“this time is different” Vaccines rollout, good news abounds, 75% probability you are wrong

There has been a flurry of good news with stocks reaching records, talks of more stimulus, and vaccines rolling out.  Small stocks like Gamestop and AMC have been off the charts minting new millionaires every day.   What does all this mean for real estate?  How will interest rates respond to the current events?  Is “this time really different” in the market? Where do we go from here?

What was in the data?

1. Stock markets have reached record highs: The stock market has exceeded even the wildest expectations and continues to set records. There is an exuberance we haven’t seen in years within the stock market with considerable good news priced in.
2. House prices continue to set records every month: As the stock market roars and interest rates continue at historic lows, house prices are continuing to set records with historically low inventory and huge price appreciation in most markets.
3. New stimulus talks could further the good news: The Democrats have proposed an additional 1.9 trillion in new stimulus to further juice the economy to try and quickly recover all the jobs lost due to the virus

What could go wrong?

1. Stock market reset: There is so much optimism in the stock market that it is basically pricing in a “Cinderella” story that will be hard to achieve.  Take for example the recent jump in the auto stocks, Tesla has led the way but now Ford and GM stocks are also increasing.  There is only one issue, there is only so much “pie” of the auto market to share and the “pie” is not growing but will stay relatively constant.  If Tesla is fairly valued that would be ford and GM would have to lose market share to Tesla in order to justify the growth in revenue and the inverse would be true with GM and Ford.  Unfortunately, the auto market hasn’t expanded exponentially so the amount of available revenue has to be split amongst the various automakers.  If one auto maker increases, then the others will in turn decrease.  The market is not pricing this in which is leading many to predict that the current market is frothy and will correct.
2. Interest rates jump: With all the talks of stimulus and good news in the market look for short term interest rates to jump.  With all the good news, the market might not fully be pricing in the impact on yields.  In essence there could be a swift increase in short term rates if the market is correct with its exuberance.  A jump in rates would further propel a stock market reset as this is not factored into the current market.
3. Vaccine rollout continues at the current slow pace: The vaccine rollout is continuing at an anemic pace with most not being vaccinated until the fall at best.  New variants are emerging that also could make the current vaccine less effective.  If Covid continues to circulate like it did this past winter, this will quickly drown out all the good news.

“This time is different”; Is it really?

I hear this phrase frequently “this time is different” whenever the market bucks historical trends.  Unfortunately, I’ve been through enough cycles from the tech bust of 2000 to the real estate bust of 08 and now the 2021 rally to know that “this time is different” are some of the most expensive words in the English Language!  At the end of the day, the basic economics of supply and demand always rule.  This will occur in our current environment just as it has historically.  The only remaining question is how everything “unwinds”.

How can the current cycle unwind?

Unfortunately, with the lofty expectations on the economy, there is considerably more downside risk than upside surprises.  The million-dollar question is what could happen next.  Here are a few scenarios:

1. Reset of the stock market: The stock market has reached historic highs; it is hard to believe that the run will continue much longer as it is nearly impossible for earnings to meet the lofty expectations. This will result in a stock market correction that could be large.  The market unto itself will not crater the economy, but consumer confidence could be drastically altered which could lead to correction in the entire economy
2. Large stimulus passed: if a large stimulus bill is passed, look for short term rates to jump which will crimp consumer demand and also drastically slow real estate as the market digests the higher interest rates.
3. Small stimulus passed: This could be the best option that doesn’t juice the economy too much causing rates to rise assuming that the economy gets opened sooner rather than later. On the other hand, if a small stimulus is passed the economy could stall out by not having enough support depending on how quickly the virus is brought under control.
4. Short term jump in rates: If there is not a reset in the stock market, that means there is still considerable optimism on the economy and the future growth of the economy which will lead to higher rates in the short term.  We have already seen long term rates move off their lows, this trend will accelerate. The irony is that we have a “chicken and egg” scenario where higher rates will lead to a stock market selloff, whereas a booming stock market could lead to higher rates!

 Summary

Of the 4 options above, three of them (75%) are weighted to the downside risk of the economy.  This leaves only a 25% chance that there is not a reset somewhere in the economy (interest rates, stock market, etc…).  We could get lucky and the federal reserve might be able to engineer a “soft landing” where the impacts on the economy are not profound.  Unfortunately, with continued low rates and the prospective for more stimulus, bubbles will no doubt form throughout the economy.  As the bubbles get bigger, engineering a soft landing will become increasingly difficult.  I hear all the time; “this time is different”; don’t count on it.  As Mark Twain famously wrote, history does not repeat, but rhymes.  I’m starting to hear some rhymes with prior bubbles.

 

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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine,  The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

 

Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide.  To get started on a loan all we need is our simple one page application (no upfront fees or other games).