Zelman on housing

[muscleman]

On 11/24/2021 at 11:45 AM, fareastwarriors said:

just glad I'm not renting... talk about ouch!

 

 

 

 

https://www.bloomberg.com/news/articles/2021-11-24/south-florida-new-york-see-apartment-rents-surge-more-than-30?srnd=premium

 

South Florida and New York See Apartment Rents Surge More Than 30%

 

Nothing surprising after the eviction ban is lifted. The more the socialist government tries to control the prices, the harder it bounces back. Nature forces cannot be fought by human.

 

[ValueArb]

On 11/24/2021 at 12:45 PM, fareastwarriors said:

just glad I'm not renting... talk about ouch!

 

 

 

 

https://www.bloomberg.com/news/articles/2021-11-24/south-florida-new-york-see-apartment-rents-surge-more-than-30?srnd=premium

 

South Florida and New York See Apartment Rents Surge More Than 30%

 

I'm glad I sold my home during this bubble and happy paying the extra rent until things return to normalcy. 

[cwericb]

On 12/6/2021 at 7:46 PM, ValueArb said:

 

I'm glad I sold my home during this bubble and happy paying the extra rent until things return to normalcy. 

 

There was a thread here about how the housing bubble was about to burst.

Numerous posters echoed the above sentiments. Sell. Don't buy, rent. Prices have to come down soon.

That was seven or eight years ago.  How has worked out so far?

The world population in the mid 1970's was 4 billion. Today it is 8 billion.

Don’t ignore the law of supply and demand. People gotta live somewhere.

 

 

[thepupil]

while from a conflicted source (realtor) this describes the state of things around here. 
 

objectively less frenzied than 2020, prices not going up at same rate, but if you price right 20-50 showings, 10+ offers. 
 

there are currently 2 homes for sale in the neighborhood of several hundred. 5 traded last quarter. There are simply far fewer sellers than buyers and incomes and borrowing rates allow one to pay up.
 

low inventory, robust end buyer (DC area has virtually no SFR for now) demand, same as it was in 2019 and 20 years prior when my next door neighbors won a bidding war to get their house.

 

it’s hard for me to conclude this is a bubble rather than simply strong fundamentals. I came to the same conclusion in 2019 when i bought (though still felt like a top tick)

This is market specific ($1-$2mm everyday mass affluent single family homes in close to city In NWDC/MD/NoVa) for which no new supply exists. 

 

 

Edited December 8, 2021 by thepupil

[cubsfan]

^ Been down in Florida for a month now, till the end of the year.

Pretty accurate description - no inventory - and a wall of buyers.

 

Definitely not a bubble. As one of the residents told me - prices are crazy, but the real 

problem for sellers is - where do you go now?

[Gregmal]

Exactly. Folks really dont appreciates the beauty of the rental niche. Smart folks who dont want to buy a hot housing market...paying through the nose. Poor folks who cant afford housing? Paying through the nose. Reasonable folks who sold to realize life changing home equity gains, renting til they can go elsewhere...paying through the nose. MF rental is the ultimate long housing play from a risk/reward perspective. You can make money pretty much anywhere in the ecosystem, but a lot of things can slowdown and fall off and in many cases, those things are even more bullish for rentals. 

[Gregmal]

https://www.redfin.com/news/housing-market-update-record-high-price-record-low-inventory/

 

Weird, I was told housing was slowing down....

[Viking]

For my US friends you have no idea what a housing ‘bubble’ driven by fundamentals looks like (i say that with all due respect). Vancouver and Toronto real estate markets are a one way train that has been rolling for 20 years. The US bubble in 2008 is NOT a good comparable for what is going on today as it was driven primarily by lax lending standards, speculation and overbuilding. Fast forward to today where you have had under-building in the US for many years - undersupply - in the face of growing demand driven by demographics, covid preferences (that are likely not going away any time soon) and easy money. Look at what US home builders are forecasting for 2022… very bullish. But hey, maybe Vancouver/Toronto are terrible comparables. We will see  

 

PS: i am a self confessed real estate idiot (i am not complaining... dumb luck has worked out great for me!)

—————

This is What a Crisis Looks Like
- https://stevesaretsky.com/this-is-what-a-crisis-looks-like/

 

“Greater Vancouver home sales jumped 11% from last year, the second strongest November on record besides 2015. In case you forgot, the winter of 2015 was sparked by a frenzy of offshore buyers, pushing the market to dizzying heights before ultimately peaking a few months later in the spring of 2016. It feels a lot like that today, with sales up and inventory down a whopping 40% from last years levels. If you thought looking for a detached house last year was tough, well inventory has fallen another 25% since then and currently sits at its lowest levels ever. In other words, bidding wars and high prices. Detached home prices are now up 21% in Greater Vancouver and 36% in the Fraser Valley. There have certainly been better times to buy a house, and today isn’t one of them.”

[cwericb]

Rarely see a "For Sale" sign around here any more, and when you do it usually has "SOLD" plastered across it.

[ValueArb]

On 12/7/2021 at 7:40 PM, cwericb said:

 

There was a thread here about how the housing bubble was about to burst.

Numerous posters echoed the above sentiments. Sell. Don't buy, rent. Prices have to come down soon.

That was seven or eight years ago.  How has worked out so far?

The world population in the mid 1970's was 4 billion. Today it is 8 billion.

Don’t ignore the law of supply and demand. People gotta live somewhere.

 

 

 

In the 70s mortgage rates peaked at 12%. 7-8 years ago average mortgage rates were 4.5%. This year rates were in the 2.5-3% range. 

 

https://fred.stlouisfed.org/series/MORTGAGE30US

 

Do you expect mortgage rates to be lower or higher in the future? And if the answer is higher, how will that affect real estate prices?

[Gregmal]

Unless higher rates emerge as a result of lower wages and lower building costs you can basically throw that line of logic in the garbage. It may be a bit harder for single family sales, but rentals will be the new treasury bond 

[maplevalue]

3 minutes ago, Gregmal said:

but rentals will be the new treasury bond 

 

+1 (although technically it will be even better than a treasury since it has inflation protection!)

[ValueArb]

21 minutes ago, Gregmal said:

Unless higher rates emerge as a result of lower wages and lower building costs you can basically throw that line of logic in the garbage. It may be a bit harder for single family sales, but rentals will be the new treasury bond 

 

Not sure I understand. If inflation remains in the 4-6% range, how would mortgage rates remain lower than that?

[Gregmal]

Rates don’t go up in a vacuum, just cuz. If they go up, based on the factors currently in play, those variables will more than compensate for the higher rates. 
 

As I’ve mentioned previously, the GFC occurred because of a housing bubble when mortgages were 5-6%. The notion that 5% mortgage rates will kill housing is largely academic.

[thepupil]

10 minutes ago, ValueArb said:

 

Not sure I understand. If inflation remains in the 4-6% range, how would mortgage rates remain lower than that?

 

mortgage rates = 10 yr swaps + mtg basis (simplified)

 

there's no law that 10 year tsy rates must be at or above inflation. financial repression has kinda been the current / past / and potentially go-forward policy. the rate is subsidized by fed/government. Not saying it will ALWAYS be that way, but I don't think 4-6% inflation will automatically lead to 4-6% 10 yr. no one is entitled to any kind of return, particularly buyers of government bonds (or owners of real estate for that matter). 

Edited December 13, 2021 by thepupil

[ValueArb]

2 minutes ago, Gregmal said:

Rates don’t go up in a vacuum, just cuz. If they go up, based on the factors currently in play, those variables will more than compensate for the higher rates. 
 

As I’ve mentioned previously, the GFC occurred because of a housing bubble when mortgages were 5-6%. The notion that 5% mortgage rates will kill housing is largely academic.

 

If people are happily borrowing $1M to buy homes because it's only going to cost $2,500 a month in interest, and then rates spike to 5% and now interest payments are going to be $4,150 a month, you don't think that a significant number of buyers are going to reduce how much they'll pay for homes?

[Gregmal]

You’re focusing on the wrong end of the equation. If rates go 5% it’ll be because you have way more people with $1M to spend on houses. 

[ValueArb]

5 minutes ago, thepupil said:

 

mortgage rates = 10 yr swaps + mtg basis (simplified)

 

there's no law that 10 year tsy rates must be at or above inflation. financial repression has kinda been the current / past / and potentially go-forward policy. the rate is subsidized by fed/government. Not saying it will ALWAYS be that way, but I don't think 4-6% inflation will automatically lead to 4-6% 10 yr. no one is entitled to any kind of return, particularly buyers of government bonds (or owners of real estate for that matter). 

 

But how long can the government keep those rates below inflation rates? No one is entitled to any kind of return but the government isn't entitled to sell bonds to them at any price either. Why would most buy 10 year bonds yielding less than inflation rather than wait it out for higher long term yields in 1-3 year bonds?

 

I'm not saying inflation is guaranteed to stay or that rates are guaranteed to rise, my macro prediction record is about as good as Cathie Wood's bubble prediction skills. But right now they seem to be really substantial risks, which leads me to want to stay out of making leveraged long bets dependent upon low rates.

[thepupil]

31 minutes ago, ValueArb said:

But right now they seem to be really substantial risks, which leads me to want to stay out of making leveraged long bets dependent upon low rates.

I generally agree w/ you. I tend to focus on public RE stuff that i think has a lot of margin of safety built in / would withstand increase in rates pretty well (probably not thrive, but withstand).

 

But on well located single family homes I guess the supply/demand picture appears so favorable (for owners/sellers) that it's hard for me to really be all that bearish (and in fact think the price increases are relatively sustainable<--not the rate thereof, but rather the levels achieved). 

 

Example a $1.3mm house in blue state land w/ $1,300/month of taxes and insurance is $5,600/month at 2.875%. At 4.5% it's $6,500/month. If SALT goes to $80K, then the buyer's income increase / property tax deductibility covers pretty much all of that. so you could have a situation where rates increase but prices don't collapse because of other factors. (ie rate increases carrying cost by 17% in my example, but SALT would decrease carrying costs by a good by 8-15%

 

should i focus on the propsective $12k/year in carrying costs or the fact that every house has 10 willing (and very well qualified) buyers? 

 

it's not clear at all to me that we're in a bubble or that prices will go down. it's clear to me they can't go up 20% /year lol, but i wouldn't hold my breath waiting for collapse and i definitely wouldn't pay 6 figs of t-costs and uproot my family betting on big price decrease. 

 

as noted earlier, my own area influences my views. DC is <5% investor owned, has much better price/income ratios than NY/SF, a low beta economy (some would say countercyclical), and no land for new SFH. if I was talking exurban property somewhere w/ cheap(er) build costs and still plentiful land, maybe i'd have a different veiw. 

 

to use a more median home . 2.875% --> 4.5% = $3,500/yr on a $400K house. there may easily be other factors (general inflation/wages) that push people's ability to pay byu more than $3,500/yr that keep prices stable from here even if rates go up. 

Edited December 13, 2021 by thepupil

[Gregmal]

It is in no ones interests for housing to fall off. Even those who say it is, it isnt. Even if they raise rates or shit gets whacky in one place, there will be mitigating factors in others. We haven't even really seen much accommodation in terms of loosening lending standards. Juts closed on another cash out refi Friday. Its a total bitch and I have 800 credit and good income. They'll call it making homes more "accessible" or something. Any way you cut it, theres a huge and long runway ahead. And the risk/reward to me is vastly more appealing than buying AAPL at 40x or BRK at 20x, although I can dig the later, just not as much as what you get when you buy the housing freight train.

 

@LearningMachine has been talking about 10% interest rates for a while now. Maybe that happens, maybe not. All I know is that would be a metaphorical destination down the line. Call it Z. Maybe at the moment we're at A or G or M. But if we get to Z the cocktail of factors along the way are going to make housing plays look like Gamestop stock in Q1.

[ValueArb]

One of my biggest regrets is not buying rental properties, especially in 2009. A friend bought a townhome that was insanely cheap  (I think he paid $45k and was renting for $900/month) and we actually started to work out a partnership to buy more but ended up I didn't want to pay the penalty to take money out of my IRA. I think it would have worked out.

 

Right now I'm just focused on finding stocks that should do well both if inflation picks up permanently and if it turns out to be transitory, so I can avoid relying on my non existent macro forecasting skills.

[Gregmal]

Yea no I can joke/poke fun at @LearningMachine because he has been somewhat bombastic in his deliverance of the 10% rate thesis, and pursuit of the ultimate investments that work if it happens overnight, but the major underlying concerns he shares have really resonated with me and made me think hard about how I want to be setup with my long term investments. And I keep landing back at rentals, especially well located ones. 

 

By and large stocks are hard to project more than a couple years out. With housing, its so integral to the system and so many safety nets, plus on top of that, so much cash out there which will only be furthered if bonds implode.....it looks mighty good to me. 

[Viking]

Today a Canadian can get a 5 year fixed rate mortgage for about 2.75%. Today in Canada inflation is running at +5% and will likely remain elevated well into 2022. Its not unreasonable to assume inflation will average +3% over the next 5 years. With mortgage rates well under the expected rate of inflation is it not sensible to carry a very large mortgage? 
 

Your cost to own will be far less than what it would cost to rent (a comparable home). AND it is highly likely the nominal value of your property will be significantly higher in future years (likely increasing at least at the headline rate of inflation). 
 

The Fed is in the classic prisoners dilemma. Clearly inflation is a big problem and something needs to be done. AND the globe has way, way too much debt - so raising interest rates will tank financial markets, sentiment and then the economy.
 

The 10 year bond yield at 1.42% is telling everyone something loud and clear (Fed policy error is coming which will tank the economy). We will see who is right - the bond market or those piling into housing  There is also a decent chance that both could be right at the same time (house prices move higher AND long bond yields stay crazy low).  

Edited December 13, 2021 by Viking

[Spekulatius]

21 minutes ago, Gregmal said:

Yea no I can joke/poke fun at @LearningMachine because he has been somewhat bombastic in his deliverance of the 10% rate thesis, and pursuit of the ultimate investments that work if it happens overnight, but the major underlying concerns he shares have really resonated with me and made me think hard about how I want to be setup with my long term investments. And I keep landing back at rentals, especially well located ones. 

 

By and large stocks are hard to project more than a couple years out. With housing, its so integral to the system and so many safety nets, plus on top of that, so much cash out there which will only be furthered if bonds implode.....it looks mighty good to me. 

My guess is that if we indeed get 10% interest rates, we will have probably 15% inflation. In that scenario, real estate will be fine, especially if you have levered it with a mortgage.

 

My wife was keen on paying back our mortgage (less than ~40% LTV) but not since we put some of her money into the 7.12% isavings bonds while we pay 2 3/4% on our mortgage.

 

These type of disconnects shouldn't exist but they do.

Edited December 13, 2021 by Spekulatius

[Viking]

The central problem we have today is historical analysis/numbers don’t really apply. And that is because the pandemic is causing fundamental changes to the economy and society. And the pandemic will remain the key driver for the foreseeable future (next couple of years). 
- massive changes to consumer behaviour: goods vs service; stay at home - demand for single family homes etc

- massive changes to labour force participation = fewer workers

- massive supply chain disruption

 

We also have a few other super important structural changes going on:

- accelerating move to ESG: electric vehicle revolution plus more

- recognition of China being a competitor/threat to West

- shift of production back to US

- China just starting to deflate its property bubble

And we have had massive, unprecedented intervention from the Fed for the past 10 years. To the point the Fed even does not understand how the unwind of its intervention will impact the economy and financial markets.

 

Bottom line, there is NO playbook for what is happening right now. History provides little guidance. Investors need to accept what they do not know. Be rational. And be prepared for most of the experts to be off base.
 

My ‘solution’ is pretty simple: to carry a higher than normal cash balance and wait for volatility. @Gregmal will be my Jimminy Cricket… sitting on my shoulder telling me to buy… 

Edited December 14, 2021 by Viking