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Clown Car Markets and Housing

Clown Car Markets and Housing

I am 50 years old and never in my adult life has the news and what is happening with the US government been more chaotic.  If you subscribe to the Ray Dalio thesis, these events are always surprising because they tend to only happen once in a lifetime so we have no living precedent, just what we were supposed to pay attention to in history class.  However that chapter 12 reading due 35 years ago just doesn't land the same way current events do.  In this post I will do my best to postulate how all of this madness will impact the housing market.

I'll try to break it down into the three things that most impact housing, interest rates, inventory, and jobs/income.  Although I find myself doubting because many of the 'known rules' of investing aren't working like we expect them to, so there may be reason to doubt my foundations as well, but they are all I have to work with right now, so let's proceed cautiously.

Rates

Over the past six months we had seen rates start to trickle lower but still hovering around 6.5% which is not a bad rate if the house price to household income ratio is low (under 4).  Given the chaos in the markets from tariffs being on again off again, a goal of the administration I believe was to lower interest rates by causing enough fear in the equities market to drive buyers into bonds.  When this happens, there is an assumption that US treasuries are he safest place to park money while you wait to see where the chaos goes.  Lots of buyers means that treasury rates generally fall because so many investors want them, their yields in theory go down.  So using the old assumptions of supply and demand for bonds that I have lived with my entire life, you can see some logic in causing fear in the markets if you want bond yields to go down.  

This would serve a purpose for the US government in at least two scenarios.  One they could push rates down which can be a boon for business borrowing as well as mortgage borrowers.  Two much of the US federal debt that was taken on during covid at low rates is now coming up for renewal, and low interest rates would allow the US to refinance its gargantuan debt at better terms.  The later is probably the more important of the two.

However something different happened this time.  The assumption above broke.  Investors, many of which were on the other side of the Trump tariffs, started to lose faith in US treasuries and were going to bond markets outside the US or simply somewhere else.  As a result the yield in the 10 year went up.  The US Treasury recently had an auction and it did not go well.  Now the numbers are not catastrophic, but it is telling that investors are looking for other safe haven options.  Most analysis agree that this reaction in the bond market is what influenced Trump to pause tariffs for 90 days.  The plane will still crash, just three months from now.

Thanks for indulging me this far, the short version of this is that rates look like they will be going up based on current conditions.  This will put downward pressure on housing prices.

Inventory

Coming out of the pandemic anomaly, inventory looks almost back to normal on a national level.  Every market is different of course, but if you look at inventory compared to pre-2020 it looks like a normal curve line is starting to come back, but still not to the levels we saw as recent as 2017.  So the trend is up but we are still behind in general.

Since most of my readers are in Texas and more likely around Austin, here is the same chart for Austin homes from the MLS.

We (Austin) look different from the US market at a whole.  Our inventory is higher and our sales are lower which suggests negative pricing pressure from inventory.

Tariffs will only make build costs go up, but builders won't build if they can't make a profit on the other side.  So instead of increasing build prices, I expect builders to simply build less, further out where land is cheaper and easier to develop, and build smaller homes which have a smaller price tag.  We are already seeing this with scale builders on the outskirts building homes that are only 1200 SF where 1500 SF used to be the norm.

Overall Austin inventory will be ample at least in the short term.  This will also put downward pressure on prices.

Jobs

In past posts I have said that the US government doesn't like recessions and is stopping the business cycle by stimulating away the down turns.  This makes people happy, but it also creates a bit of a sugar high.  Tariffs while attempting to bring manufacturing jobs to the US in the long run will just make everything cost more which will have a big recessionary impact.  Cheap inputs from China are now gone.  Consumption of those goods will shrink which will also shrink hiring and employment.  The tariffs are certainly going to be bad for jobs and household income.  In the short run this means fewer home buyers and more inventory.  It will also lower the cost to build by making labor cheaper.  This happened in 2010 when banks were not lending, vendors were frankly desperate for work and their costs were low because there was a massive oversupply of labor in the trades.  This made it easier to build houses for less at least from the labor point of view.  In the short run household income and employment will fall, but it could lead to the next boom cycle where the formula for home building works again.

Austin is different from the rest of the country as well.  Our jobs growth is one of the strongest in the county.  Right now we are kind of flat, but certainly not down.  Tariffs will hurt across the economy and I wouldn't be surprised to see a dip here as well, although hopefully not as bad as many other areas.  Austin will retain robust employment compared to the nation as a whole, but it won't be booming like years past.

TL:DR

For the US it looks like: Rates: UP, Inventory: SAME, Jobs: DOWN.  This adds up to falling price pressure.

For Austin it looks like: Rates: UP, Inventory: UP, Jobs: FLAT.  This also adds up to falling price pressure.

If I had to make a prediction, I think housing prices will continue to fall until the above changes.  However given the absurdity of the markets, politics, and the speed of global economic changes vis-a-vie the presidents social media posts, the rates at least could change quickly.  The worst case scenario is that international investors, China most importantly, start dumping US treasuries which could cause a massive spike in rates.  Inventory and Jobs will move more slowly, but the tariffs are going to hurt employment the most in the long run if they stay.

You will often hear that real estate is an inflation hedged asset.  Under the right conditions which have been present most of our lives, it is.  This assumes that there is more money chasing fewer houses that people want to live in.  When you have slow inventory growth, increasing population and economic growth this holds true.  However if inventory is still rising, jobs and therefore income are shrinking, and interest rates are going up making it harder to borrow, housing prices can only go down under those conditions.  Don't fall victim to wishful thinking and price high if you need to sell your home.  You don't want to be catching a falling knife.

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