Moneybeat: The worst of both worlds in the housing market

MARY REICHARD, HOST: Coming up next on The World and Everything in It: the Monday Moneybeat.

NICK EICHER, HOST: Alright, time now to talk business markets and the economy with financial analyst and advisor David Bahnsen. David is head of the wealth management firm, the Bahnsen group. He is here now, David, good morning.

DAVID BAHNSEN, GUEST: Well, good morning, Nick, good to be with you.

EICHER: Well, I've collected some listener questions, David, which we have not done in quite a while, we've had so much news, it seems, we needed to cover. But three questions I have selected, I think we'll get at some issues we have not talked about, and approach others in a fresh way, like this one, the first one, which I'll read from Ryan Smith of Clinton, Utah. He writes, “David has commented and written about the Feds debt impact on economic productivity and growth, but I haven't read or heard a discussion on state economic policies, and the impact of state debt on fueling our overall economic growth and productivity. So what contributes more to driving our economy, the Federal Reserve, or the policies and debt of our 50 states?”

BAHNSEN: Yeah, really, it's a wonderful question, because too many people do only focus on the federal debt. And when you're talking about the state debt, you are talking about real debt that has to be paid and can also only be paid by the collection of tax revenue, which is to say, by the extraction of revenue from the private sector. Now, one thing that needs to be said is states do technically have a little bit more variability in how they can collect revenue than the feds do, because there are state consumption taxes, and there are state property taxes. And for certain projects, there might even be revenue fees, meaning like a bridge that a state runs that they charge tolls for the users. Those by the way, you know, I think are better forms of collecting revenue than by taking from someone's income. But nevertheless, the primary source of state funding is certainly state tax collection. And in both the cases of state and federal, collecting taxes means you're extracting money out of the private sector, where I happen to believe it's more rationally and productively allocated. The caveat, though, is that the state debts are a fraction, teeny tiny fraction of the federal debt. And so while the numbers and the principles and the concepts all work the same, there isn't a market governor that holds down how much debt they can run. The exception to this and it's such a long setup to get to the real—I kind of buried the lede, I suppose, is unfunded pension liabilities. States can run and do run—in the case of California, for example—hundreds of billions of dollars of unfunded pension liabilities. Now, again, hundreds of billions up against 32 trillion nationally, maybe it still isn't that big of a number. And that's one state where there's plenty of other states that don't even have an unfunded pension liability. But all that to say that I believe the principles work the same, we ought to be very focused on state viability. But what I will say about this beautiful system of government we have in our country, is that for those worried about what that will mean to future services, to future governance, people have the ability to say, I don't think the funding, and the fiscal management of this state is going very well. And I like it at another state. And we have the ability to move across borders, and one can relocate as many have from California to Tennessee, or from New York to Florida. Or people can say I don't mind the state fiscal picture. And I like being in New York better. I happen to be a person who lives in both of these states. And so there's a lot of freedom in our form of government to make those choices, but at least we have those choices.

EICHER: Alright, I like question two here David, because you've touched on this indirectly a few times over the past many months. But given the political year that's coming up, this one seems especially relevant. The Reverend Kevin Slemp of Berea, Kentucky writes, “One hears of the Biden economy or the Trump economy. But how much influence does a president actually have on the economy when a president for example, does try to affect the economy, how long does it take for his actions actually, to take effect? In short, do presidents get more credit or more blame than they deserve for the economic health of the country?”

BAHNSEN: Well, I'm you know, Nick, you probably know that I love this question, because I have addressed it quite a bit and he is 100% correct. I should point out and I think he's implying this himself in the question, the association of the presidential administration is pure marketing and branding, and sometimes media laziness and sometimes political choice, but it's never accurate. In other words, if we were to look at a four year period of a given president and say, How would you define this four year period, it would never be the case ever, that the biggest thing that happened in that four year period was directly related to the presidential administration we happen to have been in. There would be things inevitably, that happen, like I would be incredibly comfortable talking about this four year period that with the Biden administration, with some aspect of Biden policies and the ramification on the economy, but when people say that the “Trump economy” was more influenced by COVID, or by Trump policy, obviously, extraneous circumstances, a great financial crisis in 2008, the COVID moment and 2020, there's different circumstances. But the bigger piece, and I think WORLD listeners really deserve to understand this, if you were going to pick some element of public policy to associate with a period of economic administration, the central bank would be a far more significant one. If you show me a president who does X, Y, and Z, while a Fed is tightening, or a president does A, B, and C, while Fed is loosening, I promise, the tightening and loosening of monetary policy is going to be more important than the X, Y, and Z and the A, B, and C of that respective president. So it's the nature of the beast, we have a very messianic view of politics in our country. And not only do we have an elevated view of politics, we have an imperial view of the presidency. And so it's natural that we want to view more people got jobs this month, the president must be doing something right. More people lost jobs, the president must be doing something wrong. Both things are almost laughably absurd.

EICHER: Alright, final listener question, David. This is Heather Moriarty of Spokane, Washington. She writes, “We've heard of the potential for a reverse market crash in the housing market. Could you clarify what this means, and give your thoughts on the potential?”

BAHNSEN: Yeah, I think that what it's a reference to is this idea of market prices not crashing, and yet mortgage rates still going higher. And so that's what is really kind of the case in terms of a new buyer now. You could have borrowed money at two and a half percent a few years ago, but you were paying a high price. And then in theory, if you now were going to borrow money at 8% but paying a lower price, because the market adjusted then you would be, you know, somewhat offset. And yet in this current state, you get the worst of both worlds. Prices haven't crashed, and yet, the mortgage rates have gone significantly higher. Now, of course, the issue with this is that many phenomena are unsustainable. Right now, you do not have market prices not going lower, and mortgage rates still higher, because that's simply how it's going to be. You have sellers that don't need to sell. When housing prices crash, it's very rare, first of all, but when it happens, it's because of a significant amount of forced selling. And I think this is a wonderful thing that we don't have forced selling and that what we don't have forced selling because we don't have a ton of people losing their jobs. And because most people who own a home have equity in the home, which is the polar opposite of 2008, with the massive amount of people who have bought homes with either no money down or very low money down. So people don't walk away from their homes and become forced sellers when there's a lot of protective equity. But if what they mean by a reverse housing market crash is prices skyrocketing higher. It's not related to the lack of offset from high borrowing cost. I certainly see no scenario whatsoever by which from current levels, house prices could skyrocket higher. But the concern generally is you already had high prices used to have very low supply. And then you have high borrowing cost that has the sort of net impact of what this phrase means. That's what she's referring to. I think it's what has been playing out. You have transactions that have totally collapsed, there's very few people buying or selling homes right now. And that's because it's too expensive for buyers, and the sellers don't have any forced impetus to be selling. And I think that one of these things breaks at some point one way or the other. But I don't think you're getting talking about a crash. And I certainly don't think you're talking about a huge reverse crash to the upside simply because of affordability. There are not enough qualified buyers that can afford where we are now, let alone going much higher.

EICHER: Alright. David Bahnsen is founder managing partner and chief investment officer of the Bahnsen Group. You can keep up with David at his personal website, that is bahnsen.com. His Weekly Dividend Cafe, you'll find that at dividendcafe.com. David, I hope you have a great week.

BAHNSEN: Thanks so much, Nick.

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