I have been highlighting the coming bust in the housing market for these reasons:
- It is the largest industry in the US
- Nobody seems to be concerned about it
- The coming bust will damage the financial sector as well.
We are only at the beginning of the housing bust. Other bubbles have burst:
- Stocks
- Crypto
- NFTs
And now housing will bust.
Why?
The chart tells the story. Prices went way beyond their true value over the last year. Plus the Fed has tightened so much that mortgage rates have doubled.
These are two shocks to the housing market. Both caused by the Fed.
The price rise shock was caused mainly by the Fed’s super loose monetary policy then was turbo charged by the Trump and Biden administrations’ lockdowns then handing out trillions of dollars of welfare, er, help to people. That boosted demand for houses way beyond their true value. Now the roosters are coming home.
The Fed is currently raising rates so the combination of too high prices and rising rates are shocking the housing market right now. The chart shows that housing affordability is plunging due to these two shocks.
I always believe that the change in pressure is more important than the pressure. Let me explain. You have all heard the story about how to cook a frog. Turn up the heat in the pan very very slowly so it gets used to the increasing heat. If you throw the frog into boiling water it will jump out.
The economy is like the frog. A slow increase in interest rates will allow everyone to adjust to it and things will be OK.
But throw the economy into boiling hot 1% increases in rates and the economy will go into shock.
The housing sector is going into shock right now.
So how do we make money?
Clearly, we have to short the housing sector. But a collapsing housing market will also affect the banking sector. So we will want to short banks particularly regional banks because they are the only banks left that actually give out mortgages.
I would also look to execute the same strategy in Europe as well.
http://wsw2021.com
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