Housing Market Reality Check: Are We Facing a Collapse? | Eric Chemi & Brad Case

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the people who are buying houses right now are unfortunately in some cases they're people who are being encouraged to buy they're being told oh it's a great investment I'll tell you the truth it's not homeownership is not a better investment than putting your money in the stock market welcome to wealth on I'm Eric chemy today I am very excited because we are talking all about housing the macroeconomic picture what does inflation look like and is there a stock market bubble today my guest is Brad case and I've got notes about Brad but what everything you've done and who you are so I'm just going to break it down a little bit so our audience knows what a stellar guest we have today Brad case PhD CFA CIA is Chief Economist for middleberg communities providing analytical support for se- Lev buying selling developing and Market focused tactical decisions Dr case has researched residential and non-residential real estate markets domestically and globally for more than 30 years you you've worked at Fanny May narat the Federal Reserve board your research encompasses investment return characteristics including returns volatilities and correlations with other assets you've got a bachelor from Williams a masters at Berkeley and a PhD at Yale where your dissertation adviser was the famous Bob Schiller you even worked at HUD you've worked with Alan Greenspan and Ben banki and you were part of the team trying to design risk-based Capital standards to head off the sort of real estate bubble collapse that we saw in 2008 so that's just some of your amazing bio bread thank you so much for joining me tonight oh it's a pleasure to be with you grick so first off I know that your greatest concern right now is this continued stock market bubble tell me about that yeah I mean I I think we have to be careful about using a word like bubble but it does concern me a lot um uh companies uh have traded at a very high multiple to earnings um especially a fairly narrow part of the stock market um but the uh but it reminds me a lot of where the market was in about uh 2000 before the dotcom Bubble Burst um there is a lot of uh optimism about certain Technologies as there was a lot of optimism back there um and um and so if the stock market if people uh start to get concerned that stocks are overvalued which I think they are um and they start to sell their stocks so that they get ahead of a stock market downturn then that could get scary fairly quickly so it's nice to be in in assets that aren't subject to that kind of uh of a snap movement um but if the stock market does uh decline substantially even if I don't want to use a word like word like crash even if the stock market does decline substantially it will affect the entire economy your advice to your colleagues at middleberg since late 2021 so going back a couple years now the US was most likely not going to enter a recession but that you should prepare for rapidly increasing interest rates because of the strength of this economy that seems to be what's happened although there's debate on whether or not we've already had a recession we didn't realize it or or a recession is still coming we're still waiting for it why why have you been in this Camp of there's not going to be a recession what are the data points you're looking at yeah it's not that I think a recession will never happen it will um there are no data that tell us that we're going into a recession and in fact the data that we have tell us that the economy is still strong enough that we have to be more concerned about inflation than about recession what what data are you looking at what are the data you're looking at because because I see a lot of people saying look at unemployment picking up look at people's credit card delinquencies people eating out of their 401K because they need cash you know job layoffs that and that like I see people just going all on the be side that we are dealing with a recession because all these these bad things what are you looking at that doesn't look so bad so so first of all the job market that's the most important piece of the entire economy and employment growth has continued to be strong um for example the latest numbers on on new claims for unemployment lower than expected um so uh so when you look at the unemployment rate the unemployment rate is based on a survey it does have a tendency to tick up and down uh somewhat randomly just because it's a surve um but what you can't get get away from is the fact that it's still extraordinarily low and every every uptick over the last uh couple of years has been matched by a downtick so so unemployment is honestly not a concern uh employment growth is still strong what the what the what what we need to look for is balance in the various parts of the economy and there's still I would say too much demand relative to the supply of labor and so what's what's good about that is that people who have not been in the job market because they didn't think they would be able to get a job they're entering the job market and that will give us better better balance between demand and Supply but it's still very strong now one of the things that you mentioned was uh was uh people's credit card balances and and we have seen an uptick there but what people don't don't pay attention to is the fact that generally speaking credit card balances are low historically speaking the fact that there's been an uptick um you know it just just means that they were even lower before uh so so actually one of the things that's really driving the strength of the economy is the continued consumption by people who have the money to spend whether it's come from strong uh wage increases wage growth or whether it's come from strong you know personal balance sheets the ability to take on uh purchases on their credit cards those are still quite strong what would be the data point you would look at when you might throw in the towel and say okay A recession is coming or recession is here what's the the most important thing that would would change your opinion yeah well job growth but I I I would like to see sustained well I don't want to see it but if I saw sustained weakness in job growth so job job creation not happening as strongly as it has been for the last few years um then I then that would start signaling recession you know I I have a recession forecasting model um and uh and the forecast um you know the last job report was a little bit weaker than everybody expected and that did in fact um tick up the probability of recession but only something like from 33% to 34% um and you know one thing that people should should be aware of is sometimes people throw around a an idea like technical recession there's no such thing as a technical recession a recession what do they mean by technical recession and then what do we mean by a real recession explain the difference so there's a shorthand that says if you've had two quarters of negative growth in Real GDP so G GDP measures the entire economy real GDP says correcting for inflation it that so people will often say if there are two quarters of negative real GDP growth then that's a recession that's that's a good shorthand but it's not a recession a recession is a broad-based uh severe downturn in the economy that lasts for some time now you you don't have to have all three of those necessarily but generally that's the three things you're looking for so for example the last recession happened because of covid it was it was not a situation that lasted for a long time but it was so severe and it was throughout the economy that it was a recession even though it was very brief um but what but uh in 201 21 early 2021 we did have two quarters of negative real GDP growth and people and several people said well that's a recession it's not we had negative real GDP growth because of a couple of numbers in the GDP that fluctuate quite a bit one of them is inventory growth and the other is uh foreign trade um so in fact uh sometimes economists like me and like the fomc the federal the Federal Reserve will look uh more deep deeply at not the overall GDP because it can be thrown off by things like that and when you look at the at the sort of the real economic uh uh performance number one it's strong not weak number two it's strong throughout the economy that doesn't mean for everybody but it means generally speaking throughout the economy and it and any weakness that we've seen over the last uh two years has been very brief so nothing like a recession so how do we know what the fed is looking at and what they're ignoring because I think a lot of times people look at the fed and say oh they're making a mistake but then you're almost explaining well they're they're thinking about it differently than the way a normal person is thinking about it well they're they're saying what they look for um unfortunately there are a lot of people who don't pay attention to what the fat actually says so I'll tell you what they look for you know we all know that they want to get inflation down that has been done even though the the numbers that are reported for the CPI are not yet down to 2% the biggest reason for that is that a year or a year and a half ago uh housing costs were going up dramatically that has stopped but that's not reflected yet in the inflation numbers so inflation is actually lower than the overall number says it is okay they understand that so in a sense the inflation battle has been has been one can we pause it for a second you said inflation is lower than what the number is so then why can't they use a number that's correct or why can't they have a number that accelerates these these Trends why do we have the wrong number it's a matter of what you're trying to measure they're saying they're they're saying what is everybody generally speaking paying for things right now but when you're looking at housing let's say you rent an apartment you're still paying the rent on the lease that you signed a up to a year ago so what they're measuring is true it's just not a picture of the leases that are being signed right now now most of your expenses aren't like that you don't most of the time when you're buying things you don't you're not buying things according to a price that you agreed to up to a year ago um but but rent is the one thing that that really throws the numbers off now as I said the the Federal Reserve they understand that so they're actually paying attention to what we call marginal rent what are people paying right now and when you look at that inflation has come down to the 2% level if not even a little bit lower but but the Battle Is Not Just can we get current inflation down the battle is can we prevent it from coming back and that's very much a concern um and so what they what they look for uh uh to to answer that question is do we have balance in the labor markets and we really don't yet do we have balance in terms of overall demand and supply and we really don't yet do we have you know is is the inflation that we see very narrow or is it across all Goods it's across a lot of goods so even though it's not high all goods are affected by it um and and this is very important what do people think inflation is going to be over the next year or two or three because if if I'm if I'm coming up for a wage wage negotiation and I think inflation is going to be high I'm gonna ask for a high inflation High wage now to help me out later when I think inflation is going to be high and we know that inflation expectations are still high in fact they're higher now than they were last month so do you think the FED has the right policy in place right now yes it yes I do I really do and I think I think people would be well served to actually listen to what the FED says they don't want to be secretive there are two reasons for that if they're secretive then that means that um there's a there's a lot of money you know it's worth a lot of money to get illegal inside information they don't want any trying to get illegal inside information so they don't want inside information to be worth anything but the other reason is they don't want to surprise people because occasionally they will want to surprise people and if you're surprising people all the time then you lose the ability to surprise them when when it's really important so the FED tells us what they're going to do and in fact in fact can I actually share a a graph that the the FED produces please yeah please do so um so the fed the FED produces what's called a uh a Dot Plot are you seeing this Dot Plot I think we might need to give you the sharing permissions here but that'll happen in in a second in the meantime while they're doing that my question for you is when when do they want to surprise people what is an example for okay we normally don't want to surprise people but sometimes we do what's an example of that well we get you that sharing so let let let me give you a very current example let's say that suddenly the economy starts to weaken and they become concerned so maybe it's early you know maybe it's in January or February or something like that they don't have to wait for another meeting of the Federal Open Market Committee to change interest rates they can change interest rates and just make an announcement suddenly so if they think that people are are losing confidence that the E that the economy will keep going then they want may want to put out a surprise rate cut to tell everyone we are really on top of this we're not going to let the economy fall into a recession okay okay let's let's get that screen share going let me see this do plot okay so the upper right on the upper right here is what what is called The Dot Plot people often think that this is their prediction about what interest rates will be and that's not correct what they're doing is saying this is what we think will be the appropriate interest rate at sometime in the future and the important thing to note here is that this is from the last uh last meeting the the meeting in how is that different though explain the difference it's not a prediction but this what they think it's going to be in the future isn't that what a prediction is they what they're they are predicting what the economic conditions are going to be and saying in those economic conditions here's the appropriate uh in appropriate policy interest rate so it's not a big difference but it is but it's an it's a difference that's very important to them um and so so they thought back in September that we would need another increase or even more than another increase in interest rates in order to make sure that inflation doesn't come back um but so this is an example of of where they're trying to be transparent to everybody but if things soften more quickly than they expect then they will not hesitate to to uh make a surprise rate cut to head off a recession and they've they've made both surprise rate cuts and surprise rate hikes in the past but it's been a while so when we so when we look at uh what we expect the FED to do uh you know I I kept this uh this this um chart even though we're past the November meeting because the FED has been saying very clearly that there's a strong uh strong probability that rates will have to go up again to respond to to have off the you know a recurrence of inflation um but people in the market don't believe that they're not really listening list to the fed and I think they should listen to the fed I'm curious what other charts do you have in this in this PowerPoint that you have open what else can we see well I I'll there's a lot I can show you so for example I mentioned the um my my recession probability model so here is a forecast of the probability that we will go into a recession 12 months from now in in October this uses data through October of this year so it shows the probably recessions through October of next year and a few months ago it went up fairly sharply um that was because there was a big decline in housing construction and that often happens before a recession um I did not believe that that actually was going to lead to a recession um even though my model said there was a 77% chance of recession but we're now back down to 33% um but there there's a lot more in this in this presentation I'll I I was mentioning to you that um that one of the problems is that we have um uh imbalance in labor markets and we talked about unemployment um the unemployment rate even though it has ticked up is still well below its normal level its natural level and one of the things that we look at is as then you're saying unemployment's too low employment's too high you're saying too many people have a job right now I don't want to say that what I'm saying is there aren't enough people looking for the jobs that are available there are not enough people looking for the okay so let me go to a different chart and tell you what I mean in the lower right I'm showing the employment to population ratios for various groups of people who are more vulnerable in the sense that when the economy starts to weaken they tend to be the first to lose their jobs and when the economy starts to strengthen again they tend to be the last to get their jobs right so so if these numbers were starting to go down then that might be an early warning sign of a coming recession they are not um whether we're talking about Hispanics U and it's and and I I would say Hispanic or Latino workers but it's all it's all people because it's it's it's a it's showing whether they decide to look for a job whether we're talking about Hispanic people or black people or youths or adults who do not have a high school diploma um they their participation their employment level is almost higher than it's ever been um so that tells us that the economy is very strong and even the people who typically have the most difficulty finding jobs have been able to look for and find jobs what else you got what else I feel like you have a few more slides show us a few more and then and then we can get chatting again so here is one of the things forward looking aggregate balance what does that mean so this is looking at um I'm looking in the lower right where it says household debt service coverage Okay so households have debts for a lot of households that's Mortgage Debt um and then they also have credit card debt car loans other forms of debt and this is saying what are what is that debt relative to their income how much can they cover their required payments on their debt and it's actually their it's very positive um the uh mortgage payments are low relative to people's income um total debts service payments are low relative to people's income and there's another pie source of data that's not on this chart because it's a much shorter uh time period but it's looking not just at debt payments but other Financial Obligations like I have to pay my rent I have to pay my property taxes um I have to pay my utilities and again uh uh those uh Financial Obligations are low relative to people's income so again even though even though we may see people's credit card balances go up that doesn't mean they're high relative to their ability to pay them off what about the idea that there's and haves not so the average can look like one thing but there are people who are doing great and amazing and their incomes are going up and their debts are going down and then there's people in the Middle where it's oh my income is not going up but my debts are going up but on average it looks okay but but you're really it's almost like the stock market right The Magnificent Seven is dragging up the other 49 three but the average looks okay yeah no that's that's always a concern um uh and and we will see that in increases in default rates um or delinquency rates um but we're starting from a fairly fairly uh uh a position in which there aren't that many people in trouble if you think think for example of back in uh 2005 2006 there were a lot of people who became homeowners um for whom home ownership was a real stretch and when house prices declined and interest rates went mortgage interest rates went up they got in big trouble really quickly so that was a real shame but when you look at uh growth in median wage by wage cortile um we have seen some decline in the pace of wage growth among the people who have who get the highest wages but we haven't yet seen any meaningful decline in wage growth among people who get lower than medium median wage so that's that top chart here this top right chart that's the top right chart here and so this is this is data that you know the Atlanta fed pays attention to um all the time and updates their data so uh so so the one thing that really worries me I mean aside from the possibility that the stock market may go down is affordability for people who would like to buy houses and so I'm looking here in the lower right this is the housing affordability index um and it it has not been this low since the 1980s um and that's a that's a function of two things number one uh uh interest rate how home uh home mortgage interest rates are extraordinarily High by recent standards they're they've been uh around uh you know close to 8% uh more like 7 and a half% if you don't count the people with the really big houses the jumbo mortgages um but on top of that house prices have been so dramatically High it really makes it not affordable for people to buy houses who don't already have houses so that's you know so that's where plenty of people are hurt it's not the overall economy it's the fact that housing is too expensive um now I think that this this this situation is likely to be a little bit become a little bit easier partly because interest rates are not likely to stay as high as they are right now but also because I think there is a real prob real possibility that house prices may go down and they may go down sharply if you look at the lower left at the median house price you see how much of a decline there was from 2006 to 2011 a lot of people lost a lot of money because their health prices declined so dramatically and that may happen again that does worry me the interesting thing is if you even bought at the top of 2006 at that median home price you're still way ahead of the game so you've almost doubled if you can hang on you're still ahead even if you buy at the top well that's the key if Eric right um if you can hang on then it's not a stretch um but a lot of people uh who buy houses they're not the people who have spent their career building up their bank accounts and their investment accounts so they're not the people who can withstand a dramatic decline in their Mor in their home values the people who are buying houses right now are unfortunately in some cases they're people who are being encouraged to buy they're being told oh it's a great investment I'll tell you the truth it's not homeownership is not a better investment than putting your money in the stock market and right now as I've mentioned stocks stock prices are elevated so are home prices so I don't know why uh either of those would like look like an appealing investment but on a long-term basis home ownership is not a good investment we have so much to to discuss there right so are you saying that people should be renting that they because then they never own a house they they never catch up right that that median home price keeps moving further and further up and away from them it doesn't always move up it it doesn't always move up just like the stock market doesn't always move up a lot of people lost a lot of money in cryptocurrency because they thought it was they saw it always moving up and so they jumped in and suddenly it started moving down it's the same with all Investments the the thing you have to remember about um about housing is you should buy a house for exactly one reason and the reason is that that's the house you want to live in and you can't live in it unless you buy it um but a lot of people and this is increasingly true they want to be able to move to where the better jobs are and if you buy a house then as soon as you start to move you're going to be looking at a 5% Commission to sell the house and it's going to take months and months to sell that house before you you can actually move out of it if you rent a place it's much easier to move and it's much cheaper to move to to where the better better jobs are are we are we walking into a generation where no one's going to be able to afford a house and we're all going to be renters because I see big companies and they're just buying house after house after house so they can rent it out or apartments that we're g to have this nation of renters I'm sure you've seen these stories right are do are you afraid of that for the future for kids and grandkids going forward I am not afraid of it for two reasons number one uh you know the idea that there are these you know hedge funds who are buying up all the houses it's it's just not really true in the real world yes you can find examples of where a house has been bought by a hedge fund but most uh rental housing um is is owned by you know people whose job is rental housing and it's not units that are appropriate for uh home buying anyway um but the other reason that I'm not worried about it is that um I think that going forward renting a home is going to be more and more appealing and what I mean by that is it used to be that you had two choices if you wanted to rent you had to be in a multif family in an apartment building if you wanted four walls of your own you had to buy it okay now going forward we're seeing more and more uh development of single family Rental Community they're professionally managed they have the amenities like the pool and the clubhouse and and the and the storage they have the amenities that you associate with a high quality uh rental apartment building but you have your own four walls and your own lawn is that what middleberg focuses on that kind of rental housing community it is not our Focus we do both rental housing uh both single family rental and um and uh you know traditional apartment buildings but when I say single family single family rental I am talking about these professionally managed rental housing communities with four walls I'm not talking about buying a house in the middle of a residential neighborhood I do wonder about even just owning this house that I'm in how much we pay every month property taxes maintenance Landscaping the gutter cleaner the electrician the plumber all of a sudden you're effectively renting it all over again and you're stuck if you can't just walk away and I have done that analysis and I actually hope to be publishing a paper before the end of this year um but a lot of people all they're looking at is all they're comparing is the mortgage payment with the rent payment and that's misleading because your mortgage payment doesn't include all of the maintenance and repair it doesn't include all of the Lawn Lawn Care so you can actually come up with numbers to make to to make dra to draw that comparison and if you take everything into account you know your your your your mortgage payment it your housing payment if you're a homeowner is much higher than you than you realize and your rent payment covers a lot of amenities that you would have to get separately if you own a home the neighborhood pool is a separate payment but if you are in a rental housing community whether it's a multif family or a single family then the pool's right there and it's included in the rent so what are your main concerns right now regarding the housing market whether it's you know the buying or the rentals when you look at housing in general what worries you so so the main thing that that that worries me is you know we need to make sure that people have the ability to move to where the jobs are and my company's focus is on the Southeastern part of the part of the country basically from Virginia to Texas um and there are a lot of people who are moving into that part of the country and uh and and there's so much in so much demand for housing that um we need to make sure that we have enough housing being developed to meet the demand from people who are moving from other parts of the country but if you don't have enough housing being built then it prevents people from moving from those parts of the country where they just don't have the job so you end up being stuck in a job stuck in a bad job or stuck in a location where there aren't any good jobs because there isn't enough housing in the part of the country where you would like to move to because you know there are good jobs available we call that job Mobility we we need a lot of job mobility in this country so explain that against you mentioned Virginia to Texas I assume that includes the Carolinas as well because I feel like everybody since Co has been moving to the Carolinas and Texas and Tennessee and the classic right I'm going to Nashville or I'm going to Austin Texas I'm going to krye North Carolina all of these kind of cities everyone's going down there but I'm wondering is it they're going to move there and then find a job or there jobs there and then people move like it is a little bit of a chicken and egg thing how how does that all play out here especially because so many people move I don't think all these jobs there these are all remote workers yeah well no see there there's where you're wrong it's not since Co it's over the last 30 years um because and and or I feel like it accelerated the hype accelerated since covid yeah yeah there was there was a there was a very short-term boom in movement to the southeast but that's not why my company is is developing housing there my company's developing housing there because for decades uh companies have been moving there um so you have companies moving to places where you know they they they just didn't used to be interested in moving to like Orlando Orlando was more than more than just Disney Orlando is a lot of new employers who are moving there and a lot of employees who are moving down there to work for those companies so you mentioned you know Carrie North Carolina you know another good example or or Charlotte or Richmond Virginia these are places where companies from say San Francisco or New York or Austin those companies are saying to themselves number one we're paying a lot of money for the office space that we have number two we're paying a lot of money so that our employers employees can afford to uh pay rent in these very expensive markets um and it used to be that we didn't want to move to a place like Charlotte because it didn't have the cultural amenities or the quality education that we and our employees are looking for that's no longer true and so the companies are happy to move to plac to company to cities like that because they know that a lot of their employees will want to move with them and there will be other people who who want to uh who who want to move who already live there or who want to move there who will apply for jobs with them what about the idea that you know if you rent and rent and rent and rent you're you're you're unable to know that you can still live in this house you might get kicked out because they can jack up rent at least if you buy a house well you can let the roof leak you you can cut costs and survive and stay there but in a rental if you don't pay you're getting kicked out and and they'll keep changing the rent on you every year so it might be cheaper today but all of a sudden two or three years from now you're caught in a bind what do you what you're saying is is is is perfectly true but mostly in theory in practice the landlord wants a Dependable tenant and so if you start if you lose your job the first thing you should do is go go talk to your landlord and say I just lost my job but you know that I'm a Dependable person you know that I'm a responsible person I'm going to be looking for a new job right away can you can you work with me so that I don't get myself um uh you know behind on the rent um and so stressed out that I have trouble finding a new job the landlord wants to keep the same renters in those apartments every month now if you're not a responsible person then they're not likely to likely to to want to work with you but uh but generally speaking the landlords it's you know every time you move out the landlord has to spend money to fix up the apartment and then wait for somebody else to want to rent it so they would prefer to have you stay in the apartment and they will work with you to get that accomplished what are the the other data points you're looking at in terms of this renting versus housing I like to seeing that affordability ratio that right now renting is a better deal than housing but it it doesn't feel to me like that's because renting is a good deal it feels to me because how buying a house is such a bad deal it's it feels like it's more it's more of a problem on the buying side than it is a benefit on the renting side at the moment yeah the the problem is that most people have a very very shortterm sense of what's happened historically if you look at uh at house prices over a very long period you know I you mentioned at the beginning that I did my PhD dissertation work with Bob Schiller Bob aside from from earning the no Nobel prize in economics he has also looked at longterm uh stock price movements and longterm house price movements and if you look at the longterm house prices don't typically increase at the rate they have in since covid over the last few years and so it's a very poor idea for people to think that suddenly we're in a situation where house prices you know are going to go up dramatically forever and so all I need to do is push my way in do you see a house price collapse coming then in the near future that that is even more a concern to me than a stock market collapse um the Texas Federal Reserve Bank uh for example has it produces what they call an exuberance index of house prices and uh and that flash is yellow or red um and so they think that uh for the last several quarters in fact um uh you know the housing Market in this country has flashed either yellow or red um and that means that there is a very high probability of a sharp downturn in house prices um and as I said you know the problem is when your house price declines you can't move into a different city you're stuck in that house until you come up with 5% of the value to pay a broker and you got to live somewhere else so then you need a down payment to pay for something else or different interest rates but why does it matter like why does the house price matter than someone needs to move as long as they still have their job they don't need to move just because the house price went down that's correct you know so so most people don't move unless two things are true number one There's A disruption in their life that maybe a divorce or a job loss something like that and number two their house price has gone down so if there's a disruption then they look at their financial situation and they think to to themselves the house price has gone down I'll be better off if I default on this mortgage that's that's generally speaking what causes people to default but it's not just a matter of whether you're going to default on your mortgage it's my child is is going to college they chose a college more expensive they got into a college that was more expensive than I was expecting I knew that I had equity in my house that I could borrow against oops it's gone I can no longer borrow against the equity in my house because the value of the house has gone down and wiped out my excess equity that's the kind of thing that that you know people people just just don't have enough of a sense that when things go bad they can go bad especially if you're stuck as a homeowner with an with a house that you bought when when house prices were very high so feel like your concerns are you know no particular order that house prices could collapse that we might see a stock market collapse because the bubble's high but also you're afraid of runaway inflation it feels like we can't have both sides of that right if we have runaway inflation then are we going to see collapses in things that go up nominally with inflation so I mean you know the problem with Runway inflation is that the FED need know that they the FED needs to stop it they know they know they need to stop it they if if inflation does uh respark which is a real risk then they will continue to raise interest rates and that will continue to drive mortgage interest rates up um so yeah that could spark a collapse um in the house market housing market or the stock market I I want to emphasize I am not predicting any of these events these are just the things that I worry about okay what's your most likely prediction then my most likely prediction is that um next year it be it it's possible that there will be one more increase in the interest rate because the economy is so strong but following that I think that next year inflation uh it will become more clear that inflation has been conquered even for the long run and the Federal Reserve will will allow interest rates to come down again not to where they were before but to the three and a half to four and a half percent level let's say um and um and that will uh that will enable the economy to continue growing not as strongly as it has been growing but the important thing about not letting inflation rate uh interest rates go too low is that when interest rates are too low people make stupid decisions and that's true in my business in real estate if interest rates are too low then people feel as though they can do whatever they want it's free money it's not free money it shouldn't be free money so when interest rates are um are relatively high as I said in the three and a half to 4 and a half% range then people tend to be careful about whether they're making good decisions with their money now when when policy interest rates are three and a half to four and a half percent that still puts uh puts mortgage interest rates around 6% so uh so it's not going to make it much more appealing for people to buy houses but I think it'll proba my my my most likely scenario is a pretty comfortable economy going forward what else am I not asking what what should I be asking in this conversation let's see so uh so one one of the things that that really does worry me and it actually worries me at the state level is that Pension funds have made very poor Investments over the last 30 years um and a lot of those Investments have been in venture capital in private Equity um they have not um chasing returns alternative assets yeah that the Pension funds have been careful not to measure accurately whether they have performed well in choosing their Investments but as a result uh taxpayers in those states are going to have to come up with extra money extra tax money to uh to help uh uh make the oblig the the um you know the pension obligations that the states have taken on and that will do two things number one it'll hurt the economies in those States um the other one is bad for people in those States but not bad for companies like mine which is that it'll encourage people to get out of those states that have the very high pension obligations um and move into states that didn't get in that kind of trouble over the last 30 years that that worries me will it create a bad spiral a bad cycle for those states where oh we got to raise taxes people leave so we raise taxes more on the people that are left and then eventually everyone's gone and we can't tax people 100% well unfortunately I think that the response eventually will be we simply cannot cover new workers with that kind of a pension plan and so uh I mean I thought that was obvious that that should be obvious now we can't cover new workers on those pension plans I don't know what we're waiting to find out here I'll tell you Eric when I was in high school when I first learned what a pension was I thought to myself that doesn't sound like a very good idea because there's such an incentive to do a bad job of investing the money and and putting the money into the system um so uh you know I don't think that current retirees are going to be uh hurt by it but I think taxpayers are going to be hurt by it and future employees are not going to be helped yep yep so how how is Brad case investing his money right now so would you not be buying any kind of real estate I assume not buying a house right now where would you put your money is it not stocks I assume is it is it bonds then like where would you put your money gold so I typically invest 100% in stocks okay and and that's because I have a very high tolerance for risk in my portfolio I'm not bothered on any day that the stock market goes down because I know that over the long term it'll go back up um however over the last six months when uh a new plug of money comes in I have not put it into stocks I put it into bonds or or SE certificates of deposit or ibonds from the US Treasury um that will not last forever um and it's not normal for me um but the other thing that I've done is I've taken money out of the US Stock Market and put it into uh other countries especially Emerging Markets where I think their stocks are not not overvalued the way they are in this country okay and and I'm sure people are gonna ask because you mentioned Schiller I know it's not the case when they see the cas Chiller indices I I know that's not you but explain maybe you know the case that it is or is a coincidence how what's the story there SOA the case Schiller the case of the case and Schiller indexes was Carl case who name who was called Chip he was a professor at Wellsley College in Massachusetts and he was a friend he died several years ago um uh interestingly it fooled my father too well he knew that I was doing some similar work and in fact there's a different index called the case quigly index but it's not a commercial product and that's why you've never heard of it the case Quigley index is me um and and uh the case Quigley index and the case Schiller index were kind of going head-to-head and academically speaking my side won commercially speaking we weren't in the game um so the cas Schiller index became famous but as I said it fooled even my dad we yeah you're right I've never heard of this other one what did you win and what does that mean to be a commercial index are people paying for the index and is there's not as good is the one that you did explain some of this you can actually trade um options and fut you can trade derivative products on the case Shiller indexes okay um you cannot trade uh products on other on on the case quigly index we've never tried to do that um the difference between the two indices is that the case Shiller index uh requires very little data as long as you're willing to make a very strong assumption which is that housing quality hasn't changed between the times that a that a house transacts the case quigly index says wait a minute a lot of houses do change in quality between uh sales we need to take that into account sure that's what makes the case quigly index a more accurate index but it is harder to harder to to compute yes people do Renovations or they do nothing in the house deteriorates the house is never identical from buying to selling if it's just a matter of normal deterioration you can just you know you you can you can make an a fairly fairly easy assumption to get around that it's when people fix up their houses that it's a real problem and many people do the other thing that happens is that if you move into a house and you realize it's a lemon you know there are leaks in the walls that you that weren't obvious when you bought it then you sell it again and guess what because you sold it again it shows up in the case Schiller index uh in the case quigly index it would be counted accurately I see yeah that's always my fear anytime I think maybe we should move my fear is that we would walk in into something and it would be just a complete debacle and I've spent five years here fixing any possible leak or hole or something that I don't want to have to start that process all over again somewhere else if I don't have to yeah and and in fact I published a paper in an academic Journal many years ago just looking at how often did a house transact and it turns out that the houses that transacted most frequently were the ones where the values weren't going up much and guess why because everyone was finding out they were lemons yeah you see that in some of the the property histories right when you see like oh this house sells every three years no that means nobody wants this house they're they're in and out um very Brad super fascinating thank you so much for the conversation so where can people find you more if they want to maybe read some of your public work are you on Twitter is there a newsletter on YouTube how do they find you if they want more so I am I am on LinkedIn uh Brad case uh comma PhD comma CFA comma C AA I also publish uh articles at forbes.com um and I I publish other things occasionally my company has a research page it's uh it's middleberg communities.com research but most of the research that's on that page is for is for people uh who work for big institutions who invest in real in big in big real estate projects so that research page isn't going to be of interest to a lot of individual investors but some of the things I put in on put on LinkedIn and forbes.com probably will Brad thank you so much thanks again for all the time you spend walking us through your analysis on the macro environment the Housing Industry as well thanks uh thanks again to Brad case I I am very pleased to have been with you and for those of you watching again thank you for staying through all of this and and getting these insights if you're hearing this and wondering maybe I need some financial help maybe I need to think through this with an expert you can go to wealth on.com there's a very short form there we can connect you with investment advisers that we endorse it's a free service you don't have to work with them you can just have the consultation if you like them great if you don't no worries it's just something that we provide if again you're listening and thinking maybe I need someone professional to help me before I go do something crazy with my money and if and if you like this episode with Brad case and I share it forward like it subscribe these are all ways that we can get the word out there so more people can listen and watch so thank you again for joining and we'll see you next time
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Channel: Wealthion
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Length: 48min 39sec (2919 seconds)
Published: Wed Dec 06 2023
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