Friday Update January 29, 2021

What a fun week we have had across the markets!  Here locally our real estate inventory is still super tight with 212 existing single family homes on the market today.  This represents like a 1 house for every 19 Realtors ratio, and a 1 house for every God knows how many buyers ratio.  This week I saw a property with 22 offers on it and another with 40 offers.  Any agents that are reading this, if you get 40 offers on a property lets go out for coffee so I can teach you how to properly price your listings.

YTD we have 823 closings locally with a median price of $370,000.  Is the housing market crashing because the median price is down?  No.  Statistics are easy to manipulate to help with whatever narrative you're trying to drive.  A 5-10% fluctuation in median price in our market means nothing because the sample size of our sales is lowered by the lack of inventory to sell.

Nationally existing home sales are slightly down also because of the low inventory on a country wide scale.  This is not due to a lack of demand, this is due to a lack of houses for people to look at and consider.

Interest rates are basically the same as last week.  This week we saw some real funky stuff in the stock market and the fear there translated into a drop in the yields on 10 year notes.  Rates there dropped as low as 1% Wednesday night then bounced back to 1.1% this morning.  

The Fed came out Wednesday saying they have no plans to reduce asset purchases and no plans to raise the Fed rate.  So basically just the same old same.  They also said that if inflation spikes they will let in run for a bit and that they don't really see the free money as the reason that we have such high valuations of everything from stocks to real estate.  If you've followed me for a while you know that I know that they fully know that they are lying.

We know the Fed is lying because when you create 4 trillion dollars out of nothing you absolutely drive prices of tangible assets up.  There is really nothing else that could happen.  You can see the graph above that represents current M2 money stock and this graph does not include the 1.9 trillion dollar plan that Biden came out the gates with.  Total Fed balance sheet today sits at about 7.4 Trillion dollars.  This means that at any given moment if the privately owned federal reserve wanted to tank the market, as in the real estate, the bond, the stock market and all other markets near those it absolutely could do so in a heartbeat.  All they would need to do is start selling the holdings they've accumulated with the money that we have allowed them to create out of nothing.  Free market baby!  Tell me more about that bullshit, please!

Some more examples of the free market are making the news this week in a fun way.  Unless you live under a rock I'm sure you've heard of gamestop and short squeezes by now.  Basically retail traders have teamed up through social media to take on insitutional investors by buying up shares that the hedge funds have shorted.  Without going too deep into this all I can say is that what is happening right now and the way it is impacting markets really highlights how fragile and stupid our financial system really is.  Go team reddit, crush the shorts even if I am slightly on the wrong end of them and take SLV to the moon with you.  Why are they doing this though?

You may be aware of this but the current financial system isn't really designed to help the little guy.  As a matter of fact it would be an easy argument to make that the system is rigged against the little guys.  Like for example yesterday multiple brokerage platform including Robin Hood, TD Ameritrade and Schwab blocked the purchase of multiple stocks to "protect the public" while allowing insititutional traders to trade unabated.  On the one hand sure a pyramid scheme is being built and people are going to get hurt by it, but on the other hand let them play the same way as the hedge funds do.  I though it was a free market haha, it hasn't been in decades, but c'mon I thought this was America people!

So long story short here the little guys found a way to hurt the big guys and they're stoked about it.  And I'm stoked too because let's remember the biggest squeeze in recent history and how that played out.

Around 2004-2005 all sorts of creative financing became available in the real estate market and all kinds of people took advantage of it.  The readily available financing, lots of it in the forms of adjustable rate mortgages with balloon payments, drove the cost of real estate up quickly.  When asset prices  do this the average person gets a hard case of the FOMO.  That is fear of missing out.  This is a very basic psychological element that plays off people's loss aversion.  Like for example the fear of losing something is loss aversion, but greed is the fear of not getting enough, which is also loss aversion.  People are silly mammals and the financial system is a byproduct of our ridiculous brains.  Nobody knows how stupid our brains are when it comes to money better than the banks who have all the money.  So this is how the set up for the squeeze started.

Give people easy money which they spend on real estate.  As the price of real estate goes up more and more people get the FOMO and want to get in on the party.  The banks give out more and more loans, prices keep shooting up, people get more and more FOMO, housing prices can only go up and are going to the moon and so the cycle perpetuates itself.  Until it doesn't.

2008 was a liquidity crisis basically just meaning that the banks thought it was prudent to stop doing the stupid shit they've been doing and pretend to be upright businesses for a bit.  The easy money stopped, the real estate market inventory was already saturated and became much more saturated with foreclosures as loans started to fail.  Turns out all those waiters and waitresses that took out $500,000 mortgages couldn't actually repay them, go figure!  (True story in 2005 I was a bartender making about 45k a year and Bank of America offered me a 500k loan)  And so as the easy money dried up and supply far exceeded demand the price of housing dropped like a sack of potatoes, 20-70% depending on the city you were in.

You guys probably remember this mess.  It was the borrowers' fault, it was the fault of the predatory lenders, it was the government's fault for not doing enough and so on.  It was all like #occupywallstreet and no bail outs and eat the rich!!  But really it was just greed that blew up a bubble.  And now that the bubble popped our subhuman (or superhuman) friends with all the money were able to finish the squeeze.

You see by 2013 or so the housing prices started to level out and even rebound.  This in technical analysis would be called a support level and the people holding all the money understand that.  So while the average person was still feeling pretty burned by the whole bubble bursting the smart money got busy buying up real estate.  Large conglomerates started buying up foreclosures and ultimately any real estate deeemed worthy of turning into a rental.  In the years after the 2008 pop the rate of homeownership dropped by about 6% while rents increased at a steady clip.  I got into real estate in 2013 and I had so many people tell me what a dumb idea it is to buy a house.  Fun fact, most of those people today are broke.

So let's recap.  Easy money hit the market and lenders made a killing dishing out shit mortgages to people that were more than happy to take them.  Asset prices shot up, more shit loans went out, and the FOMO was raging.  Then the liquidity faucet got shut off, prices dropped, the people with like 8 days worth of savings in their bank account quickly lost their homes and the real estate market became saturated with supply and prices dropped further.  At this point the smart money jumped in to buy up literally millions of homes to turn into rental backed securities, and in the smaller scale just rentals.  

As the institutional investors were buying up all the property the common man started to see real estate prices rising again.  By 2015 it became pretty obvious the market was in an uptrend but it wasn't until probably 2017 or so that everyone was convinced of it.  By 2018 we had full on FOMO in the market again and still do.  The institutional investors are now holding millions of properties that are worth at least 200% more than they paid for them and are returning rents that are at least 80% higher than they were in 2008.  Meanwhile the average person is squeezed by the lack of affordable housing and we have an exploding population of people living in RVs or worse.

And so in turn that's why the retail traders are so excited to hurt the hedge funds in any way they see possible.  I'm excited for them too but I have this hesitation about it knowing that at the end of the day Wall Street will still win.  They're playing with our money, not theirs!  And so any losses that the retail traders are able to dish out will ultimately translate into losses for your average investors as other sectors of the market are dumped to cover the losing shorts.  Losing their shorts haha, that's for us to do, not for Wall Street.