Japan Just Crushed Your Home Value (No, Really. They Did)

0:00If you bought a house in the last three years and you're feeling smug about it, with your three and a half percent mortgage, congrats. You won the lottery. Everybody else is standing in the rain watching the rate board climb back towards seven and a half like it's a horror movie that they already saw in 2023 and somehow agreed to watch again. Just 35% of people under 35 years old only home in America, meaning that two out of three don't and many never will. This is not a fed move to quarter point, yon story. The quarter point is the official stamp. The real story is why long term money got expensive before the Fed even touched the overnight rate. While your mortgage is tracking a Japanese government bond as much as anything Jerome Powell's replacement said last week. And what happens to house is banks and the whole credit machine if this level of rate sticks. In short, the Fed did the thing that everybody had already priced in. Wednesday, September 15th, the FOMC raises the federal funds target by 25 basis points. The new rage three and three quarters to four percent unanimous vote. 12 to zero first hike since July of 2023 and the first hike of the Kevin Warsh era,

1:03the hand pick Trump appointee that was supposed to be his ally, right? They didn't do it because they woke up feeling spicy. They did it because inflation is still running hot. Consumer price inflation is still well north of 2% and the committee finally stop pretending. The leftover heat is just supply shocks. Energy is expensive because the straighter hormones has been war zone for most of this year as well as obviously Ukraine and Zelensky blowing up oil facilities in Russia. People are throwing trillions into artificial intelligence and server farms. The labor market is going okay, but people aren't feeling as if they're keeping their head above water when it comes to the inflationary rates. So the statement from the Fed was blunt. Inflation remains elevated and that action is going to support a faster return to 2% target inflation because they only want you to lose 2% of your wealth annually. Three or more starts to be a problem. You start to notice it. What we witnessed was a central bank saying out loud that we are done hoping. It's time for action. In fact, most of them are pushing for another rate hike before the end of the year.

2:07It looks like the Fed is targeting 4%. But here's where it gets weird. The Fed only moved 25 basis points. That's 0.25%. But the bond market moved like someone shot a fire in a crowded theater and now 30-year mortgages are approaching 7.5%. This is an important distinction. So I'm going to say it twice because this is where people get this story very, very wrong. The Fed does not set your mortgage rates. The Fed simply sets the overnight lending rate that banks lend to each other in. That needless to say is very short term lending. Your 30-year fixed mortgage lives in the long end of the curve. Mortgage rates in short are usually driven more by the 10-year bond rate than they are by the Fed's rate. But here's where it gets interesting. The 10-year bond rate was at 4.1, 1.5% to start this year. And it's now up to about 5.15%, which is a full point move. 10 months less than 10 months. It's the highest rate for the 10-year bond since 2007. So in short, the FOMC is not dictating that rate. That rate moved all on its own. There was other factors

3:11that were impacting that, not the Fed. And as a result, the 30-year mortgage has gone from 7.2% up to almost 7.5% in a week. That's a very fast move. And needless to say, that has a major impact on the price that you're going to pay for your monthly mortgage payment. On a $400,000 loan, the difference between 6 and 7.5% is not just coffee money or a tank of gas. Well, it might be, depending on how expensive gas is in the state you live in. It's hundreds of dollars per month. And we're talking 7.5% from rates that used to be around 3% just a couple years ago. That's why the fall buying season just sprinted into a brick wall. And here's the part that very few people talk about or even understand that's very important that you do. And that's the Japanese yen. Yeah. The currency about 7,000 miles away from you right now. And it is impacting what you're going to pay for a home if you can believe it. This is the part that sounds like a conspiracy theory until you look at the money flows. For years, the cheapest money on

4:12planet earth was the yen. The Japanese ran rates at zero and barely above zero while everybody else paid real money to borrow. So the trade was simple enough to explain borrow the end cheap by something that yields more US Treasuries, corporates, emerging market debt, tech, whatever, and pocket the spread called arbitrage. That is the end carry trade. It is not a boutique hedge fund parlor trick. It is a structural feature of global liquidity. Japanese institutions and foreign leverage players together have been a fire hose of demand for dollar assets. That fire hose is now clogged. The Bank of Japan is officially hiking. Japanese 10 year yields have punched through 3% first time since 1996. When your home market finally pays you something, you stop subsidizing Washington's deficit. That's our deficit. They want to get paid if they're going to do that. Japan still holds on the order of a trillion dollars of Treasuries, even a slow rotation home, a few billion a month of not selling or just not rolling matters when the United States is issuing debt like it's going out of business and China has already been a net seller for years. Then you

5:16get the unwind. Carry is a crowded trade that works until it doesn't. Funding costs rise in Tokyo, the end stops being a one way bet towards 160 volatility spikes. Positions that were free money become please don't margin call me. You sell the thing you bought with borrowed yen. A lot of that thing is US duration Treasuries start to sell off and when Treasuries sell off the 10 year rate starts to rip higher. As I already explained, mortgage rates tend to follow the 10 year bond rate. But the problem is is that the end continues to weaken which forces the Japanese central bank to try and fight it. Now you take all of the other ingredients around the world that have nothing to do with Japan and you start to sprinkle it on top. Suddenly you start to understand why this is a global phenomenon and a global issue. One is the energy shock. Oil is back over $100 gasoline at $450. Diesel is averaging $650. The most important input cost in the country and it's headed for $7 and it doesn't appear to be slowing just last night. Vladimir Zelensky again bombed oil facilities

6:18within Russia. Number two, the US debt not including unfunded liabilities which is about a quadruillion on top of that. But let's not get sidetracked. Deficits are not a theory. Every auction has to clear if the traditional bid Japan, China or pensions starts to thin people suddenly expect higher yields. They're not willing to put their money into United States Treasuries at two or three percent. They're going to want five six seven. This is exactly why long-term rates have started to rise even when the Fed is only moving a quarter point. Number three, other central banks are in the same exact situation. Sticky inflation is not an American exclusive because they've all behaved like idiots like we have. Europe, United Kingdom, Canada, long rates are up because the whole developed world is issuing a mountain of paper into a world that suddenly wants to be paid for duration risk. So while you've heard from President Trump and many of his supporters that Warsha's a traitor and that he's going to destroy the economy and that interest rates,

7:19long-term interest rates are spiking and it's all his fault. They have that story backwards. The chronology of it is backwards. The bond market hiked first. The Fed is just catching up. And specifically, the Fed is trying to catch up to the world that has already decided if you're going to lend the United States government money for two or five, ten years, you're going to want a rate that will outpace that of inflation. And these people, I think wisely, have kind of the conclusion that it probably isn't outpacing inflation and therefore they are demanding higher rates. So while many of us spent years wondering or arguing about whether or not the Fed was going to hike rates, the market kind of made that decision for us. And with Japan bowing out of its role as being the world's ATM, it seems as if we're about to find out what interest rates ought to actually be. Now here's where this really matters to you. Let's talk about what happens to the housing market in America if rates stay at 7.5% or they increase from here, which I suspect they will. Real estate market is not going to collapse or boom because of something that Donald Trump says. This is a

8:24market phenomenon. This is a supply and demand issue, both when it comes to finance, money, borrowing and also supply and demand for housing. Now it's also important to understand that supply is very low because there's a huge lock-in effect. Tens of millions of owners sit on 2.5% or 3% long-term debt. They borrowed it 2.5% or 3% over the past five years. And if they're living in those homes, they'll probably never sell. And if they're renting out those homes and they can keep a tenant in there and it covers more than their mortgage payment, they probably won't sell either. Unless that is they think that the market's about to tip over. Or obviously if some crazy life effect happens, divorce or job loss or death or whatever. But here's what changes at 7.5% and especially if we grind towards 8% or higher. Affordability dies a second death. With prices at record highs, affordability was already in the toilet and with rates spiking to 7.5% or 8%, well, obviously people just simply can't afford those monthly payments, especially first-time buyers, which will be immediately absorbed or sucked out of the pool of potential demand. In other words,

9:29those that we're looking at buying a million dollar home suddenly can only afford a $700,000 home. Those looking at buying a $700,000 home can only afford a $500,000 home. And those that a $500,000 home can't find a home at all and therefore become renters for the foreseeable future. And what happens in that environment? Well, that means that transaction volume starts to plummet. Or actually, it stays plummeted. As of now, we already have the largest gap between buyers and sellers we have ever seen or at least in the past 20 or 30 years. In short, what that means is that there are a hell of a lot more sellers than there are buyers right now. And rates at 7.5% or 8% or higher don't just slow the market. They can freeze the market entirely. What about building additional housing? Well, why would you do that when there's already excessive supply? There's homes that can't be sold. So you're going to build into this already very inflationary economy in a very record high bubble real estate market where the costs of permitting and financing

10:31are super high for you too. And the Fed is hiking rates. And there is already excessive inventory on the market. And it's going to take you probably two to three years to get completed inventory ready for sale. And the math doesn't math. And what happens if rates keep rising from here? What if the 10-year bond, which is now at five something percent, goes up to six when it used to be four less than a year ago? Well, that means you suddenly get forced sellers, not because people want to sell, but because they're floating heat lock rates, their home equity line of credit, start to reprice because small landlords with bridge debt can't refy. What about when builders that have land loans can't afford their payments? That's when you stop talking about affordability concerns or a frozen market and you start to talk about a bear market, a collapsing market. And that, ladies and gentlemen, is where you start to find out all of this inventory that's sitting on the sidelines that is not being liquidated. What is it actually worth? What is it truly worth?

11:34What can you actually find a buyer for? That's when you get real price discovery. And this is where we transition from the micro to the macro picture. This is where we start to talk about banks and lending institutions and where the quiet risk is living right now. As you probably know, mortgage companies live on origination of new loans. Origination at 7.5 percent is not a good business for a very obvious reason. People stop buying. That means less originations and that means less fees for you and that means we need less mortgage originators and the banking institutions start to feel a bite. But that's not the only exposure that the banking industry when it has when it comes to the real state market. And as someone who brokered mortgages for 15 years, shutting down my business in 2020, this is the little factoid that keeps me up at night. These banks hold mortgage-backed securities and tea bills that were acquired when yields were much lower and higher yields mean lower market values. Now, if they aren't forced to sell, it's an unrealized problem. Essentially, they don't

12:34have to suffer the real losses because they can just let the tea bill expire or go to maturity. But that's obviously assuming that depositors never get nervous or don't demand their money back or that liquidity is never an issue amongst these banks, which it very well could be if we're entering a bear market in real estate more broadly. Now, prime borrowers into owner-occupied properties is relatively resilient because one, people don't like losing their home and two, because they put down a down payment and they take it seriously. And basically, as long as they keep their jobs, they're unlikely to let those houses go. That is, unless the market collapses so rapidly that they don't have any equity and they don't have any incentive to hold on. The bigger problem comes with people that have either HELOX home equity loans or their investor loans, people who don't live in these homes. They are buying to turn into rentals. And with the massive wave of work from home that began with the COVID lockdowns, it is kind of a mystery to me as to why we haven't had commercial real estate crisis already. Seeing as I don't know why we need all of this office space,

13:39I really don't understand it. And I'd imagine that there's immense vacancy issues that are not really being reported to the public honestly. So what happens if there is a liquidity issue with the banks? Well, that means that their lending side of the bank may start to tighten, which means that they may stop issuing as many mortgages as they once were. This is what's called a credit shock, means that there's fewer loans available, stricter, LTVs, which is loaned to values, there's wider spreads. And the housing market doesn't need a nationwide default wave to ultimately seize up. All it really needs is for lenders to stop lending. And suddenly you've got a real effing problem on your hands. Now, I could be wrong about this, but I don't think that the subprime lending industry that exploded in 2004 through 2007 that led to the O8 crisis has come back, roaring over the past decade. But that doesn't mean that that's the only avenue by which there can be a liquidity crisis and ultimately a banking crisis. In other words, this may be a different movie, but it's the same genre. Now, you may remember that it was Lehman Brothers that went bust.

14:43And then suddenly there was a whole bunch of institutions that were also relying on the solvency of Lehman Brothers to maintain their own solvency. That's what's called contagion. When one of your competitors goes under, you find out that they're all kind of intertwined on a certain level. So if there is contagion across the banking industry, what would the Fed do? Most people in America perceive the Fed to be a fire department. I say it pretty much just sells gasoline. Now, as you know, the Fed is trying to get inflation rates back down to 2%. And I think that they're more than happy to see the real estate market freeze up if that helps to crush demand, which will bring down the rate of inflation. In fact, that's the entire point of the rate hikes that they're currently doing is that they want to crush demand. And short, the Fed doesn't really care about your financial condition. What they care about is when the entire banking institutions, the industry itself starts to feel how you do when funding markets start to seize up

15:44or a mid-size bank like Silicon Valley bank a couple of years ago, which went bust. When mortgage back security spreads start to blow out. When money market funds start to get queasy, that's when they pull out their old bag of tricks like quantitative easing or lowering interest rates trying to spark demand. Or maybe they even start to do open market actions like acquiring treasury bills, which they have started to do essentially being the buyer of last resort for the United States debt to try and keep interest rates manageable. Because, and this is the key, that the alternative is a global depression. And likely, ultimately, the death of the dollar. Because if we go into that vicious death spiral, I would imagine that they will try and print their way out of it. In which case, I'd imagine that the rest of the world is going to scramble as quickly as possible into an alternative currency system, which already has begun because of the sanction regime that we have levied against the Russians and the Iranians and so many other nations that we consider

16:44are enemies. In short, there's only one thing that the Federal Reserve hates more than rampant out of control inflation. And that is deflation. They never want your dollar to actually go up in value. They wanted to go down in value consistently forever, but just at a rate that they can manage, which is that 2% magic number. So when unemployment rips and demand starts to collapse and there's a credit crunch and the banking contagion starts to take hold, they basically say, yeah, we broke something and now we got to get involved. In other words, they don't really care that you can't afford a house. And they also don't really care if the market tanks because that would damage those that do own houses. What they only care about almost exclusively is whether or not the banking institutions can stay solvent. So well, one potential outcome would be a deflation, which would mean that your dollar strengthens, which means that the price of housing starts to become affordable and young people might be able to enter the market finally. Something that I think I would probably be in support of. There's the option B, which is the hyperinflationary death

17:48spiral, which means that the dollar is dying and everything becomes price out of control. What makes me so pessimistic about the straight-ahormose or Trump seeing the light on any of these issues is that, according to Calhsi right now, it's 54% odds that the straight-ahormose will return to normal by January 1st, 2028. That's 16 months from now. 54% basically a coin flip chance that the straight-ahormose is going to be reopened by then. And for those that don't know how Calhsi works, it's a yes or no on real world events. Another market over on Calhsi right now says that the Fed funds rate will be above 5% with a 31% chance of that coming true. 31% of it being north of 5% is pretty scary. That would be a full point because their target right now is 3.75 to 4. So if if the Fed can get up to 5% by the end of this year, that's only three months and a couple days away from now. That would be very, very precipitous rate hike. So I tend to think that that's not

18:50going to come true. I don't think that they'll hike a full point by the end of the year. Now, as I said, I'm not super confident about those predictions. But if you are more confident than me, you can trade $25, receive $25 using my exclusive Calhsi link in the description and the pin comment. You can just check it out down below. Disclaimer on that. 18 plus only restrictions and eligibility requirements apply. Event contract trading involves significant risk and is not appropriate for everyone. Please carefully consider if it is appropriate for you in light of your personal financial circumstances. Calhsi products are not available in all jurisdictions. See Calhsi.com regulatory for more information. But long story short, based off of these prediction markets, it does look as if these elevated interest rates are here to stay and likely to increase further from here. There's a third option, which is also comparably bad, which is stagflation, which means that the economy weakens that unemployment starts to go up. But inflation still stays unfortunately high, you know, 5% or 6% annual inflation while you're losing your jobs.

19:51Pretty terrible combination for either of those last two options, inflation or stagflation. I think are probably the worst outcomes. I would argue that deflation is actually the best outcome. But that's also the one that the central banks of the world want the least because they don't fucking work for you. So as I said, this is not some crazy conspiracy theory. It is actually true that Japan and its insane free money policy for the world was the reason that housing in America was as expensive as it was. Now don't get me wrong. It's not just Japan. There are many central banks all over the world that had been acquiring United States Treasury debt, which in turn kept interest rates artificially low, which meant that you could then afford to borrow a half a million dollars to go buy a home that is probably only worth 300,000 in a sane economic environment. But the real problem is that 80% of foreign treasury purchases have dried up over the past couple of years, one because of liquidity concerns in these nations, but also because we have

20:54become increasingly hostile to the rest of the world as evidenced by our treatment of Russia and Iran, as well as Venezuela and a number of other nations. And we continue to threaten Scott Bessent, the Treasury Secretary continues to threaten that anybody that doesn't want to get on board with our bombastic actions in terms of foreign policy will also be kicked off the dollar system. On September 23rd, all the Iranian Airlines will be shut down around the world. And how do we do that? That if they land, you cannot provide them with fuel, you cannot provide them with landing services, you cannot sell them tickets, or you will be knocked out of the dollar system. Why would they continue to buy our debt and trade in US dollars if they have no sovereignty of their own that they must abide by the dictates of Scott Bessent? Now what I've been warning my audience about for years is that I believe that rates at seven and a half or higher would create headwinds for the real estate market that could create a bear market and moreover a recession

21:57across the broader market because I think that banking contagion becomes highly likely. Now, obviously there will be some banking institutions who have managed their balance sheets intelligently, and they will not be exposed to this crisis, but there will be others that will probably go bankrupt as a consequence. Now, this is kind of a worst case scenario and maybe interest rates will come back down quickly. I don't really see how that's possible, but you know, you never know. As of now, the trend seems unavoidable and it seems kind of inevitable that rates are going to continue to increase from here, and it's going to be left to the Federal Reserve and the Scott Bessence of the world to see what the hell they're going to do about it because interest rates, as you know, are not just meaningful when it comes to the consumer, when it comes to you and I, and whether or not we're going to be able to buy a home, it's extremely meaningful when it comes to a nation state that happens to have $40 trillion in debt and they have to refinance that debt because they're not going to pay it off. And if they're going to service that debt and that means that as

22:59those treasury bills roll over a two year that expires that they have to roll it over into the new rate when they had been borrowing at 2% and now they're borrowing at 5%. That's a huge increase in the cost of carrying that debt. And we are already paying 1.2 trillion over the past 12 months and interest on our national debt. And it could be 2 trillion or higher in a very short time span. In other words, the Fed is fighting inflation currently, but ultimately their biggest concern is going to be the solvency of the United States more than whether or not we can buy a house. Now, none of this is really unavoidable. Donald Trump could negotiate peace in Ukraine. He could stop funding Zelensky. He could get Putin to actually accept his offer. He could recognize the obvious loss of the war in Iran and negotiate a reopening of the strait. And if he did both of those things, oil prices would likely come plummeting back down, which would make price inflation come down for us too, as consumers in this country. Another important variable for you guys to understand is

24:02that because interest rates have increased so much on treasuries, it is now more profitable, more lucrative to invest your money into T-bills than it is to be a landlord. In other words, the rent that you expect to receive from owning a rental property will be less than you can expect to get from T-bills. That is historically and anomaly and also something that is likely not to persist because you will see a leveling of the playing field. Additionally, rents are actually now cheaper than it is to own by a good amount, which means that usually is a paradigm that doesn't last very long. And usually that means that either rents will increase or the price of housing will decrease in my estimation based off of the current economy. I think it's more probable that you will see the value of housing come down to get back to equilibrium. And the truth is that in some markets, we have already seen that there is softening and price cuts that are occurring

25:05in many markets all over the United States right now. Now, I have been a money manager long enough to know that giving predictions on firm timelines is ill advised. Makes very smart people look very dumb. So I'm not going to do that. I'm not going to give you a firm timeline on this as I've already laid out and you can probably tell if you've watched through to this point. This is a very complex matter. There are many players involved that includes not just you and I as consumers and the billions of people all over the world, but also all of the central banks all over the world. Presuminated States, the Treasury Secretary, the Fed Chair, there's a lot of players that can shift the game board while we're trying to analyze it. But I will say that based off of the headwinds that the real estate market faces, I would be shocked if we don't see significant price cuts in the not too distant future. It just seems like a inevitability honestly. The reason I can't be definitive with that claim is because you never know what the central banks might do. For instance, I thought and I think I was correct to assume that there was going to be a major recession

26:12globally in 2020 when the global economy was locked down and shut down to a large extent for over a year in most places. And we didn't see that because all of the central banks, like literally all of them started to churn out trillions of dollars or whatever their currency was locally. And it just put a bid under all asset prices despite the fact that the economy was in tatters. And the reason I didn't see that coming is because I knew it would create such severe inflation, which it did that I thought that the central banks would be prudent enough not to do it, but they weren't because, and this is the key thing to remember, the thing that they fight most, the thing that they hate most is deflation. They never want your savings to increase in value. They don't actually want you to keep your head above water. They want there to be inflation. They don't like hyperinflation. They hate deflation, but they love light inflation. They want two to three percent inflation for as far as the I can see. And they're going to do everything in their

27:16power to try and maintain that equilibrium. But I don't think it's possible because of the move that's happening on T bills. So I am personally in the camp of wanting to have dry powder, dry powder just means that you have assets that are liquid that you can deploy into a bear market, because I think that the odds of a bear market are as high as they have been since 2007. And this is the best part because interest rates have spiked so much, you can go to pretty much liquid assets like short-term T bills or CDs at banks. And in my view, if you can make five or six percent on your savings and do so with maximal liquidity and minimal duration, why not do that? You're really going to try and chase 10% returns in the stock market that are already at record highs. I just think it's not a prudent play personally. So I'm not going to do it myself. Now, here's the key final note for you. Because of the national debt, because of the 40 trillion in national debt and the fact that it is completely impossible to be paid off,

28:18I do expect for there to be a hyperinflationary blowout and death of the dollar at some point in my lifetime. Now, if I'm lucky, I've still got 50 or more years on this planet. So that's a pretty broad range by which we might see the death of the dollar and the transition into a new global reserve currency. But the point is, I think that it is coming and I think that it is inevitable because our government has behaved so irresponsibly. That's exactly why I partnered with a company like Augusta Pressures Metals, which I won't bore you with some long sales pitch. There's a link in the description. If you guys want to check them out, obviously they sell precious metals gold. I think that that's, it's important to diversify your portfolio. I'm also a Bitcoin guy. So I would recommend diversification over there or to whatever cryptocurrency you believe in and prefer. And to be clear, while I am very bearish on real estate at this current juncture, I love real estate. That's my passion. That's what I did for 20 years. I've built dozens of houses, I don't know about dozens, about a dozen. I've invested in countless trustees and I love

29:23real estate. And I think it's a great hedge against inflation historically. But it really only works if your entry point is prudent. And I think that at record high prices with precipitous increase in interest rates simultaneously with record high prices, I just think it's a terrible time to be entering the real estate market. And I feel the same way about the stock market. So I personally am not interested in deploying capital in those arenas right now. I would love to. And the reason I say that the dry powder is so important is because I think that we will have better opportunities, better entry points in the not too distant future. The key thing is, can you have that dry powder, can you have liquidity when the opportunities present themselves? And I think that is what you ought to be preparing yourself for right now. Now, very rarely do I do these episodes dedicated to economic outlooks and analysis. But I had so many of my listeners and viewers that were imploring me to do so that I decided to put one out. This is solely half an hour just on the

30:23financial outlook. And because of my expertise in the lending slash interest rate arena, I thought it would be valuable to you guys. If you felt that it was valuable, please do hit the like button, subscribe and share it around. This is Liberty Lockdown. My name is Clint Russell. If you're new here, you can find the show on Spotify and Apple as well. Leave five star reviews while you're over there. And stay tuned as this plays out as this evolves. I promise to give you updates anytime that I feel that the the timing is right. Love you guys. Peace. Subscribe to Liberty Lockdown. Great podcast. Clintus tight.