Entering text into the input field will update the search result below

3 Things I Think I Think - Housing Bubble 2.0, Passive Investing And Hyperinflation

Cullen Roche profile picture
Cullen Roche


  • The buyers are mostly high creditworthy wealthy people. There hasn't been a big building boom. In fact, supply is tight.
  • Passive investors would rather let corporations be corporations and take whatever return they generate along the way.
  • A lot of the current narratives about inflation seem to be based on very poor understandings of inflation dynamics.

Here are some things I think I am thinking about:

Is the Housing Market a Bubble (Again)?

I'm starting to see a lot of chatter about a housing bubble 2.0. So I went on Twitter and asked people what they thought. There were tons of smart responses if you want to review them. Ben Carlson also wrote a nice piece about the state of the housing market. I think Ben gets the big picture right. Basically, this isn't that much like 2006 because:

  • The buyers are mostly high creditworthy wealthy people.
  • There hasn't been a big building boom. In fact, supply is tight.

There's a lot more to the story, but that's the basic gist of what's going on.

I'd only add that the current price boom seems to be more about COVID than anything else. In other words, I think that future demand has been pulled into the present because of COVID. So, as things normalize we might see some giveback, but I'd be surprised if prices fell much past the trendline trajectory of prices from 2012-2020. In other words, the torrid pace of appreciation is unsustainable, but that doesn't mean the same downside risks are present that existed in 2006.

If you held a gun to my head, I'd bet that home prices ease up some in the coming years and rents actually rise a bunch. I've noted in recent weeks that the buy to rent ratio is fast approaching its 2006 levels, but this can correct in 3 ways. House prices crash. Rents surge. Or a bit of both. I'd guess that we're gonna get a bit of both with much more emphasis on the rents surging piece.

Passive Investing is Wrecking the World (Again).

Every few years we get one of these articles about how

This article was written by

Cullen Roche profile picture
Mr. Roche is the founder of Discipline Funds, a provider of multi-asset low cost ETFs and financial advisory services. To learn more about Discipline Funds please see:https://disciplinefunds.com/

Recommended For You

Comments (21)

FredFrog profile picture
Thank you. I enjoyed your article and, for the most part, agree with your sentiments. As someone who has been trying to buy a house over the past six months, I have a different opinion about a housing bubble. Very frustrating to have a "no contingencies" offer 15% over list not be anywhere close enough to buy the house. Though it is nothing like the last one, a housing bubble does exist. Over the past few months I have watched listing prices rise 10-20% and then see closing prices 20-30% above list price. New home builders are raising their prices 2% every other week. This is a long way from the 8% in the Reddit graphic and the talk coming from the Federal Reserve. While I do believe this will end---likely this summer---I don't see housing prices dropping back anywhere close to what they were six months ago.

Also, consider the amount of soverign debt in the world and the associated problems. Of all the options, what is the most politically acceptable method for paying down that debt? I suspect the answer is inflation. Politicians control the rules and inflation appears to be the most palatable way for them to get out of this mess.
ANG Traders profile picture
@Fred the Frog

Sovereign "debt" is nothing like household debt if the bonds are denominated in sovereign currency. Debt means that there is a possibility of a forced default. That is only possible if the bonds are denominated in a foreign currency (like Argentina). T-bonds are not debt. They are a form of savings account that function in interest rate and reserve control.
FredFrog profile picture
@ANG Traders
Household debt vs sovereign debt is irrelevant to the point. There is an enormous amount of sovereign debt worldwide; much of it with negative yield. Somehow this needs to get resolved. Default seems the least likely desired path; especially in the US. Powell has repeatedly said that they are going to let inflation run hot until the "average" is 2%. According to FRED (FPCPITOTLZGUSA), average inflation for 2012-2019 is 1.615%. Eyeballing the 5-Year Breakeven (T5Y1E) for 2020, it looks like something near 1.4%. That works out to about 1.6% average since the 2% inflation target was announced in 2012. The math says it will take several years to "average" 2% or inflation will have to run quite a bit higher than 2% for a shorter time (14% in one year should get it done). Based on the historical performance of the Fed acting in a timely manner on such matters, my money says that inflation will get out of control---until another Paul Volcker comes along. Jerome Powell has said repeatedly that they are going to wait until the data shows that we have reached the 2% goal before taking any countermeasures. FPCPITOTLZGUSA runs a little over a year behind. How far do you think they will overshoot?

The housing bubble is more closely related to COVID-19 and has little, but some, relation to the sovereign debt problem. Housing prices rising at 2% every other week is still inflationary and this is going on globally. Sovereign debt is the elephant in the room that will force the hand of inflation.

Central Bankers are trying to control an enormously complex mechanism of which they have little understanding. It is their job, I don't fault them for that. I actually have a great deal of respect for them. For the most part, I understand and agree with many of the actions they have taken in light of the alternatives. In the end, we are bouncing along a bumpy road hoping those trying to control the steering don't wreck the car.

Perhaps Artificial Intelligence will take the wheel and smooth out the ride some day. However, that is far beyond the current state of AI. It will be many years before AI is capable of accomplishing this feat.
ANG Traders profile picture
@Fred the Frog
"Household debt vs sovereign debt is irrelevant to the point. "

I have to say that I couldn't disagree more. It ALL comes down to the little-understood reality that the "debt" of a monetary sovereign--especially the US which creates the world's main reserve currency--is NOT debt. It is the stock of Treasuries, which the Treasury CHOOSES to provide, to those holding dollars, as a risk-free, interest-paying vehicle which helps maintain demand for the dollar, control reserves, and control interest rates. It is a vestigial left-over from the gold standard system.

The stock of Treasuries (public "debt") has been rising for 80-years, and here we are, not having to pay for our grandparent's anything, and still able to buy all of our own production, PLUS some of the rest of the world's production (which they accept our dollars in return for). And yet, every year for 80-years we hear the same wrong story; the "debt" is going to blow us up if we don't pay it back somehow. The reason they are repeatedly wrong, is that they think the stock of Treasuries is actually debt, like household debt which has to be paid back. This misunderstanding is so deeply ingrained, that even Powell and Yellen think this way.

80-years of being wrong, and still the myth persists. Fascinating, really.
Keep it Country profile picture
Housing supply and demand numbers are obvious and probably won't change. A correction in stock prices and peoples current wealth would make the quickest negative impact. Houses coming on the market will increase if and when we see home valuations start to top and reverse.

Its like stock money flows.....they increase as the market rises like they are now. Homeowners see valuations reverse and they will want to sell.

People selling homes right now are financially making a good call. Take the equity in cash and buy some REITS paying 4-5%. Rent for the next 1-2 years.

I agree with article on rental costs rising...long apartments AVB, ESS, EQR.
JGC67 profile picture

I very much enjoy and learn from your writings.

I don't see a housing bubble at all. We don't have the loose lending practices going on today, nor the government pumping home ownership for everyone, as it did in 2006. Nor do we have Greenspan toying with the rates.

I also would not be surprised to see inflation in the 2 - 4% range this year, but don't expect the catastrophic impact Redditors are pumping. Never trust a Redditor!

"passive investing relies on active traders and market makers" - yes to this and no to "passive investing will wreck the world."
The only potential for wrecking the world lies with the people residing on this globe we call earth.

I'm taking family to Turks and Caicos first of May. To hell with the rest of the world, ha!
Re housing bubble 2.0 question, I haven't studied the details but I have wondered about the effects from the end of eviction moratoriums, rent/mortgage deferments, generally mobility freeze, etc. which should occur at some point as we shake off the pandemic. It seems there are a lot of factors which could prompt a drop in prices. Couldn't a radical drop in prices prompt even solvent owners to walk away from mortgages at some point?

Even if "radical" price drops don't occur, I'm trying to understand how prices will remain stable or keep rising when significantly more property begins hitting the market. Curious about your comments here.

I'm with you on the "passive investing" bogey man campfire story; seems to me to be a narrative boosted by commission seeking brokers.
Given Biden’s and the Dems massive spending on mostly nonsense and freebies, inflation will hit the middle class like a cat 5 storm. Those feeding at the public trough will feel like they died and went to heaven
Cullen , you must be wrong about the housing bubble,
back in Nov 2018 @dave Kranzler said there was a
home builder train wreck coming :

I'd like to hear more about your take on the role of crypto currencies.

My experience tells me it is embraced mainly by those who seek to extort money (ransomware wouldn't work without it), evade taxes, or launder money taken by questionable means.

I need to be convinced the crypto phenomena is not a huge liability to the financial system. I just don't know enough to prove it, but I see no positives in these currencies. When a scandal arises from a crypto currency, invariably there is some fly-by-night scammer at the root of it.
I concur on your inflation view-- we watched people cry louder and louder during Bernanke's quantitative easing "causing runaway inflation" over and over until they finally gave up. Here we go again?
@reasonable2 to some extent, it seems PT Barnum is alive and well in the crypto world
David de los Ángeles Buendía profile picture
@Cullen Roche ,

Nine out of ten people who write about hyperinflation do not know what they are writing about. The other one is wrong. Almost every hyper-inflationary episode followed a period of war and/or social upheaval. The government responds to this by financing government operations by printing large quantities of money. None of those conditions exist today.
@David de los Ángeles Buendía

Tell that to the home builders and home buyers
David de los Ángeles Buendía profile picture
@Dividend payer ,

Tell what to home builders and home buyers, that there has been no massive war or intense civil unrest? The the housing market has always been highly cyclical with intense increases in prices followed by collapse. There have been innumerable “booms and busts” in housing going back at least to the 1880’s. Hyperinflation is not just price rises.
j. hughes profile picture
@Cullen Roche
If you want to be taken seriously these days, try not to make so much sense.
Also, make it look complicated by throwing in a few formulas, charts and such.
@j. hughes

Now now J,
the ego-bloated windbags don't need your encouragement.
Wantingtotravelagain profile picture
Your comments regarding housing have some merit but you what you didn't touch on is the consequence to the housing market if we have a popping of all the bubbles and the compounding effect that will then have on housing. Stocks, many commodities, housing, sports memorabilia, art, etc all at ATH...if they all deflate concurrently then paper losses will snowball and your housing scenario will most likely be worse than advertised. Covid has certainly had an effect on the housing market but it has also had an effect on other markets...asset inflation across the board is real and they will all suffer greater losses than normal due to the snowball effect (psychological). People are too complacent now and they will likely only get more complacent over the next several months with all the stimulus. When the sugar high wears out watch out below. Just one man's opinion.
CashFlow13 profile picture
Excellent article.
ANG Traders profile picture
If the GDP growth is 6%, as it is setting up to be, then 6% inflation is not inflation...it is just the growth. But like you say, it won't even get to 2.5% in the aggregate,
@ANG Traders the real GBD needs to be viewed in the context of what existed in 2019, not 2020. All the so called growth has not restored what was before the Covid. Millions will never be able to restore their earnings or depleted savings
ANG Traders profile picture

That is what the fiscal support is trying to mitigate. The deficit due to the virus relief is different than the Fed QE in that deficit spending gets to be used by the base of the economic pyramid (where the hardest hit reside) before the money moves up the pyramid. QE goes straight to the top, by-passing the lower levels.

That is what happened after the GFC, and explains why GDP growth was so anemic during that recovery.
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!
To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.