Mortgage rates just hit 8 percent (Freddie Mac claims we are still at a crisp 7.63% good job massaging those numbers boys) per Mortgage News Daily. Time has shown no society that has adopted the symbol of a serpent eating his tail has survived. A fall in rates is not only likely but inevitable.
Personally I prefer a phoenix or Jesus Christ as a birth, death, renewal cycle, but since we are talking about the snakes in New York, Washington, and even China it is fitting. Let’s rewind this pre-covid. Blackrock, Blackstone, and Vanguard had their various REIT ETFs with baskets and some investment properties. This is a surprise to most people, but these leviathan pension/retirement fund holders don’t want problems like tenants.
This all changed because of a virus where videos of Chinese people falling over in the street became commonplace. The FED lowered the cost of borrowing to banks to 0-0.25% and quadrupled the money supply producing an M1 graph so embarrassing they discontinued it. What would you do if you had access to millions of dollars at 0.25% interest and bonds were paying almost dirt nothing? Every asset inflated, but particularly the housing market became low inventory very quickly with people sometimes having lines out the doors for showings and getting +50 offers. Blackrock was reportedly was buying houses spread geographically as to not get overweight in any one neighborhood. This rush to the doors created huge increases in housing prices, but at a 3% interest rate the price was right for buyers at the time. Remote workers were repeatedly scapegoated for causing the huge runup in prices in rural areas, but I’d say that claim is dubious at best given what we know about who was buying what.
Fast forward and now the FED is on a continued warpath to fight inflation. How do you get Blackrock and Blackstone to stop sucking the blood of people who just want to buy their first home? The FED adopted the predator satiation strategy which was the strategy of the now extinct passenger pigeon. Why buy tenants with problems when you can get a 30 year AAA *ahem* excuse me AA bond with 5% interest from the US Treasury? This would all be an okay bargain if it meant buyers could buy a home at an affordable interest rate, but monetary policy is pretty one-sided and usually those at the bottom get squeezed the hardest. The bible put it very succinctly.
“For whoever has will be given more, and they will have an abundance. Whoever does not have, even what they have will be taken from them.”
Add in the pressures of foreign real estate investments like Country Garden and Evergrande (the two biggest real estate firms in a country of over a billion people aka 1/7 the Earth) failing and you see why Larry Fink is saying the market is having a “flight to quality.” Things like Bitcoin, gold, US real estate, and in his opinion US treasuries are where investors can shield themselves from geopolitical risks in stocks and commodities. There is still low inventory, but there is some data which shows a reversal in prices is about to unfold unless interest rates are dropped. AirBnBs have been decimated, with the CEO declaring the company is “fundamentally broken“. Mortgage delinquencies are fairly low, but some are saying this will tick up in Q3 reports. Rents are decreasing overall albeit very slightly with the Midwest outperforming the group since the FED began raising rates.
When the printers spin up again how much will rents and home prices increase this time? Can the housing affordability index plunge to new all time lows? Only time will tell. More like Nevergrande am I right?