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Carving Out a Bottom at the Peak of Bubble World

May 14, 2021 | Financial & Economy

Reading Time: 3 minutes

When it comes down to it, real estate is like a game of Three-Card Monte. Or at least that’s how I’ve always thought about it after a decade working in and following this industry. Heavily manipulated by the government and banks, it also is dominated by a used-car salesman mentality where almost every real estate agent says it’s a good time to buy and a good time to sell… no matter what’s actually happening in housing or the economy. The most amusing part is that few local elected officials, from my experience, seem to understand it outside of viewing it as some sort of community gravy train and piggy bank to dip into.

But about a month ago, there was a discernible shift in our “red hot” real estate market. And a shift that could spell trouble for economic sentiment generally. After a year of constantly advancing prices and a mania that felt exactly like the stupidity in 2007, something felt different in April, as I monitored on-the-ground prices. And while I didn’t have any data to back it up, not yet anyway, my guess was that severely constrained inventory nationwide was finally flipping back the other way. Of course, the politicians and real estate agents I talk to were oblivious that there was ever even a problem, let alone that things might be changing.

In fact, as every Millennial I know prepared for a housing crash in 2020, officials ignored the insanely depressed supply side in 2021. Either way, I correctly called in April of last year how prices would increase substantially. It doesn’t take a rocket scientist to see that holding back a flood of defaults, more than twice the worst year of the Great Recession, might feed back to greatly reduced supply with still modest demand. But sooner or later, I reasoned, it was likely buyers would become exhausted and forbearances would ease somewhat. Well, we appear to have reached that point in time.

At the Calculated Risk Blog, they present major metro data suggesting my gut feeling last month was correct.

Although inventory in these [major metro] areas is down about 56% year-over-year, inventory is up month-to-month in most areas, and up 3.1% in total compared to March.

Could the tide be turning? What happens now is anyone’s guess.

Yet, I’m willing to bet we see prices stabilize over the summer across the country. While some still worry about riots and other chaos, I’m willing to also venture, from what we saw during the East Coast pipeline shutdown, the current administration will go to great lengths to bury any problems that appear to tarnish the view that they’re masters of the universe. And on a side note, that means they’ll probably declare victory over the pandemic in July or beginning August, brushing that supply chain problem out of the way.

Keep in mind, of course, I’ve also been skeptical of the news saying “everyone’s trying to move rural,” so I’m betting—and hoping really since I want to move away from the exo-burb I’m in—that rural prices soften substantially in this mix. Most of that narrative never seemed to be supported by any hard moving or migration data. And despite the fact that a friend of mine just sold his very modest home in a less-desirable part of town in an insane bidding war of 30 offers, Jay Powell’s comments at the Fed have been telling. Even the most rosy-eyed financial officials didn’t expect that they could contain the flood of real estate defaults forever. Or that there’s an unlimited source of buyers even though there’s a lack of sellers.

And following this line of thought, that also means it’s possible the hyper-inflation meme starts to die around now, since regular people won’t be able to be giddy about increased home valuations anymore.

What am I saying really?

Our game of Three-Card Monte might just be revealed for the con it has become as economic reality is finally calling.

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