The Real Cost of Bubbles

Well, it’s the end of another year, which means it’s time for some 2022 predictions. There is a lot of concern that the housing market is in a bubble and that we are at the peak. Everyone has been concerned with bubbles since the Dutch tulip bubble of the 1630s and probably long before that; the history of bubbles is long in human culture and experience. When trying to answer this question, we can’t just look at the price of housing. We have to look at the cost of housing — the real cost: how much does it cost monthly to buy and own that house. We can’t just consider the sticker price. When interest rates are artificially low as they are now and when we’re living in an era of financial repression, the monthly payment is the key factor that determines affordability. Monthly payments are influenced by interest rates and that should be compared to income growth which is clearly not keeping up with inflation.

Jason took his dog to the veterinarian last week and the doctor said that all the vendors, pharmaceutical companies and medical suppliers for all the supplies they need to run a veterinary clinic traditionally raise their prices each year as a normal occurrence because we’ve all come to accept inflation as just “the way it is.” Absurd! It doesn’t have to be that way according to Jason. Why do we have to have inflation? Jason knows everyone will cite the Phillips Curve and the Fed’s 2% target inflation rate because it’s a measure of employment vs inflation and has to be kept in a sweet spot to keep everything “just right” in our centrally planned economy. But as you know, Jason believes in a free market economy where the price of money and the price of interest rates is set by supply and demand. Imagine that! But that’s just not what we have. Unfortunately, it doesn’t matter what Jason or you and I believe; what matters is the reality we have and inflation is on a tear. The veterinarian continued to report that all of those manufacturers and suppliers raise prices twice a year now and those prices are up about 12%. That’s real inflation vs the fake inflation rate associated with the Consumer Price Index, which as Jason has mentioned many times, is highly manipulated through weighting, substitution and hedonic indexing.

What Goes Up Must Come Down

Back to our current bubble. Everyone is concerned that the market will tank, that they will buy now and then be left a greater fool. But Jason wants to remind you that no matter what you pay, some greater fool will come along and pay more. We’ve seen that throughout history, and just remember how important housing is to the elites, central planners and to the people who run our economy. We do not have a free market economy; we have a centrally planned, managed economy. Good or bad, that’s the reality and it’s been our reality for a long, long time. So, how important is housing exactly? Housing is incredibly important, not only as a measure of the economy, but it’s also important as a stimulant for the economy. It comprises a large part of it.

According to Timeshatter: “The housing market has significant importance for the broader economy. Accounting for about 17.5% of the US GDP.” Just think of how significant that is; 17.5% of the entire economy being just the housing market! The gross domestic product is highly manipulated like everything else because a lot of stuff goes in there that shouldn’t, such as government projects, infrastructure spending bills, etc. These shouldn’t be a part of the GDP, this is not production, just government spending into the economy. Jason agrees that it can have a Keynesian stimulatory effect, but it’s not GDP… Just imagine if you took the real GDP (Jason has done numerous podcasts on this subject) and the housing percentage in the real GDP would be a much higher percentage, maybe even 30%.

4.2% of the GDP impact is spending on construction and Jason insists that this number has to go higher because home builders have simply got to start building more houses. There is an insane housing shortage and it has to correct itself. It is especially acute in the entry level housing segment because there is just nothing! There is a severe lack of inventory in the area which is the main target for rental property investors.

Cheaper Than You Thought?

Most people look at housing price growth and they think, look at how much prices have increased. But when you really analyze it, you’ll realize that real estate is cheaper than you thought when you adjust for interest rates. When you look at the mortgage payment vs the median income and you adjust for wage growth (again — not keeping up with inflation but there is some growth), you’ll get a better picture of affordability. But what if you look at it another way? What if you consider the total value of the housing market and how it has changed? So back in 2012, the value of US housing dipped. It has had a massive upward trajectory since then up to 36 trillion dollars from a low of just over 20 trillion dollars (Jason reminds you that the US GDP is just over 20 trillion dollars…), so the housing market now far exceeds the GDP of the entire country. But what does this mean? Someone might think this just points to massive appreciation and that housing is over inflated and we’re in a bubble. Not necessarily, as those values have to include new construction, and while it is lacking demand, there still has been trillions of dollars of new construction in the past nine years since the 2012 point of reference however, the overall value of the housing market is influenced by housing price appreciation and by inflation.

Housing Inventory Shortage, But Someone’s Buying

Jason reports that the housing market faces a supply shortage of 2.5 million housing units. Data from the US Census Bureau shows that there were about 1.4 million newly constructed houses in July of 2021. This is a slight increase of 51,000 units from last year’s same time period. This small change indicates that buyers will continue to fight for homes and this will keep prices high, with multiple offers and a short time on market. But what are they not telling us? What are they leaving out of this equation? You can’t hear the dogs that don’t bark… Well, what they’re not telling us are the price segments. They are only indicating the aggregate number of units and what the shortage is. This is very acute in the number of entry level, first time buyer homes that are completely missing from the market, because the builders are not building to support or fill that market to satisfy that demand. Why? It’s just not profitable for home builders to build entry level homes anymore. And who’s driving the market? Who are the homebuyers in this chapter of history? Who is able to afford those tulip bubble homes? Generation X are driving this market with the highest incomes and they are buying the most homes. The millennials are making an impact, but Gen X is definitely driving the market.

Ashley & The Jason Hartman Team

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