US Housing Bubble: Something’s Gotta Give

"Way" back on October 28, while responding to comments on an article documenting a 31% drop in pending home sales, I wrote that eventually, house prices in the US "will correct more (and probably a lot more) than the vast majority of people who've weighed in publicly were willing to concede ahead of time." I went on to suggest that they (the people who weighed in publicly) won't frame the situation that way, though. Instead, everyone will move their goal posts gradually in an ongoing mark-my-im
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22 thoughts on “US Housing Bubble: Something’s Gotta Give

  1. Interesting about Opendoor – I had never heard of them until we started shopping for a starter home for one of our kids about a year ago. In a market where everything was selling in a weekend at prices over asking, their listings were hanging on the market. None were staged (unless you count CGI on line) and each had some flaw that they had not adjusted the price for – repairs needed, reeked of smoke, cat pee, etc. The last three quarters’ financials bring to mind the old adage, “If you eat like an elephant, you can’t expect to sh–t like a bird.”

  2. While price drop seems to be the most obvious scenario, are there any plausible alternatives? E.g. would it be possible for the owners/sellers to sit out and weather the storm until the rates “normalize” again? Or can a couple of years of inflation make current prices “affordable” again?

  3. Wall Street investors clamored for and received a fed put years ago. Will Main Street (home owners) get one? If something’s gotta give, and it breaks, how far can it go before the public noise overwhelms an already weakened fed? … a Main Street put, oh the irony.

  4. The real price of residential will fall. The question is how and how fast? Also part of the something has to give is that mortgage spreads and rates are also destined to fall. Before you get a big nominal price correction you need inventories to rise. They will but it will take time.

  5. It’ll be interesting to see if those fortunate enough to either own a home or have one financed with a low interest rate, will learn to be satisfied with what they have, and not be compelled to buy “bigger, newer, better”
    if and when this calamity is resolved.

  6. on the off chance you don’t know what the word “residential” means, aren’t apprised of what a “structure” is and are confused as to what constitutes an “investment”

    love it

  7. I thought the whole idea of the Fed attempting to engineer a “soft landing” would be that they pivot just prior to a crash ( of almost any type) and therefore, avoiding a crash.
    Seems easy enough!

  8. What H’s post suggests is a stand-off between buyers and sellers, where the bid-ask spread is so very wide that no-one will transact unless they are forced to.

    The reasons a person could be “forced to buy” are very few – actually I can’t think of one, aside from contrived things like a 1031 exchange period expiring. After all, you can always rent.

    The reasons a person could be “forced to sell” are much more numerous – lose job, get divorced, crushing medical bills, business folded, move to assisted living, etc. Sure, loan standards were solid and homeonwers are sitting on big gains and the attendant healthy equity, but that doesn’t mean they can’t be forced to sell, just that their houses are less likely to be sold to the bank aka foreclosed.

    When the forced sellers come to market, there will be cash buyers and investor buyers, regardless of mortgage rates, and those cash buyers will drive a hard bargain indeed.

    So it is likely that the stand-off will be broken by forced sales. Each unwilling seller who is forced to hit the bid is another low comparable price, and since houses are valued off comps, house values sink.

    I think we should expect significant house price declines by mid 2023, massive job loss at real estate brokers, mortgage lenders, escrow companies, and associated industries, and that many of today’s “proptech” companies will go away, including the excreable iBuyers. We should also expect the spending that is fueled by home sales and home equity to decline sharply. And we should expect even more of America’s last great middle-class asset to fall into the hands of the investor class. That is the real tragedy, and I have not heard a peep about it in Washington DC (or my local state house) from either party.

  9. I’m trying to analyze a non-public multifamily REIT given the scenarios outlined in the article and the comments. It seems to me there are a lot of cross currents, and that on the whole multifamily is likely to outperform due to the increased number of renters in a stagflationary environment. That said, the specific non-public REIT I’m analyzing has recently experienced excellent outperformance, being up 40% in the last year. Quite an anomaly given the last 12 months.

    Complicating it all is that the elderly individual who already has shares and a large capital gain in the REIT who I’m analyzing it on behalf of at the request of their DPOA has just moved into assisted living because they have simultaneously lost their spouse and also have experienced a sudden decline in their own health and aren’t able to understand investments anymore.

    To fund their needs for the next years they need to sell something as they are cash poor at the moment. They have shares in this non-public REIT, and shares in one of the most well known public companies in the world which also have large capital gains associated with them, and those are the only options for funding their living needs in the coming years. Because they have only two assets, each of which could experience a large drawdown, I think they should sell enough now and in early 2023 to fund five years of living expenses. As far as my advice goes, it’s just a question of the mix, and I think the macro favors keeping more of the non-public REIT, but at the same time, I feel the public company is much more of a known quantity. Any thoughts are appreciated.

          1. Emptynester and Derek,

            This particular REIT has a redemption policy. There is a funding pool each quarter. So far, they’ve been able to fund every requested redemption, but with the REIT averaging 20% gains for the last 5 years there are very few sellers at the moment. The penalty to redeem without waiting a year from the time the request is made is 10%.

            The thing is, this individual is going to need approximately 15% of the REIT redeemed to cover their annual expenses in the coming years, and if things ever turn negative the quarterly funding pool will quickly evaporate. If they have more requests for redemptions than they have funds they prorate the redemptions. Obviously, in a serious crisis you could easily imagine only getting a nickel on the dollar if everybody was rushing for the exits, and this individual only has 2 assets of any size: This investment, and stock in a single publicly traded company also with a large capital gain.

            So the issue is twofold. How much to set aside for the coming years, and how to divide the asset sales between the REIT and the public company.

            If the redemption doesn’t work, that would be a nightmare scenario here. Because then the 25-50% haircut Emptynester references could be the only option for monetizing the REIT, and it is 2/3rds of the individuals assets.

            Thanks to both of you for your thoughts!

    1. Things to consider for MFD REIT
      – Class of buildings. Class A best, in my view, since potential homebuyers who are renting during the high rate period are higher-end tenants.
      – Local economy and conditions. Local industries, jobs, migration to the metros where the REIT is, local landlord/tenant laws (rent control), also climate (property damage risk).
      – Growth in pipeline. The REIT’s lease-ups, pending acquisitions, construction, remodels.
      – Local supply. MFD construction is booming, raising risk of over-supply, need to check the areas where REIT operates.
      – Cost and source of capital. Loans are getting tougher and more expensive.
      – Management. Maybe you can interview them.
      – Trends. New lease rent growth, renewal lease rent increase, blended increase, occupancy rate, net operating income growth, cash flow growth.
      – Sustainability of distribution.
      – Valuation with private discount.

      I generally like MFD REITs here, if in good geographic markets. The pace of new MFD construction worries me, as does slower household formation, but collapsing house sales and new house construction are positives. The better (public) REITs are outperforming general apartment rent indicies. Rising interest rates were a big negative this year but should be less so going forward. Stagflation should benefit real assets, and a REIT is quasi such. But of all the public MFD REITs, I only own two – selectivity still matters.

      1. I’ve been dealing with a family crisis since a few hours after I posted my questions a few days ago. Sorry not to write back sooner. Things are stable now.

        It’s Class A properties in attractive cities, though I wish the properties were diversified among more cities as the city with the most properties has over 20% of the properties. The top four geographies have over 50% of the properties. The vast majority of the cities in question are growing and permitting is easy and there will be a lot of new supply coming online in the next few years, which I would say is my main concern. I like management and have spoken with one of the top three executives at length.

        Thanks for taking the time to provide such a thoughtful list of things to consider. What I know for sure is that even though this appears to be an above average REIT, given the funding needs this individual has and their net worth, I would never recommend they have more 20% of their funds in this investment, and I’d only recommend 20% if any redemptions would be close to 100% fully taxable- which they are in this case. Right now they have 66% of their net worth in this investment. 30% is in one single stock that has a single digit cost basis. So whatever gets sold is going to incur taxes, and quite high taxes if a lot is sold in one year, as they live in a high tax state. They just lost their spouse and so they do have the benefit of married filing jointly this year, which doubles the bracket in the state they live in.

        I think my recommendation is going to be to take 5 years of expenses out over tax years 2022, 2023, and 2024, which net of taxes will be about 55% of their portfolio. My instinct is to cut the REIT down by 70% and take only a small amount from the publicly traded company, because I just feel more confident about it as a long term investment. So if I’m able to redeem the REIT shares, they will have 5 years of expenses set aside in short duration treasuries, and will still have a position in the REIT about 30% as large as it is today, and will have about 85% of the publicly traded company shares that they have today.

        Likely they (or their heirs) will miss out on gains (especially the heirs for whom a stepped up basis would make the inheritance much larger), but it is removing a worst case scenario from the table where both assets drop and funding for the care of the individual runs out that I am primarily concerned with.

        I much appreciate your thoughtful help. Kindest regards,


  10. We live in a resort/lots of retirees area. “Listed” home prices are dropping anywhere from 10 – 35%. Very few sales. The 35% drop home was an estate sale and sold. New problem for other buyers – that is now the most recent and only comp.

    1. That’s another reason for “forced to sell” …

      I am inheriting a condo in Taipei and instructions to RE agent are to clean it up and sell it ASAP (FX and China). That comp is going to be a problem for neighbors, but not my problem.

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