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This real estate bubble won't pop

jaredabrock.substack.com

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Re: This real estate bubble won't pop

#41

Post by monkmartinez »

I love this article! These types of articles are the signs the market is about to turn over. The eviction moratorium and mortgage forbearance programs [i]just[/i] ended. It will take some time for the contagion from those programs to propagate thru the housing market.

Secondly, you can not get massive inflation with the velocity of money in the dumps[1]. Probabilistically, we are going to see stagflation until demand drops off due to higher prices and supply chains normalize. With "free" money drying up from "stimulus" packages, the demand for goods and services should wane in the coming months. There are various charts that show this starting to happen now. (Steve Van Metre on Youtube is good for macro stuff)

Thirdly, I recently watched a video from the Global Labor Org. [2] that made a few bold claims. One of which was, the US is probably already in another recession with consumer sentiment being the "tell." Interesting stuff. The methods are non-traditional to arrive at this conclusion and time will tell if they are bold and right or bold and wrong. I happen to believe they are right...

Anecdotally, I work the streets as EMS and Fire for my city, blue collar... but stable and can make SWE money with overtime. I worked through the GFC of 2008 and I see soooo many similarities, mostly in my colleagues at the station. Lots of them buy the most house they can afford monthly while living on the edge of personal solvency. They extract money from the property via HELOC to buy toys and remodel endlessly. If rates rise even a tiny bit, that party comes to a screeching halt. "Assets" are dumped at fire sale prices or they will simply walk away, ala 2008-09.

Yes, blackrock is buying thousands of properties, no one that pays attention will dispute that. However, we don't know how exposed these hedge funds are to the Evergrande collapse contagion that will spread like Covid in the coming months (ironic, no?). If these hedge funds are leveraged to the gills with bad paper, they will collapse and the houses will be sold at fire sale prices. My money is on the whole thing being exposed in ways we do not comprehend.... yet.

[1]https://fred.stlouisfed.org/series/M2V [2]https://www.youtube.com/watch?v=_-jmDyg0AcE

Re: This real estate bubble won't pop

#42

Post by timmaxw »

1ark wrote: post #13
tomrod wrote: post #2

Not a bad overview, but misses some things (1) political instability (2) $10M/home as sticker price wouldn't happen. Apartments and row homes would be more common substitutes (and already have sopped up demand in the starter home markets) (3) what inflation measures show 10% inflation?

Shadowstats[1] shows more than 10% in '80s-based measure. 1. http://www.shadowstats.com/alternate_data/inflation-charts

Shadowstats's 80s-based measure says we've been having 10% YoY inflation for two decades now. If that were true, prices would've 5x'ed since the year 2000. That doesn't pass the 'sniff test' to me; e.g. the Big Mac Index [1] says a Big Mac cost $2.50 in 2000 and $5.50 today, equivalent to about 4% YoY inflation.

[1] https://www.economist.com/big-mac-index

Re: This real estate bubble won't pop

#43

Post by MrMetlHed »

kaibee wrote: post #36
MrMetlHed wrote: post #24

Earlier quoted context omitted.

It seems like if it's zoned as a single-family home or residential or whatever and you're not a single family it's hording. I'm willing to be talked out of that. Seems wrong to have to compete with a corporation to buy a house.

The incentives for homeowners to prevent new construction would cause the same issue regardless of corporations getting in on it. The lack of new construction (in areas where people want to live) is the driving cause.

Oh I totally agree the lack of housing is a problem. I lived in New York City long enough to figure that one out. Death to NIMBYs.

If I were in charge of the world I'd force every apartment building in New York to magically add a couple of floors to help with that. But I don't think it's the ONLY factor, and if we keep building out other problems pop up (like less wealthy people that can't afford to live in the city proper losing hours of their lives every day to get to work, etc.)

Re: This real estate bubble won't pop

#44

Post by beerandt »

thaumasiotes wrote: post #12
seibelj wrote: post #3

The price of the average house in the USA is based primarily on the government-guaranteed 30 year fixed rate mortgage. For a given interest rate and income, the house will cost exactly the maximum amount of loan the borrower can get. Banks no longer have any skin in the game - they go through a massive checklist, gather tons of documents, and once they can fulfill their legal mandates they immediately approve the loa…

> The price of the average house in the USA is based primarily on the government-guaranteed 30 year fixed rate mortgage. For a given interest rate and income, the house will cost exactly the maximum amount of loan the borrower can get. This implies that very poor people can buy houses for very cheap. The price of a particular house is not set by reference to the person purchasing it. The price comes first, and the bu…

No- but you need the number of houses in a given price range to more or less match up with the number of buyers who can afford them.

Look what the jumbo loan and other federal loan limits are within a given market, and if you plot real estate listings/sale prices, there will be clusters grouped just below each limit, especially the jumbo.

Re: This real estate bubble won't pop

#45

Post by larsiusprime »

brandur wrote: post #22
TameAntelope wrote: post #16

One aspect of articles like this that I've noticed is the absolute certainty the author seems to have that these terrible outcomes are inevitable, with no expression of a confidence interval or possible less world-ending alternatives. I just... can't take articles like this seriously. It's the political equivalent of gore porn, and it feels like a waste of time to think about. When Nassim Taleb wrote about "Black Swa…

I would suggest reading until the end. The author makes a number of recommendations on how this outcome can possibly be avoided (see header starting with "The solution is simple" and all the way through until the end of the piece).

Henry George's Land Value tax would be a much easier and simpler solution that would ultimately be more effective than all the stuff this guy is proposing.

The reason house prices are going up is because land values are going up, and the reason land values are going up is because there's only so much land (by which I mean locations) in the world, particularly in places where people want to live, and as the population increases and as increased productivity pushes out the margin of productivity the rent goes up.

So tax land. Use existing property tax regimes, shift taxes to land rather than buildings, and raise the rates so that it gets unprofitable to speculate on land and incentivize building as much stuff as possible. Also remove restrictive zoning ordinances and all the other usual YIMBY stuff.

Re: This real estate bubble won't pop

#46

Post by jeromegv »

paulpauper wrote: post #26
tomrod wrote: post #2

Not a bad overview, but misses some things (1) political instability (2) $10M/home as sticker price wouldn't happen. Apartments and row homes would be more common substitutes (and already have sopped up demand in the starter home markets) (3) what inflation measures show 10% inflation?

5-10% for many things: tuition, healthcare, cars, homes, transportation, etc. I don't see political instability ever being much of a problem. Trump was considered 'unstable' by pundits yet prices surged during his term.

Well that would be a different story if he did succeed at stealing the election on Jan 6 while having his supporters destroying the Capitol.

The social unrest would have been quite something.

Re: This real estate bubble won't pop

#47

Post by seibelj »

thaumasiotes wrote: post #12
seibelj wrote: post #3

The price of the average house in the USA is based primarily on the government-guaranteed 30 year fixed rate mortgage. For a given interest rate and income, the house will cost exactly the maximum amount of loan the borrower can get. Banks no longer have any skin in the game - they go through a massive checklist, gather tons of documents, and once they can fulfill their legal mandates they immediately approve the loa…

> The price of the average house in the USA is based primarily on the government-guaranteed 30 year fixed rate mortgage. For a given interest rate and income, the house will cost exactly the maximum amount of loan the borrower can get. This implies that very poor people can buy houses for very cheap. The price of a particular house is not set by reference to the person purchasing it. The price comes first, and the bu…

If a buyer has $100k income and ~75k post tax, then they will be able to afford (at most) $45k per year out of pocket, or ~$2k per month. Based on the interest rate, you can work backwards to see the house they can afford, and the people buying at that price point will all have similar incomes.

Re: This real estate bubble won't pop

#48

Post by TameAntelope »

brandur wrote: post #22
TameAntelope wrote: post #16

One aspect of articles like this that I've noticed is the absolute certainty the author seems to have that these terrible outcomes are inevitable, with no expression of a confidence interval or possible less world-ending alternatives. I just... can't take articles like this seriously. It's the political equivalent of gore porn, and it feels like a waste of time to think about. When Nassim Taleb wrote about "Black Swa…

I would suggest reading until the end. The author makes a number of recommendations on how this outcome can possibly be avoided (see header starting with "The solution is simple" and all the way through until the end of the piece).

Ah yes, the inevitable, "All we have to do is chop off our arms, and our torsos shall be saved from this terrifying poison ivy. I know, because I read 10 articles on WebMD about bubonic plague, and poison ivy looks a bit like that." argument that comes with every one of these articles.

I did read the entire article, and I considered his solution to be wildly out of touch with reality, almost intentionally so to make the problem he outlines all the more drastic (surely the issue is serious if we have to take such extreme measures to end it).

Re: This real estate bubble won't pop

#49

Post by brigandish »

MrMetlHed wrote: post #5

I've always thought the solution to this was exponentialy increasing property taxes beyond the first property you (or whatever legal entity you create to horde properties) own. I'm dumb, so I'm sure there are reasons this won't work, but it seems like it should.

I'm with the Georgists on this one, which is probably why I hated Monopoly even as a child.

https://en.wikipedia.org/wiki/Georgism

Re: This real estate bubble won't pop

#50

Post by drfxyjhdyfrhgc »

thaumasiotes wrote: post #12
seibelj wrote: post #3

The price of the average house in the USA is based primarily on the government-guaranteed 30 year fixed rate mortgage. For a given interest rate and income, the house will cost exactly the maximum amount of loan the borrower can get. Banks no longer have any skin in the game - they go through a massive checklist, gather tons of documents, and once they can fulfill their legal mandates they immediately approve the loa…

> The price of the average house in the USA is based primarily on the government-guaranteed 30 year fixed rate mortgage. For a given interest rate and income, the house will cost exactly the maximum amount of loan the borrower can get. This implies that very poor people can buy houses for very cheap. The price of a particular house is not set by reference to the person purchasing it. The price comes first, and the bu…

>The price comes first, and the buyer second.

The price is determined by the intersection of supply and demand. With a bull market in real estate, demand is greater than supply. Buyers have a greater effect on price than sellers. In the extreme, market prices converge to the maximum loan as GP described. In practice, people with higher incomes, liquid investments, or previous home equity can out bid individuals who assume the largest mortgage they can.

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