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What Could Bring House Prices (and Rates) Down? The Elephant In The Room

large-home-with-poolDUDE SELLS TOO SOON!

I was at a graduation party yesterday and the host told me how his law partner sold his Silicon Valley home two years ago b/c he was convinced the market had peaked.

It hadn’t.

The poor guy’s former home has gone up another 20% (several hundred thousand dollars) since he sold, and so has his rent.

The host made the further point that people should never try to time a market that they are not intimately familiar with.

I like to remind everyone that nobody should ever try to time a market, no matter how much they know, b/c there are so many variables they have no control over – especially when those variables involve the Fed.

I blogged Monday about Why High Rates Don’t Hurt Home Prices, and why things look good in the short run.

ELEPHANT IN ROOM: MONETARY TIGHTENING

BUT – there is a huge elephant in the room that nobody is talking about: Massive Monetary Tightening via Higher Rates and Quantitative Tightening.

After the meltdown, The Fed engaged in a massive experiment known as Quantitative Easing, where the Fed bought trillions of dollars of gov’t bonds and mortgage backed securities.

These bond purchases increased the money supply by flooding financial institutions with cash in an effort to increase lending and liquidity.

The Fed also lowered rates to unprecedently low levels.

The low rates and huge capital infusion pushed up asset prices, particularly with respect to stocks, bonds and real estate.

This is what usually happens when the Fed increases the money supply, and this is partially why we see such high assets prices now.

Many people believe high prices are just a function of too much demand chasing too little supply, but that is not always the case.

Excess demand is often driven by excess capital in an economy; people want to park their capital somewhere, as opposed to letting it sit in bank accounts, so they buy assets.

In any case, the Fed created about $4 trillion of new money up through 2016, and in 2017 they reversed the policy!

They are now not only pushing up rates but also SELLING bonds with the intention of vacuuming about $2 trillion OUT of the economy.

This will likely have an adverse effect on asset (housing) prices at some point.

Do I think real estate prices will tank? No. I still like real estate b/c the fundamentals are so strong in many areas.

But – I don’t think we will continue to see such strong appreciation, and now might be a good time for Silicon Valley lawyers to sell their homes.

FED COULD REVERSE AGAIN

Nobody is more aware of this than the Fed, and they are watching closely. If Fed policymakers see the economy showing excessive signs of softening, they could very likely change course again – and lower rates.

Again – nobody knows what will happen b/c we have never seen anything like this before.

We are in the midst of one giant experiment, and we all get to be the laboratory rats :).

Jay Voorhees at (925) 855-4491
Real Estate Broker, CA Bureau of Real Estate, BRE# 01524255, NMLS# 335646