Reply to Federal Reserve: signs abound that housing market is entering bubble territory

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[quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous]Be wary of over confidence on either side. For my job I get exposure to some of the greatest minds on finance, and the amount of folks that predicted that the market would hit all time highs in the midst of record setting coronavirus numbers and new variants is zilch. The point being, people on an anonymous forum, most of whom are lawyers, doctors, lobbyists, stay at home moms, won’t be able to predict what happens to asset prices, so stop mentally masturbating on here even though it can be fun because it’s a waste of time. [/quote]

They didn't predict a record high because it is fake.

All US assets from housing to stocks are grossly overvalued because of the Federal Reserve, massive amounts of money printing, massive injection of multi trillion dollar stimuluses, and too much credit liquidity.  It is a fake diabetic sugar rush.  Bubbles built on cheap and easy money they produce an environment of irrational exuberance when people all think stocks or housing only ever go up always end so badly when the sugar rush ends. [/quote]

Agree on stock market.

[b]Housing is different. People need a place to live. Unless people are foreclosing we won’t have a bubble “pop”.[/b]

[/quote]

This is EXACTLY (word for word) what all of the economists said when they were explaining why there wouldn’t be a crises in 2007.

I don’t know if the bubble will pop or not, but people saying stuff like this to explain why it won’t makes me think it’s more likely, rather than less. [/quote]

It’s much different today. Predatory lending is not rampant. ARM loans aren’t going to jump out of control.

People were foreclosing because they were in precarious financial situations. That’s not the case today. 
[/quote]

There are many ways asset bubbles can pop. I think the point PP was making was that in 2007 people were saying housing can’t pop because people will always need a place to live. They were wrong.

But since you mentioned precarious financial positions, it is way worse today. In the early 2000s, loan products were developed to allow nontraditional (subprime) borrowers buy a house. Looser lending standards, ARMs to bring down their interest rates, etc. This caused an increase in demand for housing, which lead to irrational exuberance (aka FOMO) and spurred a building boom. Turned out there were plenty of houses and then too many houses, and prices started to decline. When ARMs reset, people who had stretch could no longer afford their mortgage, but also could not sell for what they bought it for so they walked away. The banks holding these mortgages were screwed and by 2008 a liquidity crisis ensued. While banks went under, the stock market crashed, and people loss their jobs. It was during this recession that people REALLy started losing their homes. No job, no mortgage payment. So yes sub prime lending was like a match in the tinderbox, but there are other ways to pop that bubble, including other factors that could cause people to not be able to afford their mortgage.

In 2020, low interest rates, government stimulus, investment activity, and Covid lifestyle issues created a huge surge of demand that has lead to a very similar irrational exuberance (must buy now before I’m priced out forever!). These factors driving demand are truly transitory, and only the exuberance remains. But that exuberance is waning as interest rates have skyrocketed and make real estate look like not that great of a return in your investment anymore. The Fed is deliberately slowing down the economy. People will spend less and lose jobs (Powell himself said employment is too high!). More new houses in the pipeline than since 2006. And with inflation, people who stretched to the top of their preapprovals last year (see Dallas Fed article on price-income ratios) could really have a hard time making ends meet. In 2008, ARM adjustment is what sent these people over their limit - why not gas prices, food prices, and job loss in 2022-23?[/quote]

But we don't have the over-supply issues we had in 2007-2008. We literally lost a decade of building capacity after the Financial Crisis. We still have a big supply shortage, particularly in areas within 45 minutes of major job centers.

Sure, there's plenty of 1BR apartments out there. But the 3BR and 4BR houses that families need are in very short supply and are selling at a huge premium. [/quote]

The supply issue is tied to the demand issue, particularly in an area, like ours, that is losing population. Right now with low interest rates and lockdown related emotional purchasing, there is a great deal of exuberance and high demand. That is translating into a lot of overextended borrowers. As interest rates go up, demand will go down and prices will begin to stabilize. At some point thereafter those overextended mortgages are going to come home to roost. People who are stretched are going to begin to see house prices falling and they are going to worry about getting their money out because they put all their money in one asset. Or they will need their money out because of an unforeseen health situation, or job situation, or family situation. Or a divorce forces a liquidation of assets. These things always happen, but when they happen in a market where many people are stretched there will be more than the usual amount of sell offs, and the higher interest rates will mean those sellers will sell at a loss. Maybe not a big loss at first, but as other stretched owners see prices dipping down they are going to want to sell before prices drop further. What people don’t seem to understand is that the same thing that fueled the panic-buying of the last 4 months can also fuel panic-selling: the worry that conditions are going to get worse. That depreciation will accelerate. Would you rather sell at a 5% loss or gamble that you’ll have to take a 20% loss if you wait? For someone who can afford their mortgage and is happy in their home and doesn’t have any unforeseen financial/professional/medical/family emergencies they can maybe wait 10-15 (20?) years to recover their exuberance premium price. But that won’t be everyone. Some people will need to sell and that will continue to drive prices down, which will panic more people into selling. Now maybe none of that will happen, but if you read the article posted yesterday about the Fed’s MBS sell off (from January) it seems clear that the Fed is concerned about a scenario like this as a potential economy-wide disruption. So while no one thinks it is likely it will be 2007 again, no one thinks housing prices are going to continue to increase either. We are in a transition moment and the Fed is trying to very very carefully moderate that transition (ie defuse the potential economic bomb). We should all be hoping they will succeed. [/quote]

Bumping this because more people in this thread need to read this and really absorb what pp is saying. [/quote]

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