What are your housing bubble predictions for the new year? Six months ago: “I think this will have to do primarily with interest rates – and i think that the central banks will chicken out and live with inflation (in spite of their mandate). So except for the huge bubble cities (San Fran, Boise, Toronto etc) the housing market will only go down another 15-20% from end-Q2. US The 10 yr treasury yield is 2.8% (after eventually getting to 3%). Bond market is signaling that the central banks will stop raising rates before it gets to ‘neutral’. Europe I think that they will not do enough to fight inflation because they are deathly scared of the yield of Italian, Greek etc bonds. So they will punt.”
A reply: “Goodness if the whole pile of cards collapses at 1% interest and with the Fed buying 25% of all bonds, methinks thou might have a bubble economy.”
One year ago: “2021: People are stupid and easily exploited. 2022: People become more stupid and much thus easier to exploit. 2021: Bankers are wonderful people. 2022: Bankers become even more wonderful people. 2021: For bankers life is good. 2022: For bankers life becomes more gooder.”
From Floor Daily. “Restoration Hardware’s revenues dropped 14% in 2021. Restoration Hardware is a home furnishings retailer. The company’s CEO, Gary Friedman, predicts fiscal 2022 will end with revenue down between 3.5% to 4.5%, Friedman expects things to get worse before they get better. No matter how far and fast the housing market declines next year- ‘From the housing point of view, there is no soft landing. We’re way beyond the soft landing. It’s looking more like a crash landing in the housing market. It’s looking like 2008, 2009.’”
The San Jose Spotlight in California. “This is the time of year where we all like to pull out our crystal ball and make some speculations about what the local housing market will look like in 2023. ‘Sellers may not get several non-contingent all cash offers, rather they may get just one or two offers if their home is priced well and shows well. They should also be prepared to give a little too,’ says William Chea, 2023 president of the Santa Clara County Association of Realtors.”
The Marina Times in California. “Last January we predicted a relatively hot real estate market for San Francisco, with prices continuing to climb during the year ahead — though we noted at the time some early signs of a softening market. At first, the market was indeed red hot. But by late spring and early summer things really began to change. The condominium market continued to cool, and even demand for single-family homes seemed to soften. By the end of 2022, the local real estate market had changed dramatically.”
“According to the Business Times, the downtown condo market has seen larger price reductions than any other market segment in the Bay Area. There has been a year-over-year decline of 16 percent in the median sales price for condos in the neighborhood. That is double the figure for other parts of the city, where the median price of condos dropped 7 percent in the last year. Prices for these condominiums are often at 2017 levels, and that is just remarkable when you consider how much in demand these places were just prior to the pandemic. Of course, San Francisco’s economic landscape is much changed since then — office buildings that were once bursting at the seams with commercial tenants are now empty.”
Local Profile on Texas. “‘The frenzy of the last two years could not continue, and we are seeing a softening brought on by rising rate increases,’ Michael Coburn, broker/owner of RE/MAX Town Country in Allen told the Dallas Business Journal. ‘Next year will be more of the same, with slower sales and steady prices.’ According to Coburn we are facing a housing market reset in DFW. ‘Currently, sellers are paying closing costs and offering incentives, and no bidding wars exist,’ he said. ‘When rates come down, buyers will jump in again, and bidding wars and rising prices will return. Buyers have choices right now. Get in before the next frenzy.’”
The Dallas Morning News. “This was the year the Texas economy kept crushing it. Or so we thought. Manufacturing, output was flat and new orders fell for a sixth month in a row, the report said. Texas companies also find it harder to pass along higher costs to customers. ‘Rates are rising too fast,’ a building materials company told the Dallas Fed in November. ‘We are going to have a hard landing.’ ‘Recession is coming!‘ said a metal manufacturer. ‘We are just waiting for the backlog to evaporate. Then layoffs start.’”
Bisnow Dallas in Texas. “After riding what appeared to be an unstoppable high in 2021, members of DFW’s commercial real estate industry looked forward to 2022 with unbridled optimism. But that all changed halfway through the year, when the Fed’s plan to battle inflation drove interest rates to new heights and all but decimated the industry’s ability to kick off new projects. Double-digit rent growth has thus far buoyed the market, but Carlos Vaz, CEO of Dallas-based multifamily investment firm Conti Capital said rising interest rates will continue to pressure owners, especially those looking to refinance.”
“‘Interest rates have really hit people hard,’ he said. ‘In 2023, there will be situations where people who had a floating rate are not going to be able to refinance their properties. That’s going to be an even greater issue.’”
Bisnow New York. “After the last three years, there are few real estate professionals brave enough to make confident predictions about what will happen in 2023 — other than to say once again to expect the unexpected. It might not turn into a nightmare year along the lines of 2008 — but it certainly ‘won’t be pleasant,’ CBRE predicted — and it will likely be defined by what doesn’t happen more than what actually does. ‘I think we’re in for a tough road,’ said Andrew Steiker-Epstein, the vice president of sales, leasing and marketing at New York developer Charney Cos. ‘I think you are going to see just very low transaction volume, and not a lot of things happening.’”
“‘We’re heading to what you refer to as a liquid recession,’ said Ran Eliasaf, the founder of real estate private equity firm Northwind Group, which has $3B in assets under management. ‘It’s hard to say if we’re gonna hit a full-blown recession, or it’s just gonna be a milder one, but there’s definitely a big correction in pricing as well as valuation. That has to happen.’”
“Opportunities have presented themselves in Washington, D.C., said Marx Realty CEO Craig Deitelzweig, but in New York, the ‘come to Jesus’ moment hasn’t yet arrived. ‘I thought we would see more in New York, but I’m hearing quarter one is when we’ll really start to see more of those opportunities,” he said, adding the firm will continue to look for assets in New York, and in other parts of the country like Atlanta and Austin. ‘A lot of debt comes due in 2023, 2024,’ he said. ‘They have debt coming due, and they either don’t have the capital to [improve the buildings] or they don’t have the wherewithal to do it.’”
“Northwind’s Eliasaf said the bank pullback from CRE lending has already led to some borrowers seeking out debt funds like his for products like condominium inventory loans in New York. ‘The quality of borrowers that need financing solutions increased, because they would usually get the solution from the bank and that doesn’t exist,’ he said. ‘I think we’re going to be very busy 2023 as well.’”
From Storeys in Canada. “So what happens now? We still need supply — are developers spooked? Is the investor class really “gone”? Where are the opportunities? Josh Lerner is Senior Vice President of Harbour Equity, which raises investor funds and provides equity capital to developers. He doesn’t see a crash in the future, and predicts rents will get high enough to push people back into buying: ‘It’s an interesting time. And I think some markets have dropped more than others — it’s not uniform, some of the tertiary markets that went pretty crazy in COVID suffered more than probably core 416. The market is dynamic and it has to find its equilibrium. I don’t think things are going to drop a crazy amount, because they can’t — just from a cost perspective and inflation perspective.’”
The Globe and Mail. “Many economists argue that Canada is particularly sensitive to rising interest rates because of high levels of household debt, and the importance of the housing market to the overall economy. It typically takes six to eight quarters for rate increases to have a full impact on inflation. This happens in phases: first squeezing rate-sensitive sectors such as real estate, then curbing consumer spending as mortgage costs rise, and finally hitting employment and business investment. Weaker demand for goods and services, in turn, forces companies to stop raising prices and eventually start offering discounts, which slows inflation.”
“So far, the main casualty has been the housing market. Many homeowners with variable-rate mortgages are already being squeezed. Central bank researchers estimate that around half of all variable-rate mortgages with a fixed payment have already hit their so-called trigger rate, which means the mortgage holder has to up their monthly payments or shift some of the interest costs to the principal they owe. The bank expects this proportion to rise to about 65 per cent in the coming months.”
“A recent central bank research paper suggested a ‘base case’ scenario in which the unemployment rate rises to 6.7 per cent from 5.1 per cent today. How long will this all take to play out? In a recent note to clients, Bank of Montreal chief economist Doug Porter pointed to the 1994-to-1995 tightening cycle as a potential analogue. The Bank of Canada raised its policy rate by 4.5 percentage points over a year. The Canadian economy ticked along well as interest rates marched higher. But growth slowed abruptly in the second quarter of 1995, roughly a year after the rate-hike cycle began, and grew just 0.7 per cent over a four-quarter period.”
“‘History tells us that weakness can arrive quickly when the rate hikes truly begin to bind,’ Mr. Porter said.”
From CNBC. “2022 marked the start of a new ‘crypto winter,’ with high-profile companies collapsing across the board and prices of digital currencies crashing spectacularly. The events of the year took many investors by surprise and made the task of predicting bitcoin’s price that much harder. The crypto market was awash with pundits making feverish calls about where bitcoin was heading next. They were often positive, though a few correctly forecast the cryptocurrency sinking below $20,000 a coin.”
“CNBC reached out to the people behind some of the boldest price calls on bitcoin in 2022, asking them how they got it wrong and whether the year’s events have changed their outlook for the world’s largest digital currency. In 2018, at a tech conference in Amsterdam, Tim Draper predicted bitcoin reaching $250,000 a coin by the end of 2022. The famed Silicon Valley investor wore a purple tie with bitcoin logos, and even performed a rap about the digital currency onstage.”
“Four years later, it’s looking pretty unlikely Draper’s call will materialize. When asked about his $250,000 target earlier this month, the Draper Associates founder told CNBC $250,000 ‘is still my number’ — but he’s extending his prediction by six months. His rationale is that despite the liquidation of notable players in the market like FTX, there’s still a huge untapped demographic for bitcoin: women. ‘My assumption is that, since women control 80% of retail spending and only 1 in 7 bitcoin wallets are currently held by women, the dam is about to break,’ Draper said.”
“In April, Antoni Trenchev, the CEO of crypto lender Nexo, told CNBC he thought the world’s biggest cryptocurrency could surge above $100,000 ‘within 12 months.’ Though he still has four months to go, Trenchev acknowledges it is improbable that bitcoin will rally that high anytime soon. Bitcoin ‘was on a very positive path’ with institutional adoption growing, Trenchev says, but ‘a few major forces interfered,’ including an accumulation of debt, borrowing without collateral or against low-quality collateral, and fraudulent activity.”
“The entrepreneur says he’s also done making bitcoin price predictions. ‘My advice to everyone, however, remains unchanged,’ he added. ‘Get a single digit percentage point of your investable assets in bitcoin and do not look at it for 5-10 years. Thank me later.’”
“Ian Harnett, co-founder and chief investment officer at macro research firm Absolute Strategy Research, warned in June that the world’s top digital currency was likely to tank as low as $13,000. Harnett’s target is closer than most, but bitcoin would need to fall another 22% for it to reach that level. When asked about how he felt about the call today, Harnett said he is ‘very happy to suggest that we are still in the process of the bitcoin bubble deflating’ and that a drop close to $13,000 is still on the cards. ‘Bubbles usually see an 80% reversal,’ he said.”
“With the U.S. Federal Reserve likely set to raise interest rates further next year, an extended drop below $13,000 to $12,000 or even $10,000 next can’t be ruled out, according to Harnett. ‘Sadly, there is no intrinsic valuation model for this asset — indeed, there is no agreement whether it is a commodity or a currency — which means that there is every possibility that this could trade lower if we see tight liquidity conditions and/or a failure of other digital entities / exchanges,’ he said.”