The Opposite of 2008
March 2, 2021·27 comments
In late 2007 I started counting the For Sale signs on the 20 minute drive to work through the neighborhoods of Weston and Westport, CT. I’m not exactly sure why it made my risk antenna start quivering in the first place … honestly, I just like to count things – anything – when I’m doing a repetitive task. Coming into 2008 there were a mid-teen number of For Sale signs on my regular route, up from high single-digits in 2007. By May of 2008 there were 30+ For Sale signs.
If there’s a better real-world signal of financial system distress than everyone who takes Metro North from Westport to Grand Central trying to sell their home all at the same time and finding no buyers … I don’t know what that signal is. The insane amount of housing supply in NYC/Wall Street bedroom communities in early 2008 was a crucial datapoint in my figuring out the systemic risks and market ramifications of the Great Financial Crisis.
Last week, for the first time in years, I made the old drive to count the number of For Sale signs. Know how many there were?
Zero.
And then on Friday I saw this article from the NY Times – Where Have All the Houses Gone? – with these two graphics:
I mean … my god.
Here’s where I am right now as I try to piece together what the Opposite of 2008 means for markets and real-world.
- Home price appreciation will not show up in official inflation stats. In fact, given that a) rents are flat to declining, and b) the Fed uses “rent equivalents” as their modeled proxy for housing inputs to cost of living calculations, it’s entirely possible that soaring home prices will end up being a negative contribution to official inflation statistics. This is, of course, absolutely insane, but it’s why we will continue to hear Jay Powell talk about “transitory” inflation that the Fed “just doesn’t see”.
- Cash-out mortgage refis and HELOCs are going to explode. On Friday, I saw that Rocket Mortgage reported on their quarterly call that refi applications were coming in at their fastest rate ever. As the kids would say, I’m old enough to remember the tailwind that home equity withdrawals provided for … everything … in 2005-2007. This will also “surprise” the Fed.
- Middle class (ie, home-owning) blue color labor mobility is dead. If you need to move to find a new job, you’re a renter. You’re not going to be able to buy a home in your new metro area. That really doesn’t matter for white color labor mobility, because you can work remotely. You don’t have to move to find a new job if you’re a white collar worker. Or if you want to put this in terms of demographics rather than class, this is great for boomers and awful for millennials and Gen Z’ers who want to buy a house and start a family.
- As for markets … I think it is impossible for the Fed NOT to fall way behind the curve here. I think it is impossible for the Fed NOT to be caught flat-footed here. I think it is impossible for the Fed NOT to underreact for months and then find themselves in a position where they must overreact just to avoid a serious melt-up in real-world prices and pockets of market-world. Could a Covid variant surge tap the deflationary brakes on all this? Absolutely. But let’s hope that doesn’t happen! And even if it does happen, that’s just going to constrict housing supply still more, which is the real driver of these inflationary pressures.
Bottom line: I am increasingly thinking that both a Covid-recovery world AND a perma-Covid world are inflationary worlds, the former from a demand shock and the latter from a supply shock to the biggest and most important single asset market in the world – the US housing market.
Just as in 2008, a lot of the ramifications of an insane shift in the available housing supply will only reveal themselves over time. We won’t be able to predict all of the market and real-world shocks that emerge from a collapse in the supply of existing homes for sale in the United States, but we will be able to expect market and real-world shocks. Maintaining an openness and awareness to the fact that there WILL BE market and real-world shocks emerging from a supply shock to the US housing market made all the difference in navigating 2008 successfully. I think it will be the same in 2021.
I’m still figuring out my take on all this. I’d love to hear yours!
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Comments
> But let’s hope that doesn’t happen!
Anyone serious about hope learns Esperanto.
(correction of link)
The Esperanto translation of this article (with permission of Ben) is at the following location:
https://ekonomiabultenopriusono.com/2021/03/03/epsilon-teorio-la-malo-de-2008/
The Esperanto translation of this article (with permission of Ben) is at the following location:
https://www.epsilontheory.com/the-opposite-of-2008-2/
Interesting. $5 trillion in BBB rated bonds issued at low retes to allow CEO Racoons to buy back stonks and sell as prices rise.Just ask heads of AA, SWA, Delta and United. When the SHTF and these bonds tank either from recession or inflation, pension funds will need to dump as they get downgraded. The market will be like Ice-9 and even Howard Marks won’t have enough money to buy the falling knives. James Carville: When you die what do you want to come back as? The bond market, he said. Stead as she goes, Number One…
If Common Knowledge has moved to “Inflation is here” then I don’t see how the Fed can continue to get away with “There’s not enough Inflation and we’re going to keep printing money until there is”.
“More likely, the divergence will move farther in a reflexive fashion. Helocs and marginal white collar workers will keep driving prices up, rents will continue muddling and value investors will keep yelling at the Fed.”
Agree.
Boomers own homes, millennials want to buy homes.
Boomers own rental properties (directly or through their pensions), millennials pay rent.
As power shifts from boomers to millennials, rents will not rise as fast while more anti- eviction/rent control ordinances spring up. Boomers last stand will be fought over the Fed funds rate. Millennials (like AOC) will keep pushing inflationary MMT; boomers will hang on to low rates for dear life. Eventually, the old will be outlasted by the young when inflation gets out of control in a year or 10. That is when the inevitable wealth transfer from Boomers to Millennials will accelerate.
That is how a simple minded me thinks. Key is to stay nimble and opportunistic. Own durable, medium duration cash flows to survive the ride and a liquidity buffer for when opportunities show up.
The intrinsic value of housing is the discounted long run cash flow (aka rents).
We are moving into an environment where lower rents are discounted by ever increasing discount rates. So, rising prices underestimate the rate of divergence between price and intrinsic value.
Well, intrinsic value is this quaint, outmoded thing that never really matters until it does.
The three body question here is which jaw of this alligator is going to give way. Will MMT transfer enough payments to make rents catch up? Or will prices catch down?
More likely, the divergence will move farther in a reflexive fashion. Helocs and marginal white collar workers will keep driving prices up, rents will continue muddling and value investors will keep yelling at the Fed.
Thanks Ben. I will most definitely miss the FL weather (as a lifelong motorcyclist, it has been wonderful) but family first.
If the implementation of UBI and similar things is sandbagged (delayed, reduced in size, etc.) enough, there may be an (engineered?) epidemic of defaults by individuals and small companies, putting more real assets in the hands of larger-scale players, putting them on better footing for inflation.
There was a narrative going around about private equity snapping up defaulted properties in 2008, but I don’t know how significant that ended up being.
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