Friends of ResiShares -
Some of us over here are old enough to remember a time long ago, when global asset prices were accelerating in all directions amidst direct federal stimulus and zero interest rates. Thirty-year jumbo mortgages went for 3%. NFTs, untested cryptocurrencies, and the equity securities of money-losing businesses largely indistinguishable from said NFTs and cryptocurrencies called into question long-held beliefs about entire sub-fields of economics. To keep the flame of hope alive through the current spell of darkness, we must not forget those halcyon days of ancient history, 9 long months ago…
When you tell people that you’re an orthopedist, the next words out of their mouth are typically “you know I’ve had this pain in my…” Readers can imagine, after the virtually indiscriminate, nationwide run we’ve had in home prices and rents and the subsequent sharp reversal in financial conditions, what the most popular conversation was amongst the friends and family of the ResiShares team at this past weekend’s July 4th barbeques.
As much as the financial media op-eds in our daily news feeds suggest the path forward on housing prices is an obvious unwind of recent gains, reality, as usual, may not be as easy to predict. So unfortunately no, this note does not contain any predictions on the housing market. We leave that to the self-proclaimed experts. Instead, we give you Hyman Minsky.
In 2008, the New Yorker described the tipping point in the housing market as a “Minsky Moment,” the exact moment in time when the market’s participants, like Wile E. Coyote, looked down after running well beyond the cliff. Minsky’s research was focused broadly around the power relationships of shareholders and managers structurally inherent to the economy, especially the degree to which those relationships incentivized taking on financial leverage. According to his theories, bubbles were always and everywhere a function of so-called “Ponzi finance,” in which market participants took on debt that they knew could only be serviced by asset price growth, and not by underwritten cash flows.
Clearly, the housing market during the ‘08 financial crisis fits this description. In the prior cycle, it accurately described retail accounts flipping tech IPOs on margin in the late nineties. This time around, Ponzi finance seems a bit more broadly distributed throughout the financial markets. With the exception of the crypto/blockchain world which, as a nascent and poorly understood asset class, is uniquely susceptible to this sort of hyper-cyclicality, the current financial tightening does not appear to have a single epicenter. For instance, while certain parts of the stock market have undergone massive drawdowns from irrational highs, quite possibly financed by retail margin loans, corporate balance sheets remain generally healthy. It is not unreasonable to assess that the housing market is similarly positioned, with geographic and socioeconomic pockets of overextended pricing sprinkled amongst other areas and price bands that are more well-supported.
Given the national trauma of the ‘08 crisis, it feels almost unnatural to see financial tightening and possible recession in which housing does not play a prominent role. One might argue that to the extent housing price growth slows, it will be a function of “stockout” pricing, in which the market is forced to kill demand to ration limited supply by pricing above affordability. This is what drives commodity prices, for instance, and housing in this environment does begin to look a lot more like a commodity than a security.
Inventory, while rising from recent lows, is still below any historical average, and unaffordability, due not just to rising prices but rising rates, continues to limit home ownership opportunities. Meanwhile, policy makers appear poised to subsidize demand instead of addressing the fundamental lack of supply.
Ultimately, home price movement during this upcoming period will depend heavily on changes in real demand for housing, itself a function of variables that are difficult to predict, including consumer preferences.
Rest of Resi
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