[00:00:12] Good morning. Well, sometimes you get these news bits and they’re so dense, like they’re just hard to get through. And so I’m going to butcher this today and come along with me for the ride because I think it’s worth looking into. It’s just my abilities to translate that information to anyone is limited.

[00:00:37] If that isn’t a ringing endorsement to keep watching, I don’t know what is. Let’s get to it.

[00:00:42] We have this fascinating article how the Fed destroyed the housing market and created inflation in pictures. Now. Look, I’m not anti fed. I’m not anti this.

[00:00:56] I’m blown away by general economic theory being just not even being paid attention to by people that are supposed to know better.

[00:01:09] That part blows my mind. But as far as ending the Fed or anything like that, I’m not there.

[00:01:18] Maybe I will be at some point. But let’s look into this article. So the first line, the Fed erroneously does not consider rising home prices as inflation. Here’s the result in pictures. Now, this is key, okay? I got into real estate, honestly, because I thought of it as a hedge against inflation. And what I mean by that is I typically get paid on a commission of the sale of a price of a home, okay? That’s how I get paid. So I always thought that should inflation rise, house prices would also rise, and therefore it would clean up my inflation problem. So any dollar I made was still decent, at least still par with inflation. That’s the way I looked at it, okay? And I still do. Now, if that’s wrong, we’ll find out. But I always believed that was a very right way to look at things, okay? Now, the problem is, and as I’ve been in the business, people don’t look at inflation in housing. For some reason, they pretend it doesn’t exist. And I don’t know why. But let me give you my best example of this.

[00:02:40] When a homeowner is thinking about selling their home, they come to me and they call me and they say, hey, I’m ready to sell my house. And we look at the comps, and it turns out that they bought their house in 1980 and it was like 50,000, and now their house is worth 300,000. And they’re just elated. They think that’s fantastic, okay? And I’m just using numbers off the top of my head. They don’t look at that as like, hey, there’s inflation. There like a lot of it, okay?

[00:03:13] And I’m not criticizing people. It’s the same thing, though, for me. When people get excited about their house prices going up and then not realizing that their tax bill is also going to go up at the same time.

[00:03:26] It’s just weird stuff like that. Or they don’t care either way. So anyway, we have this chart, okay? And the point of the article is, again, there’s a detachment between what the Fed believes is their mandate to keep inflation at 2%. And what really goes on the housing market, like they’re not paying attention to the housing inflation. Okay, so it says for twelve years, home prices OER, which is owner’s equivalent rent, and the overall CPI rose together. That changed in 2000 with another trendline touch in 2012. Then it was off to the races as the Fed did another round after round of QE suppressing mortgage rates. So we look at the top chart we see right here, 2002, we’ve got things going a little crazy, started in 2000. He’s saying that it started in 2000, which is this a year by year. So it’s close, it comes back to the trendline and then it just goes crazy. Okay, it decouples. All right.

[00:04:24] So then he shows another chart.

[00:04:27] And this is the Case Schiller Home Price Index, where again, you see this break between the home price index and average hourly earnings and CPI and the CPI of your primary residence. So it says how much are homes overpriced? If the twelve year trend of home prices rising with the average hourly earnings stayed intact, the home price index would be 211, not 308. From that we can calculate home prices are too high. 211% too high, roughly 40. I’m sorry, that was divide by 211% too high, roughly 46% too high. If you prefer. Home prices would need to fall roughly 31%. Alternatively, if home prices stagnate for years, wages may eventually catch up.

[00:05:16] So what he’s saying there is the red line would go up and match this one, which I don’t know, the wages is a whole nother problem. Says that same house that cost 150,000 in 1988 now costs $678,366. But wages have gone up too, and mortgage rates have had wild swings. So here he compains mortgage payment and wage adjusted mortgage payment. Okay? And so you see the split. You’ve got your wage adjusted mortgage payment and your mortgage payment. It says factoring in wage growth, home prices and mortgage rates, homes are the most expensive ever.

[00:05:57] It’s actually much worse than the chart indicates because property taxes and insurance are not factored into and you’ll hear people and no fault of anyone, but they’re like there’s this animosity for people that say, well, we had it terribly in the 80s, in the early 80s with runaway inflation.

[00:06:21] Yes.

[00:06:22] The argument is that at that time you would still be able to afford things because your wages were similar, your wages were in line with what you could purchase. And what they’re saying now is that the wages are in nowhere close to the expenses for at least owning a home.

[00:06:49] So then through massive and totally unwarranted QE foolishly, hoping to create more inflation, the Fed suppressed interest rates to record lows and mortgage rates followed. So there was actually a time where the Fed thought that we didn’t have enough inflation and that was the time when it was not great. So anyone with an existing mortgage could and did refinance at 3% below this increased affordability. And we now have two classes of people courtesy of the Fed, winners and losers, existing homeowners who refinance low and those who want to buy, which is absolutely true. As I sit here today, I have people that will not sell their house because they’re telling me they will never sell their house because of the interest rate that they have.

[00:07:34] Also, it’s led to some changes in how those people act. So if they have a 3% mortgage, I’d say half of the people I talked to had plans in place to pay off their mortgage over a shorter period of time than 30 years. Now they’re saying with money so cheap, I’m not paying it off, I’m just letting it ride. I don’t care. I mean, I’m never going to get a rate like this again.

[00:07:58] I don’t even need to make extra payments, I’ll just keep the mortgage. It’s so cheap. And so it’s changing behaviors.

[00:08:07] And then the people that want to buy are just looking at everyone else and saying, how are you able to afford this? I mean, everything is more expensive
now, including home prices. And I don’t see how I can buy a home for my family. What is the deal here? So then he goes to say, yes, this is a crash. Existing home sales are down 35.8% in 2.5 years. Existing home sales are back to a level seen in the mid 1970s. If there’s a decline next month, and that is highly likely, existing home sales will drop to a twelve year low. Real estate tutors keep telling me there is no crash. What the heck are the above stats? Chopped liver and egg salad sandwich prices have not crashed, but transactions have. Crashes are rare, but we are in one. Now from a transaction perspective. Now see, he’s playing a little bit with this idea of a crash. I’ve seen people play with the idea of a crash. So when we’re talking about a crash, we have to define what are we talking about. In this case, he’s not talking about a home value crash. That is, it’s not like a $200,000 house is all of a sudden worth 150. Now. That’s not what he’s talking about. What he’s saying is there’s very few transactions. And as a real estate agent right now, I can tell you that there are very limited transactions. And when the transactions are down but the prices are up, which is maddening as a real estate agent, because the demand should be taken away right now from the marketplace due to the high mortgage rates, that should lead to lowering of home prices. And you’re not seeing it.

[00:09:48] So then he was looking at like, well, what’s the future hold? I’ve always been suspect of it says mortgage applications ground to a halt, dropping to the lowest level since 1996. The purchase market slowed to the lowest level activity since 1995 as the rapid rise in rates pushed an increasing number of potential homebuyers out of the market. Yes, this happened, okay.

[00:10:10] But to me, in just my experience in the real estate space, look, I have three lenders that I can call.

[00:10:22] They will pick up the phone right now and they will get somebody approved for a mortgage if it’s possible, and they will get it done by the end of the day. The idea that it takes 15 days to get approved for a mortgage, a pre approval letter is ridiculous. I can get one in about a half hour as long as my potential buyer goes and puts in all their information that they need, that’s not a big deal. And honestly, to me, the mortgage application, the rate is not really beneficial as far as the statistic for me, if rates go down, you’ll see more applications.

[00:11:06] It’s bound to happen. It’s just a question of what that number is. To me, psychologically, when rates started to hit 7% 30, fixed on a conventional, that’s when things started to get slow. And it looks like it’s going to get even worse here coming up and so it’ll be even slower. But I think there’s plenty of people that would buy houses if they could afford them right now.

[00:11:30] I think what’s holding them back is the high mortgage rate, not the application process.

[00:11:36] And I do think that they could change that in a day.

[00:11:39] What about the winners? Good questions. The winners refinanced at 3% or below. This put extra money in their pockets every month to spend, and rising wages further stimulated ability of the winners to buy goods and services. Thus, the Fed is still paying for its asinine push to create inflation. Meanwhile, the housing market is dead and remain dead with mortgage rates approaching 8%. So what he’s saying is the rising wages because this is a response to inflation and a tight employment market, which I think it could be argued that the Fed’s trying to slow down the employment market, which would stagnate wages, that would be not great. But the idea that it’s putting extra money in the pockets of the 3% mortgage holders every month to spend and that in itself is causing its own inflation because they can buy cars, they can buy things, is fine.

[00:12:37] Okay, I’m not going to argue that thought.

[00:12:41] I would add, however, that many, many buyers are first time home buyers and they’re young people, probably be between the ages about 25 and 35, all with student loan repayments that had been suspended for three years.

[00:12:59] And I suspect that many of those who are, in theory putting extra money in their pockets every month to spend are actually just waiting for the point in time, which started in October for many, that they need to pay their student loans back, which have been on highs for the last three years.

[00:13:21] The idea that there’s extra money out there, I think it could be, or it could be there’s not actually a lot of extra money out there. And once these student loans have to be repaid or if they’re I mean, who knows? It’s such a political football right now.

[00:13:38] If they do have to be repaid, it’s going to cause some problems in theory. My opinion, it says that’s another good question.

[00:13:46] This is about rent. For 24 months or so, economists have been predicting an ease in rent inflations. And that’s what I’ve heard, and I totally agree with what I’ve heard. The price of rent has gone up 0.4% for 25 straight months. Not to worry. Paul Krugman says this is lagging. Paul Krugman is a regime economist who just lost his way.

[00:14:06] Lost his way. And it’s sad, but he makes good money, and I guess that’s what’s important.

[00:14:15] Yeah. So what about that? We’re going to get this. And why were we going to get lower rents? That’s a big question. We were going to get lower rents because there was more rentals under construction than any time in history. And so here you look at this. And on October 2, he said, when I asked when will record housing units under construction ease rent inflation? And he said, that’s really a trick question. For better question, remove the lead when? From the sentence, so will record housing units under construction ease rent inflation? And the answer is, I don’t know. Nor does anyone else, although people claim to be clairvoyant. My opinion, or if anybody cared, was we’re not in a shortage of units and that the more units we make will just cause a collapse in that market at some point in time down the road.

[00:15:08] I don’t know. Okay, here we go. It says, I saw theory that rent would collapse as soon as housing units get completed so many times I almost start believing myself. So he’s not of that opinion. However, the data shows no discernible correlation. No matter how you shift the lead or lag times, the chart looks totally random. So perhaps rents abate, perhaps not. The data itself provides no reason to believe anything, which is kind of interesting. Regardless, please note the floor, year over year has a floor of about 2%, except in the Great Recession and the housing crash. So if you look at the chart, you’ve got your 2%.

[00:15:39] I got to check something real quick before I keep going. Okay.

[00:15:43] And then so he says, 34% are screwed. Well, don’t worry. Only 34% of the nation rents. And besides, rent is lagging. Sarcasm aside, the Fed blew huge asset bubbles and did not see that as inflation. Nor did the Fed see the three massive rounds of fiscal stimulus would cause inflation. So he’s got his chart of the real income and spending. Note the three rounds of massive fiscal stimulus in the COVID Pandemic. This triggered the most inflation since the 70s. Economists debate how much excess savings still remains, and so this is the Fed caused inflation. Okay? That’s what happened. The Fed never saw this coming, never saw a housing bubble in 2007, and has never once predicted a recession. Heck, former Fed Chair Ben Bernacki denied a housing bubble and denied a severe recession that had already started. Absolutely. And why would he acknowledge it? They were the ones that cost it.

[00:16:37] And so he says, expect more inflation everywhere. Adding to the inflation misery, biden is doing everything humanly possible to stoke inflation with EV mandates, natural gas mandates, union pandering, student debt forgiveness and regulations, some of which is blatantly unconstitutional. As a result, inflation is not coming down as fast as the Fed thought. Now, let me depoliticize this just a little bit.

[00:17:02] I’m not interested. Like, look, if you want to argue about the head of the Fed, jerome Powell was the head of the Fed under Trump, okay?

[00:17:11] Now, let’s look at this one thing, though.

[00:17:16] The Fed has a mandate of 2% inflation per year. They don’t even come close, ever. They just changed the numbers to make it look like they do. Okay? But then the Fed is not supposed to be a political position. The Fed is supposed to have an analytical position, but the Fed can only do so much. And the Fed has not been able to, and will never be able to be able to rein in government spending, okay? Which causes inflation. And so if the Fed came out tomorrow and said, you know, you guys in Congress, you guys are causing this inflation, it’s actually your spending that’s causing this problem. That guy would get sacked. That guy would get fired tomorrow.

[00:18:09] He’s not able to control anything that Congress does. Okay? So while he’s pursuing this quote unquote noble goal of fighting inflation, they’re supposed to keep inflation at 2%. They just never get it’s ridiculous. Anyway. There’s no way that they can control the spending in Congress. And until they can, which they never will be able to, you’re going to have this disconnect between the Fed, the policy of the Fed, and the actual what’s going on in government. It doesn’t matter if it’s EVs today or anything. It’s just the way Congress is set up.

[00:18:50] So, looking to buy a home? This is where it tied in the real estate part. If you’re looking to buy your first home and need to finance, good luck.

[00:18:59] Think about all the things people get when they buy a home. Appliances, furniture, carpet, cabinets, landscaping, paint, wallpaper, et cetera. Now, look, I’m laughing because no one’s buying wallpaper right now. Wallpaper has not been going well anyway. And carpet, who wants carpet in there? No one’s wanting carpet. Now, will that change? Can you save this video for ten years from now? Sure. But right now, people aren’t looking for carpet, and they’re definitely not wanting wallpaper.

[00:19:28] 100% of the people I work with, but maybe somewhere else, it’s different. Says housing normally brings the economy and out of recession. But this activity, that will not happen as long as interest rates stay high. It may weigh on economic activity for years. If you’re one of the winners, congrats. But that extra money the Fed put in your pocket every month may stoke inflation for.