Postcards: A Clockwork... Foreclosure

Something quite wild happened yesterday in the soda aisle of Publix. And why things in the housing market are about to get a lot more dangerous. ͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­ Forwarded this email? [Subscribe here]() for more You are a free subscriber to Postcards from the Florida Republic. To upgrade to paid and receive the daily Republic Risk Letter, [subscribe here](. --------------------------------------------------------------- [Postcards: A Clockwork... Foreclosure]( Something quite wild happened yesterday in the soda aisle of Publix. And why things in the housing market are about to get a lot more dangerous. [Garrett {NAME}]( Mar 22   [READ IN APP](   Market Update: Overtime for Northwestern… Go Cats! The VIX is back under 13. As I said this morning, it feels like we’re witnessing the abandonment of inflation targets. We discussed [this possibility]( August 2023, but it took October’s crisis and a realization of supply-side problems to admit it finally. Meanwhile, price action in China signals that the Yuan devaluation [I proposed in February]( is starting to form. The U.S. benefits. --------------------------------------------------------------- Dear Fellow Expat: Last night, I went into Publix for a late dinner while my wife and daughter were in Orlando. The song “Misunderstanding” by Genesis blared overhead, making me smile. I walked past the young, sulking cashier who wore eyeliner and a wry grin like Alex from  A Clockwork Orange. He eyed me funny, as always… I imagine his observations of my behavior down the soda aisle sounded like this: “In the buzzing glow of Pelican Landing Publix, my brothers, your humble narrator, tilled retail's endless rassoodock. That tune again, "Misunderstanding" by Genesis, worming its way into my gulliver for the umpteenth raz, a real melody horrorshow of taking up squatter's rights in my think box. I viddied, my brothers, this first dad-type as he sauntered into the soda aisle in the regalia of his tribe—pleated shorts and a nondescript tee. He was lip-syncing to that bolshy groody tune. Unbeknownst to him, his solo would tinker a counterpart. Scarcely had he rounded the corner when another, a fellow dad in similar attire, entered the same aisle from the opposite end. It was as if some unseen conductor had cued them both, for no sooner had they set foot amidst the fizzy wares, both of these dad-type malchicks started to cut a bit of a rug, shaking their rookers at the ceiling like they were having their own little razrez. And then it happened: as the song built towards its crescendo, both dads, separated by shelves laden with bottles and cans, unwittingly began to belt out the bridge, their solitary performances merging into a duet of sorts. "[There must be some misunderstanding]( must be some kind of mistake…I was waiting in the rain for hours…You were late…” I was caught rocking out with fist shakes to “[Misunderstanding]( by Genesis in a Publix by another dad… who was doing the same - except he was playing air guitar with a pretzel box.  We just nodded and smiled and went our separate ways. For the cashier, it was another turn of the wheel of madness, the song a relentless echo in the confines of my clockwork existence. Yes, my fellow expats, I’m 42 years old. And that song is fantastic. But the deal on the table in front of prospective American homebuyers? Not so much…  [Upgrade to paid]( The Next Housing Crisis… Over the last week - we’ve started to “Follow the Money” in government and equity markets. We’ve dug into healthcare, migration, energy, and the Green Transition. But nothing - nothing - contributes more to the average American’s wealth than their home prices. In 1978, the average American home cost $55,700. A simple inflation calculator suggests that the average price—adjusted for inflation in 2024—should be $265,000. But today’s average home is worth $395,100. Why the 50% difference? What makes housing outpace inflation by such a wide level? How are home prices moving higher while interest rates have gone up 11 times in the last three years? Well, I’ve [discussed the supply-side issues]( for years. - At least 25,000 regulatory bodies oversee housing from the local to the Federal level. That’s the number Fannie Mae told us when I advised them on an affordable housing regulatory effort. We need all sorts of reform to make housing more affordable - from rezoning land and fixtures to erecting taller buildings. - Land, labor, and lumber costs are rising. (These are called the “Three Ls” in homebuilding.) Input costs are significant; building a house takes about nine months. - A decade of cheap interest rates also made capital easier to access - which spilled into these assets. The lack of supply and swell of demand - fueled more speculation - especially in the post-COVID era. - Next, if you listened to the State of the Union Address, you know that the federal government forces through countless tax credits, rebates, and more. The Biden Administration is pushing for a new credit for first-time homeowners. Giving people credits and incentivizing them to take on a home offers more sugar to the market. But there’s one thing that I’ve left off on this list. What could make home prices expensive over… say… 30 years? And I stress… 30 years? It’s the Policy, Stupid Michael Bordenaro does some of [the best real estate videos on YouTube](. He just takes long walks around the neighborhoods of Miami and talks about how the market is falling apart there. I see the same thing in Southwestern Florida, where people with cookie-cutter houses and high HOA dues can’t even get buyers to visit. Michael highlighted a $1.9 million house in Miami that sold for $800,000 three years ago. Property taxes are north of $14,000 a year, and who knows what insurance is given the collapse of that market. Anyone paying $1.9 million would look at $30,000 yearly in property taxes. Comically, a picture of a real estate agent hangs in the front yard. It says, “$7,500 available” for a credit for first-time buyers—pure subsidies. Bordenaro points out the real driver of higher home prices: It’s financialization. All these incentives are designed to trap new buyers into 30-year mortgages. As he notes, you need to go back to the 1940s to see the roots of the 30-year mortgage.  They were only available for new construction in 1948. But most mortgages before this were in the five to seven-year range. Then it jumped to 15 years. Then… 30 years… Longer mortgages lower monthly payments. Bordenaro shakes his head and smiles because he’s saying something so obvious that many people seem to miss.  If more people can afford lower monthly payments, demand for that payment and the “security” of a home will surge.  Lenders didn’t want this risk. They didn’t want to be on the hook for 30-year payments and endure three decades’ worth of default threats.  But then the government - in all its stupid wisdom - got involved.  The U.S. government pressed Fannie Mae and Freddie Mac in the 1990s to start buying up those 30-year mortgages, which created easy capital to fund more new 30-year mortgages. Meanwhile, as Bordenaro says, one of the selling points of the 30-year mortgage is that people can use the money they saved from lower payments to do other things: Buy cars, buy toys, etc.  And they have. It’s a contributing reason why credit card debt is also at an all-time high.  With these new false incentives and zero risk on the lending side this bubble was born. Now, decades later, housing is more unaffordable than ever. Did anyone learn their lesson?  No… it’s time for a new fix. Is the 40-Year Mortgage Coming? Now, this is an excellent time to pour yourself a drink.  As he notes, the 40-year mortgage is now in prospect… because the 30-year mortgage is now too unaffordable. I almost fell out of my chair; I needed to see this myself.  It turns out… this plan was proposed by the Department of Housing and Urban Development, or HUD. This group created the vicious mortgage buying cycle at Fannie and Freddie under Andrew Cuomo's leadership. Here’s the text from a ruling last year. “HUD's regulations allow mortgagees to modify a Federal Housing Administration (FHA)- insured mortgage by recasting the total unpaid loan for a term-limited to 360 months to cure a borrower's default. This rule amends HUD's regulation to allow for mortgagees to recast the total unpaid loan for a new term limit of 480 months. Increasing the maximum term limit to 480 months will allow mortgagees to further reduce the borrower's monthly payment as the outstanding balance would be spread over a longer time frame, providing more borrowers with FHA-insured mortgages the ability to retain their homes after default.” Now, this is perhaps the most insane thing I’ve seen. And I wanted to do some simple math.  A 30-year mortgage - no taxes, no insurance, no closing costs, nothing but the principle and interest over the duration of the loan.  - At 7.5%, that 30-year payment term on a $400,000 home with a 20% down payment would be $2238 a month.  - Total interest paid over 30 years: $485,495.11 Now, let’s go to the 40-year payment: - It falls… by $130 a month - to $2,105. - But the total amount of interest over the life of the loan: $690,796.64 That’s an extra $205,000 in interest… against a short-term benefit of $130 per month less in payments.  But let me finish on this. It’s the government - they don’t press for 20% down payment.  They’re lucky if you have 3%.  Well… let’s just look at the debt on a 3% down payment on 30-year or 40-year notes.  - With a 3% down payment, the monthly cost would be $2,700, with $588,600 in total interest paid over the life of the loan.  - A 3% down payment on a 40-year mortgage… and total interest paid jumps to $837,000.  Again, on a $400,000 house.  This isn’t home ownership. It’s renting from a bank. No one is building equity, and they’re just getting smoked on other fees while maintaining the homes on the bank’s behalf. This is a complete scam. If anyone ever tells you that the government cares about poor people and giving them access to the American Dream - you show them these numbers.  This is a sadistic form of indentured servitude. They might as well make the buyers work on a chain gang. That’d be more just. Stay positive, Garrett {NAME} Disclaimer Nothing in this email should be considered personalized financial advice. While we may answer your general customer questions, we are not licensed under securities laws to guide your investment situation. Do not consider any communication between you and Florida Republic employees as financial advice. Under company rules, editors and writers cannot recommend their positions. The communication in this letter is for information and educational purposes unless otherwise strictly worded as a recommendation. Model portfolios are tracked to showcase a variety of academic, fundamental, and technical tools, and insight is provided to help readers gain knowledge and experience. Readers should not trade if they cannot handle a loss and should not trade more than they can afford to lose. There are large amounts of risk in the equity markets. 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