Wed. Dec 1st, 2021

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Good morning. I ate all the Halloween candy and I’m falling, which helps explain the generally clumsy tone of today’s letter. Maybe my bullishness will increase with the Thanksgiving approach? Email me at of Ethan by

What kind of property bubble is this anyway?

One of the common answers to the collapse at Zillow’s home buying business last week was to suggest that it was one of those ominous events that marks the end of a euphoric market. The analogy used by a colleague of mine was to inflate two Bear Stearns-backed hedge funds in the summer of 2007.

This reaction makes sense, as the wild house price movements that Zillow is turning around from the home have pushed business lanes, to some extent, wildness in other markets – paradigmatic the stock market. Here, for example, the stock market is mapped at median existing house prices of the National Association of Realtors (data up to September):

This, I admit, is a suspicious graph. Both lines show year-on-year percentage change, but I plotted them on different scales to make them overlap more. Furthermore, there are times (including most of the early mid-2000s) when the lines run in opposite directions. But the two price ranges certainly come together when things go bad, and it now certainly seems like it’s one of those times.

So, if you accept the analogy, markets are generally euphoric; something haunting and bad happened to a lever player in housing; so maybe we should worry about not only housing but also other markets like stocks.

(If one was looking for ghostly things to deepen the analogy, you could also point out that homebuilders’ shares are now well above their 2005 highs, but they seem to have rolled around in May and are a bit shaky here lyk.)

One thing that is broadly understood, but that can always be repeated, is that the housing market in the US now looks very different from the last time it blew up. Yes, stimulus has helped household balance sheets a lot and, yes, very low interest rates help. But all the same, mortgage lenders’ credit points are much better, and mortgage crime rates are parked near historical lows. Mortgage debt as a percentage of disposable income is also close all time lows. Adjustable-rate mortgages currently make up only 4 percent of new mortgage loans, half the number of a decade ago, According to ICE Mortgage Technology (in 2005, perhaps a term of mortgages was adjustable rate). If we’re heading for a lever-driven housing market to go up, the leverage is not in the same places it was in 2008.

But there is something that currently connects the stock market and the housing market. A global boom in liquidity means that capital is crushing in both markets. I wrote about flow to real estate before; the most important point is that institutional money absolutely sobs to get into residential property, and especially single-family rentals. Rick Palacios of John Burns Real Estate Consulting explained the reasons why in an email:

Capital flows in for a myriad of good reasons. Global bond yields are at historic lows, and investors need returns; inflation is on the rise, and most investors view rental housing as an inflation hedge; record high rental growth is supported by high occupancy rates. And tenants have shown that they are willing to pay a premium to rent in a new neighborhood run by a professional landlord.

While the news headlines and NIMBYs are cracking down on institutional owners, many tenants are clearly enjoying a better rental experience living with tenant (instead of homeowner) neighbors and no fear that their landlord may decide to sell the house soon .

Rick and his team found 43 institutional equity investments in US $ 30 billion single-family rental property announced since the beginning of 2020. The debt associated with those investments will be a multiple of the equity – and there are many Unknown investments as well, Palacios says. So the actual number is much, much higher than $ 30 billion.

So, just like in the stock market, the question is whether the current rate of flow is sustainable, and what will happen to prices if and when it slows. One reason why flows may slow down is that the large government transfers and deficits of the pandemic era may slow down, and monetary policy may become tighter. Another reason is that as house prices rise, the return on rental investment falls, and it approaches the lows of 2006-‘7. A slide from Burns:

I am not convinced that we are seeing collapse conditions in stocks or in real estate. But if real returns in both asset classes are not below the historical average over the next decade, I would be surprised.

Icarus market

Peter Atwater or Financial Insights definitely think we’re in a stock bubble, and enjoy writing about it:

What we are seeing now can best be labeled as ‘Tarantino markets’. In one room we have stocks like Peloton, Zillow and Penn Gaming being shot, and in another room investors are snoring buying options as if they were cocaine.

For what it’s worth, it reminds me all of the last days of the bubble. The horses that can’t keep up with the biggest thoroughbred are maliciously thrown aside while the bullish bets become wilder and more concentrated.

He provides this graph of how the stocks that were “shot” last week have actually been atrophying for a year or so:

This is an interesting point, and I agree that it would be a worrying indication of investor sentiment if high-flying stocks with an unusual frequency fall to earth – an Icarus market, if you prefer the classic over Tarantino. But is it more than an anecdotal phenomenon?

The answer depends on your time horizon. There seems to be a recent jump in the number of stocks reaching one-year lows:

But zooming out and it’s not clear what we’re seeing is more than a flash:

Unhedged keep an eye on it.

Is Powell a lock, and what if he is not

Jay Powell will most likely be re-appointed as Fed chairman, at least according to bets markets. The next most likely candidate is Lael Brainard, of whom I do not know much, other than the fact that she votes no when someone proposes to ease banking regulations. So I asked some serious policy nerds what they think.

My former colleague Matt Klein, from The leftovers, it said:

I think [Powell’s and Brainard’s] policy views are quite similar. . . The big difference is that he is an extraordinarily efficient politician in terms of persuading both his colleagues and Congress, while being smothered on her own side for the treasury post. The question is how much does it matter for monetary policy.

Ed Mills, an astute policy analyst at Raymond James, said:

I consider her more of a pigeon. [Appointing her] will also allow Biden to add another governor to the board, which is likely to move more pigeons …

[but] there is perception and then there is reality. The market would consider her different or at least unknown. Powell’s ease and record is an incredible asset to him.

My other favorite Wall Street cop, Isaac Boltansky of BTIG, told me:

The policy differences are probably just on the sidelines. . . No matter who Biden addresses for the top job, the White House will be able to fill at least two and possibly more seats on the Fed, which will draw the board ideologically further to the dove side of the spectrum. . . We should expect a steady continuation of the shift chair that Powell has already begun rather than some sort of sudden turnaround.

Here’s a theme. Brainard and Powell are ideologically close to monetary policy, but Powell has significantly more political capital at his disposal. Given his administration’s unpopularity problem, wouldn’t Biden be crazy about not sticking with the well-known entity? Why dare an ugly Senate confirmation hearing and an ugly market reaction to simply ensure incremental policy changes?

A good read

Big maintenance of Politico along with Jeff Roe and Kristin Davison, who ran the successful Youngkin campaign for Virginia governor. It will be interesting to see if next year’s national campaigns hold at the Roe / Davison screenplay. Will Republicans run hard against the Biden’s spending bills? Here is Roe:

I wish they would have passed the Reconciliation Bill and the Expenditure Bill [before the election]. I wish they would have spent it. There’s no way to spend $ 3 trillion on making people feel good about it. You can not do that.

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