I know a lot of people in
the audience and some people on our
staff, very worried about what's
going on in the housing market and
what it's going to look like over
the next year or two.
It doesn't seem like what's been
going on, can be sustainable and
it turns out that the vibe here at
TYT is reflected across the country
because apparently searches for
the phrase.
When is the housing market going
to crash?
Are up 2,450%
just over the past month.
Similarly, Americans are searching
in droves for explanations about
why the housing market is so
hot and why home prices are rising.
So look, we have talked about this
multiple times that I have some
responses to the current state of
the housing market from some
insiders, as well as some
explanations about how we got here.
But I wanted to make sure that we
have time for both of
you to weigh in, especially Naomi,
is this something that you're
particularly worried about?
Or people like the rise in Google
traffic like that is that freaking
out a bit disproportionally?
>> Well, here's the reason that it
is worrying at the housing market
and by that, I mean, the homes that
are going up by 40 or
50% over where they would have
been last year, because people
are buying them with cash.
And not under sort of, in some
cases not even looking at them and
it's not just actual people.
One of the elements that's making
this housing market so
out of whack, is the fact and this
happens is that there's some bottom
fishing going on even at high
prices from things like private
equity funds and real estate sort
of programs or groups of investors.
And they have the ability to put
cash into a real estate deal as
soon as they see a home whether
they are physically seeing it or
not as soon as it comes out
of the market.
And as a result, real actual people
even if they wanted to follow
the other part of the trend that's
moving prices up which is sort of
leaving from urban to more suburban
or outside of city locations.
Because some people can
work from home.
Because it seems more desirable
because COVID and the pandemic made
city living much less helpful and
it was already expensive to begin
with and so forth.
A lot of those people like actual
real people who
don't have tons of cash or
aren't a private equity fund aren't
able to actually do that.
And so they're getting sort
of priced out of this market,
which is why I think the second
part of that search was why
is the housing market so hot.
Now the other side of that is
will it crash.
Right and
one of the things that happens,
this is a housing bubble.
It's a different kind of a bubble
then the subprime mortgage market
initiated back in the day that
related to the financial crisis
because investment banks are doing
something a little bit different.
Then they were buying up subprime
loans which are given at very high
interest rates to lots of people,
then the economy turn they couldn't
pay those rates or those rates went
up relative to what they thought
they would be able to pay.
They couldn't pay the extra and
a lot of foreclosures and
defaults happen because of that.
So investment banks got smart, and
they're actually not lending even
though rates are so
low again to most people who might
want to buy a home right now for
the reasons of leaving the city and
going outside of it.
And so those people aren't actually
in the market, nor
can they afford the market because
they don't have the money.
But the leverage that's
coming into the system, the money
that they are borrowing and
where the borrowing is happening is
in some of these funds,
because they get money really
cheaply from some of the big banks.
They have these sorts of lines.
They're able to go in and
purchase properties.
And oftentimes when you hear so
many stories around the country of
20 bidders in 40, bidders,
basically offering 100% or
140% cash over asking price.
Not all of them are actually humans
or they're not individuals is.
And so it is creating a skew for
the affordability of housing as
well as a problem because people
who make normal money or lost money
this year lost jobs this year and
want to potentially move.
Or buy a house are finding that
they can't actually get loans even
though these rates are so
low right now because
of where the Federal Reserve is at.
So there are problems brewing
behind this bubble that can cause
a housing crash.
They're merely different in
terms of how they're evolving
than they were last time around.
>> So Naomi to me the most
important question is, yes, this is
the was the trigger last time and
it's an important question to ask
whether it's going to be a trigger
for a crash this time.
But the gun was the derivatives
that was the gambling that they did
on top of the housing market.
And so
they would do $10 or oftentimes
more of bets on top of a $1 value
of the homes or the package of
homes to oversimplify, right?
Or 10x of the value.
>> Right. So are they doing that
again this time or no?
>> There is an element of the
market in which that's being done.
So a lot of these either private
equity funds or real estate pools,
some of these actually have
a borrowing lots of money relative
to the house.
Or relative to other collateral
they might have in order to be able
to be really quick with these,
above offer type of cash offers to
these homes,
which is what's bidding them up.
And so not the entire market and
in the case of
the financial crisis, you're right.
The market crashed because banks
basically used every single
individual subprime loan to line
lots of different
derivative products and so forth.
The derivative products right now
are still related to real estate
but they're a little bit different,
their leverage or their additional
borrowing, sometimes in the form of
derivatives related to real estate
groups or pools that aren't
necessarily subprime low unrelated.
But they are related to still
creating excess borrowing over to
not individuals, but to sort of
groups and to funds and to firms
that are pulling together to be
involved in the real estate market
and bidding up prices as a result.
So yes, there is leverage in the
market, and there are some elements
of derivatives or different sort of
engineering around that, as well as
real individuals who are putting
downcast because they're on the we
need to leave the urban and
go to suburban side of things and
they simply have the cash.
So there's two different areas from
which money is coming.
The leveraged part of it is
the part that's most likely going
to cause a housing crash.
>> Yeah, that's what
I'm really worried about is
the leverage because that's
the basically the gambling part.
But I want to ask also about their
excuse.
They're saying no,
this is not a problem.
We don't have a bubble even
though the prices are overinflated
by about 15% or so,
roughly speaking, and
some markets are way higher than
that in terms of overall inflation.
But they're saying it's actually
natural because of the pandemic.
People are looking to move out to
the suburbs or wherever or rural
areas and buy houses, and there's
definitely some truth to that.
But what percentage of that is
what's actually causing the problem
versus the other factors?
>> Right, and I think the majority
of the factors that the people that
they do you want to move out often
and the percentage of second home
buying is actually quite high
because what's happening is,
in general, there's not enough
supply in the market.
In other words,
people aren't selling the homes
that they're living in, in the more
desirable areas so outside of
the city areas because they can't
afford to buy anything else.
And they're like, hey, we're in and
outside of the city area anyway,
why would we move and where, and
how could we move there, right?
So, there's a lot of staying put
and that is creating one of the
elements of this, which is there's,
more demand for outside of city,
places than supply.
And that's why on average,
even though prices might be looking
like they're up 15% nationally,
they're at 40, 50, 60, or
more percent on an individual house
in a lot of specific areas.
And that's, what's creating these
sort of like pocket bubbles,
throughout all of these areas.
So that is one of the causes.
But a lot of the people that are
doing that are also on second home
buying because they can afford it.
Because banks aren't actually
loaning as much to some of
these buyers as they did back,
even before the financial crisis,
or at some point since
the financial crisis.
It's not coming out of lending as
much as it's coming out of
people's cash.
Or, again, these pools of money and
in different forms of private
equity or distressed buying are the
types of funds that are borrowing
on top of it in order to buy up
the market on the assumption.
And this is similar to
the assumption of the pre financial
crisis period that these housing
prices will always go up.
And so they're basically kind of
cornering the market
with leverage money.
It's not real people that
are buying up and bidding up
the prices on a lot of this when I
say real people, I mean most real
people don't have a half a million,
2 million two more dollars sitting
around to throw in an all cash bid
and close it that day.
That's not normal for
most people's budgets.
>> Yeah my last thought on is this
so guys, if you're not aware of
this phenomena we talked about
a couple times on the show.
Wall Street's buying up houses
a lot of the houses.
Because after the foreclosures
they've foreclosed on the homes and
they thought, wow,
these are really cheap and
nobody has any money left.
So they bought up a lot of those
homes, and now they're charging
rent back to the people who no
longer have the money for a down
payment and can't buy the homes.
So then they're building up
the equity in those homes rather
than the individual homeowner.
The real people that know these
talking about and so they figured
so win win I'm going to get
the rent, I'm going to pay for it
that way and I build the equity and
I screw over the homeowners in two
different ways.
But the problem here is that if
they are playing that game too
aggressively and they're driving
up the prices too much,
and then they're
using leverage to bet on it again.
Well, then we've rebuilt a bubble
that is very dangerous not just for
the housing market but for
the entire economy, >> And
all those neighborhoods in which
the real spikes are happening,
>> You right, so, yeah, so we'll
obviously follow the story and
see if how it develops.
But right now,
everybody's got a different view on
how much of a red alert it is.
But certainly something that you
should all be concerned about
to some degree, and keep a careful
eye on because, here we go again.
It could easily explode to
some point.