patrick.net

The housing market is entering a massive slowdown and only the naïve and delusional will ignore the red warning signs. First, there is this odd narrative that housing continues to excel and thrive in the current market. “Inventory is low therefore the market is hot” or “7% interest rates can’t stop the equity train baby!”

This seems to be the mentality at this point. But the reality is, $2.3 trillion in housing wealth was wiped out in 2022, the most since the Great Recession in 2008. $2.3 trillion is a lot of equity that has gone up in smoke but somehow, the delusional housing brigade continues to beat on the “real estate never goes down” tagline.

Keep in mind why real estate prices shot up. First, we had dangerously artificially low interest rates brought on by the Fed during the pandemic. Those rates were never “healthy” and with inflation raging out of control, the Fed has had to slam on the breaks. The idea of the free lunch is strong in a lot of people.

Second, people were confined to their homes for two-years and many thought remote work was here to stay. That is absolutely not the case as companies bring people back either full-time, 4-days a week, or 3-days a week. In other words, being stuck at home is over and 2022 cleared out a ton of inflated equity.

The last time we’ve seen this much destruction in real estate wealth was in 2008 at the core of the housing crash. So many people were saying that this was not possible because NINJA loans were not here or that lenders were the perfect example of financial prudence. Absolutely not! We had millions of people on pandemic forbearance, coupled with the Fed going Chernobyl on rates, and finally people thinking the home was the new office for life. All of that is reversing and reversing fast.

2022 wiped out that first layer of equity to the tune of $2.3 trillion. If you are selling today, your audience is looking at 7% mortgage rates and a tighter economy. You are now in a stucco sarcophagus like an Egyptian Pharaoh except instead of being buried with gold treasure, you will be buried with your Ikea ottoman and Double-Double from In-N-Out.

As we look forward, it should be obvious that we are in a cycle of a correction. Housing takes a long-time to go up and a long-time to go down. Unlike the stock market that can go mark-to-market in a day, housing takes a long time because you have delusional homeowners that can sit back until the good days come (or until they need to pay the bills and run out of cash).

Next, you have troubling financial behavior by the public:

The spending rate has plummeted and consumer debt is at record levels. Keep in mind that consumer debt rates are off the charts. Cheap money is gone. Some places are offering 90-month car loans which should come with a therapist appointment. You can get 5% nearly risk free with US Treasuries.

So why would a Wall Street investment firm buy tons of properties to gain a similar yield? We’ve seen places like Zillow and Opendoor take big hits because they overpaid with their algorithm that was built on higher and higher prices. These only work when buyers are willing to overpay.
Mortgage demand is also now at a 28-year low:

The vast majority of people beyond foreign buyers and Wall Street banks actually need a mortgage to purchase a crap shack. And like any market, you have leading indicators. New Homes are very telling since builders need to get rid of the inventory. And guess what? People are canceling contracts at very high levels:

Home builders have done everything to avoid lowering prices: incentives, upgrades, buy downs, and any other gimmick. But now, they are pulling the trigger on prices which will trickle down to your Taco Tuesday baby boomers that now think their crap shack is worth $1 million just because Zillow or Redfin says so.

The market is correcting with $2.3 trillion being incinerated. So are you buying, investing, or selling in 2023?

http://www.doctorhousingbubble.com/the-correction-is-here-with-home-values-declining-by-2-3-trillion-in-2022-personal-savings-plummets-with-record-consumer-debt/