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3-10 HANSON: Housing Market…”RETURN-TO-NORMAL” Cycle Starts Now?
If this is the long awaited “return-to-normal” for housing demand (and prices) — when 37% of all purchases are NOT by investors and speculators, and historically high vacancies are liquidated in exchange for growth assets — get ready to buy houses at much lower prices.
1) A step-higher in jobs and a 2.8%yy wage increase will sell some houses, no doubt.
But, WHAT REALLY GETS HOUSING ROARING IS THE FED — drawing “unorthodox” demand, capital, credit, and liquidity into the sector — turning houses into an alternative asset class, driven by a chase for yield.
BOTTOM LINE: A lift in fundamental, end-user, jobs-driven, PRICE-SENSITIVE, housing demand (Average-Joe) is a notable “DOWNSHIFT” compared to how the greatest Central Bank monetary policy experiment and Gov’t debt creation cycle in the history of the world drove the housing sector over the past 6-years.
2) In fact, in 2007/8, when the exotic mortgages (“unorthodox credit”) — that turned everybody into a millionaire for the purposes of qualifying for a mortgage — went away all at once and the housing market “REATTACHED” to end-user, mortgage-needing, shelter-buyer fundamentals, it meant a housing crash.
BOTTOM LINE: In this cycle too, if an improving “Average Joe economy” leads to continued change in nuclear, Fed monetary and Gov’t borrowing policy, which in turn leads to a reduction in flows of “unorthodox” capital, credit, liquidity, and demand — that ignited all assets prices, globally, over the past 5 years — then, housing will once again be drawn to end-user, mortgage-needing, price-sensitive, shelter-buyer fundamentals, which in most core, markets nationwide, sits far below present house prices.
3) TO SUM IT UP, HOUSING IS ALWAYS drawn to, and underpinned by, the employment and income fundamentals of the “Average-Joe, end-user, mortgage-needing, price-sensitive, shelter-buyer” cohort.
After long-periods of stagnant housing, for example, this reattachment can mean a lift to house demand and prices. But, after a long-period of the most nuclear Fed and Gov’t spending policy in history, “this” housing market reattaching to the “Average-Joe” is a disaster, especially if the past several years of Fed-induced, “unorthodox” demand moves to the sidelines. OR WORSE, if Fed-induced/inspired cohorts begin to liquidate their housing, “bond-replacement-trades” in search of growth elsewhere.
4) Ask yourself, of the five pillars of housing demand that drove housing for years, listed below, can core markets, nationwide, sustain if the demand from ITEM B) ebbs?
ITEM A) Fundamentally driven demand:
• Price-sensitive, end-user, mortgage-needing, shelter-buyers, both first-timers, and move-up.
ITEM B) Fed-induced, or inspired demand:
• Relentless, less-price-sensitive, institutional buy-to-rent demand – riding a wave of cheap and easy credit and liquidity — using housing as a bond-replacement trade;
• Private speculators, with cheap and easy credit and liquidity, chasing said insti’s, buying at a pace of 10:1 for rentals and flips;
• Unsustainable, STEM-sector growth – on endless cheap and easy credit and liquidity — driving outsized demand in core, leading-indicating regions;
• And price-insensitive foreigners — either with rich foreign currencies relative to the US dollar, as during most of the Bubble 2.0 cycle, or looking to hide cash — looking at US dollar denominated real estate as cheap.