La Chronique Agora – Edition April 8, 2022 (by Bill Bonner)
In the United States, the real estate market is reaching excesses reminiscent of the subprime era. The wind that is starting to turn could bring down this house of cards.
There is a time to cry and a time to laugh. A time to buy and a time to sell.
Yesterday we heard from former US Treasury Secretary Larry Summers. He said the Fed has yet to recognize the full extent of its mistakes. It kept interest rates too low for too long, didn’t notice rising inflation, didn’t realize it wasn’t “transient”, then took no action to try to stem it.
It was struck by “sleepwalking” as inflation soared to its highest level in forty years. Computed honestly, inflation could already be at its highest level in history.
But the burden on our thinking today is this: millions of investors and homeowners could be sleepwalking, too, and quickly plummeting.
“It’s crazy out here,” our son told us, describing the housing market situation in his area of South Florida.
“I wanted to move house. But prices have risen so fast so far that they are out of my reach. I wanted a house near the Intercoastal. I saw it two years ago. And when I noticed it was for sale again last week, I thought it was worth seeing it again. But the owners were asking for more than $4 million. Incredible. »
Disconnected from reality
In Miami, rents are rising faster than in the rest of the country. According to the South Florida Business Journal, homeowners with properties in the Delray Beach area make a fortune. They increase rents by 30% per year… or even more…
And when it comes to real estate sales, according to Norada Real Estate:
«It’s a seller’s market, with a lot of them making a lot of money […]. Miami’s real estate market continues to smash records as pent-up demand and low borrowing rates further drive real estate transactions.
The Miami’s ultra-dynamic real estate market, fueled by domestic and international buyers, ended 2021 with a total of 39,394 sales of existing homes, that is 49.5% more than the 26,345 transactions carried out in 2020, and 31.1% more than the previous annual record of 30,041 transactions recorded in 2013. The value of sales made in Miami amounted to $30.3 billion in 2021, an annual increase of 103.4%.
The average home value in Miami-Fort Lauderdale-West Palm Beach Metro is $397,603. This value is seasonally adjusted and only includes homes in the middle price bracket. Home values in the Miami-Fort Lauderdale-West Palm Beach Metro area have increased 22.3% over the past year, and Zillow projects it will increase 16.2% over the next twelve months.»
Home prices are becoming “out of touch with reality,” declared the Dallas Fed said.
«’According to our evidence, the US housing market is exhibiting abnormal behavior for the first time since the boom of the early 2000s, Dallas Fed analysts say, citing an indicator of ‘exuberance’ on real estate markets that they have developed with academics from around the world as part of the International Housing Observatory.
This indicator suggests that the “US housing market has shown signs of exuberance for five consecutive quarters through the third quarter of 2021”, they write. Soaring real estate prices have continued ever since.»
Yes, behind this disconnected housing boom, there are policies of the Fed’s disconnected rate.
Amateurs noticed that they could “buy bigger” by refinancing their home loans at increasingly lower rates. And the pros found they could borrow money at a rate below inflation and turn a profit buying apartments to rent out massively.
The wind blows both ways
Recently, about a third of home purchases have been made by investors, not resident owners.
This buying pressure then drove up prices, and future owners are struggling to find a place to live now.
But the wind blows both ways
The interest rate cycle appears to be coming to an end, with the yield (or rate) on the ten-year US Treasury note hitting a record low in July 2020. It has since rebounded from 0.5% to 2.658% at high yesterday.
You may think it’s not much, but rising yields worldwide have already cost bond market investors about $5 trillion.
And now, borrowing rates are skyrocketing. And owners are confronted with mortgages at 5%.
If you ask us, mortgage rates will continue to rise for many years. (Interest rate cycles tend to last very long.)
Those who have refinanced their loans with adjustable rates (ARM) will not be able to afford the monthly payments… homes will come back on the market at a lower price, and those who have just bought will think that they would have been better off waiting for the bubble did indeed explode.
Bill Bonner is the co-author of several bestsellers such as The ineluctable Bankruptcy of the American Economy, The Debt Empire and Hormegeddon. In his latest book, Win or Lose, he explores the advancement of our modern societies, their ups and downs – and along the way reveals the one rule a society must follow if it hopes to progress… all the while showing what happens to those who ignore this rule. In 1978 Bill founded Agora – now the largest independent research network in the world. He has launched companies all over the world – including Agora Publications in France… employs thousands of people… has invested on five continents… has acquired more than two dozen companies…owns hundreds of thousands of acres of land…travels more than 150,000 km each year…and has launched more than 1,000 products. His daily notes, published in particular in La Chronique Agora, are read by more than 500,000 people around the world – including nearly 40,000 in France. Bill is on a mission to identify the best investment opportunities – and show where retail investors are making the most costly mistakes. Simply put, Bill offers a lucid look at the world of economics and investing — a contrarian and uncompromising perspective you won’t find anywhere else.