The market is not in a bubble

[Matthew Crivelli]

I see people every where saying we are in the middle of a real-estate bubble. I also see people working as reps for hedge funds trying to buy up as many rentals as they possibly can.

Ask yourself this question. Why would hedge funds be on a buying spree if the market was really going to crash? Hedge funds only make moves to make MONEY, or in this case equity. 

Inflation does not look like its going ANYWHERE. I don't think it's smart betting against hedge funds. I believe home prices will continue to rise for some time. "Well what if they raise rates?" Rates will not move up fast, you have to remember when the FEDS raise interest rates they also raise the rate on governments debts. They would put the U.S. Government into a jam.   

[Chris Mason]

In late March 2020, everyone in Congress, at the Fed, and at the Treasury Department, were reciting the exact same thing, in unison, over and over again, like a religious incantation, when they came up with the policy-set that is mostly still in effect:

"2008, never again. 2008, never again. 2008, never again."

That period of time was characterized, in part, by insufficient demand, and too much housing supply.

Lo and behold, they knee-jerked in the opposite direction.

Policy-set I am referring to:

- Suspending evictions. This is an artificial supply constraint. 

- Suspending foreclosures. This is an artificial supply constraint.

- Mortgage forbearance. This is an artificial supply constraint, telling someone they get to keep living there, but don't have to pay their mortgage, and it's not going to impact their FICO score, is no different than paying corn farmers not to grow corn. 

- Easy money, low rates. This is a demand inducement. 

So it's not really about "the market," it's about the manipulations to it, the ASSUMPTION in early 2020 that we would "once again" have too much supply and not enough demand, along with slow-moving gov't not realizing/understanding/grokking/etc that they're actually doing the OPPOSITE of what the ACTUAL market needs/wants - "omg a fire!" - "ok, quick, throw kerosene on it!!!" - "that didn't work, it's getting bigger!" - "THROW MORE KEROSENE ON IT!!!" -- then members of the "peanut gallery" (that's us, btw) suggest to the firefighters that they're being stupid and should try water, but the fire fighters insist that they know what's best, and dump more kerosene onto the fire, in an effort to 'put the fire out.'

We are presently seeing the normal seasonal slowdown that happens this time of year (we didn't have one last year). 

Here's what's next: right around thanksgiving, the new conforming loan limits will be published. Currently it's $548k in most areas, and $822k in high cost areas such as the San Francisco Bay Area, Los Angeles, New York City, etc.

The general predictions are that it'll be around $640k for most areas, $960k in high cost areas. If so, that means buyers in Oakland, for example, can purchase a $1.01m single family home with just 5% down ($960,000 / 0.05) as a commodity product, with subsidized/sexy interest rates, and so on. Those conforming loan limits for 2022 will be based on appreciation for the previous year (2021). That algorithm for determining the new loan limit is by statute, by law, policy-makers can't change it on a whim and the Fed doesn't get a vote. So even if the entirety of that policy-set was suspended tomorrow, at least a year of additional momentum is built into the system. 

The pattern is that real estate values in desirable areas gravitate up (or down) towards those new limits on who gets a gov't subsidized interest rate with only 5% down as the new year kicks off, through the summer, and so on.

TLDR: Yeah, we're just skipping the down cycle we "should" otherwise be in right now. Our grandkids will pay for it certainly, and we'll see how this whole inflation thing pans out too, we may end up ourselves paying for it very very shortly. Mandatory plug! Mortgaged real estate is a hedge against inflation. Free/clear real estate is not.