"The Housing Market Makes No Sense!" - Why You Shouldn't Buy Right Now | Morgan Housel

Duration: 12:44 2571 transcript words EN summary

Video summary

Morgan Housel argues that the current housing market defies standard economic logic, creating a scenario where high home prices coexist with mortgage rates rising from 3% to 8%. In major cities like Los Angeles, San Francisco, and New York, starter homes often exceed one million dollars, yet unlike historical precedents in the mid-1990s when similar rate hikes were accompanied by significant price corrections, this adjustment has not occurred. This disconnect results in a market where very few transactions take place because financing costs are no longer realistic for most buyers relative to asset values. Housel suggests that without a surge in incomes, a drop in mortgage rates, or a correction in home prices, the situation cannot be sustained indefinitely, leading him to describe it as a "Wile E. Coyote" moment where market participants have gone over a cliff but are only just realizing there is no road beneath them. Despite these housing challenges, Housel points out that other economic factors currently mask underlying instability. Unemployment remains at historic lows, even lower than the late 1990s boom period, providing a strong tailwind for employment and income growth. Additionally, trillions of dollars in excess savings accumulated during the pandemic continue to support household finances, particularly benefiting those with less money prior to COVID-19. Many homeowners are also locked into favorable low-interest mortgages from previous years, insulating them from current rate hikes while they wait to potentially move. However, Housel warns that this stability is fragile; advertising revenue is pulling back due to changes in tracking technologies and broader economic caution, signaling a "soft" economy where confidence has waned even if hard data like unemployment suggests strength. The volatility of the modern economy relies heavily on public sentiment rather than just raw numbers, driven by what Housel calls the "vibe recession." Consumer spending—and consequently the health of the entire economy—is dictated largely by three factors: stock prices, gasoline prices, and politics. When these indicators turn negative, consumer confidence plummets, leading to a rapid unwinding of economic activity that can happen within thirty days due to exogenous shocks like 9/11 or the collapse of Lehman Brothers. This sentiment-driven nature means that even if current metrics look good today, the narrative could shift dramatically in months based on how people feel about their financial future and political climate. To navigate this environment, Housel draws upon Hyman Minsky's Financial Instability Hypothesis to explain why stability inevitably breeds instability. He notes that when optimism is high, debt accumulates rapidly until the system becomes fragile enough for a recession or crash to occur; therefore, avoiding recessions entirely actually triggers the next one by fostering over-complacency and excessive risk-taking in stock markets and housing alike. Consequently, Housel advises investors to accept that experiencing at least two recessions per decade is an inevitable baseline reality rather than a sign of policy failure or bad luck. Ultimately, the lesson for long-term wealth building is psychological as much as it is financial: one must assume that good times can vanish overnight and prepare accordingly by maintaining sufficient cash liquidity and margins of safety. By accepting that economic cycles are innate to capitalistic societies and that crashes will happen regardless of human error or specific political mistakes, individuals can avoid being caught off guard when the inevitable downturn arrives. This mindset shift encourages financial preparedness not out of conservatism, but as a necessary strategy for survival, ensuring investors endure enough challenges to remain in the market long-term and benefit from compounding over decades.

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We've laid out sort of the basics of what people ought to do if they want to die wealthy. However, I want to get into like the real economy that's happening right now. So, everybody inherits a set of circumstances. Those circumstances matter a lot. They will for sure shape people. Um you said at one point either in your book or in an interview that I heard you say, "There's no precedent for it being worse than it is now if you're buying your first house." Yeah, I think that's true. Specifically right now where home prices are by and large higher than they've ever been, but mortgage rates went from 3% to 8%. That defies all economic logic. It should be in a world where mortgage rates go from 3% to 8% and home prices fall 30%, 40%, 50%. And we hasn't happened yet at least. So, now you're in the situation where particularly in big cities, LA, San Francisco, Seattle, New York, Boston, the big cities, you're looking at at least a million dollars for a starter home. For a starter home at an 8% mortgage. It's a it's a completely different universe than anything we've experienced in a lot. Because the last time that rates were this high, even in the mid-1990s, home prices adjusted for inflation, like an apples-to-apples comparison, were a fraction of what they are today. So, having home prices where they are today at 3% mortgage rates was still very high. You're still oppressive for a lot of people. To do it at 8% is just like a different world. Now, because of that, very few people very few homes are transacting. There's like the level of sales has just dropped off a cliff. It's the lowest uh point in I think 20 years in just in terms of the volume of home sales. Because the prices that are out there are not realistic given the financing options for most people. So, a lot of people will say, "According to Zillow, my house is worth X million dollars." But that's not actually a mark-to-market price. Like if you actually needed to sell it to someone tomorrow who has an 8% mortgage, the actual market price, the clearing price for that is going to be much lower than you think. So, I think there's like a Wile Coyote mo- moment of like we've gone over the cliff and we're just starting to look down and realize there's no road beneath us. Three things needs to change. Either incomes need to surge, either mortgage rates need to come down, or home prices need to come down. Like one of those three or combination of those has to occur. You can't keep this situation that we have going indefinitely. So, is the would you call it a housing crisis that we're having now? Is there a set of other things going on in the economy that makes this a good or bad time? Like what if you were going to paint a generalized picture of what's happening now, especially for young people? Um I mean I mean what's good right now is that unemployment is incredibly low. I mean having an unemployment rate below 4% other than the late 1990s and a period in the 1950s, it's lower now than it's ever been. And even it's even lower now than it was in the late 1990s that we associate with like the best economy that's ever existed. It's lower now than it was back then. Unemployment rate is crazy, crazy low. If you want a job, jobs are out there. So, that's a major tailwind that we have that's propping a lot of this up. If you took today's housing market, very high prices, very high mortgage rates, and you mix that with high unemployment, everything falls apart. Everything breaks. So, I think a very strong employment market that we have today can mask a lot of challenges. The other thing is that during COVID, the amount of stimulus that went out, trillions of dollars of stimulus during a period where people were locked in their homes, they saved that up and what's called excess savings was trillions and trillions of dollars of money and by and large that benefited the poorest people the most. The people who had the least money in their checking account before COVID had the the biggest percentage boom. Real like those are the people for whom their financial situation just utterly changed overnight. And a lot of that excess savings still exists. Not as much as it did 2 years ago, but people like households in general are in a better financial shape right now than they've been in a very long period of time. Including, you can say mortgage rates are 8% today for the people who are buying a new house today. But so many people locked in a 3% mortgage, either cuz they bought in previous years or they refinanced in 2021. So, to the extent that they don't need to move, and someday they might eventually need to move. But if you're locked in at a 3% mortgage in a world where you maybe you're getting an 8% raise every year, like that's a that's a boon. That's an amazing situation to be in. So, there's all these like weird breakages mixed with a lot of great things that are happening in the economy at the same time. So, so many people were predicting recession. I'll be honest, like it as a person who is very tied to advertising, I can just tell you things ain't what they used to be. Yeah. So, advertising money is pulling back. Advertisers are definitely expecting something bad to happen, for sure. Um so, from where I'm sitting, the economy feels soft. It feels like Wile E. Coyote has run off the road and is looking down. Uh it's just no one has reported back what they actually see yet. But everybody's paranoid that they're going to see something bad. That's how it feels from where I'm sitting. Yeah. Um is that people just being paranoid? What's the I mean, not to get too technical about this. How much of that is literally when Apple changed the tracking feature, and all of a sudden advertising got less potent than it used to be? Isn't that at least part of this? That wouldn't matter for the advertising that we deal with, because we interface with it through YouTube. Yeah. Um but when we're trying to advertise our stuff, that matters. But not the inbound. I mean, one one other way to phrase this is that is the economy weak today? No. Is it weaker than it was in 2021? Yes. But 2021 was the anomaly. Today is not the anomaly. So, even if it is weaker by any metric in unemployment, income growth, household debt-to-income ratios, it's doing very well today. Now, the history of all of these things is that the speed in which you can break that narrative is very quickly. So, 1990 the year 2000, strongest economy that's ever existed. 2001, everything fell to pieces. 2007, absolutely on top of the world. 2008, worst year since the Great Depression. So, even if you say even if I can say all these things are going well today, we could be talking 2 months from now and be in a completely different world. It's usually not a slow thing that kind of trickles in. It's like most recessions are usually a big exogenous event that hits. Like Lehman Brothers go goes bankrupt or COVID or 9/11 that just throws things for a loop. So, just because you I can sit here today and say things are very good, it doesn't mean that 30 or 60 days from now that narrative can't be completely unwound. Now, And but and that's why forecasting is so difficult. Now, you said the narrative. So, how much of this and this is one thing that freaks me out about the economy and money, it's basically just a public confidence. It's feelings. There's a great economic uh commentator content maker named Kyla Scanlon who who talks about the vibe recession. And it's literally like most most economists are like data and charts and numbers. She's like, "No, it's just the vibes. It's just how people feel." And it's true. When people feel good about what's going on, they spend money. When they spend money, the economy strong. When they don't feel good about things, when the vibes are low, they stop spending money. And then the economy unwinds. Like, it's not more complicated than that. So, mood is a massive thing. It's huge. And a lot of it is it's self-fulfilling. A lot like there's measures of consumer confidence. And most of what moves consumer confidence, what actually moves the needles, are three things: stock prices, gasoline prices, and politics. Those are the things that people pay attention to or they can just get a quick update when they watch the news for 10 seconds. Stock market's up, gas prices are down, I'm not hearing anything about politics, good. I'm in a good mood. Or the opposite of that. If gas prices are going up and the stock market fell today and politics is a mess, you're going to be in a bad mood. And like those are the three things that move people's economic sentiment. That has a very strong uh impact on how much money they're going to spend. And the money that they spend is somebody else's income. So, when you stop spending money, that's someone else's income that just went down. And it snowballs from there. So, okay, knowing that um basically this is a sentiment game, I want to bring up something that you talked about in your book uh that I'll tie to what I'll call the debt crisis. It'd be very like it feels to me like we're in a debt crisis just looking at the numbers. Uh doesn't seem sustainable to me when you look at the housing numbers. You were saying, "Hey, one of these three things has to give." Like uh you you can't have debt like this with interest rates as high as they are. Like this just seems like an absolute recipe for driving off a cliff. household debt? Everything. Household, corporate, and government debt. All I don't know if they're historic highs, but holy hell, they they are massive. It's something like three times GDP. That could be wrong. It it's bad. Like the the debt-to-GDP ratio is crazy. Some people I think it was Chamath that said, "Oh, it's a nothingburger." And I'm like, "Bro, how can this be a nothingburger?" Like you at some point just servicing the debt becomes a problem. Anyway, not an expert, but I'll call it a debt crisis from my limited understanding. Uh but you have a statement in your book where you say, "This is crazy to me. Stability is destabilizing." Yeah. And you walk through Minsky's financial instability hypothesis. Do you remember the three beats? Oh, yeah. I mean, so Hyman Minsky was this economist back in the 1960s. And in the 1960s, there was this move in economic circles that we should eradicate recessions. People were very optimistic back then. let's just get rid of it. But we had just walked on the moon. We had like eradicated polio. There was this idea that of course we should be able to eradicate recessions. Hyman Minsky said you'll never do it. It can never be done because of what he came up with we would call the financial instability hypothesis. He said, "When people are optimistic, they go into debt. When they go into debt, the economy becomes unstable. When the economy is unstable, you get a recession. So, the lack of recessions is what triggers the next recession. If you never have any recessions, people go into crazy amounts of debt. When they go into debt, you have a recession. So, by definition, you cannot avoid it. It's always going to be a thing that you're going to have to deal with in life. The same is true in the stock market. Like if the market never crashed, people would put all their money in the market. If they put all their money in the market, valuations go way up. When valuations go way up, the stock market's fragile and it crashes. So, a lack of crashes is what causes the next crash. It's just it breeds a level of over-optimism and over-complacency that causes the next crash. So, when you accept that, just like the nature of how cyclical these things are, then you don't pretend that we're going to be in some sort of stable zone or that we can stop these or that the next recession is caused because this politician and that policy maker necessarily made a mistake. That's just an innate part of how any capitalistic society works. Okay, so if we know that, what do we do with that information? Those of us that want to navigate all of this well. You have to assume, as I do, that there's going to be at least two recessions per decade, one of which is going to be really bad. That should be your baseline scenario. So, don't act surprised when the next one comes. Don't say nobody could have seen this coming. You know, I hope to be an investor for the next 50 years. So, during that time, I I hope to experience 10 to 20 more recessions. You know, that's I think that's that's just the baseline of what you should expect as as an investor. But every recession we have, people say something to the effect of nobody could have seen this coming and it's that guy's fault. Versus I just think it's just an innate part of how the system works. So, when you accept that, not only are you psychologically more prepared, but I think you should be financially more prepared. I think most people don't have enough cash and liquidity because they extrapolate the good times indefinitely. And they don't have the mentality to assume that just because it's good today doesn't mean everything can't be taken away from you next month. Like I said earlier, most most recessions don't you don't cruise your way into it. You go from everything is great to utter chaos in 30 days. That's usually how it plays out. And so, because of that, and most of what causes the big economic declines are surprises, things that people don't see coming. 9/11, Lehman Brothers, COVID. Nobody saw those things coming until they wreaked their havoc. And so, because of that, I think most people just don't have enough cash, liquidity, margin of safety, buffer in their finances. So, accepting that just the natural path of what we've gone through in the past, and that these crashes are inevitable, pushes you naturally towards a greater degree of safety. Not because you're conservative, but because you want to be able to survive and endure all of those challenges so you can stick around long enough to be a good long-term investor. If you liked that clip, check out the full powerful episode here, and I'll see you there.