take a similar stab at it. I agree to just wait it out a bit. But, in the meantime, if you really want a house, low-ball the heck out of them. All they can say is “no”.
You just never know. I had friends that offered 140k for a large house on a lake several years ago. It was in rural central Illinois, so not worth all that, but asking was 300k.
Offer was immediately accepted. Turns out it was owned by New Jersey Mafia and they were running an illegal online gambling scheme out the house and it got busted. They just wanted to dump the house.
In any market, you just don’t know what people will take if you don’t try.
Wait. Even Powell said that a while back :-]
Ok. Thank you Wolf and all the other commenters for your input. I really enjoy this website’s articles and reading all the comments. I’m in no hurry to move but I’ve been waiting a few years and getting impatient. Sounds like I’ll just have to wait a little longer.
Another thing you can do is offer a bonus (like 1% of the purchase price) to your realtor if they can get the home you want at a certain price, say 10% below asking.
Realtors will be pretty hard up soon and this strategy is legal (in California, at least). Basically the realtor will work his/her little buns off to get that lower price because THEY will get paid more.
On an $800k house, if you could get if for $720k, it costs you $8k to pay the realtor but you make $62k. In a buyer’s market where prices are clearly coming down, it’s a good strategy.
So a realtor won’t “work his/her little buns off” for 2.5-3% of a $720,000 purchase as a buyer’s agent in a buyer’s market? The commercials I see all the time extolling the virtues of having a Realtor™ are actually just BS? They need an extra incentive to actually do their job of negotiating the best price for their client? I’ll keep all this in mind the next time I deal with a realtor.
Just hire a title company no realtors ,done it many times. Works good when selling
Math works fine. It’s the application of math (or pretense) when addressing ‘economics’ that fails.
Housing mkt is a big part of an economy. It is also interconnected with Bond & equity mkts, with some lag.
Front running for the several days has the mkts reversing it’s decline, in a spectacular manner.
Many money managers, including MFunds and pension plans are also jumping into this mkt mania. They are calling the bluff on Fed.
QT is not fast enough.
Fed is unable to break the power of perception. Asset bubble is reforming and the wealth effect do not help Fed in containing the inflation.
Great interview, Wolf!
Thanks again for pointing out again that the risk the Fed/Banks hold now with MBS’s is much lower this time compared to 2008. Investors and taxpayers are holding the risk.
I think the Fed does have a lower bound. The banks still have loans out into the economy. If the housing market does crash hard, like in 2008, how will that affect the rest of the economy? A deep recession will affect all bank loans. However, rampant high inflation is also eating away at those low interest rate loan returns. The Fed is responding to that to fight inflation to save the banks.
The Fed is walking a tightrope but with some safety features to prevent a repeat of 2008 bank crashes. I agree that MBS’s and the stock market will be sacrificed first but not to the extent of a deep recession causing massive defaults in other bank loans.
Today it looks like the mortgage rates themselves are what’s popping.
Incredible what is happening with only a slight beat yet inflation still stupidly high. Not even a nuclear meltdown in crypto could stop it. Now, just add in some weak job numbers and pepper on some more dovish comments and Santa will be delivering a very nice Christmas indeed for the bulls.
“Stop looking at Zillow”…one for the ages here, Wolf, a real doozie. Thank you and I just put my money where my mouth is with another donation. Smiles!
There is a neat trick that Canadian politicians use to keep the bubble going.
It’s called NIMBY zoning laws, creating artificial scarcity, and letting Greater Fools pay the mortgage via rooming houses and basement suites to help pay the mortgage.
I used to live in a remote part of Toronto that was mainly nuclear families living in bungalows.
Now that area is packed with vehicles, they had to install traffic lights for the influx of people, and basement suites are renting for a few grand per room.
You are a rockstar, Wolf.
IdahoPotato,
hahaha, thanks. But no. Actor.
When is the next post about “the markets fighting the FED” coming? Because the 5,000 point straight up move on the DOW is absurd. At this rate it could be all time highs next week.
Still short?
Who said dont be short going into the election?
I like the statement in this interview that mentions the high proportion of millennial buyers over the past few years and how falling prices adds insult to injury (Since many of these buyers had to pour every last dollar of their savings into a down payment just to afford these homes at astronomical prices). Depending on how far prices correct, I’d expect an outsized impact on younger buyers (Which I’m sure was the case for Gen X buyers in the past crisis). I have several friends who bought in the past year/year and a half and others still plan on buying. Hordes of 30-somethings purchased homes in 2020-2022. This cohort will get especially hammered the deeper the correction goes. Adios what little wealth you managed to save!
They’re the ones who drove up the prices. They’re not the victims, they’re the perpetrators.
The next big battle will be between big government who wants to inflate away the debt and print prosperity, and the banks who will be ruined by runaway inflation. The Fed is in the middle, a hybrid creature of neither realm. In the end, debasement will win as it always does, and take out the paper buck.
If they can afford the payments, what does it matter? The ones that bought in the past three years have 3-4% mortgages, so they am will pay off more principle the more they pay.
And I disagree with Depth, the AirB&B and two home crowd did more damage to the housing market than the first time buyers.
Kurtismayfield
Wait till Congress takes away the interest deduction on second homes. Look out below.
Taking away the interest deduction on a second home would mostly hurt the upper middle class/lower wealthy who purchased a very nice second home with a mortgage.
Most people I know who have second home/condo mortgages, aren’t paying enough in interest per year since their primary home is likely paid off and they have very little interest to deduct with a 3% mortgage.
The standard deduction for a married filing jointly is $26K.
Assuming the SALT cap of $10K is reached, that means there is $16K left for interest and charity. $16K in interest would mean that you have a $550K 30 year loan at 3%.
Eliminating the second home deduction would not affect people with less than $550K in 1st + 2nd home mortgages since they take the standard deduction.
It would likely not affect the wealthy since they likely pay cash for a second home.
The dynamics are changing now with 7% mortgages but that will affect new buyers and will not force people out of their second homes with any tax changes.
Please correct my math.
Congress would do much more damage if they took away the generous deductions on rental properties. So far, they just add more loopholes and deductions.
As someone once said on another blog, if you are paying any income tax on rental property income, you are doing it wrong. After deducting ALL mortgage interest and property taxes without limit (unlike poor people who only live in their houses), deducting all expenses, AND a generous depreciation over 27 years, your tax form should show Biggly losses which you can carry over to next year. If you want to deduct this year, just invest in some REIT investments or oil pipelines that do show a profit and all of your tax losses and gains will cancel out while you are rolling in a steady yearly income.
Taxes are not for RE investors.
I decided long ago to pay off my mortgage when I retired from the Federal Workforce. All these calculations above didn’t mean a thing at the time because things could change in a heartbeat. But I did a quick analysis with an Excell spreadsheet of the offsets and saw that I could save about $250/month GUARANTEED if I paid it off. I didn’t listen to these junkyard dog financial planners. When the new 2017 Tax laws went into effect the savings was even more than the $250/month. So, it turns out I made the right decision even if it was for some of the wrong reasons.
Wolf, thank you for the informative interview! I am in the position where I am mortgage free but I bought in the wrong city close to peak pricing. My costly relocation mistake. Early retiree who wants to move back to my home city. It is likely I’m looking at 5-10% loss including realtor fees etc. (based on recent offer). How dangerous would it be to take the loss now and rent/wait for 1 year to re-buy? I can probably recoup the loss (by buying lower) if you’re right about the market continuing to unravel over years.
It is all the pivot narrative that scares me to take a big loss for nothing. As you note some people believe things will start turning around next year.
I’m in Canada … want to move from Victoria to Vancouver.
Very confused.
Your primary mistake is that you’re not a billionaire – most of us here are in this predicament. Billionaires make those kinds of mistakes all the time and don’t care. But we have to care. So the question is: what kind of loss can you even comfortably afford?
Can you comfortably afford a 10% loss on your residence? or a 30% loss? People who own stocks deal with this all the time. No one can answer this question for you.
But if you’re miserable where you live now, and you’d be happier somewhere else, that is worth some money. But how much?
You may not even be able to actually sell your home for a 10% loss. So the first thing to do is to put your home on the market and see what the best offer is – you can always reject it. Reality on the ground can look a lot different than regional price indices. Maybe you come out ahead, maybe your loss would be 30%. But you don’t know until you try.
In terms of next year, no one knows. But here’s my best guess: Inflation is going to stick around, rates are going to stay higher, home prices are going to come down, that’s my best guess for next year.
Canadian government is restricting Chinas investment in mining companies, esp lithium. What if they put the same restrictions on China money in real estate?
If you have to move, then you are trading a 5-10% loss in Victoria with a 5-10% discount on the new home in Vancouver. As long as both have dropped the same amount. As long as you are above water in Victoria, and had put 20% down, you should still have the cash to make the move without dipping into savings. On the bright side, your capital gains tax on the house you sold will be low or negative.
My crystal ball is broken. I agree with Wolf that home prices will likely drop more. However, I told my son in 2019 not to buy then because I thought there was a bubble. I also told him that if he did buy in 2019 at the peak of a bubble to plan on living there for at least 10-15 years.
Short term investments in a primary house worked during the last 6 years, but was a disaster from 2006-2014 where everyone lost money.
Good Luck! Life is short.
Short term rentals with negative cash flows were ok as long as house prices were going up. Now what do you do? There’s like 1.5MM STRs … how many of them generate positive cash flows? Oh my …