A weekend topic starting with Fortune. “Homebuilders and economists alike were on edge this spring after the Federal Reserve Bank of Dallas published a paper titled “Real-Time Market Monitoring Finds Signs of Brewing U.S. Housing Bubble.” Shortly afterwards, Fortune spoke with Dallas Fed economist Enrique Martínez-García. He had a stern warning. ‘This might be a housing bubble. The evidence suggests it looks like a housing bubble. A little bit like a duck. It walks like a duck, it looks like a duck, it certainly might be a duck,’ Martínez-García told Fortune back in May.”
“Fast-forward to November, and it’s no longer taboo to throw out the term ‘bubble.’ Not only has the Federal Reserve’s inflation-fight created a sharp contraction in home sales, it has set-off a home price correction. The bubbliest markets, like Phoenix and Boise, are already down close to double-digits. ‘A housing boom—such as the pandemic-era run-up—becomes frothy when the belief becomes widespread that today’s robust price increases will continue unabated. If many buyers and investors share this belief, purchases arising from a ‘fear of missing out’ (FOMO) further drive up prices and reinforce expectations of strong (and accelerating) future gains beyond what fundamentals could justify,’ writes Martínez-García.”
The Daily Mail. “Employers should stop giving pay rises to their staff, a member of the Federal Reserve‘s board has said, in a bid to help bring down inflation. Christopher Waller, one of six members of the Fed’s board, used a speech to urge bosses to take into account inflation when looking at their labor force. ‘Wage growth has been a contributing factor to inflation, especially in the service sector, so it is important to get the labor market into better balance to bring future wage growth down to a more sustainable level that will assist in moving overall inflation lower,’ said Waller. ‘At any other time, I would be pretty unhappy about slowing growth, but not now.’”
Fox 4 Now in Florida. “With North Port and Cape Coral as two of the five metro areas that require the steepest income increase from year-to-year for a borrower to afford what Redfin calls a house with a ‘media sale price’ for October 2022. Redfin’s survey finds that borrowers in North Port would need a 73.9 percent ‘year-over-year change in income’ to reach the $488,824 median sale price. That increase of income from $75,659 to $131,535 is the steepest in the nation.”
“The survey reveals that Cape Coral is fifth in the nation, with a 60.6% income increase for a median sale price of $390,000. Borrowers would need an income of $104,943 for October 2022 in Cape Coral, up from $65,338 the previous October. Nationally, the survey found an increase of 45.6 percent in year-over-year income increases to secure a mortgage.”
WTSP in Florida. “Elisha Lopez, Broker/Owner of Ocala Realty World says she’s definitely seen a shift in the housing market. ‘A year ago we had offers before it even hit the market.’ Associate Professor of Finance at USF Lei Wedge says the current market is unaffordable. ‘Just the principle interest is over $2000 dollars. For a 1,700 square foot home, people are spending almost $3,000 dollars on a mortgage, that’s unheard of,’ she explains. For now, she cautions buyers to wait for home prices to level out.”
The Lincoln Journal Star in Nebraska. “In Lincoln, we are seeing the market return to more ‘normal,’ where it may take 30-60 days for a property to sell, now that inventory of homes for sale has improved slightly and buyers have more options to choose from. The reality is that we still have more buyers than sellers, and that will help keep home prices from drastically falling. We have seen a lot of price reductions for homes that have hit the market over the past few months, where it seems the sellers are still thinking it’s 2021 and have priced too high.”
From WISH TV. “If you’ve been following the Indiana realty market over the past couple of years, you’ll know that it has been something of a rollercoaster. During the early days of COVID, house prices crashed as lockdowns made sales almost impossible. However, they quickly recovered and the market went on to soar for the next two years. This was the case not just in Indiana but throughout the United States. Factors including low mortgage rates, low supply, and construction delays all led to huge price increases. Only in the past few months have prices started going down again.”
“However, now is probably not a good time to buy. Mortgage rates are high. Houses are still overvalued, even having cooled somewhat, and they are likely to get even cheaper. By waiting, you could get a much better deal in the future. What makes a crash seem unlikely is simply that it hasn’t happened as of yet, even though the conditions are right for one.”
The Motley Fool. “When mortgage rates started to plunge to record lows during the second half of 2020, two friends of mine who had gotten married a few years prior decided to dive into homeownership. They’d been saving up for a house and had decent incomes, so they figured they’d take advantage of those low rates and increase their home-buying budget. Initially, they told themselves they’d buy a home that was $800,000 or less. (For some context, we all live in New Jersey, and while an $800,000 property is certainly a nice one, it’s not necessarily a mansion.) But the more they looked, the more they realized that if they stretched their budget a bit more, they could have a really amazing house instead.”
“So that’s what they did. They wound up buying a $1 million home and putting 20% down at closing, leaving them with a giant whopper of a mortgage. And while they were happy with that decision at first, they’re now at the point where they regret it. My friends knew going into their home purchase that they’d be spending a lot of their income on housing. But they were okay with that. That plan worked for a while, and to be fair, they did cut back on leisure spending. But they also started spending a lot more on not just their mortgage payments, but also, maintenance and repairs.”
“In fact, the cost of owning their home became so tremendous that they wound up virtually draining their savings. And that left them in a really tough spot earlier this year when their HVAC system broke down. My friends who own a $1 million home (actually, more like $1.1 million at this point based on market value) now have a $5,000 credit card balance they’re paying off over time. The reason? They depleted most of their savings for the down payment on that home, and pretty much wiped out the rest in the course of maintenance and repairs during their first couple of years in it. And so when they encountered a recent HVAC issue, they had to charge it and pay it off over time.”
“My friends acknowledge that their situation is problematic, as they’re the spot-on definition of being house poor. But they also feel stuck.”
KVIA in Texas. “As rates remain high during a volatile time with high inflation, many prospective homebuyers are feeling the pain. Alejandro Munoz saw his dream home slip away due to economic factors. He was in the process of purchasing a new build in far east El Paso last spring. But as the process played out, and inflation grew worse, the price kept climbing. ‘The original cost of the home was going to be about $1,200 per month,’ Munoz said. ‘By the time we were going to close on it, it went up to about $2,300 per month.’ He had to let the deal go, losing out on his dream home.”
“El Paso’s active inventory stood at 1,926 in October 2022, according to GEPAR’s market statistics. In October 2019, just prior to the onset of the pandemic and prior to high inflation, the inventory stood at 3,164. In that same time span, El Paso saw its median sales price rise from $163,000 to $240,000 and homes are staying on the market for half the amount of time.”
Times of San Diego in California. “Realtors in San Diego County reported a 19.8% decline in single-family home sales in October, but reassured owners that prices are ‘maintaining most of their value.’ The Greater San Diego Association of Realtors said 1,188 single family homes were sold in October, compared to 1,481 in September and 2,078 in October 2021. The median price fell 22.5% to $884,000, but was still nearly 3% higher than a year ago. ‘While the market continues to evolve over the next year, we expect that San Diego will remain one of the most expensive markets in the nation, as severely limited housing inventory will prevent large home price drops,’ said Chris Anderson, president of the Realtors association.”
From Reuters. “Canada’s housing market has gone cold, with buyers sidelined by soaring borrowing costs and sellers holding off listing in hopes of a spring rally, while higher interest rates mean prices need to fall more before any rebound materializes, experts say. The Bank of Canada has signaled its historic tightening campaign is nearing an end, though economists expect the central bank’s policy rate to remain at a 15-year high of 4.25% or 4.5% throughout 2023, putting downward pressure on prices.”
“Peggy Hill, who runs a real estate firm in Barrie, Ontario, has had many first-time buyers throw in the towel on a purchase because the monthly payments on a typical home in the city, about 110 km (68 miles) from Toronto, would simply be too high. ‘We killed our first-time buyers,’ she said. ‘They’re gone … they cannot afford to service that debt.’”
From CBC News in Canada. “Investors hoping to make a killing as cryptocurrencies rebounded from this year’s plunge in valuations got a rude surprise last week after one of the most trusted exchanges for crypto trading, FTX, filed for bankruptcy. But while old-school financial advisers may be tut-tutting at young and inexperienced crypto investors who they say should have known better, there are new signs a decline in speculative investments may be part of a trend that goes far beyond bitcoin and its many imitators.”
“Suddenly things like house prices, tech company valuations and fintech innovations, including cryptocurrency, that so recently seemed to be shooting for the moon are coming back down to Earth. As interest rates rise and money gets tight, suddenly what seemed like an investment that couldn’t lose has been exposed as one where the business model simply does not justify that optimism. ‘The fact is that the glut of capital in the past few years has resulted in too many companies in every market,’ Nick Mehta, CEO of the software company Gainsight, wrote earlier this year.”
“Cheap and available money can be a godsend to new entrepreneurs, but Mark Kamstra, professor of finance at Toronto’s Schulich School of Business at York University, is one of those who has worried that the cost of borrowing had recently become too low. He said this same kind of thinking can apply to real estate, where the arithmetic changes as interest rates go up. ‘I have friends with $3-million homes, and I say, ‘You are implicitly saying that living there is worth $200,000 a year,’ said Kamstra, who rents. ‘If I had $100,00, I could rent a palace.’”
“As Bank of Canada governor Tiff Macklem discussed last week, one of those scarce resources is human capital, and Kamstra worries many of his students are going into low-yield technology businesses because they offer stock options and pay well now but might not last. ‘What if that’s all just kind of a bubble?’”
From Business Insider. “The tech sector has laid off 120,000 workers in 2022, including huge layoffs at Meta and Amazon. One reason for those layoffs: Wall Street is increasingly getting a say in how the tech giants are run. For much of the 2010s, large tech companies could operate largely without complaint from shareholders on Wall Street over ballooning salaries or increasingly fantastical moonshots, thanks to revenue that reliably grew by double-digits year after year. There were some investors like Benchmark’s Bill Gurley who railed against bloated tech spending, but voices like Gurley were the exception, not the rule.”
“In late October, the hedge fund Altimeter Capital put out an open letter to Mark Zuckerberg and Meta. Fund manager Brad Gerstner called on Meta to slash spending on employees by 20% and limit spending on Metaverse projects and capital expenditures. While his recommendations were focused on Meta, Gerstner weighed in on the tech sector as a whole. ‘Like many other companies in a zero-rate world — Meta has drifted into the land of excess — too many people, too many ideas, too little urgency,’ Gerstner wrote. ‘It is a poorly kept secret in Silicon Valley that companies ranging from Google to Meta to Twitter to Uber could achieve similar levels of revenue with far fewer people,’ he continued.”
“Two weeks later, Meta announced it would lay off 11,000 workers, reducing its headcount by 13%. On Tuesday, hedge fund TCI Capital’s Chris Hohn sent a letter to Alphabet’s CEO Sundar Pichai, warning him that the company has too many workers, is paying them too much, and wasting money on bad bets. Notably, Hohn approvingly quoted Gerstner’s line about Silicon Valley’s poorly kept secret.”
The New York Times. “More than one million direct creditors are estimated to suffer from FTX’s demise, but the cumulative pain from yet another crypto collapse is raising the spectre of something much more pernicious: financial contagion. FTX is the third crypto exchange to formally file for bankruptcy protection in the past six months. The cumulative effect conjures nightmares from the 2008-09 global financial crisis. ‘I see a lot of similarities between what’s happening in crypto and what was happening in traditional finance in the run-up to the 2008 crisis,’ said Saule Omarova, a Cornell law professor and an expert on financial derivatives. ‘It’s the same formula.’”
“One thing has become clear watching crypto companies fall: These institutions are interconnected in ways few people realized, and the extent of their exposures to one another, usually through loans, is eerily similar to 2008. While reckless mortgage lending was the root of that crisis, what nearly tipped the banking system into freefall was an opaque web of derivatives and counterparty exposures between financial institutions, making it nearly impossible to determine who owed what to whom.”
“The fact that so many crypto CEOs have scoffed at the suggestion of tougher regulation amplifies the analogy, because that is exactly what transpired in the early days of derivatives in the 1990s. ‘This is a complete replay,’ said Dennis Kelleher, a former corporate lawyer who is now CEO of Better Markets, a non-profit organization in Washington, D.C., that advocates for consumer protection.”
“What’s clear now is that FTX has been in financial disarray. After founder and CEO Sam Bankman-Fried resigned at 4:30 a.m. on Nov. 11, the company installed John Ray III as its new CEO, and he has been stunned by what he’s already seen. ‘Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,’ he wrote in an affidavit filed in court.”
“Some experts hope new rules will help conventional banks enter the sector. But Ms. Omarova, the derivatives expert, isn’t so sure. ‘That was exactly the logic of allowing banks to get into the derivative business: They know how to manage risk.’ Derivatives regulation was signed into law in 2000 in the United States, and eight years later, Lehman Brothers went bankrupt. ‘There is still a danger,’ she said.”
Stuff New Zealand. “If you’ve purchased a home in the past 18 months and are facing the terrifying trifecta of rising interest rates, lower home values and, in some cases, negative equity, what caused your predicament can be blamed on another triumvirate. Politicians, the Reserve Bank and the Nimbys who, up until now, have been able to oppose new housing while their property prices skyrocketed. Several headlines this week inventoried recent homeowners’ pain; take CoreLogic’s figures, which show that more than 5% of Auckland homes sold for a loss in the three months to September, the most since 2019.”
“Or what about Westpac’s estimate of a revised fall from last year’s peak of a further 10%, creating a 20% drop in house values by the end of 2024, which, when inflation is considered, equals a 30% drop, neatly taking prices back to where they were before the pandemic began. In other words, the party is over. If you’re busy castigating yourself for buying when you did and falling prey to the FOMO effects that fear and greed exert, take a moment to consider that you were being fed cheap cash at historically low interest rates. Which is where the politicians and the Reserve Bank come in.”
“Because both ignored the fact that REINZ’s house price index had shot up by 24% annually in the year to the end of March 2021, even though the Reserve Bank’s Large Scale Asset Purchase Programme had been up and running for a year. So why did the Reserve Bank ignore the warning signals of an overheated housing market?”
“In its own controversial review of monetary policy, released last week, one of its peer reviewers said a ‘potential indicator of loose monetary policy was the surge in house prices in 2021.’ The review, which opposition parties have strongly criticised, concluded that it should have stopped its quantitative easing (another word for printing money) sooner and started lifting interest rates sooner.”
“Hindsight can be an academic wood-for-the-trees exercise and this self-serving review, which, as National’s finance spokesperson Nicola Willis points out, hints at mistakes but fails to say if they were avoidable, is no different. But it’s not just the sugar rush of too much cash driving a market bubble which has led the recent home buyer to the dire circumstances they find themselves in.”