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Linked Reuters article: U.S. existing home sales drop sharply; prices surge | Reuters
Higher mortgage rates as predicted in the Econ Club December newsletter issue could spell trouble for home prices. However, potential “Yield Curve Control” enacted by the Federal Reserve to keep the 10yr Treasury rate artificially low and negative in real terms, could extend this record rally. An influx of Federal Reserve liquidity has propped up financial assets including real estate. Historically, even taking into account the low-interest rates, housing is overvalued. The question of where prices go from here is an entirely different question.
As predicted in the December newsletter issue, the trend of aggressive home price appreciation is likely to slow down in 2021 and 2022, while a reversal of the current housing bull market would only occur if either interest rates normalize substantially higher (>5% 30yr Mortgage Rates) or if substantial supply hits the market because of delayed foreclosures or pent-up supply from Pandemic sellers who in mass waited for reopening to list their properties. 30yr rates are now above 3%. However, with the potential prospect of YCC, real, inflation-adjusted interest rates could remain negative; combine this with the expectation of higher inflation, and housing has more room to run, at least in nominal price regardless of perceived valuation.
The orange line represents US median inflation-adjusted home prices.
Alameda homes had a decent 2020 gaining 6.9% according to Zillow Research.
Do cap rates and pe ratios even matter if interest rates are negative in real terms? Warren Buffet once said that interest rates are like gravity, and so negative rates would mean that there is no theoretical limit to asset valuations. Nonetheless, mean reversion is a real thing in finance. Inflation adjusted home prices have met or surpassed their 2006 bubble highs. This is the biggest red flag. Despite all of the artificial distortions in the economy, mean reversion will eventually occur in real terms. In a Zimbabwe Project Economy, asset prices can still go up in nominal terms, while the real, inflation-adjusted value of real estate and other risk assets declines substantially, as seen in the Venezuelan stock market which during the recent hyperinflation declined by more than 80% when priced in US Dollars.
The sad thing about high inflation isn’t just that it taxes the value of money, but it additionally serves as a way for the government to “double-dip” and steal wealth through both a decline in the value of money and also by taxing fictitious nominal gains in value resulting in a net decline in investor purchasing power. No wonder a White House economic proposal back in 2019 to index capital gains taxes for inflation got shot down faster than a hot-air balloon.
Cautious investing everyone,
Disclaimer: the author Kevin Habek is not a registered financial advisor. This article constitutes the opinion of the author and should not be misconstrued as financial or investment advice. Stock and options speculation is highly risky and investors employing these investment strategies run the risk of losing all or more than their original invested principal. The author recommends readers perform their own research and due diligence and consult with a qualified investment professional before entering into any investments. The article in reference: “Home Sales Fall, Prices Surge, Higher Rates on the Horizon?” by Kevin Habek, is designed for entertainment and informational purposes only.