Why the Fed MUST *Force* a Housing DEPRESSION.

hey everyone me Kevin here boy oh boy

crashes can be depressing and a

depression is exactly what we might be

facing soon that's because this paper

back in

2006 by Mr Robert Schiller and others

over at Yale Mr Schiller created the

case Shiller index for tracking real

estate put together this piece on the

stock market versus the housing market

when it comes to wealth effects now this

is an older piece but it has a really

interesting conclusion you could really

find this just by Googling wealth

effects housing versus stock market so

it's not like you really have to dig far

uh but that's because it's a relatively

popular piece but it's just worth

mentioning the conclusion here take a

look at this conclusion because it has

really big in my opinion implications

for what we're potentially about to face

and we just got some more numbers just

this morning that are going to give us a

little bit more insight into exactly the

impacts we could be facing here so when

we take a look at this what do we end up

getting well we get the the following we

find at best weak evidence of a stock

market wealth effect so remember folks

the Federal Reserve wants consumers to

stop spending as much money less demand

means less inflation the economy slows

down or what happens when the economy

slows down well finally people lower

prices to encourage folks to buy again

that creates disinflation inflation goes

away and the fed's tightening regime

goes away

but

the Federal Reserve will certainly know

that a fall in the stock market well it

certainly feels like it hurts us and it

would make sense that there's a wealth

effect of stocks going down so people

are going to spend less at least based

on This research piece stocks aren't

really what have the greatest wealth

effect

it's instead and who knows I mean I

certainly think it makes sense to spend

less when your stocks go down but you

know that's just an opinion and sort of

an anecdotal piece of evidence this is a

study by Mr Schiller and Yale and and

others there and so they don't really

actually see the stock market as having

the largest wealth effect on individual

spending uh instead it's the housing

market which is really interesting

because if we think about Jerome Powell

what was his advice to home buyers his

advice to home buyers was wait for a

reset you know I would say if you're if

you're a home buyer somebody or a young

person looking to buy a home you you

need a bit of a reset we need to get

back to a place where where supply and

demand are back together and where

inflation is down low again and

mortgages or mortgage rates are low

again so this this will be a process

whereby we ideally we we do our work in

a way that where the housing market

settles in a new place and housing

availability and credit availability are

at appropriate levels he said that in

June I believe it was June it might have

been May either way it might have been

way uh when Jerome Powell tells you wait

for a reset in the housing market before

buying

it kind of sends you a little bit of a

signal that

oh dang they probably know about this

the stock market going down isn't enough

to bring inflation down you have to see

the housing market go down to get

inflation to go down because the housing

market will actually affect inflation

take a look at the next line that I've

highlighted here in green

a 10 increase in housing wealth

tends to correlate with a 1.1 percent

increase in consumption opposite within

presumably be true as well 10 decline in

housing would be a decline of 1.1

percent in consumption a 10 increase in

the stock market had virtually no effect

on consumption so if you are chairperson

of the Federal Reserve or if you're on

the board of the Fed

you know you have to manipulate the

housing market down to actually get

inflation out and one of the easiest

ways to get inflation to go down Via

Real Estate is to raise interest rates

especially for the 10-year treasury

yields to Skyrocket and folks that is

exactly what's happening now some of

this could be because of quantitative

tightening could be because of fear of

the market

it's probably a combination of both

but remember that I've said the housing

market sustains permanent damage anytime

the 10-year treasury yield is over 2.75

well it's currently at

3.57 it's up over eight basis points

today which is quite remarkable and if

you look at the year-to-date chart we

are at the highest levels that we have

been at so far this year we're higher

than where we were at the peak in the

summer the longer we're at these levels

the more permanent damage we're going to

seat in real estate the more

opportunities there will be to buy real

estate more cheaply but the more the FED

will actually accomplish their goal of

reducing consumer spending by destroying

people's wealth making them feel poor

making them spend less money when they

spend less money and feel poor inflation

comes down then quote housing will

settle in a new place says Jerome Powell

said and we'll be back to a normal sort

of equilibrium again and that in my

opinion is going to be the perfect

opportunity to go shopping for Real

Estate it's why got a real estate

startup that is looking to maximize the

opportunity of buying real estate once

the pain and damage comes you can learn

more about that by going to

househack.com but let's look at some

housing data that's just now coming out

so we can see where are we now I mean

has housing started to turn and what

numbers came out this morning let's get

into it and then we get the housing

numbers that we can look at so we can

kind of get an idea of what the heck is

going on in the housing market at least

based on numbers that came out just this

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month because the price will be going up

at the end of the month as that coupon

expires so what did we get in terms of

numbers well folks take a look at this

we have a little bit of an interesting

duration here that we want to understand

so first housing starts actually moved

up now this is actually a very

fascinating number that we had housing

starts up as new construction Rises but

we have to actually look at the details

to understand wait a minute what really

happened uh here for us to see sort of a

bump up in housing starts well when we

look at the actual data we see that a

lot of the housing starts actually came

from multi-family which makes a lot of

sense because rents are a astronomically

high and B still Rising because as

people are priced out of being able to

purchase homes they end up renting and

that drives pressure and more Demand on

rents which causes more rental based

inflation but it also makes it more

desirable to build a multi-family

building and rent it out if you are

building single family homes you're

probably selling them and those numbers

are not looking as pretty which makes

sense because single family homes that

are built by developers are generally

getting sold old this is a pretty

terrible time for starting new

construction on a single family in my

opinion now building permits plummeted

building permits came in down we were

expecting them to fall 4.8 percent but

we actually missed the economist's

Expectations by nearly two-fold actually

more than twofold building permits

actually fell ten percent we had a 10

percent decline in building permits and

uh it's a sign that Builders are not

extremely happy about what's coming to

the real estate market and it makes

sense that homebuilder sentiment has

been falling for nine months the longest

decline ever that we have had for home

builder sentiment since the start of

this tracking tool now if we look at the

Redfin data center we get some really

fascinating things going on but what you

want to do and I want to teach you how

to do this so you could do it yourself

as well as Google Redfin Data Center

and I want you to do the following go to

the data center

and when you're there you're going to go

ahead and uncheck 2020 you don't need 20

20. so you can take 2020 out because it

gives you some some weird curves and

lines that don't make too much sense and

what we want to do is we want to jump to

median sales prices

and we can already see this about four

to five percent moderation in median

sales prices we already see them

but what you really want to do is go to

certain markets

like for example let's go to Austin

Texas so we jump over to Austin Texas

and on a four week moving average we

could see some pain

and if we go to a 12-week moving average

we can see that pain smoothed out a

little bit you can make that adjustment

there on the right box now what's

remarkable is for Austin if we go Peak

to to trough so far we're going to go

from a median home price of 554 to

516. it's a big drop that actually

already reflects if we go to 516 divided

by 5 54. that already reflects a 6.9

percent drop in Austin Texas real estate

prices it shows that we've peaked in in

roughly April if I now go to the four

week you'll actually get a little bit

more of a Sinister look because the

latest data over here on the right isn't

actually smoothed out all the way and if

you look at the latest data you'll see

that the median sales price is coming in

at 498.

and so now if I divide by 498 the most

recent closings are actually showing

that real estate in Austin is

potentially down already as much as 10

percent

and you could do this in remarkably

any area that you want

for example if we go to Boise Idaho and

plop this in here and we go on to the

four week which takes more into account

the last four weeks right it's it's not

smoothed out over three months we see a

move down from 547

to 494.

494 is the new number and the old number

was would we say 547 so take the new

number divided by the old number 547

equals also about a 9.7 decline you can

do this relatively for any Market but

folks the peak is clearly behind us this

is why I sold my real estate in mostly

q1 of 2022 this year

because I believe that was the peak

and I like to buy low sell high and

that's exactly what we'll be doing at

house Sac if you want to learn more

about how I buy wedge deals to protect

myself and make sure that I'm insulating

myself check out the programs I'm

building your wealth down below

especially those real estate ones and

check out house hack if you're an

accredited investor the first investing

deadline is September 30th which is in

10 days and that's when we start seeing

warrants expire if you have not wired

funds yet by September 30th so take a

look at that by going to hellstack.com

thanks so much goodbye