Category: Insight

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CNBC has a magic 8 ball and determines no housing crash coming!

CNBC has a magic 8 ball and determines no housing crash coming!

Excluding a 07 or 10% to 20% fall in home prices should not be taken off the table. While some claim that we have more draconian rules, they forget those draconian rules were made for depository institutions and not non-bank lenders and have no accurate forecast of rates or the state of the economy.

Non-banks are lenders that have no money. I say it again. They are lenders that have no money. This is important.

But what are non-bank lenders? They are lenders that are not banks, are mostly regulated by state financial regulators, and have no deposits (savings, checking, CDs so on). Many of these state regulators don’t have uniform regulation, data, and reporting standards. Forget about stress tests. But somehow we let non-bank lenders make nearly 2/3s of all mortgage loans.

They borrow money and they borrow that money mostly using credit lines. They are nothing more than middlemen that live or die by how many loans they can push out, and how many loans they can securitize and sell (ring a bell with 2007). Since they aren’t self-funded they are required to continue making payments to investors, insurers, and tax authorities even when their borrowers skip or default on their payments with no guarantee their credit lines aren’t slashed or pulled during QT.

I am sorry to say but loose lending has already been underway for years. The industry is just not well regulated enough or has been tested to see if it can survive a liquidity crunch. I would love to see a plateau but no one, and I say no one besides the Fed, knows how far the Fed is willing to go with rates and they themselves don’t know how high or for how long inflation will last.

To take off the table a crash is too premature and I call on the Fed to start making sure non-bank lenders are REGULATED and RESILIENT ENOUGH to survive a downturn and a major QT event of unknown duration.

We have people in the media and the real estate industry with magic 8-balls making predictions without even having clear data or remotely accurate forecasts to even start making assumptions.

Are we going back to 2% inflation? I don’t know!
Are going to have even higher inflation? I don’t know!
Are we going to have higher inflation for a long time? I don’t know!
Are we going to have higher, lower, flat, negative, or positive rates? I don’t know!
Are we going to see high unemployment, low unemployment, or flat? I don’t know!
Are we going to see people default on the 11 million homes (what supply problem best 2 years in real estate since 2008) bought in the last 2 years at high prices while their stock portfolio they based their loans on gets halved? I don’t know!
Are we going to have demand destruction and a recession? I don’t know!

That’s a lot of I don’t know! Until we get a better picture of the inflation story and where it’s going and therefore where rates are going and the impact on the economy, I am not taking anything off the table!

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When going hiking check for Rhinos!

When one goes hiking, one should always look around for rhinos, gray rhinos that is!

Soon the market is going to have a bounce as rates come down a little and everyone will go happily hiking in the woods. The only problem is that we aren’t hiking alone. A gray rhino is stalking us in the bushes.

That Rhino is dangerous and could trample the market like we haven’t seen in a decade. The question is not if it does exist (Heck Unicorns were discovered) but will it trample us?

We have record household, real estate, corporate, and government debt. We have record inflation (since the 80s). We have record balance sheets and record deposits. Hard to look around and not see record this or record that in the economy. Records aren’t a problem if you keep making records but when you stop making new ones.

So why would the rhino trample us?
The main issue is geopolitical risk. The war in Ukraine is not over and in my opinion, will not be over anytime soon. This is going to continue putting pressure on oil, wheat, natural gas, fertilizer, and all other commodities and goods that use them. If it goes into winter, it will be worse.

If the war continues well into the summer and into next year then inflation even with some demand destruction will not fall significantly (could continue going up). It’s not yachts and Lambos but bread and butter that are going up. Those goods require significant demand destruction to fall. Now imagine a covid resurgence this winter that would make supply issues even worse.

At this point, the Fed and ECB will have no choice but to become even more aggressive in rate hikes and start reducing the balance sheet (banks have plenty of money to absorb it). This is going to create upward pressure on rates (well over 3% Fund Rate) and absorb liquidity in the economy aka NO LOANS. The paralysis of a midterm election year will effectively shrink new issuance creating a shortage of bonds. Rate hikes and higher bond yields will drive money away from real estate and securities.

Why would BlackRock shareholders want it to continue to buy blocks of homes with a 6% ROI and have a hard time finding renters to pay higher prices (people will pay higher bread prices but skip on the rent) while they could just buy the 10y with near 0 risk for the same ROI? What happens to that 19.5% of investor share in real estate sales then? What happens to real estate?

This is all out of our hands. Inflation is the map. If it continues, the gray rhino will trample everything in sight. If inflation stalls and falls then we could be saved and come out of it unscathed. The only problem is that the rhino’s name is Putin.

I am not being negative. I am observing my surroundings to make sure I know where I am hiking. It lets me make my own map based on different scenarios with catalysts and have a plan to take advantage of them if those catalysts are or are not triggered.

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Fed Fund Rate is at .83% but more to come!

Fed Fund Rate is at .83% but the Fed has 5 more meetings this year they can raise rates and they said they would.

Worst-case scenario
At 50 basis points per meeting and we get to 3.33%.
At 50 for 3 meetings and 75 at 2 meetings and we get at 3.83.
At .75 at all 5 meetings and we get to 4.58%

Best case scenario
At 50 at 2 meetings and 3 meetings at 25 and we get to 2.33%
At .25 at all 5 meetings and we get to 2.08%

 

Federal Fund Rate

No matter what we are heading to over 2%. Might not seem like a lot but the Fed was at 1.55% in December 2019 before the pandemic and the reverse repo market was already cranky, and in December 2018 the markets indexes fell between 14% and 19% in three weeks when the Fed raised the fund rate by 25 basis point when it was at 2.19%.

Household, corporate, and government debt have all grown since 2019. If that debt was not palatable with a 2.19% Fed Fund Rate, I am not sure how tasty it will be between 2.08% and 4.58% or maybe even higher (never say never and we didn’t have inflation back then).

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Blackstone’s Joe Zidle Says a 2007 Real Estate Crash Is Unlikely

It might make perfect sense but it’s simply not true. From 2004 to 2007, the unemployment rate fell from 5.99% to 4.62%. Only after the real estate and financial crash started did we see unemployment rise to 9.63% in 2010.

What caused the 2007 crash was a liquidity crisis that dried up lending and nearly all real estate lending. I get it, Blackstone is buying up properties left and right as future cash cows by converting millennials into permanent renters. In 2005-2007 it was everyone buying up properties for rentals and flips as well.

From 05 to 07 it was individuals, and small players buying one or two properties at a time and flipping them. Now we have Blackstone and other large institutions and companies pouring billions into buying up properties and companies that rent out tens of thousands of homes.

I am not worried about single-family homeowners that have a lot of equity and have done the smart thing and refinanced their homes at historically low rates. I am worried about these large institutional buyers and their future liquidity during a downturn and how they may drag the entire market down.

They have billions in real estate assets all backed up with a lot of debt. What happens when the stock market stays in a bear market with a liquidity crunch and higher interest rates? All that supply problem, he is boasting about, is going to turn into oversupply quickly when they and others start getting hit with margin calls on other assets and they start missing debt coupon payments. They like small players in 2007 are going to walk away from upside-down debt with no or lower rental income and refinancing at much higher rates is even worse or potentially not even possible.

These companies have been on a record buying spree these last few years (18.4% of U.S. homes purchased in the 4th quarter of 2021 were bought by investors aka they bought at the top of the market). When the debt market sours they will have record inventory that will be depressed and they will walk away from them or the US government will have to bail them out again.

Liquidity and higher rates cause housing crashes just like liquidity and lower rates cause housing booms. Always have always will.

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Home Prices Are Starting to Fall in Some Areas

Home prices are starting to fall in some markets.

With rates going up, and inflation slowing down the economy, home prices are starting to level and in some places even falling slightly. Is it the start of a crash?

Unlikely for the moment. A cool-down for sure but a crash is not yet in the cards. Out of the 10 top places where prices have fallen only 2 are major metropolitan areas, Chicago (-5.0%) and Los Angeles (-3.7%).

Supply is still an issue and overall Americans are still not moving. Only 8% of Americans moved from one U.S. home to another between March 2020 and March 2021, according to data from the Census Bureau’s Current Population Survey. It is the lowest percentage since 1948.

The higher prices we have seen have been more a supply coupled with cheap debt in the last couple of years. Call it the pandemic effect. Upper-income earners that built up savings (stimulus, pandemic lockdown savings), made money from assets, newly motivated from needing home offices and more room, all hit the market at the same time. Low supply and years of demand suddenly brought forward created a perfect storm for high prices. That’s pretty much finished.

Once we start moving again we might start seeing more supply (more retirees moving to Sunshine Belt and relocating for work). Then our supply will grow. What is left to be seen will be how high-interest rates will be then.

If rates keep going up then affordability issues are only going to get worse. Demand is already weaker in a low supply environment (years of younger buyers with money already bought). Current prices will be unsustainable but don’t look for a crash. We would need 2 more ingredients.

The first ingredient would be the system will push more exotic and risky loan types/terms (ARMs, no money dime, gov funded down payments, 0 interest, 0 interest ARMs) to generate business. Non-bank lenders, that account for 2/3s of mortgages, only make money from selling a mortgage. No mortgage equals no MBS to sell. If we start seeing this then we will create more default risk. Already ARMs are seeing a boom in business going from 3% of volume in 2020 to 19% in the last quarter of 2021. We are starting to rationalize unaffordable prices with cheaper and risker debt.

The second ingredient would be a deep recession, a financial crisis, or worse stagflation. Higher unemployment, and lower wages, with or without high inflation could lead to mounting defaults and create a liquidity crisis. No more liquidity equals no more loans equals no more demand (real estate prices are supported by debt, not buyers) and with mounting defaults (supply), we have no floor again.

The risk of a repeat of 2007 is low, but I fear non-bank lenders and legislators will start massaging the numbers to make more expensive homes easier and cheaper to buy and recreate the same scenario.

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Take Profits!!!!

A man had a chance 7 years ago to sell his home for a profit without doing anything, but instead decided to gut it and build a new house and now can barely get 1/2 of what he wants for it!

The key to real estate is to know when to walk out with money in your pocket. So instead of walking away with 8 million in profits, an LA doctor sunk tens of millions in a house than couldn’t even meet the reserve price at an Auction. He will probably lose millions as he is forced to sell due to the bankruptcy he already declared.

 

Real estate is like any other asset. Its value can fall as its value can only be determined by how much someone else is willing to pay for it. No matter the asset, no matter the transaction, no matter the industry buyers decide the price, not the other way around. Many buyers flush with cash or access to cheap debt equals higher prices. Fewer buyers without enough cash and hard access to expensive debt mean lower prices.

When you have plenty of buyers then sellers are in great shape and let buyers outbid each other to see how much they can get it for. When you have few buyers, buyers underbid each other to see how cheap they can get it. A seller market is determined by how many buyers there are and a buyers market by how few buyers there are. Supply only exaggerates the intensity and absurdness of either type of market.

The market is headed into a quantitative tightening phase and few realize how tight and how expensive that tightening is going to get. It won’t happen overnight.

We are in phase one of a transition, that will have people rush to buy high before rates go higher and as more exotic lending products are pushed by lenders to offset higher lending costs. That’s the bull market trap.

Phase two is the collapse of the lending market which is followed by the collapse of buyers as money dries up.

Phase three is when the bull trapped buyers are underwater and start walking away and supply increases and exaggerates the buyer’s market with intensity and absurdity.

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Good news for buyers!

New listings increased 5.5% year over year for June and 10.9% compared with last month. In the DMV area, listings are still short vs last year but improving.

Rates are still low and with growing supply, we could see a relaxing of prices.

Still a seller’s market with falling days on market, higher prices, bidding wars, and fewer contingencies if any.

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Inflation is like Stars Wars

If the Inflation story was like Star Wars, we would be in the opening monologue text of the Return of the Jedi.

Yields rolling over, banks full of money but not flowing to the real economy, flat wage growth, flat unemployment with many abandoning work and more retirements, yet rumors and fears persist that a new dreaded death star is being built entirely of used cars and microchips. The feared empire is running their ships on oil and will make it double again YoY, while Dark Vaflation is suffocating with his mind anyone claiming base effect.

On a side note, how many death stars lasers should one build before figuring out it’s a lousy weapon with an awful flaw, aka 1 single X wing can blow it up? They build 2 space station ones, 1 planet one, and then put some on their entire fleet and they all went kaboom with one shot.

But back to the “Imperial Inflation Strikes Back”, they want us to live in a doomed high inflation galaxy crushed by imperialistic Fed monetary policy (but no one asked Jerome Tiberius Powell if he wanted to be emperor). Inflationists won’t stop talking, without a thesis on how inflation will persist, and expect all of us “Temporarist rebels” to join the dark side.

If asked where is money velocity, spending, wage growth, loans and leases, purchasing power, wealth concentrated, and inflation on non-pandemic sensitive components? All we get is silence until they say “my 2015 Ford Focus went up in price”.

They decided to make their last stand on the planet Pandora (no Ewoks just Blue Giants) where the law of gravity doesn’t work (letting used car dealerships float in the air) and fire off their lasers wearing blazers from Tommy Hilfiger.

If they shopped at the Men’s Warehouse they would get 85% off on clearance items right now on half the store but that would mean deflation. Not everyone lives in a Lululemon West Hollywood and sleeveless bubble vest SF.

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Yes, Chantel down the street paid 500k over asking price for her $6 million contemporary Spanish Villa, but come on, homes aren’t part of CPI, and daddy’s business got PPP/bailouts and he mostly pocketed it, invested in the S&P, while he issued tons of new shares for his companies which shareholders gobbled up, making him billions.

Worse is when flat 2% inflation hits in 2023, as the reluctant Emperor Powell said, they will say look it’s high, it’s an even number, we had an even number inflation rate just before 1970s stagflation, it’s coming, run, they released and remastered Jar Jar Binks.

ook I get it, inflation is like Star Wars. The original trilogy was so good in the 70s and early 80s and you really wanted more of it. But like Star Wars, what you got was very disappointing sequels and prequels that basically made you wish you were back in the 70s and unsee them all.

Really the current inflation story is more like Rogue One. It’s the only Star Wars movie worth anything since the original trilogy because it is a stand-alone movie. Everyone dies (Spoiler), the movie ends, no sequels. It’s finite in time.

Star Wars and Inflation feed on the same universal power, nostalgia.

Heck when I pick up a lightsaber at Target, I go zoom and woosh like I was 8 again. When I see the price of a used Ford Focus, I think Pinto, and neither one makes sense!

#starwars #inflation #economy #oil #realestate #growth #bonds

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“All my OPEC+”, Why drama is going to save you money at the pump!

Oil hit $76 this weekend. Is it the last push before a selloff?

It just might be in the cards. I have never really believed that OPEC+ was seriously going to last long holding back 6 to 7 million barrels of oil a day. Historically members would be too incentivized to cheat either by their own self-interest or fear of others doing it before them or influenced by their largest client (China in most cases). Geopolitics and rivalries also play in.

If anything OPEC+ is a daytime drama show with plots and twists and dizzying Hitchcock zooms on ministers with raised eyebrows or unibrows.

In today’s episode of “All my OPEC+”, the Napoleonic complexed UAE, has on cue decided to roll the cartel by putting drama back into daytime drama.

While having a lovely meeting, UAE revealed to Saudi Arabia that it’s too good for OPEC so OPEC shouldn’t exist while in the background Putin popped off the Shampanskoye after texting Paris “C’est Fini”.

You see Putin while having made a deal with both of them, is secretly cheating on them selling more oil to China who is really in bed with all of them, and has been releasing more inventory to reduce prices getting back at all of them.

Everyone stormed out of the meeting, is now refusing to meet, and frantically posting on Instagram how it’s blah blah blah _______ (insert country) fault while uncle Joe said “let’s all get along and compromise” and backed the UAE.

We have been at these prices before in 2018 and 2019. Back then, we didn’t have 6 to 7 million barrels held back by the OC (Opec Cartel not the teenage drama show even though it’s eerily similar), China didn’t have excess reserves, less global demand, and US shale still able to pump an extra 1.2 million barrels a day and few hundred more platforms to put back into service.

When someone tells you oil is going to $100, well it’s probably not likely right now in time, as “All my OPEC+” drama keeps the world turning.