I will forever believe that buying a home is a great investment. Why? Because you can’t live in a stock certificate. You can’t live in a mutual fund.”
– Oprah Winfrey
November 20, 2024 — Addison has a new grey swan event to report – a bird strike hitting his flight to Denver yesterday.
Specifically, a swan.
What are the odds, right?
We doubt it really means anything.
But it’s a reminder that the world is a chaotic place, and these events, while rare, are hardly life-threatening thanks to technological advances.
We’ll resume our regular programming tomorrow.
But as we’ve focused on politics so far this week, it seemed like a good time to look at a core component of the American dream: Homeownership.
However, there’s a snag. Homeownership is actually a pretty political topic. There are plenty of federal subsidies for housing. Getting into a home is one of many goals the U.S. government supports via the tax code, such as the much-vaunted deduction for interest on your mortgage, or the first-time homebuyer’s credit.
For instance, I bought my first home in 2009. I put $10,000 down as a first-time homebuyer, and Uncle Sam kicked back an $8,000 tax credit that year. Add in the $1,000 security deposit that I had from renting, and I’d like to think my all-in costs were $1,000.
Today, that home has nearly tripled from its purchase price. And after spending years in it fixing it up, it’s as cash-producing rental.
Nice returns if you can get it. And when the government steps in and nobody wants to buy, like in 2009, that’s when you can get those big returns.
Today, it’s a different story…
For the past two years, the housing market has been “frozen.” Ultra-low mortgage rates in 2020 and 2021 gave homeowners a chance to refinance at historically-low rates.
We know of people who even managed to lock in a 1.99% rate, albeit on a 15-year loan, not the standard 30-year loan.
Then, rates rose. And mortgage rates peaked around 7%. And homeowners balked at the idea of moving from a place where a home could be financed below 3% to more than twice as much. If home prices were significantly lower, it would be a different story.
But, let’s face it … falling home prices would bring calls for the government to “do something.” The average American homeowner has something akin to $299,000 in equity, according to Bankrate. That’s larger than the $90,000 the average American has in a stock-based retirement plan.
So, for the past two years, listings have faded away to record lows. Most home sales have come from new homes, for the first time. And that’s kept prices high.
Now, as the Federal Reserve finally cuts interest rates… yields have pushed higher instead.
So we’re not quite at a housing “thaw” just yet. Just a bit more normal activity.
However, we could still be in for a rocky time ahead.
As Grey Swan Investment Fraternity contributor John Rubino notes today, it’s not just the initial cost of a home that’s a concern.
Rather, it’s the rising costs of maintaining and keeping that home that could derail the American dream for many. And that could truly bring down home prices. ~ Enjoy, Andrew
Housing Bust Update: It’s Not Just the Cost of Buying, It’s the Cost of Owning
John Rubino, John Rubino’s Substack
Home prices are at all-time highs, and — amazingly — are still rising. Compare today’s average price to that of 2007, which is generally thought to be the peak of America’s biggest-ever housing bubble:
And mortgage rates, which were supposed to fall when the Fed started easing in September, are instead rising. 7%, here we come.
Life is clearly hard for those who have to buy a house these days. But for a lot of people who did, at some time in the past, manage to buy a house, there’s another problem: The cost of keeping that house is skyrocketing, putting homeowners in a bind. They can’t sell because no one can buy, but they can’t stay put because the costs of doing so are becoming ruinous. Here’s an excerpt from a recent Charles Hugh Smith post on this topic:
The Cost of Owning a Home Is Soaring
The soaring costs of home ownership are changing the metrics of unaffordability in important ways.
Traditionally, the primary cost of home ownership everyone tracks is the mortgage payment, the famous monthly nut of principal and interest, which of course goes up with the purchase price and the interest rate of the mortgage.
As we all know, both the purchase price and the interest rate have gone up significantly, pushing the mortgage payment as a percentage of median household income up to levels that exceed the previous peak in Housing Bubble #1 circa 2006-08.
But the mortgage payment isn’t the only cost of owning a home. All the other costs that were relatively affordable in decades past are now skyrocketing. Gordon Long lists the six basic categories of home ownership expenses: mortgage, property taxes, insurance, utilities, maintenance and repair and home-related services.
Anecdotally, we’re hearing accounts of basic home insurance jumping from $3,000 to $13,000 annually in high-risk regions. We’re also hearing of insurers abandoning high-risk areas and entire states, leaving homeowners with few options for insurance. In response, some homeowners are “self-insuring,” i.e. they have dropped insurance coverage.
The problem with this option is that should the worst-case scenario come to pass, as a general rule the federal disaster relief agencies will pony up a maximum of $40,000 to the uninsured–far from enough to rebuild or repair a severely damaged house.
Insurers are not in the charity business. Once their losses run into the billions of dollars, they jack up rates to restore profitability. Recall that insurance is a global enterprise, and so the cost of our insurance is partly based on the cost of the reinsurance the big carriers purchase globally. If reinsurance rates rise, everyone’s rates rise accordingly.
Unsurprisingly, homeowners are responding by raising the deductibles in their policy to lower the annual cost. This is a hybrid of “self-insurance,” as homeowners with high deductibles have to have the cash in hand to fund the cost of repairs up to the deductible ceiling.
If you think the rise in the price of groceries is eye-popping, check out property tax increases, which are pushing 30% nationally. Since local governments depend on property taxes for a significant percentage of their revenues, we can expect these taxes to remain “sticky” even if housing valuations decline.
The costs of maintenance and repair are soaring as well as the costs of construction materials and labor have increased, along with the other costs of doing business. Just as the cost of a sandwich or burger seems to be about $15 everywhere, the cost of any home project other than fixing a leaky faucet seems to be $10,000 or more now: tree pruning: $10K, roof repair, $10K, and so on.
The soaring costs of home ownership are changing the metrics of unaffordability in important ways. It’s not just the initial purchase price that defines what’s affordable and what isn’t; so too do the costs of owning the house after our name is on the property tax rolls.
Home Prices Have to Crash
This is clearly an unsustainable market where something has to give. Taxes and insurance premiums have to plunge (dream on), mortgage rates have to plunge (possible but only in some kind of crisis), or home prices have to fall by 30% or more (bordering on “sure thing”).
Two articles from WolfStreet and a video from Breaking Points offer a glimpse of the future:
~~ John Rubino, John Rubino’s Substack
Regards,
Andrew Packer
Grey Swan
P.S. Regarding Addison’s recent missives about reigning in the size of government, reader Scott writes:
Regarding your “Chainsaw Democracy” piece, It’s starting to appear you have drunk the Kool-aid.
The idea that the incoming Trump administration will shrink the government is laughable. Check Trump’s track record. As you have pointed out many times, Trump caused inflation and the federal government’s growth rate to triple, and federal deficits to soar to unprecedented levels – all before COVID and his bungled response.
While Trump may cut some programs, he will likely redirect any savings to benefit insiders (spelled Musk and Ramaswamy) and favored patrons rather than downsizing government and reducing the overall burden on taxpayers. Cutting government isn’t about optics—it’s about delivering sustainable, balanced growth, something Trump and his cronies aren’t the least bit interested in – despite the endless bloviating and bluster. It’s all part the shtick.
The 2024 election was not about savings, efficiency, productivity, or prosperity. It was about who gets to devour the carcass.
We certainly think it’s likely that we won’t see any real cuts to the government at all. Oftentimes, politicians take something growing at 10%, reduce the growth to 5%, and call it a cut … while it’s still growing.
But hope springs eternal. And at least trying to cut down the size of government is a worthwhile goal worth pursuing, even if it means less of a carcass to devour.
Send more thoughts our way: addison@greyswanfraternity.com
How did we get here? Find out in these riveting reads: Demise of the Dollar; Financial Reckoning Day; and Empire of Debt — all three books are now available in their third post-pandemic editions. You might enjoy one or all three.