Housing Market CRASH Predictions With Eric Basmajian: Part 2
In this interview, Jason Hartman and macro‑economist Eric Basmajian dissect the current U.S. housing market dynamics and why a 2008‑style crash is unlikely, yet a significant slowdown in transaction volume is imminent. They argue that the Federal Reserve’s ultra‑low, long‑term mortgage rates act as a “poison pill,” locking homeowners into cheap financing and suppressing resale inventory. Meanwhile, new‑home construction faces a paradox: rising inventory of unfinished homes but a sharp drop in demand because buyers balk at 6% mortgage rates. This mismatch creates a widening gap between abundant new‑home supply and a severe shortage of existing homes, which dominate 90% of market volume. Construction labor shortages, higher wages, and material costs further constrain new builds. Basmajian emphasizes that the housing market’s health is driven more by transaction volume than price levels; a volume contraction will ripple through related sectors—mortgage brokers, realtors, builders, and broader retail—potentially adding recessionary pressure. They also discuss the growing presence of institutional investors in single‑family rentals, whose future actions (hold vs. sell) are uncertain given refinancing risk and rent dynamics. Finally, they debate monetary and fiscal policy options, concluding that the Fed faces a trade‑off between curbing inflation and avoiding deeper recession, and that solving inflation may require accepting higher unemployment. Throughout, the conversation blends macro‑economic analysis with on‑the‑ground observations about construction labor, manufactured housing, and market sentiment.
Chapters
But I said that the Fed has basically injected a poison pill into the housing market by allowing people to get three decade long mortgages at these artificially low rates. Those people just won't become sellers even if they lose their job. They have other options. They can rent rooms out, they can rent the whole house out. They can Airbnb that house. They have a lot of choices.
And now here's your host, Jason Hartman with the complete solution for real estate investors.
Welcome to episode 1895. 1895 and greetings from Mexico. We are here for our collective Mastermind event. And pardon the sound quality, it's probably a lot of wind sound, but I just wanted to show you this gorgeous sunrise and, and this beautiful environment that we're in. We had a great welcome dinner last night. This morning we have Robert Kiyosaki speaking and a few others. And it's just going to be a great time here. We're going out snorkeling this afternoon. We've got a big catamaran. We're having dinner on the yacht. It's going to be a great time. So anyway, I'll just make this a super short intro. Our guest today is Eric Basmajian again talking about macroeconomics and our deep dive into the housing market. And we're reframing that whole debate of whether it matters. And by the way, I was talking to hedge fund manager Chris McIntosh last night at dinner. We were sitting right at the same table and talking about the economy, inflation and folks, you're going to see a lot more inflation. That is definitely the way it's looking. So we'll talk about that more on future episodes. And before we get to Eric today, if you have not done so already, be sure to register for our upcoming virtual virtual event, the Recession Proof Investing Summit. And you can do that@jason hartman.com. it's a virtual event, so it's super easy right at the beginning of October. And we will look forward to seeing you there. Go to JasonHarpin.com and get your early bird pricing for our Recession Proof Investing Summit and we will see you there. Let's get to part two with Aaron.
I don't have a good answer off the top of my head as to who drives this index. All I know is that it's a broad survey. I'm sure it's tilted towards the bigger players in the space. But the only point I'm trying to make here is that we've seen this sequence unfold between a very significant spike in mortgage rates, a very predictable slowdown in the demand for mortgages and the volume of new transactions. A lot of people are just saying this is too expensive for me. And then you've seen sentiment among the home building companies start to diminish because they are watching their sales volumes dry up. They have a lot of this inventory, maybe they're thinking about discounting prices. But really what it comes down to is they're going to have to slow down their rate of new construction. They still have a lot of properties that are under construction at the moment which they will complete. But they may be reluctant to start a lot of new projects until they see maybe mortgage rates come down. And the reason that that's going to have an impact is because that's going to result in a slowdown in employment for the construction sector. And what this chart is showing Here is the 3 month average of the monthly change in residential building employees. And at the beginning of 2020, we were adding about 5,000 jobs a month in the construction, residential construction sector. We're only about 500 jobs per month now. And given the trends I've outlined and the leading elements of those, I would expect that employment in this sector in the next couple of months is going to start to contract.
You know, that's so interesting too. Housing is so low tech, it drives me crazy. I mean, I had one real estate consultant on the show, I don't know, about a year ago or so, and he said the biggest innovation, the biggest disruptive technology in home building in the last hundred years has been the nail gun. Yeah, no, it's, I mean, it's ridiculous.
It's true. And you know, we may have been better served in our country to put more of our resources towards some of this private sector investment. And I don't mean more speculation in the housing market, but I mean more in terms of private investment in structures and equipment and how we build these homes. It's something that we've significantly.
There is just such a stigma against manufactured housing and I think it's frankly very unfair. I think Americans need to get over that. It is much more efficient to build a house in a factory. Some of these manufactured houses nowadays would amaze people. They're. They're quite nice. But what I was leading to with the low tech construction industry is I had one of the nahb, national association of Home Builders people on the show and then I had another person who represented labor for construction labor. And I can't remember what group that's called again, but they both concurred that they can't recruit construction workers anymore, there's nobody wants those jobs. And the average construction workers somewhere like 54 years old. Nowadays you walk around these construction sites and you can just anecdotally see it. You know that used to be a bunch of guys in their early to mid-20s. Yeah. And now it's like these old guys are slinging hammers. It's just crazy how that's changed.
And they demand significantly higher wages. And my opinion, that's one of the factors that's preventing some of these build from, from building a lot of entry level homes. With the cost of materials and the cost of labor and the cost of regulations, there's just no way you can affordably build anything that's not, has some margin to it. So that's a significant problem. The last chart that I wanted to show to you and your viewers was the difference between the month supply of new homes and existing homes. So all the data that I just showed was for the new home or new construction market. Now this is a dynamic that we've never seen before in the housing market. There is a growing supply of inventory in the new home market, but there is an unbelievable lack of supply in the existing home market. And since I mentioned that the existing home market is 90% of the total volume, if you look at the housing market as a whole, you would say inventories are very low. But when we segment it out to new homes versus existing, we see the new home market is starting to become a lot of inventory relative to sales while existing homes are not. Why is this happening? I'll give you my interpretation and then I'd love to hear yours. What I think is going on here is that in the existing home sale market you have the entire world which refinance their mortgage rates at 2% or 2 and a half percent. And then, and then you have this unbelievable spike in mortgage rates to 6%. There is no one that's a holder of a 2% mortgage that'll ever sell their house unless they lose their job. And since we have no job losses now, everyone is is super tight and they will not let their house go no matter what the price is. But in the exit in the new home market, since no one's living there yet and no one has a mortgage yet, you have to buy that home at a 6% rate.
Right?
Nobody wants to buy a home at a 6% rate. It's too unaffordable. So this is an unsustainable gap because at the end of the day, new homes and existing homes are relatively close substitutes so what I think is going to happen here is we're going to see marginal declines in price. Maybe something like depends on your market, but maybe on average something like a 5% decline in the new home sale market. And that'll cause people to flock towards newer homes and it'll compress this spread. I think that existing homes in terms of price will, will hold on significantly better just because there's just no transactions that are going to be done in that market. I mean, I've never seen a spread like this going back. All the data that I've seen. As someone in your shoes, I'd love to hear what you think is driving this.
You know, I was one of the first people to talk about this back in literally March, right after Covid became a thing. Okay. You know, what's that? 2020. My time frame is so mixed up now. Covid just.
Yeah, right. And when it ended, it did, totally.
But I said that the Fed has basically injected a poison pill into the housing market by allowing people to get three decade long mortgages at these artificially low rates. Those people just won't become sellers even if they lose their job. They have other options. They can rent rooms out, they can rent the whole house out, they can Airbnb that house. They have a lot of choices. They're going to do whatever they can to protect that mortgage asset. You know, it's like the old idea, Right. You know, most people consider the house to be the asset and the mortgage is the liability.
Right.
Not with these cheap mortgages. I mean, about 25% of the country has a mortgage below 3%. 40% of the country has a free and clear house. Where's the distress going to come from?
Right.
And that's under 3% as a mortgage. But what if you just say under 4%, there's a whole bunch more there and that's still cheap. And if inflation continues, the. That, that negative interest rate is the spread. It's the, what I call the double inflation arbitrage. And nobody's going to want to give up those mortgages.
Yeah.
So what do you do?
I agree. I mean, no one would give up. I mean, as long as rates stay here where they are, upper fives, lower sixes, you're going to have massive segments of the population that are not going to sell their home. That's going to keep the inventory tight.
So let me give you one more thing on that. Okay, so that also goes to your argument about employment. Right. So the only thing people are going to be able to buy is new homes because the resale sellers are going to just keep their house, they're going to rent it, they're going to rent rooms, they're going to do whatever they can to protect that cheap mortgage. And even if they lose their job, how much distress are they going to be under the mortgage is so cheap. Right. But think about all the realtors and the mortgage people and the title companies and the escrow companies that don't have business because transactions aren't occurring in the resale market.
It's such a good point. One of the. One of my favorite research papers, and I've cited it in a lot of my YouTube videos, is called Housing is the Business Cycle, and it was written by Edward Lemur. I'd encourage everyone to read it. It's written in pretty simple terms. Everyone can understand it. And he says exactly. The economic activity is associated with the volume cycle of housing, not the price cycle. So like you said, if, if transactions or volumes slow not because of a lack of demand, but just because of a lack of supply, that's still going to be less new construction, that's still going to be less mortgage brokers, that's still going to be less real estate agents. And if those people fall out of work as a result, this chart that I showed here, that still is going to have negative economic effects. So my whole thesis on the housing market rounding it all out is that we are underway of a significant slowdown in the volumes of the housing market. And that slowdown is undoubtedly going to have ripple effects through the rest of the economy, through retail sales, through the employment sectors that we just mentioned. And that's going to put recessionary pressure on the economy. There's almost no way that the economy can withstand a slowdown in the real estate sector to this magnitude. However, that does not mean that you have a 2008 crash coming. Every time you talk about the housing market slowing down, everyone says, well, you think it's going to be 2008? No, we have to have a little bit of nuance here. The housing market has had ups and downs for hundreds of years. There's only been one 2008, right?
Well, there was a 1930s and there was a 1930s.
Right. To be fair, both of those were a result of excessive leverage in the financial sector and the household sector. And when we look at this chart here, we have a record level of debt in the US Economy. But when we look at the source of the problem, in 2008, it was the banking sector and the household sector in the form of mortgages, those two sectors had 220% debt to GDP in the lead up to the great financial crisis. It's only about 150% today. So the real reason that 2008 morphed into this big blow up that it was is because it was a housing downturn that morphed into a banking crisis. I think that we're on the cusp and we're actually in the middle of a housing downturn. But it's more of a volume cycle than it is a price cycle.
And what's so interesting about that is that the volume cycle literally means less inventory.
Right?
Okay, so think about that folks. Everybody who's waiting for this big price reduction to happen and they're trying to time the market. I just think they're going to be hugely disappointed. Listen, not in Los Angeles, you're not going to be disappointed. Or Seattle or San Francisco or some of the expensive northeastern markets. Those are cyclical markets. They're going to have a cycle. I mean, they're already having a cycle. Phoenix is having a cycle, you know, but by and large for most of the country, those linear and hybrid markets, I just don't see it. Maybe I'm going to be wrong, but I just don't. You've got to have a distressed homeowner, number one, and you've got to have ample inventory number two. If you don't have those two things, you can't have a crash.
Right? I would concur with your view that it's going to be the higher priced homes in the more speculative boom bust cities that are likely to have the biggest problems. And within that subset, it's new home construction that are likely to be have the largest price reductions.
So you can have a recessionary economy, higher unemployment, all of the stuff we talked about, but you can still have really sticky housing prices, right?
And you could even have flat a home price growth or home price growth of 1 to 3% in the existing home market. And you could have, you know, 5 to 8% contractions in the new home market and the aggregate will still probably show roughly flat or maybe even slightly positive home price growth because the existing are such so much bigger than the new. Most of my hesitancy in the price cycle, which I don't comment on the price cycle all that much, mainly focus on the volumes. Is, is. Is the price cycle is much more vul vulnerable in the new construction market. And most people that own homes are not home builders, right? They're just regular people and they're all sitting on existing homes. So I think that it's probably the high end home builders that are at the greatest risk.
If we're talking about I wouldn't buy Toll Brothers stock. Right.
But you know, if, if you're someone sitting on an existing home, you know, I'm not necessarily concerned about your home going down like 30% or anything like that. So, so but from the perspective we definitely got to slow down, it's definitely going to leak through the rest of the economy. That's part of the design of monetary policy. So you know, there's, there's really no way around that. But you know, we will live through it and we'll see what happens.
So here's the other question. Well, couple things thoughts here. Number one, what about all the institutional players that have come into the housing market buying single family homes, the Blackrocks, the invitation homes, the American homes for rent with tens of thousands of homes, do they sell or do they hold? And before you answer that, they are asking themselves the compared to what question and will be asking themselves the compared to what question in the future. So for example, if their debt isn't long term and they've got to refinance that debt at much higher rates soon, well, that would be a motivator to start selling off. But if in the rest of the market, the aggregate market for purchase slows, which means you've got upward pressure on rents, maybe they're commanding higher rents and then if they were to sell some of their portfolio, what else could they do with that money? What is the compared to what question? Is that a time when the stock market will be down? Well, maybe they think, okay, there's bargains to pick up in stocks and they put their money there or private equity or what do they, you know.
Right.
It's complicated.
It's such a complicated question and I don't think anybody knows the answer because we've never really had a volume cycle in the housing market with such a large institutional presence. Right. These are at the end of the day speculators versus homeowners. These, you know, they're not buying a thousand homes to live in all of them.
They're playing their investors, I don't know if you want to call them speculators.
Sure, that's probably a bit, a bit unfair. But we, we just, just, we've never seen the, the investors at this scale. Right. In the single family home market. So I think it's a guess. I don't know what they're going to do with it. All I know is that this is an element of the housing market that we haven't seen before. You know, my, my guess is, is they'll try and hold them for rent because there's probably quite a bit of friction between buying and selling them. It's not as easy to buy and sell them as it is stock prices. So my hunch is that they'll try and rent them out. And I follow some housing analysts. The name of the firm will slip my mind, but I saw that recently they were putting up data that there were significant lots of investors that were transitioning their homes from either flips or buys to sell to rentals. It's preliminary data. It's, it's. It's tough to say, but I think it is an element to the market that we haven't seen before. So it'll be interesting to see how it all plays out.
Here's the last one and then we'll wrap it up. Okay. And Eric, I love your insights, so really appreciate you coming on again. But then the question is, what is the monetary and fiscal policy response to this recession you're predicting? Right. Well, usually it's ease the money supply, lower the rates, and light the market on fire again. Right. Like they always do. When does that happen and how much? To what degree does it happen because. Or are they able to do that? Right. Are we at going to still be at an inflationary point where they just can't fix things? And that's a little bit where they are now? Right. They can't keep rates low and they've got this inflation problem. They're in a corner.
I think they're in a big corner here. It's definitely a big concern of mine. They have to press interest rates higher to combat inflation, but by doing so, they are by definition going to create a recession, which I think is the beginnings of which are already unfolding. So they are going to be in a position, I would say, in the next six months, where the unemployment rate will be going up, but the inflation rate may or may not be coming down. They have a dual mandate to solve for both. It's going to be basically impossible to do that at the same time. So they'll be posed with a choice. Which one is more important to them? I think I have my opinion. You may have your opinion.
What is your opinion?
I think. I think ultimately they should solve for inflation. I think that they have to try and get the rate of inflation down, and therefore that may require more pain in the economy or a higher unemployment rate. I think that would be the correct thing to do if you have a 10 or 15 year horizon. But my fear is that they will balk and they'll choose to save the labor market at the expense of inflation. And then we may have to deal with this for longer than than we might otherwise like.
And see, Greenspan was able to get away with that for so many years. But to use the famous last words of any investor, this time it's different. And it is different because this time we are not opening up a giant labor market in China to bring in cheap goods. Now we can still import cheap labor from Mexico, which we're doing because we don't control our borders. Right. But the last cheap labor market on earth to exploit is African American. Right. And that's so different than China. It's so disjointed. And yeah, it's.
We could have a whole nother conversation on that.
That's for sure. That's for sure. Well, Eric, give out your website and tell us where people can find you.
Yeah, thank you so much for having me on. I love these discussions. You can find my work on Twitter, PB Research. I'm quite active there. I'm putting up a lot of YouTube videos as well. You can check out my YouTube channel. Just search EPB Macro on YouTube or go to my website, EPB macroresearch.com.
Excellent. Eric Basmajian, thanks for joining us.
Thanks, Jason.
