The Stalemate of the Century: Housing Facing an Existential Moment

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DoctorHousingBubble.com:

It was only a matter of time that the housing market hit a giant wall of apathy and the level of denial is deep out there. People are starting to understand the cost of easy money policy which has created an insane level of moral hazard and rent seeking behavior.

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I’ve been following the FTX story and that is a picture perfect example of the market – tech as a religion, nonsense charity, easy money return chasing, and shiny new object syndrome with no real work being done. The day of reckoning is here and with mortgage rates at 8 percent, those million dollar crap shacks are no longer looking tasty.

This is the new normal and we were in an artificial market for such a long time, that people do not realize that an 8 percent mortgage is actually affordable relative to historical norms. Let us look at the market overall.

California Sales Hit a Wall

As it turns out, interest rates do matter. The housing cheerleaders seemed to believe that easy money was never going to go away but it has. And now we see this:

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What you are seeing here is low sales volume reminiscent of the last housing crash. But the Great Financial Crisis was a once in a generation event! Well in terms of sales volume, we are probably in worse shape since we’ve actually added more people since 2007.

But prices are still high! Indeed. Keep in mind that sales volume hit a wall in 2007 and prices did not hit a trough until 2012. So things just move slowly with housing. The reality is, home prices simply outpaced any gains in incomes.

To put it into perspective, at some point in California, home prices were going up $100,000 per year yet the typical family in California makes $84,000 per year! Bwahahaha. Why even work when you can just sit in your house and make more money than a family putting in 4,000+ hours of work (assuming 50 weeks of work at 40 hours).

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We are at a cross-roads moment. Take a look at the amount of a mortgage payment per month here:

So that drywall mass produced home that sells for $1 million just went up from $4,519 a month to $7,016! That is a 55% increase in less than one-year. So we now have realtors struggling since they make money on high sales volume. You have commercial real estate getting absolutely smashed. Banks are in a tough spots since they made bets on a low interest rate environment.

But now, that same home will cost you $2,497 per month with no measurable increase in underlying value. The house does not have a built in chef, or unlimited childcare, or a Tesla that comes fully charged every day with no cost to you.

Which brings us to headlines like this:

So one third of Americans making $150,000 a year or more are living paycheck to paycheck and using credit cards to close the gap? So that increase in the monthly mortgage nut is really going to hurt. We are seeing massive increases in defaults with auto loans and credit card debt. Student loans which were paused during the Covid-19 lockdowns, are now coming back to cash strapped buyers.

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The outcome is no different here from the previous housing bubble. Either incomes are going to catch up to match home prices or home prices will need to adjust lower. Housing is a funny asset class. In any neighborhood, if you have 100 homes, the price of all homes is dictated by the most recent sale prices.

Say you have 5 homes that sell at an average of $700,000, then the new price of all places is adjusted based on those sales. A really poor way of measuring value unlike stocks where you have a very liquid market that is turning over all the time.

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So say with slower volume, you have 5 sales and they sell for $600,000. That is the new baseline. In other words, housing is and has always been a musical chairs like game. We are now in the slow awakening of the population that no, housing doesn’t always go up.

Sales volume is a leading indicator here. But people with 3% mortgages will never sell! So long as they can keep up their monthly nut. The last housing crisis of 7,000,000+ foreclosures was largely from prime mortgages (not subprime mortgages which were a smaller portion of that number but of course were the canary in the coal mine).

This time is different of course.

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