WisdomTree Minds on the Markets
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Minds on the Markets
Archive: October 16, 2023
Nobody Has to Know That This House is in Deflation
It was a long time coming, but maybe the era of financial repression is over. Official policy in all but name for the entirety of the post-Global Financial Crisis era, the U.S. economy was gifted by Fed Chairs Bernanke, Yellen and Powell with a bond market that offered yields materially below nominal GDP growth, year after year.
Up went stocks, up went house prices, up went just about everything.
The 10-year Treasury, to name one instrument, had been offering a yield that was lower than nominal GDP growth from 2011 until the bond market sell-off. Today, Treasuries yield 4.70% but the Congressional Budget Office anticipates 2023 nominal GDP growth will come in at an annualized 3.1% rate in Q4/2023.
Financial repression has left the building. Leaving with it: a chunk of the rationale for paying top dollar for real assets such as houses and apartments.
The CPI was up “just” 3.7% over the last year, but there are asterisks. For one, the BLS is still playing catch-up on landlords’ big COVID rent hikes, saying rents were +7.4%. But Redfin’s quants are coming up with a very different number: year-over-year asking rent growth of only +0.4%. That is 700 basis points (bps) of differential plunked onto a component that is about 1/13th of the CPI.
Now consider home prices.
A house is for sale for $500,000. It has been on the market for a spell and the volume of walk-throughs is dwindling because the listing has gotten stale. The buyers who may have come when rates were 5% or even 6% are priced out at 8%. Watch how this deal gets over the finish line now, in late 2023. The seller finds a buyer who will transact at the full $500,000 list price, but the seller must provide a closing credit for a mortgage rate buydown.
The most common: lopping 200bps off the mortgage rate for the first 12 months and 100bps off for the second year, the so-called 2-1 buydown. If rates are 8%, the buyer’s rate is 6% in Year One, 7% in Year Two and the “normal” 8% for the last 28 years. To get this done, the seller in many cases will have to provide a 5-figure credit.
What will the rest of us see on the internet when it’s all done? Listed for $500,000 and sold for $500,000. Full ask.
The homebuilders have been buying down rates all year long. Now the rookies, everyday people with their house for sale, have no choice but to play this same card.
Call it “Nobody Has to Know That This House is in Deflation.”
In the CPI report, Owners’ Equivalent Rent, essentially the gauge of home prices, is +7.1% year over year. Like with rent itself, it too is catching up to the big home price jumps that hit during COVID. But Redfin’s calculation is in another ballpark, saying home prices are up just 2.2% in the here and now. That ostensibly doesn’t capture the rate buydowns either. Each passing day brings more whispers of this type of transaction becoming more and more common in residential real estate. The prediction: it will become ubiquitous in 2024. Factor it into your real-world inflation calculus.
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