At Rebel Capitalist Live, Ken McElroy touched on an existential problem the housing market is facing that would act as a tailwind in the medium-term for real estate investors - there is a giant, disproportionate demand for housing, while the supply continues to decrease. The only way to make money on new residential, on the other hand, is for it to be Class A luxury mansions or condos. There’s simply too much of a logistical headache, expensive price of labor, price of supplies, and delays that make anything lesser unprofitable. This used to be the complete opposite, as the mass manufacturing of apartment complexes was quick and easy, but if you look around yourself in places like Austin or San Antonio these days, all they’re building is high-end luxury condominiums and apartments.
This all has to do with predictability and timing, and it’s better to spend the extra 20% if it means you can get tenets who will pay rent on time, and price out the ones who won’t. This creates a pretty obvious existential issue for anyone who isn’t a martini-drinking, leg-tattooed creative who works at a startup in Austin. For most of us, if we can’t find anywhere with rent under $1200 that also doesn’t have crime, we might as well live in our cars. Unfortunately, that’s probably where we are headed.
Obviously this problem becomes exacerbated when the supply is so low, and the only options for any buyer that isn’t a multimillionaire, is to rent or pool their money with a couple of friends to hopefully buy a crackhouse. To say it’s slim pickins’ is an understatement. The median price for a home in the State of Texas, which has been famously affordable for decades, is $421,000 according to Q3 of 2021. To add to that, the overflow of out of state immigrants will only continue to exacerbate that wonderful wealth effect and raise prices on assets for the rest of us. At this point, anyone with a great credit score, and enough money for a down payment on a starter home, will get to enjoy monthly payments double, triple, or quadruple what they would have paid four years ago on the same homes.
So that leaves anyone making less than a quarter million a year in the bucket of cardiac-stressed new homeowners with ridiculous mortgage payments that are actually more expensive than the rent they’d pay on a run-of-the-mill apartment or duplex in a not-so-bad side of town (or out in the country, if you got lucky like I did). Other than mortgage rates exploding up recently (hopefully a good sign), with these elevated prices alone, what you’d pay on a $150,000 house just a few years ago, which is about $800-1100 a month, now would be somewhere in the venue of $1,600 a month when this house is now at a monolithic $300,000. The rates aren’t low enough to justify how much you are spending on the slim pickins of “starter homes” left on the market for only vain morons to pick up to fulfill that fakerich itch.
Americans are essentially left with a Catch 22 in this market. For now, they can either sell their house to buy one that is just as elevated in price. If they rent, they have to anticipate at least a year of rent-increase dread. If they are new-time buyers, they have absolutely no choices. If they’re a real estate investor, they have no incentive to build, other than to add to the oversupply of gaudy, decadent condominiums that are only ticking time bombs of depreciation. There is quite literally no option when everyone is at a stalemate, on the buy side, sell side, invest side, homeless side, rent side, etc. That’s why either the breaking point is coming, or this market is going to get bloody.
If the inflation rate continues to stay elevated like it is for even another year or two, the distortions in housing prices will continue to grow worse due to the overexcitement of inflation hedgers looking for anyway to save their buying power. Fortunate for us poors, it seems the dollar problem doesn’t quite favor that narrative, and that’s where the bright side seems to be rearing its head.
Real estate prices are always the last to come down, and the last to go back up. When the market is going sour, people still see their house as what they want it to be, even in a market crash. They will see their house priced at whatever elevated price their dreams could possibly fabricate, until reality starts to hit them and their desires, because in the midst of a sour economy, no one will take a boom economy price for their house. Reality doesn’t set in like it does on the shareholder who watches the shares of his stock crash in price in the matter of a few minutes. It has less emotional impact. That’s why, especially if this homeowner isn’t interested in selling yet, they can wait on standby believing in their hopes and dreams long enough to see the prices around them finally to start coming down. That’s when the panic selling actually starts (after the foreclosures, can’t forget that). Then you really have the selloff kickstart.
Ironic how much of people’s focus is trying to curb the inflationary impact on their lives, when really, we’re all going to be faced with the dollar shortage problem that has simply been building up exponentially for decades. It’s just the good-intentioned morons who saddled up with more debt than they can extinguish won’t be the ones sitting pretty at the end of this scenario.
That’s what is really the light at the end of this tunnel. When you see a manic episode of an asset bubble, the only thing that solves it is a dose of reality. These people who have saddled up with real estate debt simply expect the onset of a secular inflation to make the rents that they can continue to raise a means of hedging said inflation event. The issue is just nothing monetarily fits their narrative other than their blatant misunderstanding of how central banks work, and the anticipation of actions from the Fed and our lame duck government to actually do a form of helicopter money that creates such an overflow of money (that just doesn’t go immediately to paying off debt and the stock market, lol) that we have inflation going into the double digits for ten years. Unfortunately, that just isn’t the case.
One can fabricate as many fanciful tales of Weimar 2.0 and Zimbabwe 2.0 as much as they want, but when the liquidity does not back their fairytale, they have to wake up and smell the bacon at some point.
Something else people don’t take into account, either, is how long the debt creation scam can keep being perpetuated. It hasn’t been as robust and kinetic as it was before 2008, and now especially, such cheap money will be lent out less and less. Why? Because there’s already enough debt to go around for the average American! They have to pay it off with their less-than-stellar barrista job to pay off that car note, the other car note, the mortgage, college debt, and medical debt! Better make that two barrista jobs! What makes the average bankster want to lend to an overqualified underachiever economy of entitled, unhealthy people with a few screws loose who can never realistically pay even one of their debt contracts down? If the money could go around, maybe that would make it plausible, but all it looks like right now is an even sadder version of 2008. If you had more money creation in the real economy, the wealth would be there to pay off the average American’s debt from the stellar jobs they’re getting. If you had looser money, the eagerness to lend would be seen in the profitability of a higher-interest rate economy. Ne’er do you see either of these phenomena at all these days.
What looks inevitable from this is a malaise of an economy that can’t face facts, but facts will most certainly face its cocky players who are eager to take on several mortgages at the expense to their slim paycheck and credit score. That’s the American Dream, catch up every extra penny you make with an extra two pennies of spending!
Sorry, but I don’t know how anyone can be confident enough in this joke, bullshit economy to sustain the plethora of debt with a pitiful money velocity and absolute lack of value being created. When I am right, I really do look forward to young families actually having a shot at buying a house for a realistic price that doesn’t insult their intelligence, but I don’t think the debt will be left around for them to grab when that day comes. It’ll probably just be cold hard cash.
“Beginners focus on analysis, but professionals operate in a three dimensional space. They are aware of trading psychology, their own feelings, and the mass psychology of the markets.”