With memories of the 2008 Great Financial Crisis still traumatizing the psyche of denizens of both Wall Street and Main Street, folks are worried.
In fact, according to this CNBC report …
“Google reported … the search “When is the housing market going to crash?” had spiked 2,450% in the past month.”
Of course, Wall Street and Main Street worry about housing for VERY different reasons.
Homebuyers don’t want to go deeply into debt just to overpay for a property whose value crashes… stealing their equity and potentially trapping them in a home longer than they might like.
Wall Street’s worries are MUCH larger and more complex … and are inextricably linked to those of Uncle Sam and the Federal Reserve.
Of course, it’s important to understand the wizards’ motives because they influence policies which literally drive the mortgage and housing markets.
But hold that thought. We’ll come back to it shortly.
For now, let’s take a look at what’s underneath all this bubble talk …
Maybe it’s just us, but we thought real estate is a local investment … prices driven by local supply and local demand.
When everything is up everywhere it seems likely the cause is macro.
Of course, the obvious macro-culprit is the ridiculous, unprecedented, absurd, insane levels of currency printing and debt flooding the whole world.
But is that the whole story?
Not according to the National Association of Realtors. In a recent press release, NAR blames high housing prices on a supply shortage …
“… demand … is widespread, multiple offers are prevalent, and days-on-market are swift but contracts are not clicking due to record-low inventory,” said Lawrence Yun, NAR’s chief economist.
These mainstream finance news articles reinforce the short-supply narrative …
As the Housing Supply Hits a Record Low, Is There Anything Left to Buy?
-Yahoo Finance, 4/1/21
Home Prices Soar in Frenzied U.S. Market Drained of Supply
A subset of all the shortage talk is lumber, a major component of homebuilding.
It’s easy to assume these commodity price increases are purely inflation driven by out-of-control stimulus.
We’re pretty sure that’s part of it.
And if so, maybe these high prices aren’t a “bubble” … they’re just the new normal in a world full of excess currency and credit.
Of course, if the currency and credit retract, it could get messy … shades of 2008.
But we’re pretty sure the wizards behind the curtain know this and will fight it. More on that in a moment.
Meanwhile, a builder friend of ours shared this industry article which attributes sky-high lumber prices to … (wait for it) … shortages.
There’s a similar story building in energy … oil in particular.
As we discuss in this interview with our oilman friend, Bob Burr … lots of the oil production which drove the U.S. to record production is offline.
Of course, this all ties back into housing because energy is at the foundation of manufacturing and transporting all the raw materials to build a house.
We started watching energy because when energy prices rise in an economy, it affects EVERYTHING. Energy is a universal cost input to economic activity.
But maybe the question isn’t whether or not there’s a bubble (there is, but it’s not just housing) …
… but rather, how dangerous is it to Main Street investors?
So here are some things to consider …
The same pressure forcing the Fed to suppress interest rates compels them to prop up real estate.
There’s a reason why mortgage-backed-securities (MBS) are right up there with Treasuries when the Fed is intervening.
MBS purchases are a direct pipeline for freshly printed money to feed housing prices by supplying both the money and low rates.
Of course, real estate … and housing in particular … is a trickier game for both the Fed and for real estate investors.
That’s because bonds are commodities. They trade globally for pretty much the same price everywhere.
Real estate is NOT a commodity. Especially housing. Every local economy, each neighborhood and individual property are unique.
Think about it …
Jobs, incomes, taxes, crime, school districts, cost of living, quality of life …
… plus, condition of property, embellishments or lack thereof, lot size, location, view, positioning of the house on the lot …
… the list of variables affecting an individual property’s value is long.
Of course, this makes real estate inherently inefficient.
This is one of the strongest appeals for investing … the ability to find and negotiate deals in any economic cycle.
And just as Treasuries play a vital role in the financial system … worthy of the Fed’s attention and backing … so does housing.
In addition to acting as the collateral for huge amounts of bonds which populate balance sheets and are hypothecated ad nauseum throughout the financial system …
… real estate literally houses voters. So housing plays a vital role in the political system too. And you can bet politicians know this.
But wait! There’s more …
Just as stimulus is pumped into the system through inflated equity markets (i.e., the bubble stock market) …
…the same is true, perhaps more so, through real estate.
Think of the trillions of dollars of equity which is extracted (through cash-out mortgages and the MBS they become) and pumped into the economy.
Home equity “ATMs” are a substantial driver of consumer spending.
And while it may not be wise financial planning by consumers … they do it anyway. The Fed knows this.
Housing plays a VERY important role in the economy.
Yes, home building creates jobs, sells a lot of commodities, creates all kinds of peripheral industries related to getting a house ready for move in.
But it’s bigger than that.
Pumping equity into housing so consumers can borrow it and spend it is a powerful vehicle for the Fed to stimulate consumer spending.
To be clear, we’re not perma-bulls when it comes to real estate. We learned in the 2008 GFC that brutal corrections can hit real estate too.
But we also saw how the Fed reacted in 2008. All the printing presses were fired up to pump air back into the real estate jump house.
In 1987, the Greenspan “put”, which became Bernanke’s, then Yellen’s, and now Powell’s … was born.
(A “put” is just a term for an option to make someone buy something. You “put” it to them … like mortgage-backed-securities.)
Created as the “lender” of last resort, the Fed has become the primary lender to Uncle Sam and the “prop-up-the-prices” buyer of system critical financial assets.
Without getting too deep into the weeds, these system critical assets are stocks, bonds, and real estate.
When the Fed purchases Treasuries, they pump new currency into the economy through government spending. “Fiscal” stimulus.
When the Fed pumps up stocks and real estate, it pumps new currency into the economy through consumer spending.
Of course, the Fed doesn’t buy stocks and real estate directly.
They simply pump the currency through credit markets to provide the purchasing power to others who do.
In the case of real estate, it’s pretty direct. The Fed buys MBS, which provides mortgage money to Main Street borrowers.
And if there was any doubt about the commitment of both the Fed and Uncle Sam to making sure all those loans don’t go bad at a rate the markets can’t absorb …
… look at the wizards’ reaction when the pandemic hit.
Immediate, proactive moves to implement forbearance. PPP loans to keep paychecks flowing into debt service and rents.
Sure, landlord’s balance sheets took a hit.
Reserves were drawn down with debt-service while eviction moratoriums took pressure off the weaker (non-existent?) balance sheets of the tenants.
We see that as a real estate version of a banks bail-in. Make the big depositors bear the brunt to shelter the smaller ones.
Certainly, some weaker landlords got flushed. And there may be more to come.
But big picture?
It seems apparent the Fed and Uncle Sam realize the critical role of real estate and mortgages in the financial system, politics, and the economy.
Sure, there might be some shortages in housing, lumber, energy and many other things as result of entire industries and supply chains locking down for the pandemic.
And sure, the pendulum might swing the other way if supplies grow in order to cash in on the demand and high prices.
But ultimately, we think the wizards know to keep the wheels on the bus, they need to keep the wind in the sails of the housing market.
So the old Wall Street adage, “Don’t fight the Fed” might apply to Main Street real estate, too.