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#NotesByNick: 2021 Forecast: Mortgage, Housing and the Economy (Even a little Stock Market!)

Thursday, March 11, 2021   /   by Haley Vail

#NotesByNick: 2021 Forecast: Mortgage, Housing and the Economy (Even a little Stock Market!)

“Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.” -Sir John Templeton

Too much euphoria is a contrarian indicator. Markets really revolve around human dynamics and emotion. Regardless of what we believe, we make decisions emotionally and then justify them logically. That is why we believe we are acting logically when we are actually acting emotionally. Are you logically looking at the market or emotionally?

Warren Buffett said “Be fearful when others are greedy.”

There is a “Panic vs Euphoria” index provided by Citigroup. It states that anything measuring over 0.41 is getting into euphoria territory. The current and highest level ever measured in this index is right now: 1.89! That is five times the euphoric indication level! For comparison the 2007/2008 market hit .05 before it crashed down. The dot.com bubble burst when euphoria hit a record 1.4. Now we don’t know if a downturn is imminent but this certainly raises your awareness of what’s going on around you.

Joe Kennedy called the stock market crash in 1929. How did he know? The shoeshine boy started talking stocks with him while shining his shoes! Joe thought, if everyone is in the stock market (including the shoeshine boy) where is the new money going to come from? The dot.com bubble had the same issue with half the population becoming day traders. The real estate bubble grew off of every person buying not one but two or even three homes! I can remember stories of a hairdresser in Las Vegas who was talking about buying her third investment property on a stated loan!!

All of this is to make sure your antenna is up and you are on guard. How does the shoeshine boy equate to today? Think RobinHood and Reddit traders. Less than experienced traders coming in and affecting the market. If so many people are in the market, where will the new money come from? Back in the dot.com era, all the talk was around Yahoo but now it’s GameStop. The names have changed but the underlying activities are still the same. When the stock market does eventually take a hit, people will run to the bond market as a safe haven. As that happens interest rates will go even lower. Think about how that will affect the housing market?

To give you another indication of where the stock market is right now, John Mauldin and Doug Kass analyzed the current cost of stocks using 15 indicators from US Total Market Cap - Median Price to Sales - Median Ev to EBITDA. Almost every metric is at their highest point EVER measured with only four metrics not at their highest level but they are at their second or third highest level ever measured. It doesn’t necessarily mean a crash is coming but again your antenna should be up.

All predictions in this analysis point to a recession happening in 2022. These things are almost impossible to get the timing exactly right but with the knowledge of the impending recession, we need to start planning now. During recessionary periods, rates again drop. Yet another sign interest rates will stay low for the foreseeable future. The big cause for this recession? It will be a hangover from the gigantic stimulus package!

So if we are due for a pullback, when? Well, right now we are propped up on a few things: the stimulus package (first one!), vaccine euphoria, and the Fed who are doing all that they can to keep the economy humming. The first stimulus was $900 Billion and we still don’t know the true effects yet. It simply hasn’t been enough time. Even so, we are now about to pass another $1.9 Trillion stimulus package. This is like taking a spoonful of cough medicine and 15 minutes later taking two or three more because your symptoms haven't subsided!?! It has not been long enough to measure the effect of the $900 billion yet we are throwing twice that at the economy all over again. This type of stimulus will certainly keep us out of a recession right now but the long-term effects will not be as helpful to our economy. Many believe all of this stimulus actually will do more harm than good. There is even concern with this money finding its way into RobinHood or even Draftkings! Yes we will see an explosion in the marketplace from this stimulus but when it wears off, what’s going to keep the market up? Nothing...and that is what will lead to a recession. All the spending now will result in debt later. Here is a real world example:

Back in the 1950’s, if someone wanted to buy a car they would save up until they could go and purchase the car. Their purchase would drive the economy as an influx of money was injected into the economy from the purchase. Their savings would be lower after the purchase but there would be no lingering effects on their daily life after. Today, consumers want instant gratification. Let’s say you want to buy a new car but instead of saving, you simply take out a loan. You get the car immediately and pay it off over time. That purchase provides a big initial economic stimulus. Think about it: The $40-50k helps fund the sales person’s commission, the dealership’s profit, the car manufacturer, the parts and suppliers, etc, etc. They all get their payment immediately. Now they’ve got money and they go and spend it in the economy which creates that initial burst of economic activity. But when that wears off, what is left behind? The debt! You now have $800 to $900 less each month to stimulate the economy and that drags on for the next five years (or length of the loan). The stimulus is having the same effect. There is an initial boom in the economy, the stock market, etc. But this is only a short term gain. After, we will be left with all the debt. Our government will take to selling treasuries. They will take the money from the sales to cover the debt and then pay interest on the notes over time. The debt servicing is what drags down the economy- the $800-900 from the example above. The government now has less money to spend because it has to service more and more debt. Crazy huh!?!?

YCC or Yield Curve Control- What is it and why do we care?

This is another way of interest rate manipulation that involves buying as much US treasuries and government backed debt as necessary to keep yields below a certain level. When the government pegs a rate to the 10 year and 30 year and then says it will buy an unlimited amount of treasuries in order to keep it there, there are consequences. If they stop, interest rates will skyrocket but it seems that all indications point to them following the plan. Japan has been using this method trying to generate inflation for years but have so far been completely unsuccessful. Whether it is quantitative easing 1, 2, 3 or infinity, as debt increases, interest rates decline. Inflation causes interest rates to increase. Inflation is driven by economic activities. Economic activity is driven by the amount of debt the government has. As debt goes down, interest rates rise and vice versa. This is proven over and over again if you look at the economies of Germany, China, Japan, UK, Italy, France… The more debt they take, the lower interest rates go.

Inflation is pressed lower from debt as well as tech. Tech makes everything cheaper to produce while lower interest rates make it cheaper to buy. Things become faster and easier to consume which again staves off inflation. The labor force right now is down 10 million. The inflation (cost of goods rising) we are seeing right now is being caused by supply chain issues, not the economy. Here is an example: Think back a few months ago. What would you have paid for toilet paper? It wasn’t that less was being produced, it was just harder to get the product to you and therefore the price inflated to get it to reach you. As the masks come off, and we alleviate the supply chain, lower prices and lower freight will remove any artificial inflation and will lead to lower interest rates.

Debt slows growth. The US government is about to hit $28 trillion in debt. To understand what $1 trillion truly is, think about it this way: If you spent $1 million a day you would’ve had to start in 700 BC just to reach $1 trillion. Now multiply that by 28!! The amount of debt is astounding...

In 2022, or maybe 2023, there will be a recession. It will be caused by the hangover from this government stimulation and added debt. That’s coming, prepare accordingly. But what can we expect until then? Let’s talk about housing!

To understand supply and demand, let’s first look at births underlining each generation. Based on this, the housing market will continue to be red hot with an explosion to the upside! The median age of a homebuyer is 33 years old. Today, those individuals were born in 1987 or 1988. Now look back to see what birth rates did in 89’, 90’, 91’ and 92’. Births skyrocketed which means they’ll be an explosion of first time homebuyers as those people become of age (33). When a current homeowner buys and then sells, they don’t negatively impact supply. In fact supply says a net zero. Their purchase removes a home from supply but their sale replaces it. When a first time home buyer purchases however, the supply is reduced by one home and it is not replenished with anything since the first time homebuyer does not have a house to sell. First time homebuyers are 33% of the market today and expected to climb to 35 or 38% of the market as the demographic grows! This further reduces the supply and sends prices skyrocketing. In 2006, the birth rates 33 years prior dropped dramatically causing a reduction in demand and ultimately the bubble burst. What happened 33 years earlier? Abortion was legalized and birth rates dropped. You didn’t see the effect of that on the housing market until 33 years later.

Another factor, we are seeing household growth increasing. Household growth is when someone moves out of mom and dads and gets their own place, turning the electric on in their own name. We are seeing that grow more and more every year. That means there is more and more demand for housing as more and more people are looking to “get their own place”! In 2007 there were 116 million households. In 2020 there were 128 million households. On the supply side, builders have been under building for the past 10 years (since the bubble burst) which is in stark comparison to the increased demand. We now have 8 million more households created yet 3 million fewer homes built then needed.

In 2006 Builders were building like crazy... but there was no one to buy. Why? The number of buyers who were 33 dropped significantly based on fewer birth rates. The bubble had lots of supply and waning demand. Now we are facing lots of demand but the supply has still yet to catch up. We are at the beginning of another explosive birth rate of 33-year-olds that will result in even more demand over the next few years. New construction has been way behind and then they got hit with Covid. You can’t take six months off of production and make up for it when you’re already behind! All this points to home prices continuing the skyrocket and supply continuing to be short.

Another factor in supply, less people need to sell. Home vacancies are at an all time low so investors aren’t thinking of selling. They keep renting and making income. Then, even more people are buying and holding properties using new options like Airbnb, a new product that has again taken supply off the market. Supply peaked in 2007 and it’s now the lowest ever, which again means this market isn’t a bubble!

Forbearance isn’t really a worry either. Many people who got it didn’t actually need it and the people that did need it, won’t have much to worry about. When they come out, there is no bill. It’s paid at the end of their mortgage with no interest and no payment. People have equity now. If they want to just sell, they can. The average homeowner has 51% equity and they can sell their home quickly in today’s market if they choose. 87% have at least 20% equity and 95% have at least 10% equity. In fact, 37% of all homes are free and clear. Compare that to 2009 where 26% of homes were leveraged higher than their true value- 1 in 4 were upside down!!

Last let’s look at affordability. If the median home price is going up 16% and hourly earnings are only going up 5%, is there an affordability issue? The answer is no, but why? Median home price just means that half the homes were bought more than that and half were bought below that. Right now $1 million+ homes are up 80% while first time homebuyers are struggling to find homes available. This pushes the median price higher without actually affecting affordability. As for hourly earnings, if we change the stat to weekly earnings we can see that they are rising by 7.5%. Hourly rates are increasing but hours needed are even outpacing that! So they are making a bit more per hour but more overall as they are needed for more hours! If the real appreciation is closer to 10% and the weekly earnings is 7.5%, affordability is closer. Now that rates have dropped even more, the cost to own is even less, again making the home today more affordable than it was a year ago! If a home appreciates 20 or 30% more, homes will still be more affordable because of how low their payment is compared to their increase in income.

Is it a good time to buy? Absolutely.

Is it a good time to sell? Absolutely.

We are estimating 7 1/2% appreciation for the next year so if you bought a $100,000 home (easy math!) and put down 10% ($10,000), it would appreciate $7,500 in value year one. Your cash on cash return is 75%! So, when it comes time to buy in this market: Should you bid more to get the house you want? YES! You will make up for it quickly with the appreciation of the house! If you paid $105k for that house instead of $100k, you’d be back to even ?’s of the way through the first year… Worth it as now you collect the gains in appreciation the rest of the year and next!

This was a lot!! If you made it this far, thank you! Hopefully you found this helpful. If so, please tag someone you think would want to know this!

If you are a buyer or seller in Maryland, I would love the opportunity to help you navigate these changing times. If you are a realtor, I hope this helps you better service your own clients!

Take care!

Nick Waldner


  economy, mortgage forecast, notesbynick, real estate