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]

Really? Then why such a big and drastic jump in 2020-21? What were those families doing before? Do you think America just grew a bunch of families in the summer of 2020?

We are about to have a major oversupply issue once the houses in the pipeline hit the market.[/quote]

So the market will soften wherever those homes are being built. Note: not existing hot markets with limited new construction - like inner DC area.

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