Is this a repeat of the 2006-2008 time period?
It is certain the run in real estate prices during this bull market was different from the one that started at the end of the DotCom bust. Or is it?
Roughly 20 years ago, we saw the wave of investors beginning to enter the real estate market. It was a time when home flipping seminars were the rage. The market was hit with all these wannabe real estate tycoons who started to take advantage of a field that was perfectly cultivated. Between the government's desire to move past the DotCom along with the securitization of mortgages so that Wall Street could package as many MBS as possible, we saw most anyone approved.
This time, none of that existed. While individual investors entered the market, it really wasn't a bunch of newbies. Those who were involved knew what they were doing, from the individual point of view.
The cluelessness, this time, came from corporations. We saw the likes of Zillow and hedge funds enter with piles of cash. The hunt for yield was one and real estate seemed like an easy market to target.
This era is going to be epitomized by Blackrock. The largest company based upon assets under management was a major buyer of real estate over the last half decade. It was one of the main reasons prices in many markets got bid up. If there was a major player like Blackrock in the area, individual purchasers were outbid.
In other words, these companies were not going to lose. They wanted the asset because they were desperate for a yield. Of course, the result was higher rent prices as the inflated home price necessitated it for the return.
All this works well on the run up. As long as things are appreciating, the model is sustainable. What happens if things reverse course?
It is a question the likes of Blackrock and other Wall Street firms are facing. The buying spree is slowing (if not ending), aka the music is stopping. How they handle this is going to get very interesting.
One major problem could be the speed with how things descend. Many feel this might be orderly. That was the case for the last year since things peaked. Going forward, it might resemble moves we see in the stock market (or worse, cryptocurrency).
The Golden State is the most populous in the US. Close to 1/5 the entire population resides there. Thus, if something major happens with its borders, the rest of the country has to take notice.
This is a bit of what the state is facing:
It’s peak home-buying season in California, but sky-high home prices, holy-moly mortgage rates, the collapse of cryptos, the vanishing DeFi, and the implosion of tech startups, SPACs, and IPOs, all of which are crucial to the wealth, or perceived wealth, of many Californians, pulled the rug out from under California’s splendid housing markets.
Sales volume of single-family houses (SFH) in California plunged by 14% in July from June, seasonally adjusted, and by 31% from a year ago, the 13th month in a row of year-over-year declines, according to the California Association of Realtors.
Sales volume of condos plunged by 18% in July from June, and by 36% from a year ago.
These are the overall numbers. The worse hit areas are seeing bigger declines.
Sales volume of houses plunged by 20% from June, and by 37% from a year ago. In San Diego, sales volume collapsed by 21% in July from June and by 41% year-over-year. In Orange County, sales volume collapsed by 39% year-over-year, in Los Angeles County by 32%.
Anyone who is looking at this should be horrified. This is just the beginning. What do you think will happen when these numbers are spread around? If these can appear in this article, they are easy found. This is only going to set off another wave of panic for home buyers. Who is going to jump in the market with conditions as they are?
The major challenge is the aforementioned Blackrock and companies like that. At some point, they are going to realize it is time for a fire sale. The hunt for yield is ending. It will then move to "save your ass". We all know how the real estate market can freeze up. This is the challenge of dealing with an asset that isn't very liquid. It is much easier to dump a stock or bond then unload a house.
We have to be careful with what is taking place. If we are about to enter a bear market in real estate, this is going to take a while to flush out. The challenge is that we could be looking at a paradigm shift.
As was laid out in the layout for the globalization of real estate, we could be in the first phase where a prolonged bear in real estate means that not all markets recover. Some might find the declines permanent as migration starts to take place.
After all, remote work is only going to gain in popularity as we enter the middle of the decade. In addition, as we start to approach 2030, we are going to see many countries feel the impact of their aging population. The developed world is going to see a multi-decade hit from their demographics. Some of this could be felt this decade.
Many are operating under the belief this will be just another real estate cycle. Certainly, there is that possibility. However, if my assertion is correct, there could be something bigger taking place.
And that might present some major minefields for those who believe in the status quo.
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