Denton home prices shatter records

Bubblicious prices for new homes helped to fuel those crazy numbers last month. Imagine paying $237 per square foot for a tract home from a production builder in Denton, Texas. That’s the kind of insanity taking place last month as the median price for a new Denton home posted at $541,141. A few local builders seized the opportunity to unload a batch of new homes at prices which would have seemed unimaginable just a few years ago.

The rental market was also hot in December. NTREIS stats show that the average price of a single-family rental in Denton County was up 16% year-over-year. Apartments are expensive too. Vacancy rates are at historic lows.

Official government statistics on housing inflation have been woefully inadequate capturing the real picture. The Bureau of Labor Statistics took another opportunity to insult your collective intelligence with Consumer Price Index readings that bear no resemblance to real housing inflation.

The December print for CPI inflation was a whopping 7%. Consumer inflation is the highest in 39 years. Real hourly average wages in the U.S. have been negative for 9 straight months now. Spiraling inflation destroys purchasing power for typical workers.

Mortgage rates started the new year with some fireworks. The rate on the 30-year fixed jumped 30 basis points compared to the 2021 average. Your qualifying rate on a mortgage purchase application could now be 3.5% or higher. Things are going to get even more challenging for mortgage borrowers this year because our reckless Fed is woefully behind the curve.

Built-to-Rent is a plague infecting the housing market

Chicago-based Core Spaces and investment management firm Harrison Street recently announced a joint venture which will pour another $1.5 billion into the development and acquisition of more single-family build-to-rent communities in the U.S. Whee!

If you recall, we already have one of those build-to-rent paradises on the drawing board right here in Denton, Texas. The press releases and marketing for these projects are a real hoot. They talk about how well the product is “received” and how customers are keen on renting as the new normal. After, who wouldn’t want to cram their family into an overpriced, undersized rental and have none of the tax advantages of home ownership. It’s the new American dream, right?

In truth, the growing number of build-to-rent projects popping up across the country are a reflection of a market drunk on liquidity, excess and inequality.

iBuyers fuel housing inequality

Chances are good you may have received an offer from an iBuyer offering to pay you cash for your home and help you move to a new place. This is simply another form of financialization infecting the market. Those iBuyers flipped 20% of home purchases to institutional investors in 2021. That’s essentially a secret pipeline of homes being sold by billionaire corporations to other billionaire vultures. But, wait. It gets worse. When that affordable housing inventory gets mopped up by wealthy investors in a search for yield, this financialization of housing hits communities of color the hardest.

“A Bloomberg News analysis of more than 100,000 property records shows that Zillow and the two other biggest iBuyers, Opendoor Technologies Inc. and Offerpad Solutions Inc., are selling thousands of homes to landlords backed by KKR & Co., Cerberus Capital Management, Blackstone Inc., and other large institutions. In many cases, those properties are never even listed, further squeezing average buyers out of competitive housing markets.”

It’s no great secret why wealth inequality and housing inequality are getting worse in the current environment. End user buyers are constrained by income. Institutional investors are not bound by the same constraints.

In case you haven’t noticed, trickle-down theory as practiced by the Fed is a huge lie. Central bankers want you to believe the cost of capital for American workers is the same as it is for a Wall Street hedge fund or profiteering private equity landlords gobbling up available home inventory. Have you checked the interest rate on your credit card lately?

The house the Fed built

The insanity in the housing market may last a bit longer. Real quantitative tightening hasn’t even started yet. The gut check for the housing market is just around the corner though. You can ask a local economist for a definition of quantitative tightening, but I will save you the torture.

Quantitative tightening is when the Federal Reserve takes all of the excess liquidity it shouldn’t have provided to the market in the first place, and things (markets) begin breaking.

Asset markets have been freaking out this month with the release of the December Federal Open Market Committee minutes. Those remarks from Federal Reserve officials simply confirmed what I have been warning about. The Fed is now looking at multiple rate hikes in 2022 and even balance sheet reduction.

That sucking sound you hear in the distance is the sound of the Fed’s printing press about to go in reverse. If you remember the fourth quarter of 2018, it should ring a few bells. Real estate pundits and economists keep pretending all of this is not happening. They are hoping and praying for a soft landing, for a resumption of more sustainable growth. Unfortunately, that’s not how markets work, particularly when the Fed is involved. The Fed specializes in blowing bubbles and handing the bill off to taxpayers.

Things are probably going to get a little volatile. Volatility can also be described as messy. Federal Reserve officials spent most of 2021 pretending inflation was transitory. They did this despite overwhelming evidence to the contrary. FOMC officials are now staring at the Frankenstein markets they created, wondering what to do. Be safe out there. 2022 could be one wild ride. Liquidity flows are still driving the housing market. When the flow changes, all of that “pent-up demand” could disappear along with it.