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What I want this time period to be is a boring lesson of monetary policy and supply/demand, not a surprise spanking from Jerome Powell. A friend of mine always told me to think in cycles. When people start to panic, it is the time to start getting excited.
Maybe you can’t get on board with my optimism. If it’s triggering to hear, we’re probably closer to a bottom than previously anticipated. Remember what I outlined earlier? When small time investors start to panic, big money starts to buy.
In the short term, things are volatile and unpredictable, but if you can see the long term, the trend is clear.
If you’re thinking in cycles, this is not only what you’ve been expecting, this is what you’ve wanted. Cyclical buyers bought post-2008’s pain, and they either sold 2021’s peak, or boosted their bottom line by refinancing and renting their property out. They’re not worried about 2023 when they know 2030 will pay for their retirement.
Phoenix is one of the fastest growing markets in America. Are you really trying to fade that growth? Good luck. Seriously! Selling closer to a bottom than a top doesn’t often work out, but if you enjoy adding stress to your life to make a quick buck, I say stick to your own plan. At the end of the day, you only have that, a plan.
“Okay, but I didn’t buy after 2008. I never got into the market. I’m never going to get my chance now!”
That’s fear talking, by the way. Brother of Greed.
If you thought you missed your chance, think again. Although prices have fallen, interest rates are still climbing. There’s no indication that the Fed is going to pause anytime soon. It’s a catch-22.
The average bear market lasts 289 days with an average of 37-52% declines. According to the numbers, we are at that 32% mark, so we know we’re close to the end. Can we go lower? Well, yeah. There is local speculation that home prices could dip as much as 15%. We think that is a bit high, and that prices are really just adjusting to the market. Perhaps we see asking prices adjusting and mistake that for a decline in values.
But again, we are trained to see the bigger picture. That drop in price is meaningless if rates rise. Why? Because you’re paying the premium of your mortgage anyway. But with a lower rate, you ensure a lower monthly payment. If rates go down in the near future, you can refinance and pay even less. It’s really as simple as that.
Using a metaphor: “You marry your house, you date your mortgage rate.”
BE LIKE GEORGE COSTANZA. DO THE OPPOSITE.
Every American dreams of being able to buy into a brand new emerging market, but they get scared when opportunity actually presents itself. Are you scared? Feeling a lot of complex emotions? If you’ve got this far, you should be breathing easy. Just do the opposite.
When people are shouting for relief, you should feel optimism. I know that sounds crazy. But let’s just think about this for a second. Imagine you bought a home in Arizona in 2010. You were told another housing correction was looming around the corner in 2011, 2016, 2018, 2020… Do you get the picture?
If you bought a house in Phoenix at that time, chances are you would have earned a pretty penny from holding that investment. It’s possible that purchase allowed you to lever up and take on new investments, which may have increased your worth tenfold.
The bears want you to think everything is over. But the bears are bulls, too. They want to buy! They’re just waiting for you to move out of the way. There’s plenty of anxiety to go around right now. They know you’re ready to bow out of the market.
But here’s the deal. You can buy into a bubble or you can sell into a bubble, and there is not much middle ground. This is how America functions. The old stuff dies, and the new stuff is born. Entropy prevails. It’s what we want to happen as a society, and what’s more important, this is what we can predict to happen! Think of the Fed as the buoy keeping things floating in the longterm. Now that a cycle has ended, short term, it brings the chop.
So, yes, the Fed is here. They’ve come with all the bad headlines. They’ve got the same stern, puckering faces, reminiscent of a scary, angry grandparent. But they’re doing everything in their power to make sure things don’t break.
When things break, it’s no fun. We’re at the point when the family member throws the monopoly game just to get out of his/her margin call. It’s also a little like getting sick. If you root out most of the excess, you can have meteoric rises in demand again. And that’s exactly what the Fed has set out to do.
Overall, you’d be hard pressed to find people celebrating this type of market. Rising rates plus a tightening balance sheet does not equal a great party.
Largely, it feels like it’s up, down, turn around. One term for this type of market is a kangaroo market within a larger bear market, but none of those terms matter. In reality, it is the bullwhip effect of supply and demand as issues in the chain get resolved. Demand rises, but supply can’t keep up. Supply then goes up, but the demand is squashed by the Fed.
Now that you see the cycle, you understand how big money looks at trends: long term.
Read our final, Bottom Line Summary in Part Three, posted tomorrow.