The Opposite of 2008

In late 2007 I started counting the For Sale signs on the 20 minute drive to work through the neighb
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  1. Fun note, hit me in a few places:

    • Already looking forward to a day when we will build a digital city named Epsilonville or something and it will be one of the places I live.
    • Always love a Third Body Problem reference, frankly I get nostalgic because above all other ET notes it changed me because it was one of those rare unforeseen intellectual convergences of things I care deeply care about (in this case physics and markets).
    • Last but not least as much as I'm an ET fanboy...I remain uncertain on one of the key principles! Namely, what is the water in which we swim?? Is it the shift to inflationary expectations via extraordinary monetary/fiscal policy as Ben argues in ET or is it the similarly massive and hard to appreciate deflationary forces (Empty Planet demographics, technology/Replicator Scenario, conversion of physical economy/experiences to digital economy/experiences, etc)? I believe all these forces are certainly huge drivers just don't know which will win....and I cannot help but be fascinated by trying to naively predict outcomes even with the wisdom of 3rd body problem front of my mind!
  2. No idea where this is going either, but here is my recent personal experience with housing. Due to a death of my father-in-law in Dec 2020 and the fact that our kids weren’t truly meshing with FL we made the decision to move back to IL to be closer to my wife’s mother and our older out-of-the-house kids. Our resident 8th graders (triplets) were also consulted and very enthusiastic about a return move. I am fortunate to be home office and my wife can the business she created last year up North. So, on Christmas Eve 2020 we decided to build back in our old neighborhood where a new phase had just opened and with the help of our friends in said neighborhood (also enthusiastic about our return, which felt great) we picked a lot and a model to build. Contracts were executed via Docusign on 12/28/2020.

    Next, we consulted our RE Agent who helped us to find our FL house. She and her husband work as a team and stopped out to review our home, assess features/upgrades/etc., and gave us an initial estimated target for a listing price. This was January 16th 2021. A month later they called to say they thought we could now ask at least 10% more that what they told us a month earlier because with our type of home the demand was off the charts and the inventory nearly non-existent.

    Now it is March 2nd 2021 and I just finished reading Ben’s note above. I then checked with the builder of our new home back in IL and confirmed that the base price of the home we have only been under contract for build since 12/28/20 is now > 10% higher, starting to approach what our total cost of build will be with our lot + elevation + upgrade choices.

    Needless to say fairly shocking to me since I knew prices were rising but had no notion of how far and how fast it was happening. I have been working on my Renter Nation thesis and a portfolio of stocks for three years or so now and I have been slowly moving to include them in my portfolios, but with the crazy divergence happening now in rent vs home prices now I wonder what other ripple effects will be which means yes I am looking for thoughts which is why we are here after all.


  3. The lack of a closed-form solution to this shift is actually one of the main reasons I started reading ET years ago. Your point on owner-equivalent rent and its insufficiency as a proxy for housing costs in the CPI basket is spot-on. It quite conveniently let’s the Fed absolve itself of any responsibility for its financial bubble-blowing impacting consumer buying power on the 40% of the basket represented by housing.

    I look forward to spending some time on this subject in the forum. Thank you very much for creating it!

  4. Avatar for bhunt bhunt says:

    Amazing story, Jeff, and yet I’m hearing lots of similar experiences. Thank you for sharing this and good luck with the move back to Illinois!

  5. Avatar for bhunt bhunt says:

    Thanks for getting involved, Michael!

  6. South Carolina coast and western slope Colorado housing prices are rising to catch up with building costs. Check out lumber, cement, copper, pvc prices. Also immigration policy has hit labor force - framing crews, roofers all the manual jobs associated with the higher skilled trades. New build lead times to finish 1/1/2 to 2x longer than recent past.

  7. Hawaii real estate off the hook.

    Median price for a single family dwelling on Kauai over $1M.

    Homes in the medium to low end subdivision (for modern homes, not single wall plantation homes) in Kona that I live in are up 20 - 25% over a year ago, are sold in 3 to 5 days of being listed and generally are bid up from asking price. About 50% being bought site unseen.

  8. I wrote an article in 2012 titled “Invest in Purchasing Power”. I fully agree with Ben’s view. Inflationary booms kill bonds. In preparing the article I came across a book that consolidated a series of Barron’s articles from the 1920s. This is an excerpt.

    Consider this excerpt from a 1925 book titled Investing in Purchasing Power,
    written by Boston investment manager Kenneth Van Strum:

    What is a dollar worth?

    About twenty years ago a certain Boston business man, feeling that he had reached a
    discreet age for business retirement, sold his business and invested the proceeds in what
    he considered to be gilt edged bonds. The yield from these securities was ample for his
    needs and, he thought, would enable him to live for the rest of his life in the style to which
    he had been accustomed.

    Satisfied that he would be able to continue his old mode of living, he continued his daily
    life heedless of the encroachment that the rising cost of living was having upon his plans
    until one day it was brought forcibly to his attention. He was planning a trip abroad with
    his family and was surprised to discover that the increased cost of the thousand and one
    items used in daily life had so eaten into his reserves that it would be necessary for him to
    draw upon his principal in order to make the trip.

    By degrees he was forced to curb his standard of living until today the income from his
    bonds is downright inadequate to assure him the comforts and pleasures he had in the
    early years of his retirement. But what has happened to his investments? His bonds are
    as high grade today as they were twenty years ago and they command the same income
    in dollars. The answer is to be found in the increased cost of living and not in the fact that
    he received any smaller dollar income from his investments.

    There is an Investment Counsel in San Francisco by the name of Van Strum & Towne, founded in 1927.

    When I was a Trust Officer in the late 1970s I saw exactly the same outcome. The beneficiaries of old money trusts had to change their lifestyles, fire the captain then sell the yacht. The intergenerational fighting was fierce, Income beneficiaries needed more income, capital beneficiaries were desperate for growth. Investing for growth and income is a tough discipline.

  9. this may sound crazy - but isn’t this the best of all worlds, real-estate wise??
    Multiple more people own a home than want to buy one - so rising prices is a win.
    Most people who rent are poorer, and rents are falling - also a win.

    and as we know, once mortgage rates rise by 100bps - the housing boom will be over.

  10. If the implementation of UBI and similar things is sandbagged (delayed, reduced in size, etc.) enough, there may be an (engineered?) epidemic of defaults by individuals and small companies, putting more real assets in the hands of larger-scale players, putting them on better footing for inflation.
    There was a narrative going around about private equity snapping up defaulted properties in 2008, but I don’t know how significant that ended up being.

  11. Thanks Ben. I will most definitely miss the FL weather (as a lifelong motorcyclist, it has been wonderful) but family first.

  12. The intrinsic value of housing is the discounted long run cash flow (aka rents).
    We are moving into an environment where lower rents are discounted by ever increasing discount rates. So, rising prices underestimate the rate of divergence between price and intrinsic value.

    Well, intrinsic value is this quaint, outmoded thing that never really matters until it does.

    The three body question here is which jaw of this alligator is going to give way. Will MMT transfer enough payments to make rents catch up? Or will prices catch down?

    More likely, the divergence will move farther in a reflexive fashion. Helocs and marginal white collar workers will keep driving prices up, rents will continue muddling and value investors will keep yelling at the Fed.

  13. Boomers own homes, millennials want to buy homes.

    Boomers own rental properties (directly or through their pensions), millennials pay rent.

    As power shifts from boomers to millennials, rents will not rise as fast while more anti- eviction/rent control ordinances spring up. Boomers last stand will be fought over the Fed funds rate. Millennials (like AOC) will keep pushing inflationary MMT; boomers will hang on to low rates for dear life. Eventually, the old will be outlasted by the young when inflation gets out of control in a year or 10. That is when the inevitable wealth transfer from Boomers to Millennials will accelerate.

    That is how a simple minded me thinks. Key is to stay nimble and opportunistic. Own durable, medium duration cash flows to survive the ride and a liquidity buffer for when opportunities show up.

  14. Avatar for bhunt bhunt says:

    More likely, the divergence will move farther in a reflexive fashion. Helocs and marginal white collar workers will keep driving prices up, rents will continue muddling and value investors will keep yelling at the Fed.”


  15. If Common Knowledge has moved to “Inflation is here” then I don’t see how the Fed can continue to get away with “There’s not enough Inflation and we’re going to keep printing money until there is”.

  16. Interesting. $5 trillion in BBB rated bonds issued at low retes to allow CEO Racoons to buy back stonks and sell as prices rise.Just ask heads of AA, SWA, Delta and United. When the SHTF and these bonds tank either from recession or inflation, pension funds will need to dump as they get downgraded. The market will be like Ice-9 and even Howard Marks won’t have enough money to buy the falling knives. James Carville: When you die what do you want to come back as? The bond market, he said. Stead as she goes, Number One…

  17. > But let’s hope that doesn’t happen!
    Anyone serious about hope learns Esperanto.

  18. Wither the lemmings?
    On one occasion they went east. On another, west. What gives? The answer is that they always go toward the sea.
    The takeaway is that sometimes the answer is not always available at the object level: you have to go meta to get the answer.
    A similar closed-form solution exists regarding the U.S. housing market in 2008 and 2021: they seem to be contradictory – ‘opposites’ – but are actually both manifestations of the same phenomenon, namely, that the big market swings always have one goal: to put down / keep down the uppity hoi polloi (pretty much synonymous with blue-collar workers, but others feel the wake as well, of course), by either taking away from them a resource that they really couldn’t afford (as in 2008), or putting a resource that they really can’t afford well out of reach (as in 2021).

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