Real Estate Markets and National GDP Scores Compete in a Race to the Bottom

Even as the US economy came in looking surprisingly resilient with GDP growth at 2.4% last quarter, the other major economies of the world are at or in contraction. Today’s headlines show that Canada is teetering on the edge of recession. Parts of Europe have been in recession already. Germany, for example, was in recession for two quarters, and this last quarter barely grabbed the bar to gets its nose over and into positive growth — an achievement that might easily give way under fatigue since most of the rest of Europe’s economy is now going into decline. China’s data is reported today as showing further decline in growth. (These are the stories in the economic news today.)

The decline of major economies all around the US as second-quarter data gets reported shows the kind of counter-vailing forces I’ve talked about. Even the Bank of Japan made its first move yesterday toward raising interest rates to fight inflation, which sent the international bond market into paroxysms because that may reprice over $3-trillion in debt. It will be hard for the US economy to remain resilient when its major trading partners all over the world are going down due to high inflation curbing consumer demand and high inflation-fighting curbing credit that fuels businesses with money.

Of course, the credit side of the crunch that is forming is much worse than just not finding easy money to grow. With double last year’s rate of bankruptcies (Monday’s news), the US is experiencing the reality I said would be a big part of the collapse of the Everything Bubble. Numerous zombie companies accumulated in the US because of more than a decade of cheap credit. These are companies that normally would have flushed out the pipeline due to lack of profits; but practically free money enabled them to stay alive on credit. Now that they are starting to have to roll that credit over at the cost of real money, it is impossible for them to do that and still service their debt, so the cost of debt soars even higher for them, leaving bankruptcy as the final solution.

These bankruptcies just got started last year. As the Fed and other central banks tighten credit just a little more to fight inflation and then hold, it is the holding that will kill hundreds, if not thousands, of zombie corporations as it will exceed their ability to endure. Those failures plus particularly the commercial real-estate companies that are going down will create phase two of the banking crisis that JPMorgan’s CEO, Jamie Dimon, warned would be coming almost for certain later this year. In making that proclamation, he affirmed what I wrote for my supporting Patrons over a year ago about how one major part of the Everything Bubble would burst.

(As of now, I am making those privileged articles about the various bursting sectors of the Everything Bubble open to everyone so all readers of The Daily Doom can benefit from the advanced warning given to my supporters last year in time to understand what is playing out this year: The Everything Bubble Bust Pt. 1: How Far Will the Stock Avalanche Fall?, The Everything Bubble Bust Pt. 2: Zombie Apocalypse, The Everything Bubble Bust Pt. 3: The Big Bond Blowup, and The Everything Bubble Bust Pt. 4: Housing.)

While the crash in commercial real-estate is leading the way, its sister decline is just beginning to play out in the residential real-estate market where we see in today’s news how the recently rising prices of homes and rising interest are clobbering first-time buyers. The rise in prices is a summer mirage that will quickly fade, but what it means is that homes simply are not selling. There is not enough inventory because not many sellers want to sell when they know they will be having to finance their next home at much higher rates. (For example, in 2022, active listings for last week added 30,940. This year that week added 5,848.) That not only jacks up prices, but it also leaves many of the wannabe buyers without anything they are interested in buying.

So, the market has frozen almost solid in many areas. No one is selling. No one is buying. Where the limited inventory does sell to desperate buyers, it is at a higher price than a couple of months ago due to of the limited options and at higher interest due to the Fed. That translates to few sales actually happening compared to normal times. (If any of us can even remember what normal looked like anymore.)

It is not surprising, then, that the weakest hands in real-estate — poor performing agents and loan officers — are now washing out, just like the weakest corporations. There are still way too many agents for what is selling, so there are a lot to flush out in order to realign with the falling market; however, people who have invested themselves in selling real-estate will try to hang on through the dry times as long as they can. I expect to see a larger flush when fall comes and the housing market goes into its normal post-summer slowdown after kids are back in school.