Real Estate or Bitcoin: Which is more Reliable?

Hey, hey, hey. Hi guys. And welcome to Macro Markets, a show where we analyze how the macroeconomic news and events impact the crypto trading. I'm your host, Marcel Peschman, veteran stock markets and real estrader analyst at cointelegraph. On today's Macro Market show, I'll explain why the mortgage demand decline is not necessarily bad for real estate prices. Plus, we discuss the impact of Instacart, IPO for bitcoin and cryptocurrencies. Today's show will start by discussing real estate markets. The CNBC headline reads, mortgage demand stalls at a level not seen since 1996. Higher mortgage rates continue to take toll on mortgage demand, especially for refinancing. The average contract rate for 30 year fixed mortgages increased to 7.27% for loans with a 20% down payment. Demand for refinances dropped 5% for the week and was 31% lower than the same week one year ago. Applications for mortgages to purchase a home are 20% lower than the same week one year ago. There are two problems that arise when mortgage demand plummets and none are directly related to housing prices. Meaning those expecting a crash in this market similar to the 2008 crisis might come out disappointed. Firstly, the reason why so few people are refinancing their loans is because the terms are much worse than two or five years ago. So there's no incentive to use this vehicle for financing. Why let go of a debt that pays 2 or 3% per year to enter a new contract at 6 or 7%? So the only sector impacted by that is banking, especially the regional banks focused on real estate financing. Now, one might argue that the mortgage decline for home purchases is also down, which causes a much lower demand for buyers. Sure, that is correct. But why would anyone sell their current house in the first place if they to have to open a new mortgage contract at a much higher financing cost? It makes no sense. It's just easier to stay where you are, regardless of how much cheaper one could buy a new home. Given how high rates are right now, there continues to be minimal refinance activity and reduced incentive for homeowners to sell and buy a new home at a higher rate. I'll go a step further and raise the possibility of the house prices going up if inflation continues to pick up. Sure, there'll be desperate sellers, especially in the Airbnb market, which is already suffering from the lower demand of a recession environment. But overall, the real estate sector, especially in the residential urban areas, not vacation properties, have functioned as a reliable store of value for the past 40 or 50 years. Therefore, if the cost of finance remains high, sellers will be unwilling to let go of their current properties to seek for a smaller or cheaper one and cash in the difference. With less houses available for sale, the reduced demand will not drastically impact the price equilibrium. Meaning the odds of a price crash in the housing market solely to the financing costs reaching 7 or 8% should not be the main concern. That's not to say that the real estate prices can't go down 15 or 20% in 12 months. But it means that after the panic has settled, odds are investors will realize that their options, such as the S&P 500 gold or bonds, are not catching up to inflation anymore. Meaning there's no safe haven out there. So when we're talking about increasing mortgage costs, it's all a question about the discount of the house price versus the current price. Maybe 20% discount is enough to justify the rates going from 3% to 7%. So, yes, the investors are gonna take a loss as the interest rate payments are higher. But at a certain price point, it doesn't matter anymore. Maybe it's 20%, maybe it's 15, maybe it's 30% decline in housing prices. We don't know. But it is not enough to justify a housing market crash. Moreover, the 7.2 or 7.3% mortgage rate won't be considered high if the inflation reaches 5 or 6%. So the numbers in absolute terms means not much. Still, the most important message is if you're looking for signs of real estate price crashes as a recession indicator, you might be looking at the wrong market. Just to highlight that's my own personal opinion and does not necessarily reflect Quintellagra's official view. Now let's move on to the Instacart ipo. According to the Wall Street Journal headline, instacart IPO is an expensive lesson for venture firms. When Instacart lists in the coming week, it will leave many of its later investors with significant paper losses, a sign of the pain venture capitalists are facing after years of fast and loose spending. The grocery delivery firm is targeting a valuation of as much as $10 billion, sharply lower than the 39 billion doll it reached at the peak of the startup funding frenzy two years ago. You may be familiarized with the success stories of early investors in Spotify, Facebook, WhatsApp, Instagram, but that fails to consider that The S&P 500 returned 210% between 2012 and 2021. So in a span of 10 years, a period marked by interest rates averaging less than 1%. Now that the effects of such a loose monetary policy are coming back to haunt us in the form of inflation and businesses being required to post profits instead of just growth, the venture capitalist world is falling apart. Private investors going forward are going to need to embrace the new reality of a reset valuation world, said Byron Dieter, a partner of Besner Venture Partners. The resulting IPO slowdown has lasted almost two years, starving venture firms of a crucial source of income and denting their financial performance. Notice that those companies such as Instacart have raised multi millions if not billions of dollars from private investors throughout the years without ever being profitable. And we're talking about four up to eight years here. So those investors were never worried about losing money in the first place in their minds. If that worked for Amazon and Google, then it certainly was the best strategy. Growth at all costs In Instacart's case at least, they have been posting profits over the last five quarters, whereas competitors such as Uber and DoorDash continue to lose money. But that doesn't mean that venture capitalists that injected money on Instacart over the years will be put profitable if the company is making profits. It doesn't mean that the venture capitalists that invested on this money are gonna get their investment back. The problem Read Some funding rounds for the grocery delivery firm stood at $23 billion while others at an incredible $39 billion valuation. Now you may ask why the hell did those professional investors continued put money in given that the scenario was so competitive and uncertain? Again, the best answer is free money and misaligned incentives. For example, it is very common for those VC backed companies to build large contracts with tech suppliers which happens to be other companies where those same venture capitalists had invested. Even worse, there are hundreds of cases where the money that enters the company and is simply reinvesting in other venture capitalist funds or portfolio startups merely reshuffling the money around to boost valuations. Maybe the biggest lesson for Instacart's partial failure should not be the 75% discount from the seed round pick, but a shift in investors metrics growing at all costs both in terms of employees and revenues, which used to be the main driver for the past 15 years is no longer valid. WeWork is a perfect example of this failed investment thesis. Now one might argue that the reason cryptos have failed to break above the 2.8 trillion mark and the subsequent downtrend to $1 trillion also reflects that investors are no longer paying upfront for the future growth. This statement might be true in the sense that the adoption of cryptocurrencies remains small and irrelevant in every sense, both in the number of active users and transactions, especially in the decentralized finance industry, the defi industry, the current $39 billion TVL the total value locked might seem relevant to the crypto market, but that's less than half of Amancio Ortega's fortune, Zara's founder. It is worth noting that Ortega is not Even a top 10 global wealthy competitor now. What investors might be missing is that not every crypto intends to grow based on fees or expanding the user base. For bitcoin to succeed, there's absolutely no need for 1 billion users given that it could work as a whole transparent reserve system for banks and countries which would then issue their own bitcoin backed digital assets. We've grown used to the dependence of innovation growth venture capitalists, but there's also the need for a reliable store of value. And precious metals such as gold don't offer such a level of protection because no one can audit the reserves and the total output. Consequently, there is room for bitcoin and cryptos regardless of the day to day adoption by regular users. Well, that's it for today. Hope you guys enjoy the show. See you.