The Real Estate market bust is likely to gain momentum this spring, which is unseasonable because Spring time is typically when the buyers come out of hibernation.
But the latest Fed rate hike, its eleventh and most aggressive rate hike in more than forty years, taking the Fed fund rates to 5%, has made the coming real estate market bust a virtual certainty.
As Darren Winters points out, more than 300,000 tech jobs have gone since the Fed took on its inflation fight. The Fed has hiked rates by 5% over the past year at a record speed, bearing in mind rates were at zero percent for two years during the global lockdowns.
From unprecedented easing to record tightening could mean a policy-driven real estate market bust is now deadhead
The Tighten until you break something Fed has been on a destructive rampage for the past eighteen months.
The Fed’s relentless rate hikes in 2022 pricked the bubble of everything, wiping out more than 30 trillion US dollars off stocks, bonds and cryptocurrencies. So from decade-long unprecedented easing to record tightening, there was no safe haven in the financial markets in 2022.
Typically, bonds outperform stocks in a risk-off sentiment but US treasuries, perceived prime collateral, had their worst year in 2022 in history, worse than the Great Depression.
The Fed continued hiking in 2023, so the second half of the year could be about the real estate market bust
So the catalyst for the 2023 great bank runs was the treasury market blowup of 2022.
“A tighter monetary policy from here is akin to central banks shooting themselves in the foot. Further, tightening will feed a doom loop as layoffs spiral into Great Depression levels, collapsing both consumption and investment in the economy and leading to more distressed banks as their revenue dries up,” we wrote in a piece entitled, Distressed banks, February, 23.
Relentless Fed rate hikes create unprecedented maturity risks for long-maturity treasury holders, which include banks, pension funds and insurance companies. The value of long-maturity treasuries has fallen by more than 30% from their high, which is the crux of the bank credit squeeze and bank runs today. This unprecedented collapse in the value of long-maturity US treasuries, prime global collateral, has the potential to make the 2008 financial crisis, a crisis in the niche subprime mortgages look like a picnic.
With the mother of all credit squeeze on deck, the real estate market bust 2023 could also be a record-breaker
To say spring real estate activity is turning out to be a bit of a damp squib would be an understatement.
Pending home sales plunged 23% year-over-year in April, and a month earlier, March sales also plunged by a similar amount, 22%.
What’s more, there is no light at the end of the tunnel with the real estate market worsening in late April and early May.
Throw in a worst cost of living crisis since the 70s into the cocktail, spiralling cost of servicing mortgage which has gone up more than 40% for a variable rate mortgage, rising joblessness and a real estate bust in 2023 comes next.
As Darren Winters comments, US Mortgage rate applications are the lowest in almost three decades.
Real Estate housing is predicted to fall between seven to ten per cent in 2023, according to Norada.
Brokers remain divided about how low prices will fall in 2023, but there is consensus that the market has cooled significantly from its previous highs.
But think about it. If safe haven treasuries, a debt-based investment, fell 30% from their high point in 2022, real estate, a debt-based asset, could also fall, by at least 30%.
Real estate bust 2023 and the Last Great Depression
So real estate prices fell by approximately 35 per cent in the last Great Depression. A house, which was valued at $6,000 before the Depression, was worth approximately $3,900 in 1932. Moreover, by the early 1930s, most homeowners were in negative equity.
In other words, they owed more money through their existing mortgages than the reduced value of their homes.
So if a real estate market bust in 2023 plays out, home prices could fall at least 35% from their all-time high.
The Hoverville, people living in homeless shanties of last century’s 1930s, and the Great Depression are now visible today in the 2020s.
A growing number of homeless encampments spread like wildfire throughout the San Francisco Bay Area.
The number of homeless shanties has reached two miles long.
The wealthiest country has parts resembling the third world.
Many people, falling on hard times, were evicted from their homes because of the double-digit inflation in shelter and food, conveniently omitted from the publicised core inflation data.
So as central banks keep hiking rates, it seems more like another great depression making the 2023 real estate bust a virtual certainty.
But cash will be king if the 2023 real estate bust plays out.