OT: Why the real estate market is not in a bubble: Q1 2023 update video added to OP

[Rutgers Chris]

Wells Fargo stepping back from the mortgage business. They have traditionally been the biggest player in the business. Any thoughts ?

Wells Fargo, once the No. 1 player in mortgages, is stepping back from the housing market

It's the latest, and perhaps most significant, strategic shift that CEO Charlie Scharf has undertaken since joining Wells Fargo in late 2019.

www.cnbc.com

They’ve struggled with following laws it seems

Wells Fargo Ordered to Pay $3.7B for Array of Violations - NerdWallet

Wells Fargo fines add up to $1.7 billion, along with $2 billion in consumer redress for "illegal conduct" across several business lines. The CFPB has ordered the bank to pay up.

www.nerdwallet.com

 

[RUDead]

They’ve struggled with following laws it seems

Wells Fargo Ordered to Pay $3.7B for Array of Violations - NerdWallet

Wells Fargo fines add up to $1.7 billion, along with $2 billion in consumer redress for "illegal conduct" across several business lines. The CFPB has ordered the bank to pay up.

www.nerdwallet.com

That's a reoccurring theme with them. Bad corporate culture.

But they are a big player so curious what implications this may have, if any.

 

[Wolv RU]

This is a great point. Whos in better shape the person who buys a house for $600K 20% down at a 2.875% rate or the person who buys a home a year later for $575K with 20% down at 6.25% rate?

This seems less than ideal for all sectors of the economy in 2023:

 

[anon_0k9zlfz6lz9oy]

This seems less than ideal for all sectors of the economy in 2023:

Now look up excess savings built up during pandemic and what thats at now.

 

[RUTGERS95]

Wells Fargo stepping back from the mortgage business. They have traditionally been the biggest player in the business. Any thoughts ?

Wells Fargo, once the No. 1 player in mortgages, is stepping back from the housing market

It's the latest, and perhaps most significant, strategic shift that CEO Charlie Scharf has undertaken since joining Wells Fargo in late 2019.

www.cnbc.com

they were also the only bank to do well during the fiasco of sub prime and a strong Alt A balance sheet. This will create some issues in the RE mkt

 

[anon_0k9zlfz6lz9oy]

Cpi is being murdered. We may see rates in the 5’s by tomorrow after todays cpi print. Cpi minus lagged shelter is nuts. And since oer is so lagged we already know what those prints are in the coming months on the oer side. And oer makes up close to 30% of total cpi

 

[Plum Street]

Cpi is being murdered. We may see rates in the 5’s by tomorrow after todays cpi print. Cpi minus lagged shelter is nuts. And since oer is so lagged we already know what those prints are in the coming months on the oer side. And oer makes up close to 30% of total cpi

5 percent mortgage rates ? So that means still buyers and no collapse or bubble ?

 

[anon_0k9zlfz6lz9oy]

5 percent mortgage rates ? So that means still buyers and no collapse or bubble ?

Not 5% but have a 5 handle tomorrow. Rate quotes coming in 5.875% right now after checking with lenders.

There never was a bubble, collapse was never happening. All we had to do was look at the data. And again, we defined bubble as prices retracing to March 2020. If rates settle 5.5-5.75% youre looking at peak to trough declines somewhere in the vicinity of 5-7%.

 

[Morrischiano]

DC home prices lower than a year ago for first time in years - WTOP News

For the first time since September 2016, the median selling price of homes in the D.C. area is lower than it was a year ago.

wtop.com

 

[Knight Shift]

US real estate market in ‘big trouble,' expert warns

Pulte Capital CEO Bill Pulte and Thor Equities CEO Joe Sitt explain why U.S. real estate is headed towards "big trouble" in 2023 and could put "a lot of things to a stop."

finance.yahoo.com

 

[DanRU]

Not 5% but have a 5 handle tomorrow. Rate quotes coming in 5.875% right now after checking with lenders.

There never was a bubble, collapse was never happening. All we had to do was look at the data. And again, we defined bubble as prices retracing to March 2020. If rates settle 5.5-5.75% youre looking at peak to trough declines somewhere in the vicinity of 5-7%.

Prices in March, 2020 were at what many would consider a normal level. Increases since then until a few months ago were in the range of 50% and higher in some areas. To bring prices back to that level would mean 0 appreciation for 3 years which is pretty unlikely. I wouldn't be surprised to see a 20-30% drop from the peak which would still show appreciation from 3/20 and if there is a decrease of that much, many would consider it as a burst bubble.

 

[anon_0k9zlfz6lz9oy]

Prices in March, 2020 were at what many would consider a normal level. Increases since then until a few months ago were in the range of 50% and higher in some areas. To bring prices back to that level would mean 0 appreciation for 3 years which is pretty unlikely. I wouldn't be surprised to see a 20-30% drop from the peak which would still show appreciation from 3/20 and if there is a decrease of that much, many would consider it as a burst bubble.

Agreed. If prices were to drop 25% (the middle of your range) it would be a bubble of sorts. Not going to happen though imo

 

[pmvon]

My forecast barring another major move up in rates for price declines of 5-10% and then flat for a while.

 

[fg7321]

People cant afford homes at these prices. Rents are insane as well. That cant continue and the only way that can be corrected is to get home prices so they are affordable. The only way that can happen is to continue to raise rates. That creates less demand.

Long term as baby boomers move out to retirement homes/ die off etc more inventory will come onto the market. That will increase supply. Your not going to see any increases in home prices if you bought in the last two years. You cannot ignore the demographics.

 

[jtung230]

People cant afford homes at these prices. Rents are insane as well. That cant continue and the only way that can be corrected is to get home prices so they are affordable. The only way that can happen is to continue to raise rates. That creates less demand.

Long term as baby boomers move out to retirement homes/ die off etc more inventory will come onto the market. That will increase supply. Your not going to see any increases in home prices if you bought in the last two years. You cannot ignore the demographics.

They need to get the institutional money out. Good way to do that is have a 2nd home real estate tax. Think they do that in parts of SC.

 

[pmvon]

People cant afford homes at these prices. Rents are insane as well. That cant continue and the only way that can be corrected is to get home prices so they are affordable. The only way that can happen is to continue to raise rates. That creates less demand.

Long term as baby boomers move out to retirement homes/ die off etc more inventory will come onto the market. That will increase supply. Your not going to see any increases in home prices if you bought in the last two years. You cannot ignore the demographics.

Or prices remain flat as wages rise

 

[yessir321]

People cant afford homes at these prices. Rents are insane as well. That cant continue and the only way that can be corrected is to get home prices so they are affordable. The only way that can happen is to continue to raise rates. That creates less demand.

Long term as baby boomers move out to retirement homes/ die off etc more inventory will come onto the market. That will increase supply. Your not going to see any increases in home prices if you bought in the last two years. You cannot ignore the demographics.

It’ll be a bit before equity is seen, but the market has always and will continue to increase over time. I promise you 10 years from now house prices will be higher.

The other issue to deal with is material cost. New construction simply can’t buy the materials as cheap as they used to. Same premise as restaurants increasing pricing

 

[RUAldo]

It’ll be a bit before equity is seen, but the market has always and will continue to increase over time. I promise you 10 years from now house prices will be higher.

I tend to agree absent a major correction. But what always amazes me is the stories like my buddy whose parents bought their brownstone in Brooklyn in the 60’s for $50K. It’s now worth over $2M. Assuming my math is correct that would be like buying a house for $1M in Northern NJ today and in 50+ years it’s worth $40M. Mind boggling.

 

[pmvon]

It’ll be a bit before equity is seen, but the market has always and will continue to increase over time. I promise you 10 years from now house prices will be higher.

The other issue to deal with is material cost. New construction simply can’t buy the materials as cheap as they used to. Same premise as restaurants increasing pricing

Yes replacement cost is another underpinning for real estate. More important than material costs is labor costs which are even stickier.

 

[yessir321]

I tend to agree absent a major correction. But what always amazes me is the stories like my buddy whose parents bought their brownstone in Brooklyn in the 60’s for $50K. It’s now worth over $2M. Assuming my math is correct that would be like buying a house for $1M in Northern NJ today and in 50+ years it’s worth $40M. Mind boggling.

Oh don’t get me started. I’ve been criticized on this board for going after baby boomers and what you just outlined is exactly why. They privatized everything, and over 40 years let the American infrastructure die by slashing rates and keeping their own pockets as full as they could.

There once was a level of checks and balances, the boomers threw that out the window and wanted everything for themselves.

 

[yessir321]

Yes replacement cost is another underpinning for real estate. More important than material costs is labor costs which are even stickier.

Over time yes this is true. Right now is a bit weird. I mentioned earlier that I’m the regional director of sales in the Baltimore division for a new home builder. Right now we have contractors BEGGING for work even offering to work for less. Problem is for many of them, there just simply isn’t work right now.

Maybe one of these days Jerome Powell will get his head out of his ass

 

[anon_0k9zlfz6lz9oy]

They need to get the institutional money out. Good way to do that is have a 2nd home real estate tax. Think they do that in parts of SC.

Conspiracy theory. Institutions arent buying grandmas house. Theyre buying build to rent communities

 

[anon_0k9zlfz6lz9oy]

This right here largely answers what most are probably scratching their head over looking back at their replys to the op in june. People were so sure we were in a bubble but that was just because they didnt look at the data. Thats why i started this thread to begin with, to lay out the data

 

[anon_0k9zlfz6lz9oy]

People cant afford homes at these prices. Rents are insane as well. That cant continue and the only way that can be corrected is to get home prices so they are affordable. The only way that can happen is to continue to raise rates. That creates less demand.

Long term as baby boomers move out to retirement homes/ die off etc more inventory will come onto the market. That will increase supply. Your not going to see any increases in home prices if you bought in the last two years. You cannot ignore the demographics.

Our demographics are the best in the world along with france.

Were in pretty good shape there, at least for the next 15-20 years before we even have to think about demos. Millenials are the largest generation ever and gen Z while not as big is pretty strong in numbers too.

Next 15-20 years will see alot of issues. China likely collapses over that period and russia is in demo hell as well and its likely something very substantial happens to that country. Two really good books on demographics and global insight are
Amazon product ASIN B09CS8FRRDAmazon product ASIN 1599327228

 

[pmvon]

Over time yes this is true. Right now is a bit weird. I mentioned earlier that I’m the regional director of sales in the Baltimore division for a new home builder. Right now we have contractors BEGGING for work even offering to work for less. Problem is for many of them, there just simply isn’t work right now.

Maybe one of these days Jerome Powell will get his head out of his ass

Agree in the short term but overall wages are not declining particularly at the lower end of wages. The other thing you are highlighting is a reduction of development into an under supplied residential market which should also reduce impacts on pricing. No doubt prices will decline and some areas will see larger declines (the ones that were the hottest) but this isn’t the GFC or anything remotely like it. That being said, if inflation doesn’t dissipate and Powell keeps going, all bets are off.

 

[anon_0k9zlfz6lz9oy]

Agree in the short term but overall wages are not declining particularly at the lower end of wages. The other thing you are highlighting is a reduction of development into an under supplied residential market which should also reduce impacts on pricing. No doubt prices will decline and some areas will see larger declines (the ones that were the hottest) but this isn’t the GFC or anything remotely like it. That being said, if inflation doesn’t dissipate and Powell keeps going, all bets are off.

Wages are increasing at a slower pace. The most recent report was a pleasant surprise.

CPI is 1.8% if you annualized the past 6 months, which is nuts. Yes, core is slightly higher and thats what the fed looks at but the largest chunk of that is OER which is lagged and we already know what those prints will be over the next number of months. I dont think spreads come in on mortgages to historic norms until fed goes 3+ straight meetings without a hike

 

[pmvon]

Wages are increasing at a slower pace. The most recent report was a pleasant surprise.

CPI is 1.8% if you annualized the past 6 months, which is nuts. Yes, core is slightly higher and thats what the fed looks at but the largest chunk of that is OER which is lagged and we already know what those prints will be over the next number of months. I dont think spreads come in on mortgages to historic norms until fed goes 3+ straight meetings without a hike

Spreads have already started to decline on agency mortgages.

 

[RUskoolie]

Over time yes this is true. Right now is a bit weird. I mentioned earlier that I’m the regional director of sales in the Baltimore division for a new home builder. Right now we have contractors BEGGING for work even offering to work for less. Problem is for many of them, there just simply isn’t work right now.

Maybe one of these days Jerome Powell will get his head out of his ass

I'm a small GC but noticed the same in the last few months. Two different crews I use for apartment cosmetic updates came looking to me for work and I just bid out sheetrock on a new house I'm building and my sheetrock guy asked what price I needed because he needs to keep his guys busy.

Last time I had people asking me for work was March 2020.

Lumber is also way down. I don't buy it from HD because it's crap there but needed to pick up 16 pieces and it was $3.35 for a 2x4, that was hitting $8 last year.

 

[anon_0k9zlfz6lz9oy]

Spreads have already started to decline on agency mortgages.

Yup, guy i know got a sbl at 4.9%. Granted it was only 65% leverage and 1.30 dscr

 

[RUAldo]

I'm a small GC but noticed the same in the last few months. Two different crews I use for apartment cosmetic updates came looking to me for work and I just bid out sheetrock on a new house I'm building and my sheetrock guy asked what price I needed because he needs to keep his guys busy.

Last time I had people asking me for work was March 2020.

Lumber is also way down. I don't buy it from HD because it's crap there but needed to pick up 16 pieces and it was $3.35 for a 2x4, that was hitting $8 last year.

I haven’t seen any contractors begging but there seems to be a demand shift occurring. BTW, my cousin is a contractor specializing in sheet-rock, light gauge framing, drop ceilings, etc. if you are interested. One of the best in the business he does a ton of commercial but now doing a lot of res work. Thankfully he rebounded from COVID disruption with materials/labor and still picking up new construction projects and finishing basements. But I think service sector may be getting nervous.

 

[anon_0k9zlfz6lz9oy]

one of a few great charts from Bill McBride in his piece today

The Housing Bubble and Mortgage Debt as a Percent of GDP

In a 2005 post, I included a graph of household mortgage debt as a percent of GDP. Several readers asked if I could update the graph. First, from February 2005 (18 years ago!): The following chart shows household mortgage debt as a % of GDP. Although mortgage debt has been increasing for years...

open.substack.com

Average credit score of a borrower currently is 768 and average ltv on homes with mortgages is only 42%. And 40% of homes dont have a loan to begin with which is not accounted for in the ltv number because then it would obviously make it stupid low

 

[krup]

one of a few great charts from Bill McBride in his piece today

View embedded media

The Housing Bubble and Mortgage Debt as a Percent of GDP

In a 2005 post, I included a graph of household mortgage debt as a percent of GDP. Several readers asked if I could update the graph. First, from February 2005 (18 years ago!): The following chart shows household mortgage debt as a % of GDP. Although mortgage debt has been increasing for years...

open.substack.com

Average credit score of a borrower currently is 768 and average ltv on homes with mortgages is only 42%. And 40% of homes dont have a loan to begin with which is not accounted for in the ltv number because then it would obviously make it stupid low

Since government spending is part of GDP, and government spending has accelerated greatly in recent years to the point we run huge annual deficits, using any historical comparison of “X as a percentage of GDP” is misleading.

 

[anon_0k9zlfz6lz9oy]

Since government spending is part of GDP, and government spending has accelerated greatly in recent years to the point we run huge annual deficits, using any historical comparison of “X as a percentage of GDP” is misleading.

Thats fair, population has grown as well though.

Is average LTV nationwide of 42% on homes that have loans and 40% of homeowners not having a mortgage misleading?

 

[krup]

Thats fair, population has grown as well though.

Is average LTV nationwide of 42% on homes that have loans and 40% of homeowners not having a mortgage misleading?

I am not going to get into any of your other numbers. I just hate that use of GDP as a statistic for comparisons like this, or even for use in judging when we are in a recession or not, because the government basically gets rewarded by their statistics looking better when they overspend.

 

[anon_0k9zlfz6lz9oy]

I am not going to get into any of your other numbers. I just hate that use of GDP as a statistic for comparisons like this, or even for use in judging when we are in a recession or not, because the government basically gets rewarded by their statistics looking better when they overspend.

Sure but its all relative. When the gov spends more, asset prices inflate which makes the underlying debt less of a burden.

Theres a ton of ways to slice the data, but it all points more or less in the same direction.

 

[RutgersNo1]

 

[anon_0k9zlfz6lz9oy]

View embedded media

Haha dont link gerli. Hes a youtuber and since 2011 has been calling for a collapse. Estimated he makes $250K/yr off his youtube page views. Hes called 13 of the last zero crashes and has refused any debates because he knows hes a grifter who prays on fools haha

With that said, cancel rate is true. People went under contract a year ago when rates were 2.875% and now cant qualify for that same price at 6.20%

Mortgage rates gonna touch the 5’s today. Markets not in a bubble and people gotta stop reaching for it to be 2008

 

[RUAldo]

Haha dont link gerli. Hes a youtuber and since 2011 has been calling for a collapse. Estimated he makes $250K/yr off his youtube page views. Hes called 13 of the last zero crashes and has refused any debates because he knows hes a grifter who prays on fools haha

With that said, cancel rate is true. People went under contract a year ago when rates were 2.875% and now cant qualify for that same price at 6.20%

Mortgage rates gonna touch the 5’s today. Markets not in a bubble and people gotta stop reaching for it to be 2008

Lack of inventory only thing keeping the housing market afloat. People have no choice but to pay up and swallow mortgage rates that are more than double or triple what they were not long ago if they want a house that badly.

 

[anon_0k9zlfz6lz9oy]

Lack of inventory only thing keeping the housing market afloat. People have no choice but to pay up and swallow mortgage rates that are more than double or triple what they were not long ago if they want a house that badly.

Aka supply and demand, of course. Which I pointed out in the OP. All of this shouldn't come as a surprise. We are anywhere from 4-5mm housing units short with 40% of homeowners not having a mortgage and somewhere between 63%-73% having rates below 4% with average ltv’s of 42%. Why sell?

 

[pmvon]

Better chart. Another thing that will help housing.