The boom is over. And there are broader effects.
By Wolf Richter for WOLF STREET.
Spiking mortgage rates multiply the effects of exploding home prices on mortgage payments, and it has taken layer after layer of homebuyers out of the market for the past four months. And we can see that.
Mortgage applications to purchase a home fell further this week and were down 17% from a year ago, hitting the lowest level since May 2020, according to the Mortgage Bankers Association’s weekly Purchase Index today. The index is down over 30% from peak-demand in late 2020 and early 2021, which was then followed by the historic price spikes last year.
“The drop in purchase applications was evident across all loan types,” the MBA’s report said. “Prospective homebuyers have pulled back this spring, as they continue to face limited options of homes for sale along with higher costs from increasing mortgage rates and prices. The recent decrease in purchase applications is an indication of potential weakness in home sales in the coming months.”
The culprit of the plunge in volume: The toxic mix of exploding home prices and spiking mortgage rates. The average interest rate for 30-year fixed rate mortgages with 20% down and conforming to Fannie Mae and Freddie Mac limits, jumped to 5.37%, the highest since August 2009, according to the Mortgage Bankers Association’s weekly measure today.
What this means for homebuyers, in dollars.
The mortgage on a home purchased a year ago at the median price (per National Association of Realtors) of $326,300, and financed with 20% down over 30 years, at the average rate at the time of 3.17%, came with a payment of 1,320 per month.
The mortgage on a home purchased today at the median price of $375,300, and financed with 20% down, at 5.37% comes with a payment of $1,990.
So today’s buyer, already strung out by rampant inflation in everything else, would have to come up with an extra $670 a month – that represents a 50% jump in mortgage payments – to buy the same house.
Now figure this with homes in the more expensive areas of the country where the median price, after the ridiculous spikes of the past two years, runs $500,000 or $1 million or more. Homebuyers are facing massively higher mortgage payments in those markets.
The combination of spiking home prices and spiking mortgage rates has the effect that layers and layers of buyers are leaving the market. And we’re starting to see that in the decline of mortgage applications.
The Fed has caused this ridiculous housing bubble with its interest rate repression, including the massive purchases of mortgage-backed securities and Treasury securities.
And the Fed is now trying to undo some of it by pushing up long-term interest rates. It’s the Fed’s way – too little, too late – of trying to tamp down on the housing bubble and on the risks that the housing bubble, which is leveraged to the hilt, poses for the financial system.
What it means for consumer spending.
When mortgage rates fall, homeowners tend to refinance their higher-rate mortgages with lower-rate mortgages, either to lower their monthly payment, or draw cash out of the home, or both.
The wave of refis that started in early 2019, as the Fed did its infamous U-Turn and mortgage rates declined, became a tsunami starting in March 2020, as mortgage rates plunged to record lows over the next few months. Homeowners lowered their monthly payments, and spent the extra cash that the lower payments left them. Other homeowners extracted cash via cash-out refis and spent this money on cars and boats, and they paid down their credit cards to make room for future spending, and this money was recycled in various ways and boosted the economy. And some of it too was plowed into stocks and cryptos.
This effect ended months ago. By now, applications for refinance mortgages collapsed by 70% from a year ago, and by 85% from March 2020. Refis no longer support consumer spending, stocks, and cryptos.
What it means for the mortgage industry.
Mortgage bankers know that they’re in a highly cyclical business. Faced with rising mortgage rates, and collapsing demand for refis, and lower demand for purchase mortgages, the mortgage industry has started laying off people.
Add Wells Fargo, one of the largest mortgage lenders in the US, to the growing list of mortgage lenders that have reportedly started the layoffs late last year and so far this year, including most notoriously Softbank-backed mortgage “tech” startup Better.com, but also PennyMac Financial Services, Movement Mortgage, Winnpointe Corp., and others.
Wells Fargo confirmed the layoffs last Friday and a statement blamed the “cyclical changes in the broader home lending environment,” but didn’t disclose in which locations of its far-flung mortgage empire it would trim mortgage bankers, and how many.
So that boom is over. And the Fed has just now begun to push up interest rates, way too little and way too late, but it is finally plodding forward in order to deal with this rampant four-decade high inflation, after 13 years of rampant money-printing – an inflation of the magnitude the majority of Americans has never seen before.
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Many realtors and mortgage folks hopefully learned to code during the pandemic.
Perhaps the ones that didn’t go through the same kind of bust in 2008. Probably not though.
Restaurants need way more kitchen help
For what? Robots can and are replacing most of the ‘help.’
No, they’re not.
I know from personal convo’s, fearing a weakening dollar. many “savy” investors did a refi on their current mortgage to purchase an Air BNB. Most purchased at a market high, citing inflation hedge.
And didn’t Wolf write “ppl were buying new homes, not bothering to sell their current homes, and using that house as a cash ATM?!”
Interesting times, to say the least.
“Restaurants need way more kitchen help”
Hard work for low pay. You’re not going to get it.
We’ll get it. The stimmies are cashed and spent.
Bye-Bye to more Mom and Pop businesses. Already have only one owner operated coffee shop left in my large 250K+ area, where we hung out pre-covid…guy cut hrs to 4-11.
Contractors/subs have to have a place to meet every am and swap info, make deals, BS competitors, and luckily picked him. My boss went every am, too, when I worked construction mostly PT early 80’s.
Small factories I worked in when younger are long gone.
Economy of scale, ya know?
Google Bork’s America article in American Conservative. (short and to the point). Wolf had a similar article here a while back, basically saying that all Americans want out of life is to consume a LOT and as cheaply as possible.
Chicago School of Econ stuff…uncle Milty, et al.
Wolf’s article addressed the “importance of consumer welfare, as measured by PRICE” and the consequences, IIRC. Anyway, here’s a link if he will allow it….it’s good history of part of how/why we got to where we are today. (I should have waited to send my donation till after he allowed it ;)….)
https://www.theamericanconservative.com/articles/robert-borks-america/
Restaurants will lose business:
The young are not so interested in restaurants, they are opting for home delivery so that will be a declining business.
Restaurant spend is a discretionery purchase and with inflation, people will have less money to be able to go to restaurants.
Restaurant popularity was high recently only because people did not have the opportunity to go to the restuarnt during the corona virus pandemic.
Bead, I laughed when I heard your restaurant joke.
No way in hell realtors are smart enough to learn how to code.
Most realtors are really just untrained tour guides.
Restaurants are going to one of the bigger failing businesses in the coming recession/depression. Back in the 1970’s (the last time we had a inflation rate over 10%) the average family ate out less than once a week.
Interest rates will have to climb to meet the inflation rate, and that’s going to take 3-4 years, and then another 4-5 years to come back down. It’s going to get ugly for anyone who’s never learned to live without credit. And credit is going to get much harder to obtain, even for those with good scores. That’s going to massively impact consumer spending.
20% of the salespeople make 80% of the money anyway, and they’re still standing when the part timers and newbies are gone until a fresh batch come along to pay ridiculous licensing and training fees when the next wave comes. It’s a real racket now.
I did it many decades ago and it was 150 bucks and 3 months’ evening courses, then straight into a brokerage where I worked part time. I ended up hating it, but my timing was great – the market took off right about the day I started working. Stuff was up 50% over a few months even though interest rates were ~15%. Later the market dumped, and I was gone like so many others when the easy times faded – I had lost interest anyway.
Today, for a license up here in Kanada it’s about 8 thousand dollars and a ‘learning path’ that takes a year, then an articling period for two years with a broker, a license fee of about 600 dollars, and several more education courses, 2,000 a year in fees, 1,300 dollars one-time fees.
All designed to slow the process of new entries into the market and milk them as much as they can. The middle class is the only class that will eat its own kind.
Ironically, my mortgage lender graduated with a CS degree but the money was better in mortgages.
Right. Just like the pipeline workers whose jobs were killed by Joe his first day in office.
LOL, more talking points.
Ed C,
What kind of drive-by one-liner nonsense is this?
I believe he refers to executive order 13992, which stops the pipeline on federal land. It is a loss of potential jobs not yet created. Not actually firing anyone, which he infers.
Wolf – You Beast!! I for one appreciate your input
Once the train gets rolling, lots of layoffs.
Don’t worry. Everyone’s going to get bailed out going forward. Here’s Janet Yellen backing permanent rent / mortgage relief as part of the Fed / Congress playbook to deal with recessions:
https://www.reuters.com/business/us-treasurys-yellen-calls-better-automatic-stabilizers-fight-recessions-2022-04-28/
The inmates are running the asylum and have bought into Modern Monetary Theory (MMT) hook, line, & kitchen sink.
This woman is pure evil.
They did learn to Code..
But they were coding for Mortgage Application and Processing Fintech startups…
Ro Rohhhhh….
It only means that volumes will keep declining and prices will keep rising slowly. America will soon become renters nation like much of the rest of the world. Homeowners will refuse to sell at any lower price knowing well that in the long run it will only appreciate. Those who will sell due to extreme reasons will be sold very quickly with many bidders.
In Bay Area, despite tech stock crash and despite mortgage rates rise, and despite work from home and little to no immigration, home prices continues to rise and in good areas 1-2M overbidding on 3-4M asking price is very common. And these are very old, tiny 2K sqft homes in poor condition.
Despite what experts have been telling , home prices in US will NEVER drop again because homeowners have tasted the blood and know that Fed will always save their bottom in the long run as long as they are patient.
🤣 You’re so funny.
I’ve noticed something else in the USA that may eventually smash new house prices. When people move houses, to get the latest big deal, they appear lose their homeowners rights to limited property tax rises and so have to pay whatever the new full property tax rate is. It’s odd for me, as we don’t have property taxes in the UK, just a thing called council tax (to pay for local utilities) and they don’t change and go up if you move into a new house. I imagine (and read?) that for new house movers this may be a substantial amount….
Just to let you know, the biggest council tax (on the biggest houses) is around the £4000 rate ($4900) even if you house is worth $50 million pounds/dollars or more. That’s why I sometimes struggle to understand USA property taxes…. I pay way less, just over £900 and my rise this year is up £4 a month, so not too bad…….. If I’m wrong about this ,then let me know but I’ve read of massive property tax rises when people move…..which may seem ok if your house is going up in value but if it doesn’t or drops in value then….ouch….
Youre talking about California because of a unique tax law that limits property tax rate increases for those living/staying in their home (prop 13). Thus some people who have stayed in their home for decades in CA have a very low tax rate on their primary residence.
I second that and add an ostrich meme.
Wake up or stop trying to be a comedian.
To-date, the Fed has only stopped buying MBS & treasuries and raised the funds rate a minuscule 25 basis points. There’s a LONG way to go before the “Fed Put” happens.
Do you actually believe this or are you practicing writing for “The Onion?” Because if you believe it I am at a loss for words.
LOL
Maybe he thinks that the fed will drop rates to negative and turn the free money spigot back on. In that case, home prices in nominal dollars could stay flat or even rise! (While the currency inflates to worthlessness.)
The Fed is odds on to drop rates into the negative when the next housing crash happens.
If the Fed sets the price of money at -5% you’d be mad not to be taking out loans all over the place.
They will go to -5% to stimulate the economy and get people spending.
I believe in data. Show me price declines in Bay Area and I’ll believe you.
Kunal,
“I believe in data. Show me price declines in Bay Area and I’ll believe you”
Sure. Absolutely. No problem. Happy to. Here we go: Prices fell 45% between June 2005 and March 2009. Lots of mayhem. I was living here at the time and saw it first-hand.
Is there you there Lawrence Yun or Chris Thornberg? What are you doing wasting your time trying to “sense” into us naysayers? Plenty of dumb lemmings out there for you to convince.
Tell them how great or how much it make sense to take a 40yr mortgage out or consider ARM all over again as I heard from one news story coming out of Houston yesterday.
We need to bring back option ARM’s to keep the housing bubble from popping. And if that doesn’t work interest only 50 year mortgages.
Lol
KUNAL
‘Fed will always save their bottom in the long run’
They are already behind the curve in containing the inflation which will keep increasing, until resolution of Uraine war, supply chain squeeze, cost food is increasing all over the world. so are the private and public debts in record territory in the human history!?
Will they really contain inflation or told to reverse, just before Nov elections! May be you believe in Fed’s miracles!?
Inflation staying the same is actually pretty terrible too. It needs to drop to 2%, and all the sordid gains it made never go away by the way. I hope everyone understands how that works.
Another post of yours totally detached from reality.
My reality in data driven. You guys live in a fantasy land but your wishful thinking will not crash the RE market.
Show me data that Bay Area prices are indeed declining and I’ll believe your reality.
Kunal,
As I showed you above, the Bay Area is INFAMOUS for its real estate price declines. Boom and Bust. That’s what the Bay Area is all about. If you don’t get that, you don’t get anything about the Bay Area. This has been the case since the Gold Rush days, Boom and Bust, always.
Real estate moves slowly, so you need to give me a few years to duplicate the chart that I posted above in reply to your other comment, about the 2001-2012 boom and bust. The next one will be even prettier, I promise, but I need a few years to let the magic work.
I visited friends in SoCal in 2004. I’ll bet their houses aren’t worth even half of what they were then now, and dropping.
Well, I moved out of SoCal in 2006. The apartment I owned went up as high as 360,000. It was finally sold around 300,000. Just checked the comparable surround units today, the price range from $440k to $543k.
It’s about 60% increase in price since 2006. So I am not sure which area in SoCal you are taking about where the prices is droping.
hmmmm? Over confidence much? “…home prices in US will NEVER drop again…” but in the mid 2000’s home prices were NEVER going to drop so one could get an adjustable rate mtg and refin. or sell at a later time because ‘the market ALWAYS goes up”…but then the credit crisis happened.
As Wolf just pointed out a day or so ago, new home sales continue to drop and inventory is at a 6 month high comparable to 2008.
Plus, there is another important detail overlooked: unlike the mid 2000s, the number of actual households are no longer growing. It doesn’t matter what the mortgage or pricing and inventory in the market is doing, if there is limited ACTUAL households (not investors) that NEED a home to live in, that’s going to negatively impact housing prices and demand.
History has also shown that the top of any market is usually found where there is/was a B-I-G glitzy “send off” party. It’s never marketed that way of course. In fact one usually gets the impression that things will be that way for ever. The ridiculous sized Mall of America marked the end of mall building in the U.S., Suvs and oversize trucks are marking the end of petroleum fueled vehicles in the U.S., and If this housing market hasn’t been big and glitzy, I don’t know what is.
That is the funniest post I’ve read anywhere in a long time! Thanks man!
Kunal. You do realize that a 2000 sf home in the bay area is gigantic right?
And you do realize that many, many people in those areas make enough money to EASILY support those valuations…. right?
Please support your statements with more data that makes sense. Otherwise your comments just read as complaining
yea, right. the blood has already begun to hit the stock market. the housing market is on a time delay. higher interest rates will begin to sap up all the demand, finally inventories will rise and people will move away from overpriced markets. And then there will be a 2-3 year decline in prices as all those investors sell their homes and people cant find a buyer.
the Fed is running very scared and wont be able to bail anyone out.
But prices still aren’t coming down. While this is bad for mortgage lenders, it’s no relief to prospective buyers and renters, who continue to pay higher & higher prices as inventory shrinks.
When and if prices do come down, they’ll still be far above 2020 levels.
They will come down when sellers are trying to sell to buyers that aren’t in the market anymore.
Last bust took five years to play out. During the first year, people didn’t even know it was a bust. So be patient.
The Bay Area and Silicon Valley not immune from price declines. Huge glut in commercial in the mid 90’s with housing price declines too.
More people realizing they are screwed on property tax. Those transplants to Austin, Texas are beginning to find out what they are in store for. No prop 13 in Texas.
Top to Bottom of last cycle using Residential Property Price Index (Nominal, Local Currency):
USA – down 30% over 5 years (2006 to 2011)
UK – down 12% over 4 years (2007 to 2011)
Ireland – down 51% over 5 years (2007 to 2012)
Spain – down 42% over 6 years (2007 to 2013)
Source: Helgi Library
Wolf, so last bust took five years at the velocity/pace of tightening that occurred then.
Assuming the Fed goes through with what they say they will do (big if) and assuming markets respond accordingly, if we have a tightening that continues to tighten as quickly as we are… then what is that bust timeline looking like this time?
I think we will bust faster than 5 years, especially with the recent proliferation of MLS data (Zillow, Redfin) that didn’t occur prior to GFC.
I do agree housing moves slowly but I think it will move a little quicker given technology and tools today?
This time, we have inflation out the wazoo and the Fed timidly and belatedly cracking down it. I have no idea how this will turn out. I envision a long-drawn-out situation.
These scumbag mortgage lenders owe us over 3K in fees that they never paid us. If they are ripping us off I hate to think what they are doing to the lemming masses that are lined up at their doorstep to go into debt on some overpriced shack for the rest of their life.
Rocket Mortgage per chance?
They gave me a pre-qualification that was basically a letter restating how much I told them I want to pay for a house. When the CSR, erm, ‘mortgage advisor’ couldn’t convince me ‘a pre-qual is basically the same thing as a pre-approval’ I got passed around to a few more CSRs, then a ‘manager’ who repeatedly tried to get my credit card # to pay $500 for a pre-approval letter, stating it was an administrative fee to cover running the credit report… that they had already pulled. Walked away pissed about the credit ding but glad that was all I lost aside from the wasted time.
I’ve heard Rocket referred to as ‘the Walmart of mortgage lenders’ but even Walmart has more credibility than those clowns.
Lily, that doesn’t sound right. Maybe I am missing some of the details here but even with a zero point / no origination fee mortgage application, you do pay for SOME stuff. It’s not uncommon for a lender to charge you for the credit pull.
They aren’t charging you money for the prequal letter – I’m sure they just so happen to be bringing up the fees at the time you are asking for the letters (while they have you on the phone).
I know it is annoying to have to pay for something you didn’t expect or didn’t know about, but it’s not uncommon to pay a few bucks for that. $500 seems sort of a lot though.
The good news is if you make several mortgage loan inquiries right around the same time, it will only count as one credit ding. So shop around! Don’t feel beholden to the lender that you currently have.
How could Rocket Mtg do that? They’ve got golf pro Ricky Fowler vouching for them on non-stop TV ads
I wonder how many of those buyers are organic people that ACTUALLY need a housing unit to live in VS. an investor. Investors will be the ones left holding the bag because they assume the organic market is still growing.
“So today’s buyer, already strung out by rampant inflation in everything else, would have to come up with an extra $670 a month – that represents a 50% jump in mortgage payments – to buy the same house.“
In one year, how does that not look like anything other than a massive bubble?
People keep asking what will prick the bubble.. it’s already been pricked. But as a wise man once said “nothing goes to heck in a straight line”
ARMs usage doubled from 3 months ago. Now 17% of the weighted loan amount. I bet that gets above 30% shortly.
Minutes,
Yes, this is interesting from an inflation point of view: People pile into housing as a hedge against inflation, where your monthly costs are locked in and don’t change. But that assumes that you get a fixed-rate mortgage.
With an ARM, your interest rate adjusts higher in a long-term inflationary environment, precisely the environment people are trying to dodge by buying a house in the first place. So when the mortgage rate resets, they’ll have a higher monthly payment, which defeats at least part of the purpose of having bought the home as an inflation hedge.
OK, there’s gotta be some room for ‘costing me an ARM and a leg’ joke around here somewhere…
LOL
My credit union just offered me an 18 month CD with an interest rate of 1.75%. I told them to sign me up for a 100K CD. Looks like the interest rates are finally getting off zero bound. The lemmings that followed Jim Cramers’ advice or Lawrence Yun are going to wish they had sat on the sidelines.
ARMs went horribly bad my last few years in banking, ’80 and ’81.
Swamp, what the hell? 18 months at 1.75K? Go tell them to pound sand???
Just sign up for a treasurydirect.gov account and get basically 2% for 1 year?
Why would you buy an 18 month CD at 1.75% when a 1 year Treasury bill is yielding 2%?
Peanut beat me to it
Swamp, wait a couple of weeks until the FED has their May meeting and announces a 0.5% increase in the FFR. You might see a one year T bill at 2.2%.
Well, 1.75% is a lot better that Wells Fargo who was paying 8 basis points for my 100K MM account. I told them to go pound sand.
If bad knock-on effects hit jobs generally, this postpones some price drops until the resets happen. My understanding is there is still a teaser rate (?) and then the interest in a series of resets, converges to reflect the rate rises over time.
I got an ARM in ’94 that worked out OK. Later refi’d to fixed.
Minutes
This is why home prices will continue to escalate or at least stay flat in a worst-case scenario. Lenders will offer introductory rates which look like 2020 / 21 borrowing costs. In that aspect, we are seeing 2003-2006 revisited.
This is just so comical. The entry of ARMs in the mortgage scene basically just proves that we are late in the 4th quarter.
But on the other hand, if you are signing up for a 5/1 ARM and don’t intend to live in the house for more than 2 years, I suppose it makes sense.
As long as the bottom doesn’t fall out and you are forced to hold and have to refinance having negative equity…
Lots of nasty scenarios possible especially with fixed rates rising…
Prop tax 20% higher, too…
Many people don’t know that if everybody’s home in the same taxing area goes up by 20%, your property tax stays the same. Your RE tax is based on the local government budget, not your individual home appreciation.
So, if your home went up 20%, and the neighbors saw a 25% increase, you may actually see a 5% reduction in your RE tax.
That said, inflation may be driving up local government budgets.
In California, all residential property taxes are set at a very low 1.25% (approximately) of the purchase price and then can only increase by 1% per year no matter how long a person owns the residential property that they live in.
Are you under the impression that everybody lives in your state?
@Bobber: “Your RE tax is based on the local government budget, not your individual home appreciation.”
In theory, yes. In practice, local governments find a way to spend every penny that comes in, and many pennies that don’t. We’re not expecting anything but a massive total tax increase with the reevaluation.
SoCalBeachDude,
The annual prop 13 property tax increase limit in California is 2%.
That’s not true in Chicago
Lisa, in Chicago the math is quite simple… Every home owner basically agrees to give all of their money to the state at all times ;)
Uh, no. Houses in WA State are taxed based on annual appraisals. If housing in your area goes up your taxes go up accordingly. My property taxes have almost tripled in 10 years, as has the appraised value of my property. This is an increasing burden on homeowners on a fixed income. Basically a unvoted increase in taxation.
KGC,
The appraisals are used only to allocate the tax burden across households. The appraisals do not impact the amount of tax that’s gets allocated to everybody.
If the government budget stays the same, the aggregate tax will not increase even if everybody’s property value went up 20% in a year.
This is the case for almost all RE taxing jurisdictions.
Most certainly not here in California.
Another plus to CA is that at 55 you take take your tax rate with you if you move.
Simple example: you bought your home 10 years ago for $500k and pay $5k a year in taxes, basically locked in.
House has appreciated to $1M due to price insanity, but you’re still paying the $5K. You want to move to a same price house elsewhere (same price since everything is up) but your prop taxes would double to $10k.
At 55 you can take your original price basis with you when you move. So you could sell for $1m, and buy for $1m, and keep the $5k tax. If you buy a more expensive house you pay the base, and only extra tax on the difference in the new price and the sold price.
The idea is that empty nesters can downsize and move to resorts and such, and open up family housing supply.
The same law also took a wack out passing the low tax rate on inherited housing if not occupied by the heir, which was also a good thing.
SoCalBD,
My point is that said buyer is paying 20% more for a house. So they’re paying 20% more in prop tax, not just a higher mortgage.
Anybody that’s asked me in recent years I told to plan for at least 8%, 10% if you’re conservative, and if you have to take anything over a 20 year mortgage you can’t afford it.
That’s not a bubble in prices of homes, that’s an increase in borrowing costs.
It’s both, read the two paragraphs wolf posted.
Cem
Wolf states (as you quoted):
“So today’s buyer, already strung out by rampant inflation in everything else, would have to come up with an extra $670 a month – that represents a 50% jump in mortgage payments – to buy the same house.“
That is a statement on the increase in borrowing costs. The price of homes may or may not continue to go up. You stated the “…bubble has already been pricked….”
One can speculate increases in borrowing costs are going to have a downward effect the pricing of homes – but to date – there has been no correlation.
That said, I would agree with your closing statement that pricing is likely to come down or at least flatten at some point – and also as you state, probably not in a straight line.
The thing about the RE market is the changes can be slow to see.
Wolf: ” … risks that the housing bubble, which is leveraged to the hilt, poses for the financial system ….”
I wonder if this can be a 2008 redux. The system-wide leverage is lower this time, right? But there may be hidden leverage adjustments to come. We don’t have NINJA loans out there, but we do have a lot of phantom assets (not just NFTs) bound to be exposed. So asset values reset down, and liabilities up. Loan exposure can get scarier than even these numbers.
Since 2008, the entire landscape has changed. Among the changes: the banks are no longer on the hook to the extent they were then. The residential mortgages they carry on their balance sheets are relatively small. They offloaded most of them via MBS to investors and taxpayers that are on the hook this time. The Fed can let housing go, if it chooses, and it might have to because of inflation.
> The Fed can let housing go
I’d love for you to expand on this more
He means the Fed doesn’t have to take extreme steps to protect the banking system to the extent it had to when the last housing bubble popped.
Or, the Fed doesn’t give a wazoo if the taxpayers have to pay for it!
Point made by maxpower is very important. The mosquito with two lobotomies earlier suggested that the Fed will rescue the pathetic dimwits who are buying into the insanity when reality intervenes. No chance this time around. And last time they weren’t rescuing the dimwit bubble buyers, they were rescuing the banks. No need for that this time. The market is in for a shock.
Banks are off the hook on residential but what about commercial? Not to be off topic but there is are a ton of for lease signs around here an I think you’ve already documented the office vacancy rates.
A lot of commercial real estate loans got securitized into CMBS — I’ve been covering this a lot — and those are with investors around the globe. Good luck, boys and girls!
However, some CRE loans are still on the banks’ books. That is not an issue with big banks. But some smaller regional banks that are heavily concentrated in CRE will take heavy losses, and some of them will collapse. The Fed has pointed at that issue for years, and it really doesn’t care because a regional bank collapsing isn’t a big deal. Stockholders, preferred, stockholders and holders of contingent convertible bonds will get bailed in, the assets will be sold to other banks that in return have to take the deposits. The FDIC does this over a weekend, even though it can take months or years for all the loose ends to get squared away.
The government-backed housing debt ponzi scheme is now in full display. Millions are starting to understand.
Agency backed mortgages? Tax deductible mortgage interest? First $500k of gains tax free?! Why so generous?!!
Because housing is the primary collateral for our debt-backed USD. Same for most other major currencies. And the supply of these currencies must constantly grow to avoid a deflationary implosion… so the collateral must also continue to grow in value.
Debt-backed currencies and underlying collateral are all on a one way trip (with some localized volatility along the way).
The Fed will “let housing go” just far enough to kill inflation (lower housing demand, fewer mortgages, lower money creation, lower inflation)… but they’ll turn around and “stabilize” their manipulated housing collateral eventually.
You have to admire the sheer audacity of it!! Convince the world it’s all a “free market” but they keep pulling all the strings. Wild!
This is why that crackpot (crackpipe) Yellen is talking about making the pandemic assistance to the unemployed a permanent feature in the economy as it pertains to housing. It’s not to help them out, it’s more crony capitalism and socialism for the wealthy which guarantees the lenders get paid by the taxpayers no matter what. We need to send these financial thugs packing. Go eff yourself, Granny!
Leverage that seems reasonable when you’re gainfully employed (let alone getting big raises by job hoping) can crush you if you get laid off. Some of these mortgage payments are a big nut to cover every month. At least no one has to worry about student loans! :)
Just curious, John…
Do you have to declare the student loan on a mortgage application even if it’s in forbearance…
Or is it a wink,wink, nod,nod…
Does it affect your DTI..
Thanks…
COWG, I was told by my bank that for the Federal loans in the current pandemic deferment, they don’t count toward the monthly DTI ratio. (I still budgeted them in cuz you’d have to be daft not to.)
The balance owed is still debt on your credit report regardless of repayment status for their consideration, but they didn’t count it in the monthly payment budget / DTI.
Lily, the fact that those federal loans don’t count against your DTI is absolutely bizarre.
And I think you just discovered a hidden “gem” of a piece of data that may help me better understand some of the not so obvious fragility of housing debt going on right now.
Think about how many millenials just bought houses over the past couple of years??
I just recently talked to a mortgage lender about the student loan thing at JPM. They told me that they calculate it by taking your total loan amount due for student loans and multiply it by 1 percent in order calculate the monthly payment that should be coming out for DTI calculations. For what it’s worth.
John, that student loan comment really hurt…….. ;)
I wasn’t trying to be a dick about it :) And I’m not complaining that I had to pay mine off.
John, I was just messing with you. Of course I don’t have any student debt!!!! :)
I apologize for the long post, Wolf, but it’s extremely pertinent to set the record straight once and for all. I am sick and tired of stupid mouthbreathers and intellectually lazy people parroting BS, eyes closed, oblivious to reality, so I will post this again:
May 24, 2018
“In his corner of American finance, where hard selling meets hard luck, Angelo Christian is a star, and he looks the part…
Each time Christian sells a home loan, the company he works for, American Financial Network Inc., takes as much as 5 percent—$12,500 on a $250,000 loan, to be distributed among his staff, corporate headquarters, and, of course, himself. As he and his team chase more than 250 leads a week, they’re on pace to close 50 a month. Christian says he has a Lamborghini on order to go with his Mercedes.
He calls back a customer who’s spent hours watching his sales videos: “Bad Credit, I Can Help,” “Fresh Start: Credit Boost,” and “Go For Your Dreams.” This would-be homeowner has a 596 credit score, putting him in the subprime range. His car has been repossessed, something that would likely disqualify him at the Bank of America branch next door.
“Usually a repo that’s like three years old, we’re not really going to sweat that,” he assures the caller. “We’re pretty lenient here.” He steers his prospect to several $400,000 homes with swimming pools. “Have your wife check that out,” he says, referring to a remodeled kitchen with granite countertops. “She’s going to love it.”
Many of Christian’s customers have no savings, poor credit, or low income—sometimes all three. Some are like Joseph Taylor, a corrections officer who saw Christian’s roadside billboard touting zero-down mortgages. Taylor had recently filed for bankruptcy because of his $25,000 in credit card debt. But he just bought his first home for $120,000 with a zero-down loan from Christian’s company. Monthly debt payments now eat up half his take-home pay. “If he can help me, he can help anyone,” Taylor says. “My credit history was just horrible.”
Christian can do this kind of deal because he is, in effect, making the loan on behalf of the federal government through its most important affordable housing program. It’s a sweet deal: He gets his nearly risk-free commission. Taylor puts no money down. If things go south, the government ultimately bears the risk.
This kind of lending echoes the subprime mortgage boom that preceded the credit crisis of 2008.”
That’s just a snippet. The “there’s no subprime” liars need to go RTGDFA. And this article was from 2018. Subprime has been going strong this entire bubble. The whole thing is based upon fraud. THE ENTIRE BUBBLE. You can’t get prices like this without it. They did the same thing again because they didn’t learn last time and they got bailed out instead of going to the slammer.
Haha I remember this article from reading it back then. The guy looks totally douchebag to the max. I felt like punching the picture of his face from the article.
Much like cult leaders and MLM upline, I hope these people will suffer the worst of it when and if that time comes
Yeah, he’s got that major fraudster/sleazeball vibe. I don’t know who started the whole “but there’s no subprime this time, lending standards are strong” nonsense, but that’s all it is. The standards are “fog a mirror” just like last time.
All thanks to the federal government. Is it the duty of the federal government to ensure that everyone have a house with a swimming pool?
The housing boondoggle is openly sponsored by government. Today, you can get a mortgage with 3.5% down and have it government insured up to a limit of near $1M in the Seattle area.
Speculators can put $35k down, buy a $1M house, then watch the home appreciate by $100k to $300k each year at current home inflation rates. If, by chance, the home value drops, they can walk away from the mortgage and only lose $35k.
You can invest $35k now to receive $100k to 300k in annual gains. Why does the government need to offer such a sweet deal? Does the government not have any respect for taxpayers who will have to bail out the speculators again?
System wide leverage isn’t lower, it’s higher than ever. It’s just not higher in US residential real estate.
History doesn’t ever repeat exactly and mortgages mostly government backed.
The crisis of confidence will originate somewhere else, from a source most do not expect. There are so many too choose from now. Most don’t have a clue there is even a mania, thinking that post 2000 financial behavior is “normal”.
How many first time buyer folks actually put 20% down?
Everyone I talk to buying a house is forced to get Mortgage Insurance…
Everyone is required to put 20% down on low-amount conforming loans which are purchased by Fannie Mae / Freddie Mac / Ginnie Mae. On Jumbo loans over that amount at least 20% if not much more is paid as a downpayment, and many buyers simply pay cash on high value home in the $1 million to $100+ million range.
FHA loans have down-payment requirements as low as 3%. VA mortgages can be had with ZERO down-payment.
Many people do not pay 20% down. Yes, it is required to be purchased by Fannie and Freddie. But those that don’t pay 20% down, those mortgages can get portfolioed or whatever. Not all mortgages are sold.
20% is not required to sell a loan to the GSE’s. They have low down payment programs that have certain criteria that are quite easy to meet.
Orange County has a conforming loan limit of $971k right now.
This mean you can purchase a $1,020,000 home with 5% down. It’s real. I have a mortgage broker friend who is/was making these loans.
A tiny dip in home prices and the mortgage is fairly well underwater.
Don’t you feel sorry for these folks who will might lose money on their home purchase, through no fault of their own? HDTV makes them do it.
Everyone? Come on now….not sure where you get this from, it makes no sense. We sold two houses last year, got over 10 offers on each house, and only 1 person was putting down 20%. Everything from VA Loans wit 0-3%, to FHA with 3.5-5%, and conventional with 5-10%.
People from money or extreme savers, or about 10-15% at most.
Plus many are getting help from parents. Their parents are sitting on a lot of equity and are loaning / giving the down payment to their kids.
As mentioned above, many young adults do not have 40k to 60k for a 20% down payment partly because they are young and it takes awhile to save up that much money.
I know several friends who took this path.
That’s exactly what I did in 1995. Since Dan the TicketMan did not qualify for any bank to lend me money to buy a home, there was really only one way to buy a house, and it was time, as I was 32 years-old.
My parents simply put $75,000 in a trust at our fledgling seed company’s bank (It helped that they could do so easily, of course). When the house that I now live in hit the market, I made an offer of $74,100 on an asking price by the seller of $72,500.
In two days, five offers were made, and one was higher than mine, but mine was “Straight Cash, Homey.” The deed was in my parents name. A legal and binding mortgage was made in Hennepin County & the deal my parents and I made was simple: a 15 year loan at the current 10 year Treasury rate plus 0.5%.
I got the interest paid income tax breaks as income from the family seed company started to come in for me and everything was transparent and equitable to both me and my folks. They declared the interest earned from issuing the mortgage on their taxes as well.
Perfect timing too, as the 15 years coincided with Dad and I selling Trigen Seed LLC for a very nice number to a seed company out of France. Karma & Family!
A great path to follow.
Dan Romig,
Given the way things are going and how poor millenials are compared to their parents, I would imagine that many will follow what you just described. I appreciate how honest and by the book your family did everything. Very admirable.
By the way… you paid over list!!! The horror…. :)
I have learned to live in the gray area of the housing market renting by word of mouth. My latest adventure is the 100 year old shack I am renting is going to get a total renovation with a new foundation, roof and everything in between. I have to be out for at least 6 months.
I have purged everything except what fits in my car, plus a couple of tubs I will store in my neighbor’s shed.
I am going to be renting out a friend’s place in a new town while she travels. We are all different, but having a lot of stuff and a large home always made me feel trapped until a lifestyle that I didn’t like, but I did it til my kids were out of the house.
Not sure I will move back into the old rental. I will see what makes sense at the time.
Old School,
Isn’t it a great feeling to not be shackled by tons of junk? I am early on in the journey and my kids are little so we have lots of junk shackle…
But I still make everyone get rid of all their junk and we still move ;)
Good reminder…..
At my old age of 78, I really need to clean out all my “stuff” (tools, a few sets of old golf clubs, boxes full of who knows what). No sense leaving all this junk for my daughter to throw out once I leave this place.
I fly under the radar as well. I rent from Craigslist ads single bedroom. Have very few possessions. Save almost 3/4 of my take home pay.
I always find some old guy, house is quiet, neighborhood is usually quiet. I stay gone on the road half the week. Works out well for me. I hate renting and living with another person but until the housing market collapses, I’m stuck. 3-4 months ago I could get into something in my area that fit my qualifications, now with interest rates up and prices up yet still, it’s only crummy trailers on 1/10 acre lots. And I’m not writing my name on a loan for that garbage at 250-450k.
I think it will bust. I certainly hope it does. I got sick of living in a truck for months at a time and had to get out to a local/regional job for my sanity. I’m getting sick of the boredom of living in what is little more than a cell. I don’t understand how “city folk” do it. Contempt to live in an apartment for decades, or even worse, an HOA dictated subdivision.
US inflation rate : from 5.6% in July 31 2008 down to minus (-)2.10 in July
31 2009. Up to 3.9% in Sept 30 2011, a 0.774 retracemet of the move down to 2009 low. After a correction to minus (-)0.20 in Apr 30 2015 up vertically to 8.5% in Mar 31 2022.
This inflation have probably reached it’s peak : Covid liquidity was wasted
on RE, used cars, tp…
Yep. Covid Liquidity has ended. Now lets see what the economy can do on its own.
The economy and the bull run was looking a little weak as Trump entered office but his tax breaks gave the economy another little boost. Then along came the covid stimulus and that gave the economy an adrenalin rush.
The FED is trying to give the economy a sedative but it also want to prevent a hangover.
CPI : from 5.6% in 7/31/2008 to(-)2.10%in 7/312009. Up to 3.9% in
9/30/2011, a 0.774 retracement. After correction to (-)0.20% in
4/30/2015 up vrtivally to 8.5% last month.
US CPI have probably reached it’s peak. JP liquidity was wated on RE, used cars, tp…
“US CPI have probably reached it’s peak”–let’s not forget that this inflation is only “temporary”.
In a hundred years they have never admitted that inflation is permanent.
That makes inflation permanently temporary.
Given that housing went up 30-40% in just two years in many areas, I suspect housing prices could drop 30-40% without hampering the economy a great deal. I assume the Fed now realizes this too, given the rate hiking plan. Let’s see if they stick with it. I have my doubts.
It would have been a lot easier if the Fed didn’t leave rates pressed to the floor for so long and didn’t unnecessarily buy so many mortgage backed bonds. Pandemic or no pandemic, it was a rookie error that strongly suggests a high degree of leadership incompetence.
Housing is by far the largest financial outlay and/or investment for nearly all Americans. The Fed stood by and watched housing costs rise 10-20% per year for a decade. For some unexplained reason, they thought it wouldn’t be a problem. Very foolish.
Unfortunately, it appears we have financially unsophisticated people running the nation’s monetary policy.
Some areas in San Diego have doubled in the last 2-3 years. It’s been an insane ride to watch.
By September of 2020, it was clear housing was not only going to be fine, but was seeing excess demand due to the pandemic. By December 2020, the fed should have stopped buying MBS. Instead, they kept buying all the way to 2022. Huge overshoot.
Hey sc7,
Did theBoston suburbs fall in line or do you still have the aberration in your area for the outside city center…
@Bobber – Good post.
Not only did they lower rates the Government handed out Trillions of dollars. Only 12% (unemployed) of the people needed the money, the others could not travel or go anywhere so a lot went into housing, stocks, cryptos. Plus all the people who did not have to make student loan payments suddenly could afford a house payment.
I think I had read studies prior to covid that student debt was a big obstacle in buying a home.
The FED hates deflation and over corrected and now they got a big inflation problem.
Time will tell if they will reduce the balance sheet by much as honestly….who thinks that they can lower it by even 50%?
I think they will do QT until it hurts the economy, then they will stop. Lets see how low they can go.
“The Fed stood by and watched housing costs rise 10-20% per year for a decade. For some unexplained reason, they thought it wouldn’t be a problem.”
This is why I have no confidence in them resolving the current problem. So they going to fix it now after letting it happen?
They’ve been intentionally driving up housing for a decade to: 1) get all homes back above water after 2008, 2) raise home prices as collateral for more USD creation via mortgages, to inflate away the national debt. They must to these things to “maintain order” (take on debt, pay it off, retire on asset value, generation after generation)
It’s not incompetence, it’s central management via monetary policy, hidden by deceitful marketing, and a solid poker face.
True, population growth is a deflationary wrinkle they haven’t figured out yet.. but they can fight demographic gravity for a few more years still until ponzi pyramid inverts.
In the meantime… The Fed says congrats to the levered winners! Better luck next time to the responsible losers.
But hey, the best things in life are free right?! Enjoy that sunset walk with your loved ones! But don’t walk too far, night shift for your second job starts soon.
PNWGUY got it right. Fed intended to bring RE asset prices above GFC levels. But they sort of overshot, probably for a variety of reasons.
I don’t think the Fed is asleep at the wheel. They know what they are doing.
Remember, if housing goes up 40%, it only takes a 30% drop to get back to where you started.
In some places with price jumps of 150% over the last few years, those new prices only need to fall 60% to get back to break even (a 60% drop is big, but after a 150% run it doesn’t seem quite so unrealistic).
This is a quality many people don’t realize (the higher market doesn’t have to drop as far as it rose to wipe out the gains).
Thanks for posting this math! I didn’t know that, although it makes sense! :)
I’m not sure what we have gained by artificially supporting housing for the past 2 years on a scale never witnessed before.
Wealth “illusion” effect
Home as an inflation hedge? So repairs, insurance, and taxes don’t inflate? That is news to me.
“The Fed has caused this ridiculous housing bubble with its interest rate repression, including the massive purchases of mortgage-backed securities and Treasury securities.”
It’s an absolute disgrace. And then to sit back and boldly announce that they are going to “let inflation run hot for a while” when it was never more evident that prices were soaring and had become completely unhinged from fundamentals – which is in complete violation of their mandate – is unforgivable. Yet they reappointed Jerome Powell. “Heckuva job, Brownie,” is what I’m reminded of. There is almost no accountability in government anymore.
I know one thing – I would hate to be a house seller now. Your buyer pool just evaporated.
“I know one thing – I would hate to be a house seller now.”
How about those people who bought a home during the pandemic to go work remotely in the country but kept their first home because of rising values? It might be time to start squirming a bit.
How about those buyers who will soon see their loans ‘underwater’?
They might be one in the same.
Depends how quickly they sell. If you can get to the exit door fast enough you might be able to make a good amount…
Is the Fed stupid, insane or plain evil?
I’d say, none of the above. But it should have never lowered rates this far, and it should have never ever done QE. And if it hadn’t done those things, we wouldn’t have those problems today — the spike in asset prices and the surge in consumer prices. Now there is no good way out. It’s too late for that.
What are the odds that the FED never does QE again? I’m starting to see articles questioning not only the FED but the entire financial response to the pandemic by .gov. It’s obvious that it did more harm than good, but to have the msm start putting these articles out there means maybe some blame game is forthcoming since “there is no good way out” and they are waking up to “something wicked this way comes.”
I agree that there are signs that it is dawning on some policy makers (and some folks in the MSM) that QE has terrible consequences, after having denied it for over a decade.
And it looks like the Fed will stay away from QE as long as there is substantial inflation, even if markets crash.
I think the period of relatively low inflation is over for a while. I think we’re looking at many years of substantial inflation, higher rates, and QT. And no QE.
I agree with all of this. It does seem like a major shift is coming. Will be very hard for the young people whose entire adult lives have coincided with QE. But I sure hope QE dies. It has been a horrendous failure.
That’s the psychological mindset changing which drives behavior which was previously believed to be “impossible:
Wolf, I agree that substantial inflation and higher rates will be with us for at least a couple/few years.
But how tempted will the Fed be (for whatever the reason) to touch the interest rate lever again at some point in the future? Don’t you think that if inflation moderates back down to 4.5 or 5% that the Fed would be tempted to lower rates again?
Futures markets seem to think so?
One thing we know about the future market: they’re always wrong about where they think rates are going to be a year or two from now. There are some beautifully funny charts out there on this with all these thin lines going out from every month, and compared to where rates actually went (Bloomberg does a chart like this, and others do too). They’re hilarious.
Thank you for staying vocal about it, Wolf.
I hope for priced out buyers and renters that the ever growing financialization of the private real estate sector will fail. Lately many have been paying big bucks for investment properties, directly or through REIT’s, and now there are apps like Addy in Canada (“game-changing, barrier-busting, super fun“), to attract retail into the final phase of the bubble. High inflation, deglobalization, war and the climate urgency may be doing the dirty job government and Feds cannot manage to do – their most important job. No crisis is “super fun”, but perhaps we will emerge out of it with more frugal habits, conscious consumption of goods and services with an emphasis on quality over quantity, and hopefully, a decently priced roof above one’s head.
Coccidioidomycosis,
I couldn’t resist…..was straight from very old memory and what us kids were told we would get if we didn’t quit digging forts and trenches and having endless WW1 style dirt clod wars in a big vacant lot off 99, when I lived in Bakersfield….any entrepreneur that monetized that pastime would have become rich. Was great (in hindsight) growing up pretty much unmonetized, unlike poor kids today……except for movies, cereal, candy, etc. Finally browbeat the old man into our first TV there, which he hated and called “the Mahogany Shrine”, when the must see Mickey Mouse Club came on TV and we walked home from friends after dark, (teen age drivers being the primary danger)
Anyway, I share your hopes regarding EVERYTHING you said, especially “climate urgency”.
Good Post!
I’d assess that as plain evil.
The Fed boxed itself in, and it’s clear they had no exit plan from the start. That’s leadership incompetence. Let’s not sugar coat it.
100% agreed.
Hubris. I mean look at their leader, someone who obtained his wealth and home from a better time. How could he and his ilk relate to what normal people are dealing with?
Jpow is worth well north of $50 MILLION DOLLARS. How can someone with net worth like that, have any idea how to set monetary policy for the 40% of Americans who “have zero savings at all” ???
Reverse Repo Program : down from last week to $1.803T.
Let me grab my popcorn and hope for this epic movie to start soon. Besides my popcorn, I have my bottle of crocodile tears next to me ready to deploy for all the FOMO buyers that rushed in at the top.
Too bad we can’t see mortgage application by region, as I always said, SoCal hasn’t gotten the memo yet. Would be interesting to see if mortgage application drop at all in more nice to do neighborhood in SoCal. RedFin and Zillow sold and cross over over asking price (with higher price) that I am seeing doesn’t seem to support that from an anecdote perspective
I am seeing lot of price drops in San Diego. Not sure what the future entails but high home prices in san diego has definitely made quality of life pretty bad for everyone.
Over a quarter of SDG&E customers are behind on their electric bills according to the Union Tribune. Meanwhile, I’m still seeing houses sell for 300k over in San Diego…
America’s finest housing bubble
A nice little 4,923 sq ft shack, assembled in 1926, on St Paul side of the river that I bike past quite often, 208 Mississippi River Blvd S, has been dropped from $2.2 m in March 2019 to $1.7 m now. Seems to be pulled and relisted a few times. Last record of it being sold was in November 2003 for $1.2 m.
Only a two car garage, so, won’t work for me. s/.
Good location though & .53 acres on the river ….
In La Jolla, if it were on the ocean, it would be a few bucks more I would guess.
I’d say the interest rate has some impact on this of course, but the bigger impact has been the inflation damage done to budgets.
When your budget gets a 25% or more hit, in a year, a lot of things get excluded in favor of basics. A 3% raise is long gone.
Moving to a new house, or renters buying a house is a huge undertaking in most budgets, and the first to get set aside when the squeeze is on.
If you doubt that costs of life are up at least 25% or more in the past 24 months, you aren’t living in the USA.
“If you doubt that costs of life are up at least 25% or more in the past 24 months, you aren’t living in the USA.”
Prices are up and corporate profits are at record highs.
There’s only two dots to connect here.
Prosecutions of corporations are at record lows.
I’d support an inflation of prosecutions of corporations…
How about prosecution of the actual counterfeiters ?
The Fed.
Why Fed Gov should bail out unfunded >$100K pensions of state gov retirees in profligate states like CA,NY,CT or IL ?
But Fed Gov can’t leave in the lurch their minor brethren either.
Uncle Jerome and Auntie Janet to the resque.
Article:
“CHICAGO PENSION DEBT DROVE CITY PROPERTY TAXES UP 164% BEFORE COVID-19”
Now effective property tax rate in IL is 2.47%.Meaning that 4 homeowners whose shacks appreciated to $1M will pay $100K pension of one Retired State Government Sacred Cow.
It looks good in theory but the effect of this skyrocketing RE BS on Chicago is absolutely devastating.
Soon Chicago’s ultra-rich will build a Wall alongside Lake Shore Drive and seal off the Gold Coast.
And the rest of the City will look not much different from South Side (aka Gangbangers Paradise) where houses are surprisingly affordable:
$6,800
3 bd 2 ba
13612 S Wallace Ave, Riverdale, IL 60827
What is funny – in the first American bestseller “The Jungle” (published in 1906) Lituanian immigrant Jurgis Rudkus purchased his first house in the very same place for $7,000.
So,in the past 115 years the price of similar house went down $200 even in NOMINAL dollars.Everything is copacetic 😀
The Illinois Tier 1 pensions are the golden ones. As those roll off, Tier 2 could alleviate the blood letting. But, it won’t. There’s always corruption to fund in Illinois and property taxes will never decrease.
I sold my house in Springfield one year ago at a loss. But, I’m out from under the taxes (and property taxes are just part of the Illinois tax hell)
Friends sold a condo on Michigan avenue at a huge loss. At least they won’t get murdered and/or carjacked. You can, theoretically, replace money. Death is permanent.
I suggest you leave Illinois. And, do it with urgency.
😀
In the Heat of a Summer Night
In the Land of the Dollar Bill
When the Town of Chicago died
And they talk about it still…
(The Night Chicago Died, Paperlace, 1974)
This tune was quite popular in the 70’s-80’s but somehow faded into obscurity.Well, Chicago survived Al Capone and Bugs Moran.Did fine under Mr Daley.But it will not survive Jerome Powell & Lori Lightfoot.
=I suggest you leave Illinois.=
Yeah, thats the easiest thing to do.But being not very bright yet very stubborn person I’m gonna put up the last fight, following Lori Lightfoot advice:
“As Chicago police say 57% of carjacking suspects are juveniles, Lightfoot says youth feel ‘unloved'”
Love conquers everything.The only thing is: I have no idea how to implement this wonderful plan.
Ya think it is easy to befriend a gangbanger-carjacker, hug him gently, give him a big sloppy kiss and explain to him the error of his ways ?
You have but one life, my friend…
Use it well…
Your responsibility is to yourself…
No other…
Alive in southern Mississippi beats dead in Chicago any day of the week…
Wish you well…
@COWG
A cat has nine lives. For three he plays, for three he strays, and for the last three he stays.
Judging by your previous comments you are that kind of cat too 😀
I will die in due time from natural causes and not after being shot from $120 Hi-Point.
In case of attempted carjacking involving the Precious Me – Chicago Sun Times will report “3 14 carjackers were shot and killed at 2 a.m. in Markham, IL.CPD investigation is ongoing … and ongoing … and ongoing … and ongoing”
Lori Lightfoot needs to get on the right foot. We need to go back to public stoning
All you need to know about Lori Lightfoot is that she has stated on record that she has I quote “the biggest dick in Chicago”
Halibut,
A large car-jacking operation in the Twin Cities has been shut down by the police departments recently, and life is less stressful, somewhat, as a result.
A lot of people in Minneapolis carry. I did for a while, but prefer not to.
Disadvantaged and unintelligent fifteen year old kids walking the streets with a 9 mm is not a good situation. There still is way too much of it out there, and in general, social media & no life experiences with the consequences to be paid is a dangerous combination. This is not confined to just low-income neighborhoods either.
Lightfoot’s personal security detail has more Police personnel than do most Chicago Neighborhoods.
“A lot of people in Minneapolis carry. I did for a while, but prefer not to.”
Better to be judged by 12 than carried by 6.
It’s better to live in a place where you feel safe without carrying and don’t have to worry about it.
Is crime way up in Springfield? I think Peoria had a record number of homicides last year. Champaign might’ve reached the same milestone.
Jackson Mississippi is the murder capital of the US. Jackson is the largest city in Mississippi.
Jackson reported 153 murders and had a murder rate of 99.5 per 100,000 people
might want to check out heyjackass.com for stats on Chicago shootings.
I was in Peoria and along I-74 last summer and it didn’t seem that bad.
But the area does feel very economically depressed with certain groups of people obviously not working and shuffling their feet around town. I suppose that is pretty much everywhere in the US now.
I have a retired teacher friend who retired a few years ago at 55 in a Chicago suburb. She has a $90k pension / year. I think in 10 to 12 years of retirement she will have accumulated more retirement pay than what she made in her prior 30 years. Her friends will just be getting ready to retire and she will have already been paid $1 million in retirement when you add in COLA.
I am thinking, since we do not get to collect SS until 67, why do government employees get to collect their pension early?
When I look at local city budgets, 20 years ago, retirement benefits were about 30% of the budget. Now it is over 40% of the budget and in some cases 45% of the budget. They are sneeky about it because they will say we have to raise taxes or we will have to let go the fireman or policemen. They do not tell you the reason why they have to let the fireman go is because they have to divert more of the general funds to the generous pension plans. Because as I see it, property taxes keep going up and the local government has more inflows, then why are they having problems with current salaries.
$90K ? Meh…
There was a website “Outrageous California Pensions” which listed all CA Gov retirees with >$100K pensions.The list was endless.Top guy – the former correctional system psychologist – was drawing $1.5M
Recently it was taken down.Not because there was something illegal but probably it violated the old “startling the livestock” law. “Livestock” nowadays means “property owners”
“ why do government employees get to collect their pension early?”
Because they run the state and local governments. They make the rules. They vote. It’s a total racket and most people are CLUELESS as to what is going on.
The Plunge Protection Team (PPT) abandoned their trading desks in early afternoon and headed to the bar around the corner, instead of buying stocks and propping up the markets, as they were supposed to do under strict instructions from Powell and Yellen, according to people close to the matter. This time, they didn’t all leave at once to avoid getting in trouble, as they had done yesterday, but they abandoned their trading desks and headed out in twos and threes, and by 3:30 pm, the last ones were gone, according to a source inside the building. At the bar, they skipped the beer and started drinking bourbon right away, with CNBC on the screen above the bar, where stocks were spiraling down and giving up their gains. And soon they were singing raucously and pounding the bar with their fists, “The whole shit show’s coming apart, let it go, let it go, let it go,” according to people familiar with the matter.
I know you are messing around. But seriously what is BTFD? I have read it some comments.
Buy The F**king Dip. One of the oldest and most used strategies for speculation. However, in a down-market, BTFD has a tendency to keelhaul traders.
The PPT (Pint Procurement Team) were seen buying the dip after they had finished all of the free peanuts at the bar. One young trader after indulging in one too many irish carbombs, promptly regurgitated his endowment of soggy beer-soaked cheese nachos onto the lap of a most dapper Fed Chair Powell.
Powell, who was not prepared for the turn of events fell off his bar stool and shattered his priceless Wolf Street beer mug. This constituting a ‘party foul’ led to ceaseless cajoling by his fellow conspirators much to his chagrin. He was forced to sit in the empty beer tub in ignominy with a dunce cap until inflation abated.
What about buy low and sell high? And the ol’ when the market crashes, wear brown pants.
I made the latter up 💩
for ZM:
You did NOT make the brown pants comment up:
From many sources allegedly on the ground, The KING of France made it up when a ”British” officer was brought before the king and asked why the British officers wore RED coats, and replied, “so IF we are wounded, the blood will NOT show to our troops.
French officers and troops were instructed by their KING to wear brown trousers/pants.
LMK if you have any questions about WHY the French King would order such a thing,,, but
those few remaining WW2 veterans will not need to ask, but will still honor all the ”Free French” fighters of that war appropriately.
Buy the F#*%^# dip
Love your snark.
Those lazy PPT good for nothing sack of S$$$…..after counting on them for last decade and more, they dare to get ready to walk of the job now?
I really hope they didn’t also join the great resignation and decide to be a full time Youtuber now…
1) The Fed cannot raise rates > 8.5% to 10% to subdue inflation, because US gov debt is to high, gravity with Germany will not allow it, and a prolong
period of buybacks, increased corp debt, higher than 80% of total
assets for many corp.
2) The Fed will keep rates moderately elevated,
until higher dx and a lower cpi, – still above normal – will hurt investors.
3) JP will not cut rates as he did in Xmas 2018, he will reduce the RRP warchest to provide liquidity, when necessary.
4) And pray.
“The Fed cannot raise rates > 8.5% to 10% to subdue inflation, because US gov debt is to high”
As noted….ONLY new debt meets the higher rates.
Michael, you sound like you’re long…and this cant be happening. It is ..and it must.
Historicus – I was listening to a podcast. They said the Government has 6 trillion of debt coming do this year. Plus add in the normal government deficit.
Who is going to buy this debt that needs to be rolled over?
In reading the following in the NY Times, it appears that the famous economist Kenneth Rogoff that our $30 trillion in debt is not a principal problem (whatever that means)
————————————–
And some economists argue that a more recent economic phenomenon — inflation — may have a silver lining in that it could chip away at the nation’s debt burden.
Kenneth Rogoff, a Harvard University economist, said that rising prices essentially watered down the value of outstanding debt and increased tax revenue as incomes rise. He suggested that markets appeared to be largely unfazed by the possibility of higher interest rates so far and that given the other risks to the economy amid the pandemic, the scale of the national debt was not as worrying as it sounded.
“You would rather have no debt, of course,” Mr. Rogoff said of the $30 trillion total. “But compared to other issues at the moment that’s not the principal problem.”
That was from Feb 1, 2022. It looks like the markets are a bit fazed. LOL
Intellectual idiot
Oh, dear.
Rogoff is certainly an intellectual but he is not an idiot. His work with Carmen Reinhart on the debt of nations put numbers around the idea of how far the can could be kicked down the road.
The limitations of this strategy form a central pillar of Wolf’s worldview.
Google : ‘This time is Different’
Michael Engel
Mkts couldn’t tolerat rate at 2.45% in late 2018!
Now even if they can raise to 2%, I will be surprised!
And with QT, double whammy!
SOFT LANDING any one?
I am with you. Market has priced in the expected rates. Mortgages might break the housing market if they stay at 5.25% for a while. Not much need to go higher I don’t think. So much debt that a little increase will get the bubble popped.
I make the joke that when a new franchise makes it’s way to our small town of about 30,000 it’s time to sell the stock. We are now in the middle of a real estate development boom as two developers are racing to get two 50 acre housing projects built within a mile of each other close to me. One is supposed to be a four year build out. Seems like timing couldn’t be worse.
MBS and short term bonds have priced most of it in.
I think long bonds are just now starting to get the memo…
4 months ago, a house in my subdivision was about to be listed at $420k. It sold before it went on the market. Buyers didn’t even walk through the house or do an inspection. According to the sellers, the buyers peeked through the windows and made an offer for $475k to discourage them from listing and waived all contingences.
Last week a similar home went up at $495k. Open house was a circus, have seen several realtors show the house. ZERO offers and it’s been listed a full week.
What a difference a few months make. The rate jump stopped the circus.
My brother in law said it’s slowed significantly overnight.
What area?
1) The German 3M is (-) 0.72%.
2) Russia cut energy to Poland. Poland will buy from other countries, at higher prices, because have been ready. Inflation in Poland will definitely rise.
3) There is a refinery on the Polish / German border. This refinery
provide oil to Berlin. Poland will induce inflation Germany and Europe.
4) The German yield curve is hooked to (-)0.72% at the front end. The long duration will rise, until recession will cut demand.
“the housing bubble, which is leveraged to the hilt”
Wolf, this isn’t accurate and it’s worth reassuring folks that the housing market isn’t collapsing anytime soon. Everyone wants to think this is financial crisis 2.0 and to argue the housing market is overleveraged is completely false. Homeowners have more equity now than at any other point in history. Even if you bought your home 12 months ago you’ve already seen it appreciate at least 20%.
I don’t think housing is leveraged but with inflation and mortgage rate increases ( increased almost 100% in last 1.5 year or so ), the affordability of people to buy home has gone down. A lot of people have bough second/vacation home and if the yields in safe assets e.g. cds/bonds etc increases quite a lot, a lot of people would bail out. Then the psychology shifts causing more and more people to bail out.
Homeowners who have bought to live won’t sell but investors would for sure.
That concept didn’t play out from 2007 to 2009.
Uh, based on ‘current’ value?
Nonsensical argument
The reason homeowners aren’t currently overleveraged is because of the housing bubble. That’s the source for most of the equity.
So basically, you’re arguing that there isn’t a housing bubble because of the housing bubble.
just THANKS once again AF for your inputs on here, mostly supporting the very full of wonder of THE Wolf.
that he is at least trying to bring us THE best ”explanations” of what the so called Federal ”RESERVE” banksters/criminals ( thanks DC ) has done LATELY makes me want to protect him,,,
WE the PEONs can only hope that Wolf and others in his ”ILK” will prevail.
And, to be sure,, while I have never been on ”face hook” or any others of THAT ”ILK” it may not bee too late for me to ”join”,,,though not not likely that one
Rock Financial (Quicken Loans) just announced a buying out of positions in the mortgage division. 2000 people. This is in Detroit and they will also look forward to the auto meltdown in the cards.
Thanks for sharing this info. I’ve been expecting quicken to get into trouble.
I work at a financial institution and it was announced that tons of mortgage people would be laid off as well
I do closings for a living – for some time cash sales have dominated – at least three to one over lender deals.
No sign that cash sales are slowing at all – both land and housing are still in high demand – took in several new deals this week – some well over asking.
It appears the party will go on for bit longer.
David…
as long as loose money is looking for some type of return, a fair return denied by the Federal Reserve policies for 12 years….
The real estate buyer’s metric is simply….”Inflation is OVER any other return…replacement costs of these homes are skyrocketing…thus, the fruit on the low branches are harvested.”
Until this changes…more of same. I agree with you.
So you’re claming that >75% of home buyers are all cash? What market and price range, because the stats don’t back that?
Your statement about 3 to 1 cash vs loans is completely inconsistent with data that is published on this issue, which indicates that cash purchases are more like 1 in 4, or thereabouts. I suppose you could be an anomaly, but I suggest the readers here look at published data.
Seems like so much investment is recency biased. Novices are buying I think because of recent rapid appreciation which usually happens at the top.
People looking for homes will be priced out….
Corporations looking for any type of return will KEEP BUYING like it’s their job…..and it is.
Pyramiders will do the same…until they are hurt. Imagine all the “mom and pop” …”we own ten properties and are renting them out”…..are out there? And they did the right thing…but they must realize real estate is the most illiquid of markets…and you have to get out before the top is in.
Until people and corporations can make similar money in fair returns on fixed income, without the management hassles, RE taxes, etc…real estate continues in this bizzarro world. Thanks be to Fed.
Historicus, I wonder how well the Fed has capitalized the Blackstones of the world, and other structural buyers? As Wolf said, the toxic mix of high rates and high prices surely has priced out the (relatively) sane portion of the market. Future generations, starting with Gen Z are priced out. There needs to be a balance of income vs expenses. Not a problem for the hydra that is turning people into renters.
GMac,
Blackstone and the other ilk weren’t created from thin air…
Someone/something gave them the money they have….
That’s where your problem with them should lie…
Bingo!
Also, Corporation are putting their loans into MBS that are now being guaranteed by the GSEs. Thus they have not skin in the game. So what if they overbid on a house. They sold the loan. They will service the loan but if the renter quits paying and they have to let the house go into foreclosure, they sort of do not care. It has not happened yet but wouldn’t that be the Cats Meow if the house is foreclosed on and is a non-performing loan in the GSE backed MBS, the GSE would sell the house for pennies on the dollar back to Blackstone. Blackstone could then bundle the the loan into a new MBS. LOL
As long as interest rates are below the rate of inflation, this is a good money making deal for corporations.
With the recent introduction of the 40 year fixed mortgage by FHA. The housing market can still be viable for people looking to purchase. The 40 year rate is the same as the 30 year rate, so the monthly payment will be lower. This should inflate the purchasing power of people to keep house prices from falling in the near term.
Talking to some young professionals, rent increases are keeping them saving any money. So buying a house and renting a room to offset the costs is the long term strategy they are employing.
Trix,
“With the recent introduction of the 40 year fixed mortgage by FHA. The housing market can still be viable for people looking to purchase.”
Pulling some Trix?? You’re spreading BS here. The 40-year FHA mortgage is only for FHA borrowers coming out of Covid forbearance with their current home. It’s a loan modification of an existing FHA mortgage where the borrower fell behind on payments. YOU CANNOT BUY A HOME WITH A 40-YEAR FHA MORTGAGE.
Thank you Wolf for extinguishing this idiot. Also, the impact of lengthening the term isn’t that helpful at all, to anyone. There are diminishing returns in this regard.
The comments here frequently seem appropriate to some kind of fight club.
Seems like I remember another financial blog site that evolved into fight club. Seems like that site is not loved here. Perplexing.
For people who aren’t in finance or banking (or who don’t understand lending) it’s easy to misunderstand.
I’m sure it wasn’t done intentionally.
But of course we can always count on Wolf to drop the hammer on any misinformation ;)
That’s why I always come back to this website
I don’t remember those details off the top of my head either. I just googled it and read what the FHA website said about it. It wasn’t hard to do, took 30 seconds. That’s why I think Trix was intentionally playing trix to hype real estate.
Wolf – You are correct about the 40 year mortgage CURRENTLY only being for FHA coming out of forbearance with a current home. However, I think what you’re missing is the extent to which the federal and state governments will instantly change the rules. For example – eviction and foreclosure moratoriums, mortgage forbearance, student loan debt forgiveness coming this Fall right before the midterm elections, etc. Who would have thought they would do all of this, let alone it being legal?! But they did it didn’t they? The 40 year mortgage absolutely will be made into law as an option for home buyers, refis, etc. This will be targeted to the massive and young millenials generation to jeep house prices, property taxes, and realtor/loan broker commissions propped up ever higher. The FED and govt will not allow any major price correction in housing. IF it were to happen somehow, they will shower people with free $, debt forgiveness, etc.
Wolf,
I did not fully read the new FHA news release. My bad for just reading the headlines. Thanks for clarifying.
OK, my apologies for implying intent :-]
Real estate is not in a bubble, merely overbought in a long-term uptrend. A reversion to the mean is often quoted here, but the mean has been steadily rising, decade after decade. Some locales can expect undershoot, such as Phoenix, Las Vegas, Detroit, and Miami did, in the last bust. Other locales may pull back a few percent and then remain on a high plateau. This, based on studying the charts, going back to the 70’s. In addition, mortgage moratoriums will return if conditions reach “crisis” level. The government and Fed will once again, save the day. No sarc.
Total bullcrap. Are you blind? We recently went through an extreme swing in prices only ten to fifteen years ago.
Your post has been edited and my response to your post has been deleted.
This reply to you is much more diplomatic in nature than the reply that got deleted.
Please refrain from name-calling and please do review the guidelines for commenting. We’re here to share ideas, and just because we have differing opinions, does not give us license to degrade one another.
Thank you!
Wolf,
Thank you, sir.
People on this website are so civil. I love it
Now if I can find people like this in real life….
Given that rates are now higher than when housing was 20% lower, what has changed between now and back then? Was everyone mad in 2019?
Or are you wrong and prices will revert.
Thank you for your tempered reply, georgist.
I’m not wrong. I stated in my original post that when looking at the trend, going back further than 2002, back to 1975, one gets a better picture of the long-term trend, and it is up. I invite you, or any reader, to show me one chart, local or national, where the long-term trend is flat to down, since 1975 or earlier. It’s all right there on FRED for anyone who cares to do a little more in-depth research than just reading the articles on this, the best website, IMO, Wolfstreet.com.
Bubbles pop, and perhaps I’m wrong, they should not reflate. I don’t see bubbles in the long-term charts, I see overbought and oversold periods in an otherwise long-term uptrend.
Is real estate due for a correction? Yes, I believe that a correction is upon us but not a crash. According to the C-S national index, the top of the last overbought RE market occurred in July of 2006. It is not unreasonable to assume that this summer may prove to be the top as well.
If real estate declines over the few years, it may seem like a crash but in reality, will be nothing more than a correction, perhaps over-correcting in some locales, in a longer-term uptrend.
Such hubris.
Interest rates have been declining for 40 years. That’s pushed up all asset prices, including housing. Now that trend is over, unless Fed does more QE.
So what will push home prices up from here, other than inflation? Rates can’t go lower. Population isn’t growing significantly. We’re building new house supply, slowly but steadily.
What will maintain this long-term trend of which you are so confident?
And if your answer is “more Fed/Government intervention” then you must ask yourself…. Do you believe in economic fascism? Or do you believe in a fair and just society, with opportunity for all?
PNWGUY,
I could only hope there would be no government guarantees of any sort, including backing of Treasuries by “The full faith and credit of the U.S. government.” No moratoriums, no debt forgiveness, no free money, etc. But all that exists now, or has so in the past, so I can only assume it will continue or be reintroduced come the next “crisis.” For the city I live in, a water/sewage customer can apply to have bills in arrears, due to the last “crisis,” completely paid off, free of charge. Freebies still exist.
If the Case Shiller national index is used as a reference, that index could drop 50% from its current high reading and the long-term trend would still be up. Yes, some markets will fare worse and some better than the national average. During the 2006-2012 correction, the national index dropped 27% from its previous all-time high, proving to be a bottom (thus far.)
I want the younger generations to have a chance at the American nightmare of owning a home, just as I have and still do. I just think the word “crash” is not the right word to use. I hope prices correct enough so that homes become affordable.
In an economics discussion, perhaps the word “crash” should be quantified. Therefore, I’ll put forth this definition: A crash shall have occurred in the United States if the Case-Shiller National Index drops below the Feb., 2012 low of 133.99.
And, if I may add, retired bike racers do not like to hear the word, “Crash.”
Sunday’s Liège-Bastogne-Liège made me say “Nuts!” watching it. A ‘Rollerball’ movie on wheels.
World Champion, Julian Alaphillipe, had a mishap with a broken scapula, two broken ribs and a collapse lung. No, he did not finish.
I can’t post charts on here, but Japan.
My belief is that post 1971 is one big super-cycle. Free-floating fiat came into being, then as people realized the implications we’ve had constant fiat issuance above the rate of wealth creation, encouraging rentier activity. More rentier activity means less real growth, necessitating period rate cuts to stoke further fiat issuance, encouraging more rentier activity – a positive feedback loop. However this feedback loop has one boundary condition – negative rates. We’ve hit those now and the cycle is ending. The cycle coincides with demographics, soon all boomers will be gone from the earth.
Big changes afoot. Or if not then the USA will just go under.
Did you consider we are in a 42 year decline in interest rate trend. If that trend is being broken it might change house price trends. Big debate on if it’s truly the end of the trend. Should find out within a year or so.
REAL ESTATE IN THE USA IN BOTH RESIDENTIAL AND COMMERCIAL IS IN A MASSIVE LAUGHABLE SPECULATIVE BUBBLE.
Using charts (presumably technical analysis) isn’t a valid method for extrapolating real estate prices but good luck believing it.
Despite the FIRE sectors attempt to successfully financialize housing, it isn’t primarily an “investment”. It’s a roof over someone’s head.
The long-term price trend has nothing to do with whether it is “overbought” or not but first, on credit conditions and the cost of funds. And second, the economic capacity of the population to service the debt they incur based upon the economy’s productivity.
The difference in housing price behavior since 2000 is due to the broader asset mania. We are in a mania (whether you are going to admit or not), it’s going to end, and when it does, the housing bubble will end with it. It won’t perform exactly like the financial markets (it isn’t one) but it’s going to lose value at minimum in “real” terms because the country and the population cannot afford current prices without cheap money and there will be fewer speculators.
I also expect a mortgage moratorium but that’s not enough to change what I am telling you. There is a cost to it even if it’s view as preferable to the alternative. Government housing policy doesn’t exist in isolation either. The government and the country’s finances have deteriorated so drastically that the day of reckoning where unpopular policy choices have to be made is also approaching.
“We are in a mania (whether you are going to admit or not)”
Yes, I agree, 100%! And I’m totally on-board with the “inflation is a political bitch” narrative. I’m literally betting on it.
Tampa Bay rents rose 24% in 2021. It is against the law to live in a tent on your own land.
No such thing as “own” land in America. Pay off entire thing, but don’t pay property taxes and government will take it away.
You must be living in the bubbles as big as this new housing bubble we are currently going through.
Chicagoland area
Houses are listed for 20-40% of fair value. Houses bought for $250,000 in 2012 are now selling for $350,000 – $400,000. Cheap kitchen cabinets and Pergo flooring doesn’t bring value of the house that much in real world. Many houses in Chicagoland area are listed at higher prices than 2007-2008.
You will throw the inflation factor argument, which is fair, but I will counter with the fact that those houses are now 15 years older since then. Most are now in need of major repairs (roof, siding etc). Purchase a house for $400,000 and you should account for $100,000 worth of repairs to be on a safe side. When this artificial bubble bursts, you will be lucky to sell this house for $350,000. Not to mention the property taxes that will only go up.
Commenting on the home price drop.
Maybe in SF where people can move to globally but in USA home prices have and will drop.
Rural american (high fuel and transport) the reason folks have migrated from farms to big cities for jobs and efficiency.
Mining towns including oil boom towns!
SF is a tech town with global reach and industry is tech not mining or farming or manufacturing.
My home in 1980 in Tulsa Ok lost 80 percent of its value from 1985 to 1990 with oil.
House prices can and will fall!
Not sure about that. I always thought you should make your money in town and then when you retire cash out the house and move to low cost low tax area.
Hi,
Wolf knows me by phone and email so he can hold this over my head later if I am wrong:
I have been in the real estate industry since 1986 in coastal California. First in mortgage until 2006 and then became a Realtor in 2005. I went through the whole subprime nightmare in San Diego from 2005 to 2009 and became a foreclosure/short sale agent in 2006 of that. Since the end of 2009, I have been a Realtor on the Monterey Peninsula for a big national luxury brokerage. Okay, table set, now here is my take on things.
I truly believe the middle class is getting wiped out and the US is going to become a renter nation other than at the tippy top.
As Wolf knows, last October, my husband and I decided to sell our house here. We did a modest rehab, put it on the market in mid-January, and sold in 4 days for all cash. I knew that the getting could get better and knew that it was good enough already. Now we rent from clients. Wolf knows this, too. He also knows we put down just about half on an investment property for almost a million in Fort Collins, CO and closed about two weeks ago. The current tenant wants to stay forever, it cash-flows right now with his current rent, he wants to stay at the higher rent we are raising it to when his lease is out in a few months.
We get to write-off every last cent of that property against income taxes. That more than makes up for the bit of income tax on the profit.
If we were to eventually convert it to a second home or to a primary residence, we would still get to write off all the mortgage interest expense and property taxes.
We bought there because we can see it as a viable place to live someday should we born and bred Californians, generations back on both sides, finally get pushed out of this state. We know that we do not want to be stuck as renters only. We understand that property values may crash but it’s okay because we have a scrumptious fully amortizing 30 year fixed conforming loan and again all that interest is a 100 percent deduction whether it’s an investment property, a second home, or a primary residence. We bought a vintage home in excellent condition but dated so plenty of upgrades are possible and in the best part of the historic district of a major college town. All the stuff you are supposed to do. Check, check, and check.
Since 2012, we have been making money as property owners by selling higher than we paid for and by the exceptional tax deduction benefits of property ownership. It pains me as a Realtor to say that home ownership appears to be dwindling for the middle class and possibly all but disappearing. I can also tell you first-hand that almost all of my clients have zero intention of selling what they have. There is no point in leaving what they have. They have it beautiful and it’s only ugly out there if you don’t already own a home.
That’s it. Wolf, you can remind us of this declaration later whether it was right or wrong. April 25, 2027-ish?
You better figure out Colorado is running out of water ,people don’t realize it
“We bought there because we can see it as a viable place to live someday should we born and bred Californians, generations back on both sides, finally get pushed out of this state. ”
Don’t let the door hit you on your way out.
Your assessment depends on complete disfunctionality in the market in the sense that there simply won’t be any or much transacting. If that was a viable mechanism for preserving price levels in any asset it would have already happened long ago. But it hasn’t. The balance between sellers and buyers is, instead, affected by numerous degrees of freedom that are constantly evolving. I’m afraid your assessment is fundamentally flawed and has no merit whatsover.
Very good insight and truly appreciate your take.
I am in Southern CA as well and with ever rising home prices, the problem I see is worsening Quality of Homes.
Good neighborhoods with million dollar plus homes have 4-6 cars. Coastal homes front are taken by homeless people.
The point is: If this inequality worsens then the rich people’s lives won’t be as good. Just go to any 3rd world country and see how the freedom of rich people are curtailed there.
I see it coming to USA especially in CA for sure.
Excellent points. In SD there is feces from homeless people on the sidewalks in million dollar neighborhoods. I live in SD. I know. Take a drive through balboa park. Tons of homeless people. My heart aches for them. Just north of the park is marston hills. Very expensive, but the situation is deteriorating quickly. Ive lived in SD since 1985. The deterioration is staggering, yet the kool aid keeps flowing…
> Since 2012, we have been making money as property owners by selling higher than we paid
> It pains me as a Realtor to say that home ownership appears to be dwindling for the middle class
It pains you, but not enough to help the bankers destroy your nation.
I don’t think realtors are a good source for macro trends, the prediction of a “nation of renters” is just extrapolating the current trend.
JWB,
You SOLD your house!! You sold because you wanted to take profits in this crazy market. Now you rent. You did the equivalent of shorting the housing market. You’re the equivalent of insiders selling. You explained it to me in even greater detail than you did here. You timed it very well. You made a bunch of money selling in an expensive area in California. Kudos!
But do you think you’re the only one to understand this? Do you think you’re the only one who wants to sell and take the money and run?
This is something I have never understood: You nailed it by selling the house with perfect timing; and you nailed it for all the right reasons; and you explained those reasons to me and to us. And then you imagine that no one else is doing the same thing? That no one else WILL do the same thing?
There is a huge disconnect here.
To me, you’re anecdotal proof — by selling to take profits, and now renting — that the housing market has turned from the top down.
Wolf,
I can’t shake the feeling that something massive is going on with the single family home market that will be keeping more and more people locked out of it for eons. That’s why we’ve bought into it again with a superb mortgage in a significantly less expensive area and have bought a great house for a long term hold. Going with our gut based on decades of in the trenches experience in both residential mortgage and sales. I would rather be wrong with a house we really like than wrong with no house at all. Something is very wrong with things and I feel this is one way to keep from being crushed to smithereens. Okay, maybe by the chinook winds, right? But that’s not ALL the time. This economy is feeling like an ALL the time thingy or worse.
JWB,
I think you still don’t quite see the disconnect between what you actually did — sell and take profits at the peak of the market as an insider — and what you’re saying. You’re not the only one taking profits. But a housing market needs BUYERS. And the buyers are leaving. So what are the sellers going to do?
You nailed the timing. The market will get illiquid because many buyers have left or are in the process of leaving, and it will be impossible to sell without cutting prices. That’s what an illiquid market does, and you knew that, and you sold before it got illiquid because that’s the only time you can max out. That was a really good move.
It seems like there is a Chinese Wall between the “you” who knows how the market functions (and therefore you sold), and the “you” who is a Realtor and has to promote the philosophy for those high prices to others. This is a disconnect I cannot quite fathom.
Wolf. She’s a realtor. What else do you need to know? :)
You got it made.
A risk is, as the middle class erodes, so does political stability. Aggrieved people vote, and eventually express themselves in more extreme ways. As their numbers grow, the tax advantages may disappear, and new taxes on wealth may appear.
I think a strong middle class is actually needed to maintain the property rights we have now.
You bought a vastly over priced house in a state that’s committing suicide right behind CA. Don’t strain anything patting yourself on the back, but rationalizing your decisions doesn’t make them good.
I did my undergrad in Ft. Collins at a time when everyone had bumper stickers reading “Don’t Californicate Colorado.” This was a long time ago, and the Californication is now most visible on the Front Range and in the ski towns.
Don’t get me wrong – I love parts of California, esp. the Sierras. But your attitude is what Coloradoans were railing against – grab the money and run to a cheaper place where you can be rich and help cause house values to rise and practice your own form of Nimbyism.
This is just the beginning.
✔️Mortgage rates are already at 6% and will touch 7-8% by summer.
✔️Buyers who pre qualified at 3% are no longer qualified during closing now with 5-6% Mortgage rates leading to CANCELLED CONTRACTS in spring/summer.
✔️Foreclosure stopped for last 2 years will start hitting the market.
✔️New construction supply will start hitting the market at the same time
✔️The wallstreet ibuyers will start dumping their real estate purchases once they realize there is no more price appreciation left.
✔️It takes just 1 house on the street to sell at 10-20% below asking to start the trend and pull values for the remaining “comps”.
A crash is inevitable.
I’ll play devil’s advocate on a couple points:
– Foreclosures: Need a weaker labor market and a weaker RE market. Right now even if someone bought a couple years ago, if they run into trouble, they can sell for a profit and move on. And with the labor market so tight unemployment is almost purely a choice.
– New construction: Supply chains are indeed hampering new construction from hitting the market. The cost of everything is indeed higher. And builders are more careful, not so eager this time to run head first into a glut. Similar to the oil industry, they rather take profits than invest in future oversupply.
– One house sets comps: A cheap house here or there can be absorbed. There needs to be a consistent increase in houses sitting on the market to start moving the needle on price.
Now on the correction-is-coming side, I think that if the Fed sticks to it and other asset markets continue dropping, then the reverse wealth effect is going to be the left hand and higher rates are the right hand in the one-two correction combo.
“And builders are more careful, not so eager this time to run head first into a glut. Similar to the oil industry, they rather take profits than invest in future oversupply.”
Uh-huh.
“Fresno has a glut of 28,310 single-family detached units over and above what Fresno households need based on household size.”
I’m so tired of the bullsh!t.
Report from Seattle area.
Feb 2022 – houses with 800k official assessment go on sale at list price of 1.6m and get sold at 2m Or above in a bidding war.
April 2022 – houses with 800k official assessment go on sale for 1.6m. There is no bidding war. Very few buyer show up for open house. House sits on market for 2 weeks and gets sold at 1.4m
Note that in Seattle area 800k houses got sold routinely for 950k to 1m, even long before pandemic.
This isn’t a crash by any means. But Between Feb and April, the actual sale price has fallen by 30% from 2m to 1.4m. And as of writing this 900k list price homes haven’t been getting offers for 10 days or more. A lot of sellers are getting disappointed and just removing houses from market. Inventory is slowly building up and if this continues at the same rate, prices will return to pre pandemic time by end of 2022.
If Microsoft and Amazon shares crash, much before that.
And yes FOMO is dead.
Thank you for taking the time to submit this report. This sort of thing is really valuable, especially for young people that are confused by all of this.
Good info. A lot of that drop can be attributed to the interest rate increase and its impact.
A 2 million dollar home with a 400k down payment at 3% is basically a $7k month payment. At 5.2% and a $400k down payment while using the same $7k monthly payment will get you a 1.6 million dollar home.
Those million dollar homes are going to take a hit with interest rates.
True. They are already feeling the heat. Also the volatility in the stock market is causing more buyer pullback. Amazon and Microsoft are prominent employers in the area and tech stocks are getting beaten. The only factor that is keeping the house prices still high is the low inventory.
Without the Fed’s big fat nose, supply and demand will find equilibrium. House prices will stabilize where median income buyer will afford the median priced house.
Thanks for the report. The West Coast and Mountain West does look like the frothiest of the RE markets in the US and as such will probably be the first to start declining with respect to the rest of the country.
Yes. In general higher priced houses buckle first as seen in my area. A 500k house will take a lot more fed hikes to get to 400k. But a 2m house became 1.4m at the first sight of tightening. Apart from low inventory, there is nothing to keep house prices up from pre covid time now. Not even tech stocks.
How do employers hire people when they cannot get decent housing for the salary?
I am in SoCal.
Here are my first hand observations:
A 2 bedroom condo can easily accommodate 2 couples ( 4 people ).
Same condo can accommodate 4 bachelors.
These condos rent out for $2500/month.
A million dollar home with 4 bedroom can house 8 adults/4 couples.
Every Single family home in san Diego has 4-6 cars which tells you a lot.
A lot of garages are being converted to studio house and are rented out.
Talk about third-worldization of Southern CA
When I left Thousand Oaks, Ca in 1990, there were 3 bedroom houses with 6 cars in the driveway and on the lawn. The city was about to pass a law limiting the number of people that can live in the house based on the number of bedrooms it had. I haven’t been back there in 20 years so I don’t know what the housing situation is, but when I left there were concerns.
please stay out of Colorado! we hate Californians, and your liberal policies that created these problems. Don’t come here and recreate these issues.
Right on Katie.
Exactly!!
Same message for Californians coming to Texas. (I think I missed the boat on this though…LOL)
Katie, Bar the door.
That’s why I left Colorado, because the people who live there think they are better than everyone else
Katie, your comment absolutely cracked me up
I am in the pacific northwest and we have armies and droves of people who are also saying the same thing
Stability is the judge,
adjudicating every grievance.
Every thing I love about America
feels like a memory.
The other thing that I realized the other day was that Politicians tell me what I want to hear so that I will vote for them.
Regardless whether they agree with what I would like to see American society return too.
Which brings me to my economic comment about the obvious disequilibrium of risk in the credit markets, which is undefined, by definition of ZIRP, under a radical interest rate repression scheme like QE.
Previous American society was never perfect but naive in believing they’re sacrifice in the American wars would establish a Democratic society that promised a path to a better life than the WW1, 1918 flu pandemic, the roaring 20’s, the dust bowl, the 29 crash, the Great Depression, the WW2, the dawn of nuclear war, they lived through.
Thank you Albert Einstein, the Angel that paved the way to hell, perhaps.
If one were to apply at least a modicum of capitalist management to our out of control government, maybe we could recreate the optimism that makes life worth living.
That being said one should be aware that financial markets are ruthless and wily. Obviously, given the phony market gyrations the last few months, the sheep are about to be shorn on the way to a 50% drop in the SaP, with regular symposium on various ways to catch a falling knife.
Like all Americans, I resent being under the financial control of the wall street wise guys who own the Fed, obviously.
The only way to make money in America is grift. Maybe we need to be prodded from our comatose by reality.
We should always remember that democracy means two wolves and a sheep deciding “what’s for dinner.”
The word “democracy doesn’t exist in the declaration or the constitution.
The one attribute of human beings that has been given short shrift, although every human being on this earth, all 7 billion of us have, is the sense of perspective, a mysterious force.
The term Democracy was invented by a journalist to describe a system that is implicitly imbedded in both documents. We accept these documents by choice and commit to the promises expressed in the documents.
We are struggling in applying the laws and customs of our great great great grandfathers, the best example of sinners turned to saints by the simple pass of time.
The kernel is still alive and causing trouble.
Oh yea, the point being that, if we give up it is like acceptance to be an indentured servant rather than a fool believing that freedom is a birth rite.
Adam Smith himself warned against allowing the merchants to set policy:
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices . . . though the law cannot hinder people of the same trade from assembling together, it ought to do nothing to facilitate such assembli …. snip
To widen the market and to narrow the competition, is always the interest of the dealers . . . to narrow the competition must always be against it (the public) . . . the proposal of any new law or regulation of commerce, which comes from this order, ought to always be listened to with great precaution.”
Adam Smith An Inquiry Into the Nature and Causes of the Wealth of Nations
Houses near SocalJim are still doing robust business.
Houses near me in Texas are doing the same.
I would like to state my theory that the fed and its 400 PHD employees are going to win.
Most people would agree inflation is maybe 15% but stated as 8%. The point is the government demonstrably lies about the inflation rate and gets away with it always. This means that if real inflation was 8% they could easily pass it off as 2%. So all the fed has to do is get real interest rates to 8%, in one year, after they have already booked a 20%+ real increase in two years. Easy.
I believe that as the official inflation figures dwindle down to 2% over the next year, the fed will have reached about a 1.5% rate when they will pause increases. They will state that inflation was was in fact fleeting. The market will make new highs on the news.
Then, next May, inflation will hit their 2% target (8% on the ground) and they will get out the “mission accomplished,” banner and put it up.
Interest will stay at the 1.5% rate, QT will be cancelled and changed back to, “we will wait for balance sheet runoff on its own.” This is literally what they did last time (taper tantrum) so I’m not going out on a limb.
Net effect is, market all time new highs, 10 years of 8% real inflation and 2% gov stated inflation, will solve the debt crisis, will solve the budget deficit, everything will be wrapped up nicely in a bow and they win. Nothing will crash no housing no stocks nothing. We will hit maybe 2016 values at the worst in any asset, and then it will recover.
We can all agree that the Fed uses inflation metrics that underestimate inflation, but I don’t think they will be able to do what you have described if inflation remains as high as it is now, or anywhere close. The reason is because this sort of inflation really matters. It’s not a game anymore. If it isn’t brought down we will have severe economic contraction, and i think they know this. I’m not defending the fed. I do not like the fed. But i think they may be forced to pursue a very different sort of policy than we’ve seen over the past few decades.
One often has to face the grim truth about relying on the entitled to do the right thing, which any street savvy person would say, maybe tomorrow.
Anyway, free markets 101, there aren’t any.
The Fed has experimented with the lives of 350 million Americans to support a couple of hundred wall street wise guys calling the shots.
There ain,t anything noble about the Federal Reserve bank of the US this past 15 years.
Let’s not sugar coat it. They financed the de-industrialization of America under the guise of supporting the global markets.
Not good guys from the perspective of a citizen that lives in America.
As we look across the world looking for workers blind to the jewel hidden under Baltimore…..
Not one that prefers dissention or strife, the ingredient of most human life
1) praying to a God they don’t even believe in to save them from themselves.
2) avoiding political conversations that may lead to loss of job and/or lawsuit.
3) emphasize the aspects of life that aren’t suicidal.
This is delusional. There are no signs that inflation will abate on its own especially with the energy embargo on Russia. The administration will soon be forced to lift the tariffs on Chinese import, and that will help inflation some, but that’s it. What people seem to be forgetting is that the Fed can’t print oil or for that matter fertilizer. The later will show up as food inflation soon enough.
The demand destruction is going to blow people away.
I don’t agree that demand destruction will be the cause of whatever you envisioned by blowing away which connotes destruction,
Personally, I yearn for justice. Demand destruction might mean distress in the group of people I think should be the ones succeeding.
Lighten up, Francis.
What is forgotten is the multi safety nets for home buyer / borrowers. There is no incentive to wait for a “crash” so prolly won’t be a crash.
Buy high, $4K / mo mortgage. Crash, 50% lost equity over next 3 years. Drop key or stay in the house and don’t pay (bank won’t foreclose on losing asset). Save $4K/Mo for 2 years and buy house next door for cash (ideally) or big down payment (LTV would be high, so banks will clamor for you).
If no crash, dang, you actually have to pay for your mortgage since the value of your home is worth chasing by the bank if you stop paying.
This already happened, so why be scared to buy now ??
” Now there is no good way out. It’s too late for that.”
Gee …. I thought Wolf said the Fed wasn’t “trapped” ?
“No way out” sounds like trapped to me. A different dictionary maybe? Ha
Mark,
Read again what I said: “no GOOD way out.” We’re already on the way out, that’s happening as you can see from this article, but it’s going to be a mess, as you can see from this article.
People who say the Fed is “trapped” either don’t know what they’re talking about or they have an agenda (such as the folks who said, the Fed will never end QE, and after it ended QE, they said the Fed will never raise rates, and after it started raising rates, they said the Fed will never do QT, and after the Fed starts QT… The same folks.
People might have said the Fed would never do this and that, but would you ever say that a criminal would ever stop being a criminal? Many people see QE, ZIRP, and inflation allowed to run above ‘ZERO’ as most certainly ‘criminal’ actions against the USA, and definitely outside the Fed’s charter.
The Japanese yen has plummeted 10% against the US Dollar over the past 7 weeks and is down 1.6% against the US Dollar today!
If Japan relaxed the entry and quarantine requirements for non-Japanese, I’d love to go there. It would be outright cheap :-]
More seriously, if the BoC doesn’t get busy talking about higher rates and removing its yield-curve control, this is going to be a problem for Japan (and it already is) because their import prices are skyrocketing, and they import most of their energy, raw materials, and lots of other stuff and components.
The US Dollar has soared up beautifully to 103.77 and is up 0.78 today as it races for the 120 mark and higher on the DXY.
Recession is now baked in at least according to the technical definition of two consecutive quarters of negative GDP growth.
The Yen is going to 200 I am guessing. I am waiting for some kind of retracement before jumping in.
yen was 300-305 per USD when I was last there socal?
not really sure how that ”measures out” against all the various and sundry ”movements” of yen and USD and SO many other metrics since mid 1960s???
many charts of the last couple decades do NOT tell the whole story, duh,,,
Then you were in Japan a LOOONG TIME ago. The Plaza Accord was back in the 80s. In other words, the Yen has not been in the 300 range for more than 30 years. The Yen collapsing to 200/300 will lower the living standard of Japanese people by a lot, a total opposite to what the Plaza Accord did. Also Japan’s economy was still in ascendance back then, unlike now.
1) Fred ; GDP : Q4 2021 : $24.002T, Q1 2022 : $24.383. No recession.
2) EURUSD down in a channel since 2008 from 1.6 to 1.000. Europe is
paying Putin in depleted currency.
What happened back in the days (pre-depression/WWII?) before the federal government got interested in housing?
Where I live, nearly 40% of the new job creation over the past 5 yrs has been construction related due to the massive building boom. If the boom ends, and the construction dependent jobs go away, it will have a huge impact on this area.
Thank you PPT for coming back to your senses and return and do your job. The market thank you today,almost 600pts and counting. Glad you sobered up from the bourbon and made up for loss time yesterday.
NO celebration yet!
Tomorrow CPI/PCE number and next Thursday Fed meeting.
Fundamentally there was no reasons for indexes higher. Up on the back of META!
AMZN earnings bombed after-hours today!!
INTC falls 5% after-hrs! Intel guidance falls short!
Oil up today at $105 up by $3.16
I believe in the secular BEAR mkt going forward with numerous (Bear traps) reflexive bounce. like today sucking BTFD crowd!
I bought/upped all my PUTS day. Wait n See!
Add: AAPL -4% afterhours.
APPL’s constrained by China, but they had another blow out quarter. Muppets will do anything to buy Apple products.
Apple’s revenue ticked up 8.5%, in an environment of high inflation, with US CPI inflation at 8.5%. Apple’s revenue growth is just keeping up with inflation. Blowout? hardly.
https://wolfstreet.com/2022/04/28/afterhours-massacre-as-amazon-plunges-apple-intel-tesla-even-meta-dive/
Well, CPI is a basket measure. If the relevant components in the CPI had risen by more than 8.5% then Apple actually did terribly, but if the relevant components in the CPI had risen less than 8.5% then I would say they did superbly.
If you’re going to compare interest rates from a year ago to today, do it honestly. You compare $326K to $375K. not 326k to 326k. Figures don’t lie but liars can figure.
RTGDFA
Median price at the time, financed at the rate back then, compared to median price today, financed at today’s rate.
That was the whole purpose: the dual impact of the price spikes and the interest rate spikes. Can you not READ?
Doing a property inspection today. Interest rate 5.65% VA loan. Heading for 6%.
What are your thoughts on the EURODOLLAR predicting negative interest rates in the near future? Seems like this QT will not last long. And the fed will have to launch QE infinity and beyond. Do you think this will have the ability to prevent housing prices from crippling?
A lot of investors believe the fed will break something before we get to 3% fed funds rate and they will have to U-Turn.
James Wolfie,
You just recited a wet dream some folks have. And then they wake up in a mess, LOL
But yes, the Fed will purposefully break a lot of things in order to tamp down on inflation. Raging inflation is a seriously shitty thing that destroys a currency, and the Fed is finally taking it seriously, but not seriously enough. I’ve been saying this for 15 months.
Once the Fed gets serious about inflation, the shrapnel flies. It will break the markets for sure (the prices, not the markets themselves, they’ll be fine) – stocks, bonds, housing, CRE, you name it – and some of that Fed-inflated wealth is going to hiss out of those markets, and it will likely cause a run-of-the-mill recession for a couple of quarters.
But a short recession is minor compared to the devastation wreaked by years of high inflation. And in a recession, zombie companies restructure their debts and shed their debts at the expense of investors, and when companies emerge from the recession, there is a lot less debt burdening the economy. Investors had it so good for so long, it’s OK if they’re going to give up a portion of it.