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Good morning. I have eaten all the Halloween candy and I am crashing, which helps explain the generally bearish tone of today’s letter. Perhaps my bullishness will increase with the approach of Thanksgiving? Email me at or Ethan at

What kind of real estate bubble is this, anyway?

One of the common responses to the meltdown at Zillow’s home buying business last week was to suggest it was one of those ominous events that signals the end of a euphoric market. The analogy used by a colleague of mine was the blow up of two Bear Stearns-backed hedge funds in the summer of 2007.

This response makes sense, inasmuch as the wild house price moves that pushed Zillow out of the house flipping business track, to a degree, wildness in other markets — paradigmatically the stock market. Here, for example, is the stock market charted against median existing home prices from the National Association of Realtors (data through September):

This, I admit, is a suspect chart. Both lines show year over year per cent change, but I plotted them on different scales to make them overlap more. Furthermore, there are times (including most of the early-mid 2000s) when the lines go opposite directions. But the two price series sure do come together when things are going batty, and now sure does seem to be one of those times.

So, if you accept the analogy, markets in general are euphoric; something spooky and bad happened to a leveraged player in housing; so maybe we need to worry about not only housing, but other markets like stocks, too.

(If one was looking for spooky things to deepen the analogy, one might also point out that homebuilders stocks are now well above their 2005 highs, but seem to have rolled over in May and look a little wobbly here.)

One thing that is broadly understood but always bears repeating is that the housing market in the US looks very different now than it did the last time it blew up. Yes, stimulus has helped household balance sheets a lot and, yes, very low interest rates help. But all the same, mortgage borrower credit scores are much better, and mortgage delinquency rates are parked near historical lows. Mortgage debt service as a percentage of disposable income is also near all-time lows. Adjustable-rate mortgages account for just 4 per cent of new mortgages at present, half the number of a decade ago, according to ICE Mortgage Technology (in 2005, perhaps a quarter of mortgages were adjustable rate). If we are headed for a leverage-driven housing market bust up, the leverage is not in the same places it was in 2008.

But there is something that links the stock market and the housing market right now. A global surge in liquidity means that capital is crushing into both markets. I have written about flows into real estate before; the key point is that institutional money is absolutely gagging to get into residential real estate, and single-family rentals in particular. Rick Palacios of John Burns Real Estate Consulting laid out the reasons why in an email:

Capital is flooding in for a host of great reasons. Worldwide bond yields are at historic lows, and investors need yield; inflation is on the rise, and most investors view rental homes as an inflation hedge; record high rent growth is supported by high occupancy rates. And renters have demonstrated that they are willing to pay a premium to rent in a new home neighbourhood managed by a professional landlord.

While the news headlines and NIMBYs are busy bashing institutional owners, many renters are clearly enjoying a better rental experience living with renter (instead of homeowner) neighbours and having no fear that their landlord might decide to sell the home sometime soon.

Rick and his team found 43 institutional equity investments in US single-family rental real estate, totalling $30bn, that have been announced since the beginning of 2020. The debt associated with those investments will be a multiple of the equity — and there are many undisclosed investments too, Palacios says. So the actual number is much, much higher than $30bn.

So, just as in the equity market, the question is whether the current rate of flows is sustainable, and what will happen to prices if and when it slows. One reason flows might slow is that the huge government transfers and deficits of the pandemic era may slow, and monetary policy may tighten. Another reason is that as house prices rise, yields on rental investments fall, and they are approaching the lows of 2006-7. A slide from Burns:

I’m not convinced that we are seeing crash conditions in equities or in real estate. But if real returns in both asset classes are not below the historical average over the next decade, I’ll be surprised.

Icarus markets

Peter Atwater of Financial Insyghts definitely thinks we are in an equity bubble, and is having a lot of fun writing about it:

What we are now witnessing might best be labelled ‘Tarantino Markets.’ In one room we’ve got stocks like Peloton, Zillow, and Penn Gaming getting shot, and in another room, investors are snorting call options like it’s cocaine.

For what it’s worth, it all reminds me of the last days of the bubble. The horses that can’t keep up with the biggest of thoroughbreds are being viciously tossed aside while the bullish bets get wilder and more concentrated.

He provides this chart of how the stocks that got “shot” last week have actually been atrophying for a year or so:

This is an interesting point, and I agree that it would be a worrisome indicator of investor sentiment if highflying stocks were falling to earth with unusual frequency — an Icarus market, if you prefer the classics to Tarantino. But is it more than an anecdotal phenomenon?

The answer depends on your time horizon. There does seem to be a recent jump in the number of stocks hitting one-year lows:

But zoom out and it’s not clear what we are seeing is more than a blip:

Unhedged is keeping an eye on this.

Is Powell a lock, and what if he isn’t

Jay Powell will very likely be reappointed as Fed chair, at least according to betting markets. The next-most likely candidate is Lael Brainard, who I don’t know that much about, other than the fact that she votes no when anyone proposes easing bank regulations. So I asked some serious policy nerds what they thought.

My former colleague Matt Klein, of The Overshoot, said this:

I think [Powell’s and Brainard’s] policy views are pretty similar . . . The big difference is that he is an exceptionally effective politician in terms of persuading both his colleagues and Congress, whereas she got nuked by her own side for the Treasury job. The question is how much that matters for monetary policy.

Ed Mills, an astute policy analyst at Raymond James, said:

I view her as more dovish. [Appointing her] would also allow Biden to add another governor to the board, likely moving more dovish…

[but] there is perception and then there is reality. The market would view her as different or at least unknown. The comfort with and record of Powell is an unbelievable asset for him.

My other favourite Wall Street policy guy, Isaac Boltansky of BTIG, told me:

The policy differences are likely only at the margins . . . No matter who Biden taps for the top job, the White House will be able to fill at least two and possibly more seats on the Fed, which will pull the Board further toward the dovish end of the spectrum ideologically . . . We should expect a steady continuation of the shift chair Powell already began rather than some sort of sudden reversal.

There is a theme here. Brainard and Powell are close ideologically on monetary policy, but Powell has significantly more political capital at his disposal. Given his administration’s unpopularity problem, wouldn’t Biden be nuts not to stick with the known entity? Why risk an ugly senate confirmation hearing and an ugly market reaction, to secure merely incremental policy changes?

One good read

Great interview from Politico with the Jeff Roe and Kristin Davison, who ran the successful Youngkin campaign for Virginia Governor. It will be interesting whether next year’s national campaigns stick to the Roe/Davison script. Will Republicans run hard against the Biden’s spending bills? Here is Roe:

I wish they would have passed the reconciliation bill and the spending bill [before the election]. I wish they would have spent that. There’s no way to spend $3 trillion and make people feel good about it. You cannot do that.

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