My kind friend and award-winning realtor Kira Mason has her pulse on the real estate market. She offers up her no bullshit, on-the-ground take on the industry for my readers.
I have zero expertise in real estate. I’ve bought and sold one house in my lifetime, and we live on our sailboat. But in preparation for eventually swallowing the hook and moving back on land I have devoted some time to studying real estate history. Based on that, Bill McBride makes the most sense. Cycles are 10-15 years, based on data going back to 1900. 4-6 years trough to peak, 2-3 years plateau, 4-6 years peak to trough.
You can look back at every cycle over the last 130 years and see how this plays out. Some are longer some shorter, but the general trend is the same. Just focusing on the GFC brings it in focus. The run up began after the dot com bubble in 2002. Prices peaked in mid to late 2006 and then declined slightly or remained steady (depending on geography) until mid 2007 when they began to trend downward. Post Lehman (late 2008) they fell hard and continued their downward trend all the way through late 2010. At which point they plateaued for a time, before beginning to rise again.
4 years up, brief plateau 4 years down.
If one puts any stock in 130 years of data, we are just at the start of the downward cycle. Which is essentially the position taken by Bill McBride. In addition, in order for the price to income ratio to revert to the historical norm, prices would need to fall in real terms back to 2012 levels.
Note: the Scamdemic, helicopter money, and ultra low interest rates did throw somewhat of a wrench into the long term historical trend. I would argue (and I think Mr McBride would as well) that this was an aberration and that a return to the historical norm of 10-15 year cycles is what lies ahead.
Oct 15, 2022·edited Oct 16, 2022Liked by Quoth the Raven
Interesting take on how the subprime, liar loan mortgages created the circumstances for the last crash, and how that is almost certainly not going to be repeated because lending criteria is much tighter... But this should tell us to look elsewhere for the next catalyst... The junk bond (one of my favorite Wall Street euphemisms is "High Yield Growth") is simply the corporate version of the subprime mortgage.
Interest in an interest only mortgage is paid monthly. Interest on a junk bond is paid quarterly. And that is the ONLY difference between the two. Junk bond prices are being driven up now just like home prices were then... and will end in exactly the same way.
FWIW, I review billions of dollars in appraisals (commercial) every week and as of late, I have only seen an estimated 25bps increase in cap rates and roughly the same in discount rates. Residential is different for sure, however, is VERY location specific. Here in Florida, a nominal drop in house prices so far.
SALT changes from the so called TJ&JA of 2017 ( which blew a nerve trillion dollar in the budget) and WFH pulled forward by Covid, are causing huge imbalances here in FL. 38% maybe more of all homes selling are for rent (you'll own nothing, etc.) and others by Boomers and exiled companies fleeing bad weather (HAHAHAH) and high taxes, many sales are cash. Just sayin...when things go south here, and plebes move back to Ypsilanti and so forth you know that the fit has hit the shan....
I have zero expertise in real estate. I’ve bought and sold one house in my lifetime, and we live on our sailboat. But in preparation for eventually swallowing the hook and moving back on land I have devoted some time to studying real estate history. Based on that, Bill McBride makes the most sense. Cycles are 10-15 years, based on data going back to 1900. 4-6 years trough to peak, 2-3 years plateau, 4-6 years peak to trough.
You can look back at every cycle over the last 130 years and see how this plays out. Some are longer some shorter, but the general trend is the same. Just focusing on the GFC brings it in focus. The run up began after the dot com bubble in 2002. Prices peaked in mid to late 2006 and then declined slightly or remained steady (depending on geography) until mid 2007 when they began to trend downward. Post Lehman (late 2008) they fell hard and continued their downward trend all the way through late 2010. At which point they plateaued for a time, before beginning to rise again.
4 years up, brief plateau 4 years down.
If one puts any stock in 130 years of data, we are just at the start of the downward cycle. Which is essentially the position taken by Bill McBride. In addition, in order for the price to income ratio to revert to the historical norm, prices would need to fall in real terms back to 2012 levels.
Note: the Scamdemic, helicopter money, and ultra low interest rates did throw somewhat of a wrench into the long term historical trend. I would argue (and I think Mr McBride would as well) that this was an aberration and that a return to the historical norm of 10-15 year cycles is what lies ahead.
Interesting take on how the subprime, liar loan mortgages created the circumstances for the last crash, and how that is almost certainly not going to be repeated because lending criteria is much tighter... But this should tell us to look elsewhere for the next catalyst... The junk bond (one of my favorite Wall Street euphemisms is "High Yield Growth") is simply the corporate version of the subprime mortgage.
Interest in an interest only mortgage is paid monthly. Interest on a junk bond is paid quarterly. And that is the ONLY difference between the two. Junk bond prices are being driven up now just like home prices were then... and will end in exactly the same way.
FWIW, I review billions of dollars in appraisals (commercial) every week and as of late, I have only seen an estimated 25bps increase in cap rates and roughly the same in discount rates. Residential is different for sure, however, is VERY location specific. Here in Florida, a nominal drop in house prices so far.
SALT changes from the so called TJ&JA of 2017 ( which blew a nerve trillion dollar in the budget) and WFH pulled forward by Covid, are causing huge imbalances here in FL. 38% maybe more of all homes selling are for rent (you'll own nothing, etc.) and others by Boomers and exiled companies fleeing bad weather (HAHAHAH) and high taxes, many sales are cash. Just sayin...when things go south here, and plebes move back to Ypsilanti and so forth you know that the fit has hit the shan....
Kira is hot.. nice to have friends like that 😎
G