Category Archives: Real Estate

Housing Collapse Redux

Take a look at this chart:

2022-11-16_07-05-40_0

That is a collapse in process. An unprecedented collapse in modern times. Perhaps 1346-53 showed something similar. It will take 4-6 months to work its way into the hard data, but it is coming. Recall Stephanie Pomboy’s observation that in July of 2008, inflation was at 5.6%. By July of 2009, it was at -2.1%. There’s a Fed pivot of some kind. Now look at John Hussman’s pivot chart:

Bears follow pivot

Which clearly shows that the real bear market will follow the pivot. Then contemplate another of Hussman’s charts which shows the potential losses from here:

Potential Losses

Now look at the international context. China has its own housing bubble collapse going on, to say nothing of choking its economy with a stupid Covid strategy because a dictator like Xi cannot admit error. Europe is seized with political correctness, internal division over immigration from Africa and an energy catastrophe. Oh and there’s a proxy war with Russia going on and another with China waiting in the wings, to say nothing of a demented President. Just don’t choke on that turkey.

Bubble Rupture

Interesting tidbits from Stephanie Pomboy. In July of 2008, inflation was at 5.6%. By July of 2009, it was at -2.1%. The price peak of the housing bubble was in September 2005. The shelter component of the CPI continued rising until its peak in February of 2007, nearly a year and a half lag. The total seasonal adjustment so far this year is +1 million, the largest ever. Of course seasonal adjustment needs to net to zero over the year. Of course the BLS is not political.

Disintegration

The world is disintegrating. Trust has been lost, both within countries and between countries. Without trust, economic relationships cannot operate.

China

China is a poor country, despite the glitz and glamor of its big cities and its showpiece infrastructure, with a per-capita annual GDP of about USD 11,000.

Chairman Xi presented his plan for world domination at the opening of the party congress. Not going to happen, sir. Your country is an economic and social house of cards that is in the process of collapsing. The housing market, investment of choice for the masses, is a bubble bursting and desperate local governments are even buying their own land use rights from themselves or one another because retail buyers have left the building. So to speak. Your Covid-zero policy has shaken the people’s faith in the benign CCP, while wreaking destruction on millions of small businesses. Unemployment is high and rising, college graduates cannot find jobs. Biden’s withdrawal of support for your semiconductor industry has condemned it to a bleak future without the production technology that your people cannot build. Export demand from the rest of the world is shrinking fast. Sir, your country is likely heading for a deep economic depression and social turmoil. This will further weaken China’s positioning for the world hegemony which you desire.

United States

In the USA, we live in a world now that George Orwell and Aldous Huxley would readily recognize. The state has commandeered the legacy media, as well as the new social media, to not only put out the “progressive” state’s version of reality but to identify, spy on, ostracize and  punish critics and dissenters.

President Biden, your “progressive” policies are not working. Democrat-run inner cities are being abandoned to crime and homelessness. Illegal immigrants are flooding in without any prospects for employment or training. You are continuing to feed the inflation which is mostly damaging the people you claim to represent. Your support for expansion of NATO triggered the invasion of Ukraine, with severe economic and social consequences.

You and your Democratic predecessors, notably Hillary Clinton, have created a deeply divided society, with those who have drunk the purple Kool-Aid and accept the state’s lies and propaganda on one side, and those with a more traditional view of reality on the other. Neither side trusts the other, respects the other’s views, or is willing to compromise. Both sides are preparing for more direct conflict as the sporadic clashes increase in frequency and severity. This is a recipe for a failing state with extremism on both sides. Negative economic consequences are to be expected.

Europe

Neither China nor Europe are democracies – by design. The architects of the European Union claimed that, since democracy had enabled Hitler, it could not be a part of the EU’s structure. As a result, bureaucrats who suffer no consequences for their failures and care little for the fate of the citizenry run the EU. Ursula van der Leyen is no less of an autocrat than Xi. Deep rifts have emerged as democratically elected governments have resisted the orders of the bureaucrats. These rifts are between rich north and poor south as well as conservative east and “progressive” west. It is only a matter of time before a second country leaves the EU, and that will spark a rush for the exits.

The coming winter is going to be hard, as the bureaucrats’ energy policy has been disastrous. Immigration policies have resulted in shocking increases in crime, with many countries reporting zones where the police dare not go in fear for their lives. Mario Draghi’s “whatever it takes” has left a legacy of irresponsible debt, as in the USA. As  interest rates increase, this is going to be a huge problem

Russia and Ukraine

Russia’s invasion of Ukraine has no winners. Regardless of the outcome, the invasion is an economic disaster for both of them. Their economies depend heavily on the export of commodities, such as food, energy and metals. The volumes of these commodities are large, and their absence are also a problem for the countries that have come to depend on them.

Conclusion

I could go on, but it is time to recognize that the future is not bright. Economies will get worse. Much worse. Be careful out there. Don’t focus on the narrative of the “Fed pivot.” The Fed is irrelevant.

China

The Covid-zero policy seems to be slowly destroying the Chinese economy and civil society. Even the slightest sign of infection sets off massive lockdowns, quarantines and daily testing, enforced by anonymous people with automatic weapons. Of course social media censorship is stringent, but even so there is trouble brewing in my opinion.  It seems to me that a single positive test is enough to shut down a city – haven’t they heard of false positives? It seem that at this rate the turmoil will never end.

And then there’s the collapse of the housing market, in a country where speculation in residential real estate, often sold and paid for pre-construction, has been the investment strategy of choice for most people.

The Cash Economy

Large-scale money printing was launched by Alan Greenspan, who believed that additional liquidity would be needed to cushion the shock of the millennium rollover. The shock never happened, but the easy money continued as the dot-com bubble popped, eventually leading to the housing bubble and its culmination with the failure of Lehman and the 2008 financial crisis. The Fed’s response was to turn on the afterburners. The December 2007 monetary base was 0.84 trillion dollars. By December 2019, it had risen four-fold to 3.4 trillion. And the the Fed lit the JATO bottles as well and we got real liftoff, as by December 2021 the monetary base had risen to 6.4 trillion dollars.

This matters because it means the economy is awash in cash. Monetary velocity has fallen from a pre-2009 low of 1.65, set in Q4 of 1964, to 1.15 as of Q2 of 2022. That means that much of the cash is idle, not being spent. All that cash is buying power in the hands of people and institutions. This means that interest rates and availability of credit are less important, and the Fed’s mission to reduce inflation by reducing demand faces an uphill battle. The Fed has begun reducing the monetary base by selling its pile of Treasuries and MBS. This is far more important than raising rates, but it will be a long time before its effects start to be felt because the current position is so extreme.

The poster child of the 2008 crisis was the NINJA (No Income, No Job or Assets) home buyer. The NINJA borrower has been replaced by the US government. Federal debt has nearly quadrupled since 2008.

fredgraph

fredgraph

This is why we have inflation. It is not going away until the deficit spending is reined in. Every dollar of new federal debt becomes a dollar in savings – and potential spending – for the private sector.

China

China sports the second largest economy in the world and its hyper-stimulated growth over the last decade has boosted growth in the rest of the world, including the US. Right now, however, the Chinese economy is foundering. Its struggle to stamp out Covid continues, with two major cities, Shenzen and Chengdu entirely or mostly in lockdown. Chinese investors have chosen to speculate in residential housing rather than the stock market, leading to a giant property market bubble with hundreds of thousands of empty or unfinished apartments overhanging the market. August sales of new units were down 33% y-o-y. Both drought and flooding have plagued the country this summer, leading to the same difficulties with agriculture and transport seen in Europe.

The Chinese government has responded with yet more stimulus, widely seen as inadequate given the magnitude of the economic problems. These problems will have a negative effect on the rest of the world.

Affordable Housing

From Sfgate:

In San Francisco, the minimum income required to purchase a median-priced home leapt from $350,400 to $450,800 from the second quarter of 2021 to the second quarter of 2022. It was even worse in San Mateo — the minimum income jumped from $390,400 to $512,000.

China Property

In a symptom of the bursting property bubble in China, the issuance of Residential Mortgage-Backed Securities (RMBS) has fallen 92% so far this year. No new RMBS have been issued since February. This is an indicator in the loss of confidence in the world’s largest asset class. The business model of property developers in China is to sell uncompleted units, taking not only a down payment but a mortgage so they are fully paid, in many cases before construction has even started. Predictably enough, many end up not only short of cash, but in default on their debts. Now hundreds of thousands of people are refusing to make mortgage payments as their units go unfinished long past their contracted delivery dates.

Of course the failures of the developers impact on their suppliers, their banks and the local governments that rely on land sales for much of their revenue.

Rate Shock

The median price of a new home has fallen by -11.9% over the last 2-month period,

Image

Thanks to Liz Ann Sonders.

The Price Of Moderation

From my last blog post of 2020:

William Greider, in his book, Secrets of the Temple: How the Federal Reserve Runs The Country, reports Nixon (’69-’74) as saying: “We’ll take inflation if necessary, but we can’t take unemployment.” The nation eventually had to take both. Note that Fed Chair Powell has indicated a willingness to let inflation “run hot” to encourage economic growth. That’s what they thought in the 1960s, too.

Well, inflation is running hot. Too hot for comfort. Discretionary spending is falling rapidly as the cost of essential goods and services takes more of people’s income. Fed Chair Powell is raising interest rates in baby steps, presumably in an attempt to quell inflation without slowing the economy significantly. People seem to think that raising rates to 2 1/2 percent will achieve this result, and are competing to time the “pivot” when the Fed returns to easy money. All I can say is good luck with that. History says that once inflation starts to surge – as it has – it is not easy to stop, as all kinds of feedback loops keep driving prices higher. Weakness now will only make the pain worse.