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Paying The Overdue Price Of The Free-Money Era

A weekend topic starting with Fortune. “Jim Grant has been tracking the ins and outs of Federal Reserve policy and its effects on the economy and markets in his famed newsletter, Grant’s Interest Rate Observer, for over 40 years. After roughly a decade of near-zero interest rates, he argues, the U.S. economy developed a debt problem—one likely to end badly now that higher interest rates are here to stay. The inevitable fallout from the end of the ‘free money era’ has yet to be felt fully, Grant warns. Grant pointed to so-called ‘zombie companies’ as one example of the issues that lenders may face.”

“Now, many of these firms are facing pressure as the economy slows and borrowing costs rise. That means they may not be able to repay their lenders. ‘It could be that the accumulation of errors in lending and an allocation of credit that were brought on by the invitation to lend indiscriminately—that is to say the 0% rate regime—was an open invitation to overdo it in credit,’ Grant told Fortune, adding that ‘assets may face the consequences of that yet.’ Take WeWork as an example.”

“Grant takes a historical reading of monetary policy, and argues we’re in for a generation of rising rates, with some volatility in between. ‘The phrase would be higher for much, much, much, much longer—but we have to underscore and italicize the conditional—if past is prologue,’ he told Fortune. Grant noted that between 1981 and 2023, barring a few brief blips, interest rates continuously trended down. And in the forty years before that, they had essentially trended—again, with a few exceptions—in the opposite direction.”

“‘It is the historical track record, it is the pattern, that interest rates exhibit a tendency to trend over generation-long intervals,’ Grant explained, arguing we may have entered a ‘new regime.’ ‘We seem to have hit some major point of demarcation with interest rates in 2020 and ‘21,’ he added. Based on history, he said, this new regime should last 40 years. Still, Grant clarified that the generation-long uptick likely won’t be a straight line up. If a recession hits, there could be a ‘substantial,’ although temporary, pullback in interest rates.”

“If Grant is right, that would mean an era of low economic growth, relatively high inflation, and high interest rates—an economic combination that’s often labeled stagflation—may lie ahead. And that’s not exactly a recipe for investing success. It could even be an environment where corporate defaults rise, with the credit markets paying the overdue price of the free-money era.”

The Urbanist in Washington. “When Issaquah instituted its development moratorium in 2016, the city’s average single family home price was around $650,000 and the average condo sold for less than $300,000, according to Zillow estimates. Single family home prices have doubled since then, peaking at $1.4 million in 2022 and coming down slightly since then. Average condo prices peaked just shy of $550,000 during the pandemic. These price spikes are typical for the region and especially the Eastside, which has grown an increasingly exclusive enclave in recent years. People who were lucky enough to buy before the boom accrued incredible housing wealth.”

The Star Tribune in Minnesota. “A new survey by the Federal Reserve Bank of Minneapolis shows deepening concerns about the health of residential and commercial construction companies in the Fed’s six-state region. Ron Wirtz, a Minneapolis Fed Regional Outreach director who tracks business conditions for the construction industry, highlighted some notable changes since previous surveys, most notably that the situation for the residential sector is worsening by a ‘sizable margin’ and that the industrial and infrastructure sectors are also showing signs of weakness as the number of new projects wanes and backlogs shrink.”

“The outlook is most gloomy for homebuilders who are concerned that new work may soon run out, with 67% saying their project backlog was waning and 60% saying they were receiving fewer requests for proposals from private clients. Revenue was down for 61% of the respondents in the residential sector.”

Newsweek on California. “The median price of condos in downtown San Francisco, one of the most overvalued cities in America during the pandemic boom, has now plunged to the same levels they were a decade ago, according to recent data. A chart updated to November 2023 and released by Compass found that the price of condos in downtown San Francisco are now the same as they were in January 2014—just about over the $800,000 mark. ‘The greater downtown/SoMa/Civic-Center condo market has been much more negatively affected by a number of economic, demographic and social factors impacting supply and demand than condo markets in other city districts,’ Compass wrote in its report.”

“As mentioned by the company, downtown San Francisco is the heart of large projects, new condo constructions, office buildings, and high-tech employment. But many of these office buildings have remained largely empty in the aftermath of the pandemic, as tech workers no longer felt the need to be physically in the office—or live close to their workplace. For this and other reasons, including the impossible peaks reached by home prices in the city during the pandemic years, San Francisco was hit particularly hard by the housing market correction which affected the entire country.”

Bisnow on California. “Coretrust Capital Partners’ Pasarroyo office building at 251 South Lake Ave. in Pasadena will to go to a foreclosure auction Dec. 20, according to a notice of trustee’s sale filed with the Los Angeles County Recorder’s office. Coretrust Capital Partners managing principal John Sischo told Bisnow the firm tried to refinance the property for about two years to no avail. ‘The capital markets are not in existence to take out a refinance for an office building, no matter how great the property is,’ Sischo said. ‘It’s not there.'”

The Real Deal. “So you want to buy an apartment building in Texas. Until recently, that would make you just another face in the crowd of buyers flocking to the Lone Star State’s booming multifamily market. But a combination of expensive debt, cautious lenders and pricing paralysis has thinned the crowd significantly in recent months. Uncertainty across the market on pricing, interest rates and costs has ground multifamily sales to a halt, emptying out what was once a crowded dance floor. The few investors left boogying can pick up valuable properties at a relatively low basis, if they can make the money work. These days, that’s a big ‘if.'”

“‘It’s mainly small and mid-sized private equity groups, both local and out of state,’ who already have money set aside, or can tap a small, close-knit group of investors with deep pockets, said Al Silva, a multifamily investment sales expert at Marcus & Millichap. Those firms can come to the table and close in 45 days. There’s no need to travel across the country raising money — several deals that have closed in Texas this year went not to the highest bidder, but to the one with money in hand. ‘Sellers have realized there’s no knight in shining armor who’s going to come in and pay 20 percent above market,’ Silva said.”

“Distress opportunities are starting to show, but industry experts think the larger meltdown is yet to come. The last six weeks of the year are usually slow for investment sales. Some brokers are ‘buying’ listings by promising higher prices than they can get. But once assets really start to hit the market in January, many won’t be seeking a profit — they’ll simply be wondering how much equity they can save.”

The Globe and Mail. “A recent immigrant who purchased his first property in Canada has seen the dark side of B.C.’s presale market, and what can happen when you purchase a property years before it is built. Sudip Sehgall purchased a townhouse in South Surrey in December, 2021, from StreetSide Developments, owned by Qualico, a very large development company that builds master-planned communities in Western Canada. The purchase price for his townhouse at the Boroughs complex was $819,900 plus GST, with a 10-per-cent deposit. Mr. Sehgall paid the deposit of $81,990 on the home, with an agreed upon completion date of July 31, 2023, at which point he’d owe the balance as well as property transfer tax. Mr. Sehgall used his savings as well as a loan from his father in India to pay for the deposit. He owned a property in New Delhi, which he planned to sell to pay for the remainder of the townhouse, and he had two years to do it.”

“However, once he put his property in New Delhi on the market, it did not sell. New government regulations that changed what could be built on the empty lot made it less desirable to investors, Mr. Sehgall says. He started to panic as the completion date approached and knew he wouldn’t obtain the money in time. His contract with StreetSide included a provision that he may be allowed to assign the presale contract to another buyer – with the developer’s permission. Although he wouldn’t own a home, he consoled himself that he would get back his deposit. He says he found interested parties who wanted to take over the contract. But when he contacted the developer for permission to enter into an assignment sale, to his shock, the answer was no.”

“Because he could not complete the sale by Aug. 3, Mr. Sehgall received a letter from the developer’s lawyer that he had forfeited his $81,990 deposit. This amounted to all his savings and some money he owed his 88-year-old father, a retired military officer, he says. Today, Mr. Sehgall says he lives in a basement suite in Surrey on disability after an accident, and he cannot afford the high cost of lawyer fees.”

“Real estate lawyer Kenneth Pazder says people often boast about the money they’ve made buying a presale property in a busy market. But when the market goes south, they discover the contracts are heavily weighted in favour of the developer. Unlike tenant protection laws, there’s little recourse for the buyer, and taking a developer to court can be very costly. It’s also standard, he says, that the option to assign a presale contract is at the developer’s discretion. ‘I’ve had people, they tried to assign a contract and the developer said, ‘no.’ The prices are dropping and each month they drop more, and they won’t let him assign the contract but they can’t close. … Sometimes they say we have units to sell and we don’t want you competing.'”

“Long-time developer John D’Eathe, who’s helped build more than $5 billion in residential properties in Asia and Canada, has seen a few drops in the market. ‘The market has definitely changed,’ he says. ‘For most of the builders now, you will find the program they had for the next five years has been reduced, because nobody is quite sure what is going to happen. They haven’t necessarily dropped their projects, but they are delaying them, which makes sense because they can’t get presales now, or they aren’t sure what the market is, and if it will come back. There are lots of stories around town of developers struggling to meet this situation.'”

The Toronto Sun in Canada. “More of the same. That would be the simplest way to describe how the Toronto real estate market fared in the month of November, based on stats released last week by the Toronto Regional Real Estate Board in their Market Watch report. The reality is that prices are absolutely coming down out there. In some cases, shockingly – with some recent sales of good properties in good neighbourhoods (that would have been a bun fight jut 18 months ago) coming in at pre-pandemic prices. But this is to be expected. With so few truly engaged buyers out there resulting in so few showings and so few purchases, if a seller needs to sell they need to price accordingly or, at the very least, be willing to listen when the market speaks. Thus, some of the sale prices we are seeing.”

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This Post Has 62 Comments

  1. ‘Based on history, he said, this new regime should last 40 years’

    The rate daters won’t like that.

  2. You will own nothing.

    You will live in the pod, you will eat the bug paste, and you will be allowed no condiments or seasoning with the bug paste.

  3. ‘told Bisnow the firm tried to refinance the property for about two years to no avail. ‘The capital markets are not in existence to take out a refinance for an office building, no matter how great the property is,’ Sischo said. ‘It’s not there’

    I’ve seen several articles saying office financing is kaput.

  4. ‘Because he could not complete the sale by Aug. 3, Mr. Sehgall received a letter from the developer’s lawyer that he had forfeited his $81,990 deposit. This amounted to all his savings and some money he owed his 88-year-old father, a retired military officer, he says. Today, Mr. Sehgall says he lives in a basement suite in Surrey on disability after an accident, and he cannot afford the high cost of lawyer fees’

    Well it was cheaper than renting Sudip.

    1. It was financial lunacy. If you have to use every dime you have, not to mention borrowed money, for a down payment then you have no business buying a home. It’s a recipe for failure. Back when underwriting standards made sense it used to be that to qualify you had to prove you had at least 3 months in reserve after closing. For me that’s a little skinny. 6 months is more like it.

      1. You can be gifted the down payment now and qualify for a guberment backed loan. When was the last time we saw the stats on what percentage of loans are 20% down?

  5. New York Times (via Archive) — People Are Pessimistic About Their Economic Futures. Can You Blame Them? (12/7/2023):

    “Until the chaos of the pandemic, there hadn’t been a year with average annual inflation above 4 percent since 1991. As a result, for more than two-thirds of voting age Americans, 2022 was by far the highest inflation of their adult lifetimes.

    To them, higher prices just means less spending power. A recent Blueprint/YouGov poll on the economy found that just 7 percent of respondents were principally concerned about the availability of jobs, while 64 percent were most worried about prices.

    Even as inflation has receded from its June 2022 peak, sentiment has hardly shifted. Many Americans appear to believe that it’s not enough for costs to rise more slowly and that prices should fall toward prior levels.

    To economists, that’s a fantasy. Prices writ-large haven’t declined substantially since the Great Depression, and the price drops that consumers seem to want would most likely indicate the kind of troubled economy they fear.”

    https://archive.is/2oMkb

    1. Related article.

      The Hill — Most voters under 30 say economy is biggest issue as 2024 nears (12/9/2023):

      “The poll, published Friday, found that 44 percent of respondents under 30 years old or younger said that the economy is the most important issue the country is currently facing.

      Seventy-six percent of respondents under the age of 30 believe that their parents’ generation had better economic opportunities than they currently have today, while 24 percent of those surveyed disagree.”

      https://thehill.com/homenews/campaign/4351561-voters-under-30-economy-biggest-issue-2024-poll/

  6. The prices are dropping and each month they drop more, and they won’t let him assign the contract but they can’t close. … Sometimes they say we have units to sell and we don’t want you competing.’”

    Even using my Common Core maff skills, I can’t work out how this is building “generational wealth” as promised by the REIC shills.

  7. Local news.

    Tents line streets outside hotels — now acting as migrant shelters — as number of Venezuelans arriving in Denver nears 30,000 (12/7/2023):

    “Around her, the street in the northwest Denver neighborhood of Highland is unrecognizable, a result of a city overwhelmed by its efforts to help the nearly 30,000 Venezuelan migrants who’ve arrived in Denver in the past year. The tent encampment, which has stretched farther and farther up the street in recent weeks, is outside one of five hotels that the Denver Department of Human Services is using to house 2,700 migrants.

    Cars can hardly pass because both sides of the street are lined with tents covered in tarps. In the middle of the street, nonprofit workers and volunteers park vans and trucks to pass out food and children’s cough syrup. People dig through cardboard boxes overflowing with shoes and kid-sized coats, and a child squeals after finding Spiderman pajamas among the donated clothes.

    The migrant encampments are growing in other parts of the city, too, including near some of the other hotels rented by the city’s human services department. That’s in part because families previously were allowed to stay in the hotels for 37 days, and when their stay ended, some moved into tents outside. The city changed its policy Nov. 17 due to cold weather, however, and is now allowing families to stay in the hotels indefinitely.

    Busloads from Texas arrive daily, including 40-50 people who were dropped off in front of the state Capitol early Monday morning.

    Venezuelans began arriving by busload in Denver a year ago this week, and since then, the city has enacted an emergency operations system and spent $33.6 million. The number of Venezuelans who have come through the city since last December is expected to reach 30,000 by the end of the week.”

    https://coloradosun.com/2023/12/07/migrant-encampments/

    30,000 is that a lot?

    1. 30,000 is that a lot?

      it sure is, especially since the city is flat broke.

      And more are going to arrive. It’s in the mid 40’s right now, and tonight’s low will be about 30. And it’s going to get worse. I understand that they pile these people into crowded overnight shelters, but what happens when the highs are below 30?

      Will these people accept an airplane ticket plus some cash if they agree to go home? I’m sure they weren’t planning on camping outdoors in freezing conditions when some NGO person encouraged them to join the next caravan.

      1. It’s kind of ironic that the political establishment expects these people to be a rock solid voting block.

    2. “Some of the children in the encampment are attending nearby schools, and Gonzalez said a Denver Public Schools worker who visited the camp told her that her kids could start going to class next week.”

      I’m confident that learning to read, write, and speak English is the number one priority, right?

      “And in Carbondale, near Aspen, dozens of migrants were living in cars and tents under a bridge…”

      Good lord, people are even ending up in Carbondale? In December? If these are new migrants, how did they get cars?

      1. Good lord, people are even ending up in Carbondale?

        That is interesting. I haven’t heard of any Venezuelans here in my little burg. There must be better gibs in Carbondale.

        If these are new migrants, how did they get cars?

        Indeed, hence why I wonder if the gibs are especially good there. Perhaps some charity, or worse, the government, is giving cars to them.

  8. With so few truly engaged buyers out there resulting in so few showings and so few purchases, if a seller needs to sell they need to price accordingly or, at the very least, be willing to listen when the market speaks.

    Gosh, I hope the steady drumbeat of crater news and FB tales of woe don’t create a self-reinforcing Doom Loop for the housing bubble.

  11. Ok. Breaking News.
    Alex Jones is going to be allowed a account on X.
    Over 70% voted to restore the most banned dude by a vote Musk took.
    Apparently after the Tucker interview with Jones, a majority voted they want more.

    1. Not that I’m keeping score, but over the past 3 years the “conspiracy theorists” are up about 37-0 over the globalist scum media and “approved” globalist Narrative purveyors like the CDC and Jacinda Ardern.

      1. Musk acknowledged Saturday that reinstating Jones would “be bad for X financially,” but he argued “principles matter more than money.”

        1. I’m still thinking about Musk swearing away his X advertisers, live on stage. Did he really just do that off-the-cuff and only realize afterward that he had wounded (if not killed) X? Or did he think about it beforehand and have some plan to make up lost income? Either way, it appears he’s doubled-down on his stance, with Alex Jones.

          I dunno, maybe he’ll go public with SpaceX and take the proceeds to run X with his own wealth down to the last dollar.

          1. How much can it cost to host a bunch of puddle watchers? I’ve leased servers for years, it’s not that much. Why do they need advertisers? Why is it such a big deal in this country when somebody is ‘unbanned’? Remember when there were 7 words you can’t say on teevee? Now it’s how many thoughts you aren’t allowed to have? I’ve never had a desire to be a puddle watcher and I don’t understand the need for it.

          2. I suspect that X/Twitter still has deadwood on the payroll, plus other fixed costs they haven’t been able to shed yet.

            As far as advertisers, he might lose Disney or Microsoft, but I suspect that there are a lot of small fish who would advertise on Alex Jone’s tweets.

            One thing is certain, Musk way overpaid for Twitter, but what’s done is done.

            I have also noticed that progress on Starship is moving slower than many expected. Granted, the Feds have been running interference on that, but I also wonder if Musk is more concerned about cash flow burn than in the past.

  12. Can’t help but wonder what the blow back is going to be for allowing the biggest anti- Globalist on the PLANET a voice on Social media. Right off the bat, that will cause advertisers to withdraw from X.

    1. Those advertisers can be boycotted by millions of X users that have had enough of globalist censorship and demonstrably false “Narratives.”

  16. Are you concerned about struggling realtors who can’t afford to pay their rent?

    Something seems wrong with this picture: Since homeownership is the guaranteed road to riches, don’t all realtors own their own homes?

      1. Same realtor citing 0.63% California owners with negative equity:

        If you’re waiting for mass distress to buy in CA

        You’ll be waiting for a while

        Yes it can accelerate but distress doesn’t happen to everyone all at once

        And no this doesn’t mean there won’t be a correction in pricing or price cuts.

        It just means the Doomer posts you see predicting how all houses in CA will go on fire sale 50%+ prices is probably not gonna happen

        A huge percentage of owners can just hold on

          1. Just because folks haven’t reached negative equity doesn’t mean they won’t start freaking out when they start seeing huge equity losses. Especially investors. Fear is even more powerful than greed. And the fear of getting schlonged trumps the fear of missing out. All you need is a few drops of blood in the water to start a feeding frenzy. And realtors of all people should know that rational thinking does not rule the day. It’s irrational emotion that drives markets. It’s gonna be like when someone yells “fire!” in an overcrowded club with one exit.

  18. *”Are you concerned about struggling realtors who can’t afford to pay their rent?”

    why, yes I am. I’ve always kept the garage stripper pole shiny & ready for the next RE downturn.

    the chairs have been moved in closer ’cause us old farts are going blind. AED fully charged in the corner. “Mercedes Parking Only” signs posted again.

    just doing my part.
    apply within

  19. Via NYT, 3,200 venture-backed U.S companies have gone out of business in 2023. Collectively, they raised $27.2B in venture funding. Poof!

    1. I’m sure a lot of them had truly inname business plans. I am reminded of an old Dilbert strip where Wally ties his hair in a ponytail and investors start handing him bags of cash even though he has no plan whatsoever.

  20. – Great interview.

    – Soft landing or no landing. Either of these scenarios seem reasonable to me.

    \\

    A weekend topic starting with Fortune. “Jim Grant has been tracking the ins and outs of Federal Reserve policy and its effects on the economy and markets in his famed newsletter, Grant’s Interest Rate Observer, for over 40 years.”

    “The ‘everything bubble’ and its consequences”

    “To understand Grant’s worries, we have to take a step back to 2008, the year he believes Federal Reserve policy became completely illogical.“

    “Grant has long argued the Fed’s post-GFC policies helped blow up an “everything bubble” in stocks, real estate, and, well, everything. And even after equities’ rough year in 2022, real estate’s two-year slowdown, and a regional banking crisis this March, he still fears that that bubble has only partially deflated.“

    “I think that the consequences of more or less 10 years of proverbially free money are going to play out in the credit markets,”

    “It could be that the accumulation of errors in lending and an allocation of credit that were brought on by the invitation to lend indiscriminately—that is to say the 0% rate regime—was an open invitation to overdo it in credit,”

    “The bubble years”

    “Mark Spitznagel, the founder and chief investment officer of the private hedge fund Universa Investments, told Fortune in August that the Fed’s post-GFC (and pandemic era) policies have created the “greatest credit bubble in human history” and a “tinderbox” economy.“

    “We’ve never seen anything like this level of total debt and leverage in the system. It’s an experiment,” he warned. “But we know that credit bubbles have to pop. We don’t know when, but we know they have to.”

    “If Grant is right, that would mean an era of low economic growth, relatively high inflation, and high interest rates—an economic combination that’s often labeled stagflation—may lie ahead. And that’s not exactly a recipe for investing success. It could even be an environment where corporate defaults rise, with the credit markets paying the overdue price of the free-money era.“

    \\

    “There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.” – Ludwig von Mises

    “For a decade after the bursting of the debt bubble in 1837, business conditions were depressed in the United States. The number of banks available for financing speculative adventures declined. Then, after another 10 years, public memory faded again.” – John Kenneth Galbraith, A Short History of Financial Euphoria

    “The very nature of a bubble is that there’s an inside and an outside, an expanding reality-distortion field that assures people inside the bubble that they’re doing things that are rational and normal. But when the bubble bursts (and speculative bubbles always do), be prepared for reality to disagree.” – Seth Godin, March 18, 2022

    “Every bubble has always burst.” – Jeremy Grantham

  21. ‘For this and other reasons, including the impossible peaks reached by home prices in the city during the pandemic years, San Francisco was hit particularly hard by the housing market correction which affected the entire country’

    It wasn’t impossible, it happened. Enjoy the bust.

    1. which affected the entire country’

      Can’t admit you were stupid and manic. The rest of the country won’t cushion your fall.

  24. Now that Bitcoin’s price has rocketed up again for no reason after the demise of two of crypto’s biggest boosters, and in utter obliviousness to the Fed’s higher-for-longer rates, do you fear another dive deeper into the CR8R is in store?

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