This post was originally written as a conclusion to our other post on the NABOR post, but as it grew, we’ve decided to break it out into it’s own post.

To summarize the previous post – basically prices have continually increased, mostly sudden during COVID, and then a slight dip overall – but a continual/but gradual increase in home values continues – despite the fact that very few people are actually buying homes. The question is … what is really going on and where are things heading?

A Quick Note on the General Economy

One of the key indicators that has been used since time immemorial on how well the economy is doing – is overall cost of goods (monitored through the CPI) as well as the affordability of housing. Today (as we’ll explain) housing is outside the per-view of many workers. In Southwest Florida – for example – the average income for the last decade has been approximately $35,000. Conventionally, home ownership (or even rental) was 20-30% of income. At that rate housing would have to be $500/month. There is literally nothing available (and there hasn’t been anything available for at least the last 2 decades). As we’ll show below a conventional house in the Naples market now costs roughly 20% MORE than that salary – and that’s JUST the mortgage – at today’s rates. So something is clearly broken. Combining this, with the ever rising cost of goods and services, due in part to inflation and you have a recipe for disaster – one that we believe will ultimate mean a couple of things:

• Tons of foreclosures
• Increasing debt and debt default
• Home ownership only going to the most wealthy
• Homes will continue to be gobbled up by banks

Our conclusion on the previous question of how can the market price continue to climb despite record inventories, and very modest unit-sales increases is multi-faceted and it’s unclear where this is going – but as I’ll prove, this area (southwest Florida) is ONLY unique in the severity of the rise (and eventual fall) – the massive and fast price increases were entirely due to fed policies and has nothing to do with the “unique” qualities of the area. This as actually occurred in every market (at least in the U.S. residential housing market).

Take a look at this modified graph I took from the FED’s website on housing prices in Naples/Marco over the last 25 years (modified to show the slope of the rise in prices during the previous housing recession boom and bust):

Here we see a comparison of this latest run up we’ve gone through – compared to the previous massive run up we saw during the 2004+ housing boom and bust, that finally busted in 2007, with the collapse of many major banks, and caused a massive world-wide recession. During that run up – which took roughly 3 years to reach it’s peak, 3.5 years to fully unwind and roughly 6 years to recover from, with the lowest points occurring in 2011.

The massive drop that occurred during the housing crisis – whose cratered prices left many in the area insolvent due to massive loans and over-leveraging took a LONG time to recover, particularly for those in the middle or low income segments. Southwest Florida’s market, in particular, is vulnerable to such swings because of the “luxury” and “retirement” focused nature of the community. Between all 4 southern counties – Lee, Collier, Hendry & Charlotte – there’s VERY little industry, very few jobs, etc. so there simply aren’t enough working-class people to sustain these kinds of prices.

I was recently reviewing the job postings for local companies (including some of the largest companies in the area – C-Level executives are routinely offered $40,000 – $50,000. This is NOT an area for working class (or young) people. And as we saw in the Zillow comparison, BEFORE taxes, that wouldn’t even cover a mortgage payment for a modest home in Naples.

When markets (investment, equities, etc.) are good and flying high – such as we saw during covid – this area flourishes. But, as we saw with Lehigh during the 2006/07 boom and bust (which was the MOST DEVASTATED city in the country that ONLY recovered once COVID hit – and is now back down) it takes a LONG time for the area to recover.

Is this phenomenon we’re seeing with pricing unique to this area or is there something else going on? I decided to take a look at various markets throughout the U.S.

Now let’s look at this:

Man – these graphs sure look similar don’t they? The first is Naples/Marco – the rest are from Newark, Detroit, San Francisco and Seattle. You can’t get more different in terms of location, area of the country, city-size/density… yet all of the graphs are virtually the same.. massive increase in pricing, massive decrease (with the housing bust), then a slow increase – with a massive upswing just before and following covid – with a slight drop or slowing – and then an increase. What is going on here?!

Monetary Policy is 100% Driving All Housing Markets at this point (in Lockstep)

You don’t get these kinds of similarities in such differing markets (including markets that LOST residents during the last 4 years due to COVID migration) without it being a CLEAR INDICATOR SOMETHING ELSE IS AT PLAY… which of course is simply monetary policy. My guess is that this EXACT pattern has been replicated in every square inch across the country.

It’s 100% monetary policy… it’s not:

• investing
• growth
• innovation
• location
• migration
• etc.

driving this current trend – therefore it makes sense that ONLY monetary policy will determine how and when this cycle ends. Now, a caveat – I believe that Florida’s numbers (and this bore out in the above data) saw a larger increase during the run up due to the more free nature of Florida during the lockdowns – however the increases are only modest. Yes, Florida’s been growing, but as the numbers above prove, this same pattern is happening across all kinds of markets.

Ironically you also saw during the 2020+ buying frenzy the purchase of massive amounts of single family homes by Wallstreet through asset managers like Blackrock and Cerberus Capital. They get you from both ends.

There was never a better time to buy or own a home than pre-2020 covid. We’ve seen the largest and fastest increase in value we’ve ever seen. BUT – it’s basically aligning with inflation. It’s not a true increase. The inflation they (the fed and banking system) caused has essentially been stuffed into the physical asset of housing.

So where is this going…

Right now, no idea.

The trend of the last 50 years has been – continue to kick the can down the road (even in the case of the collapse of the housing market in 2007). In the below graph I took the historical increase/trend of pricing pre housing boom of the mid-2000s and extended it out through time (as the market was very stable prior to 2006). At that rate of increase, housing prices in the region should only be 2x what they were in the 90s – so that same home in Naples we saw earlier would only be about $200 – $250k. Which would line up well with average wages (and historical norms for the purchase of a home based on income).

But, obviously that’s a pipe dream (or the nightmare of many millenials and Gen-Z’ers right now).

Effectively what’s happened is much of America has died in terms of the industry and manufacturing that once made us the economic powerhouse of the world (post WW2). Once manufacturing and major industry was mostly overseas we switched to a few different things – a more service economy, a financialized economy. Check out this chart from ConservableEconomist and Phillipon:

The share of the financial sector as a percent of GDP (and the broader economy) has sky-rocketed over the the last 150 years. We also see an interesting trend in that the lead up to the great depression saw a large rise in this same sector, following a massive crash – that was only resolved (and eventually reversed) through the massive disruption of WWII. We’re now orders of magnitude higher than that

(it’s also interesting to note that the periods with falling financial sector involvement tend to coincide with periods of relative health for the country – IE there’s a correlation between more financialization = more problems)

Where are Things Going in the Southwest Florida Housing Market?

First, let’s list some things that are different (for better or worse) for Southwest Florida…

• Retirement Focused
• Low Wages and Low Jobs
• Virtually Non-Existent Industry (besides “retirement”, healthcare and travel)
• Pockets of Hyper Wealthy

Because this area is retirement focused, and has pockets of the hyper wealthy – those people that need to be hired by and for the service of the hyper wealthy will continue to be maintained by this dichotomy (including the middle incomes required to manage and support such infrastructure).

However, the baby-boomers (which are the vast majority of the retirees currently) nearly 100% support this existing infrastructure and dynamic. The last of the baby boomers will be dying out around 2045, meaning we have approximately 20 years to transform this area before time completely runs out. Obviously 20 years is a long timeline, and we’re already precariously dangling on the edge of many more disasters currently including:

• Monetary crisis
• Multiple potential wars (including our own involvement via proxy in the Ukraine war)
• Migrant crisis
• Lack of babies currently being born (probably our largest crisis)
• Potential civil war and general civil unrest
• AI Takeover
• Robot Rebellion

So there’s no telling if any of the above pops off first, what will happen.

I see a few potential directions:

Business as Usual – For years I thought perhaps a sovereign debt crisis might be on the table – but in learning more about the systems at play, this is simply, literally, impossible – as the U.S. is currently (or “still”) the world’s reserve currency. That’s possibly being challenged by BRICs (which ironically is a Goldman Sachs creation – so even if that succeeds – “meet the new boss, same as the old boss”). But, regardless – it seems that at best that’s years out and so the U.S. dollar will continue to dominate, so there’s no challenging dollar hegemony sans a black swan event. As such, when crisis happen – the dollar will be manipulated and inflated. Leading to a continuing slow decline in the health and wealth of the populace and ever increasing prices of all goods and services and ESPECIALLY equities and investments like homes.

Housing Prices Will Continue to Grow (in Relative Value) – There will probably be another major financial crisis soon, in fact – as some in the know understand COVID was a worldwide scam, executed in part to cover for the banking system collapse that happened in 2019. Regardless, I don’t see markets being allowed to fall – and things will be put in place to “catch” the homes that fall onto the market (and prevent them from falling in price). This is due to the delicate and intricately connected nature of the housing market to the boarder economy and the financialization of everything that has gone on behind the scenes.

If a house goes from $200k to $400k, but at the same time bread goes up 2x, have you actually made any money? No of course not. In fact in a recent study on the stock market – the ENTIRE market has been proven to basically weathered inflation. IE, one is NO wealthier – it just might appear that way.

Small Businesses Will Be Slaughtered – Despite the regions growing population and explosion in growth, I know many businesses suffering. We even encountered a recent scenario where a potential employee was being paid $50,000 from starbucks, for an entry-level position. This is not tenable for local businesses, who can’t compete with wages against multi-national firms.

Foreclosures and Debt Defaults Will Skyrocket – There’s a couple “perfect storms” happening (particularly in the west). There’s a massive increase in single women, and just generally – the economy is doing poorly. These two things mean (as women are – both historically and mathematically worse at managing debt and money) we’re due for a massive increase (and it’s already started) in debt defaults. Look at this graph from the NY Fed:

After the housing crisis (about a year+ on) we saw a huge increase in debt, which makes sense given it takes time for these kinds of crisis’ to unwind. We only saw the numbers finally lower 7 years later, settling around historical norms. but if we look at things post covid, we’ve seen a MASSIVE runup in credit card debt (as fast as during the housing crisis of 2007) – which coincides perfectly with this latest slow down in housing purchases. Similarly we see an increase in “other’ kinds of debt, and Auto Loan debt (keeping in mind the above is delinquencies).

THEN – Just two weeks ago Fanny and Freddy announced EVEN MORE modifications to their existing modifications program. Basically, the delinquencies on existing loans are being underreported as many mortgage providers are allowing borrowers, to pay back, less than their stated monthly accounts… THINGS ARE MUCH MORE DIRE THAN THEY APPEAR.

Housing Investments Are Protected – One of the nice things this all belies is the fact that housing prices are effectively protected now (+- 20% or so – in the grand scheme of things), so, barring just outright defaulting and going into foreclosure (which many, particularly those that bought in 2021 and 2022 WILL be going through…) the housing market overall can’t fall any more, and the controllers will stop at nothing to prevent this. Knowing that, in some ways it’s a great time to get into a home, as a forced savings and inflation buoyed asset – but one MORE THAN EVER keep in mind that carrying costs are higher and more important then ever to consider. My home, for example, has gone up to nearly $9000 in taxes – a far cry from where it was just a few years ago.

Now, we’re not financial professionals, or attorneys, or soothsayers, but given all this if I was a new home buyer (or someone considering selling/purchasing a home in the next year here’s what I’d do)… if you have a lot of cash, buy a little crypto, buy a few metals (gold and silver), and put the rest of it in the market in an ETF, and purchase an extremely modest home that I know “come hell or high water” I’d be able to cover – for years to come. Or, I would just not put any money down and rent.

Now is not the time to be speculating on homes, particularly with rates where they are. Even though odds are they’ll continue to be one of the main assets inflation gets “stuffed” into, however the additional rising costs of everything that supports housing (insurance, maintenance, taxes and sky-high rates) are NOT worth it.