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ZorbaTHut  1yr ago (text post)   31267 thread views

Culture War Roundup for the week of October 17, 2022

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While browsing reddit a few days ago I forgot that I wasn't on TheMotte and tried to make a hypothesis post. This led to much screaming and crying and rending of clothes. So I decided to repost it here to see what people think. Am I crazy or am I right?

  • I predict that the housing market will experience a fall of at least Edited to "about" 20% within the next 6 months. I have about a 90% certainty in this.

Reasoning: The current housing market as it stands is a mirage, not an indicator of growth. The market should have crashed in 2020, but it didn't because COVID. All of a sudden millions of people had the flexibility to move away from their place of employment because of work from home. Fully 60% of the home-buying surge was fueled by this trend according to the Fed, whose numbers I have no reason to mistrust. This sudden surge in home-buying has largely abated. According to RedFin, mortgage rates are their highest since 2002, searches for "homes for sale" are down 35% YoY, the Homebuyer Demand Index is down 25% YoY, and mortgage purchase applications are down 39% YoY. The market is cooling off. I believe the coming crash will be around 20% because historically that's a safe bet. The late-90s crash saw a drop in home prices of 14%, the 08 crash saw a drop of 27%, I think this crash will be somewhere in-between, hence 20%.

  • I predict that there will be a recession before June 2023, and have a 90% certainty in this prediction.

We are either in a recession right now, in which case I'm right, or we're about to be, in which case I'm right. Popular opinion defines a recession as two consecutive quarters of negative GDP growth. If that is the case the recession has already started. The National Bureau of Economic Research defines a recession as a "significant decline in economic activity that is spread across the economy and lasts more than a few months". So let's look at a few indicators. Ignoring inflation for the moment, retail and food services sales, total, peaked in May and have been on a slow but definite decline since. The Conference Board Leading Economic Index is down 2.7% since February. The S&P 500 is down 22% YTD. Oh, and almost every single CEO in the country believes there's gonna be a recession.

  • I predict that this recession will not be "mild", but nor will it be as bad as 2008. Somewhere between the Dotcom bust and 08 is my prediction, which I have about a 70% confidence in.

  • I predict unemployment will rise by more than 1%, but less than 5%. Somewhere in-between, with about 50% confidence.

These two predictions are functioning from the same basic premise. I'm pulling all my historical numbers from here. The 2008 Recession saw Real GDP fall 8.5%, unemployment reach 10% (a rise of about 6%), and the S&P500 drop 57%. The DotCom crash saw Real GDP fall by 1.6%, unemployment reach 5.9% (a rise of about 2%), and the S&P500 drop 62% (S&P drop pulled from here). I believe that the coming recession (if it happens - see above) will not be as bad as 08 because many of the co-factors that made 2008 so bad do not exist here, but that it'll probably be worse than the Dotcom crash because the Dotcom crash was largely caused by over-speculation on internet companies (hence "dotcom" crash) and low interest rates. We don't have low-interest rates anymore, but I think co-factors here (namely high inflation) will mean this one is going to be worse. My unemployment prediction is similarly predicated on this recession being somewhere between Dotcom and 08 in severity. If we're somewhere between those two numbers (2% and 6%) then a guestimate of between 1 and 5% is reasonable.

  • I predict that legal hiring will probably recover within 12 months of the recession beginning, with again 50% confidence. Please note that this depends on the specific legal market in which you are trying to enter. Bankruptcy and litigation practices will increase hiring during the recession, because more people are going bankrupt and suing each other. Real estate, corporate, IP EDIT: specifically M&A (bankruptcy could be considered part of the "corporate" umbrella term, and I put IP here by mistake), and tech practice groups will have reduced or frozen hiring.

Law firms have taken steps since 2008 to try and avoid mass layoffs. With that in mind, the legal practice has only just recovered from 2008 in terms of raw employment numbers. Recently firms have shifted their recruiting approach. To quote from the Reuters article:

There has been a slowdown in law firm hiring for capital markets and mergers and acquisitions attorneys . . . the legal recruitment leaders said law firms are likely to be hesitant about doing mass layoffs as some did during the Great Recession and may opt instead for measures such as cutting pay.

Some practice groups are never busier than during a recession. Bankruptcies surged by just over 30% during the 2008 crash, and firms are preparing for this business to pick up. Similarly litigation is a counter cyclical practice that picks up during periods of a bad economy. It makes sense when you think about it. When the economy is good, people don't want to sue. When times are bad, they do. On the other hand, M&A tends to cool off in a recession.

I was accused of "LARPing as an economist" and "pulling these numbers out of my ass", so I thought I'd post them here for the Motte to give me a more rigorous examination.

One hour after this post was made: The housing market is in free fall with 'no floor in sight,' and prices could crash 20% in the next year, analyst says

Financial doom porn is a well worked business.

I think REPE had a much better chance of a big current correction - basically multi family buildings. These guys have less debt on their buildings so selling makes a lot more sense to raise capital for future opportunities. Basically more incentive to be mercenaries. If I can hit a bid on an apartment building at close to peak and reinvest it seems like a no brainer. I can immediately reallocate to higher yielding mortgages or investment grade credit.

SFH are just different because most properties have mortgages at 2.5%. And milking that cheap mortgage is way better than selling even at peak prices.

I predict that the housing market will experience a fall of at least Edited to "about" 20% within the next 6 months. I have about a 90% certainty in this.

I used to be sure about this, but I am not so sure anymore. 20% is a fairly small change given that prices are up 2x-ish in some urban areas over the last 5 years. But generally, I do not see a housing crash coming because:

  1. The increase in demand for housing is fairly organic. Young people want to buy houses.

  2. The supply cannot keep up with demand due to NIMBY policies disallowing building and the sorry state of public transit, which further discourages densification. (even the 'good' performers like NYC/Boston are struggling on transit lately)

  3. It is hard to default on low interest rate mortgages. Especially now that they aren't subprime.

The way I see it, a housing crash will require massive population shifts away from dense urban areas, and that simply does not seem to be the trend right now. We might see tech hubs suffering, with startup stocks being in the dumpster and a general move towards T2 cities like Austin/Atlanta away from the major hubs of SF/Seattle. Interestingly, NYC is seeing more of an internal readjustment as businesses move to other boroughs (LIC & Jersey City*) instead of moving out of the Metro area.

America's urban housing market seems inflated, but it has been fairly cheap when compared to Canada, London or Indian markets I know about (Mumbai, Bangalore, Delhi). For ex: my family's 800 sqft 2 bed apartment in Mumbai costs $600,000 while the average wage in the area is around $15k/yr. I know the Indian equivalent of 'Harvard grads' who have no idea how they'll be able to afford an apartment in the city. Canada has gone completely bonkers. Compared to global markets, the American urban market is surprisingly 'sane'.

So the questions are, what kept the American urban costs so 'reasonable' for so long (white flight? or just plain availability of space); and why would you expect the American housing costs to go back to being 'anomalously affordable' as we come out on the other side of this boom-bust cycle ?

Also, if the relatively insulated economy of the US with its affordable housing prices sees a crash, what's going to happen to Canada? (Maybe we'll find out if there is truth to the Chinese investors story)

My total-market 401k balance did not change in 2022 despite maxing out everything. If that does not say recession, then I do not know what does.

I am partly & selfishly hoping for a massive housing crash, because all my money is in stocks and I lost a ton of money, so I hope everyone else does as well. Everytime stocks crash and houses stay up, you see a massive wealth transfer from renting young professionals to the older homeowners.

Land Economics versus Structure economics is the big reason American prices didn’t go insane.

Structure costs follow construction costs.

Land costs follow either (A) ability to pay for a scarce good or (B) nearly unlimited supply and relatively free. Vast simplification but those two models roughly explain the US. A few cities (often due to lack of cheap transport job, land regulation (including Feds sitting on a ton of Cali land or density limits) etc) had a scarcity of land. So land prices sky rockets and lower interest rates boosted ability to pay. Obvious cities SF, San Diego, La, NYC.

The rest of America has no tightness of land. Houston just builds another ring around the city when it grows releasing more land. Other areas in Iowa can’t give away land. So for most of America there’s no scarcity of land.

In land abundance areas home prices mostly follow construction costs. If interest rates fall it doesn’t change construction costs. Sort of like Ford which can just build more cars Lennar can just build more homes. Supply chain did temporarily limit more building.

Basically America stayed cheaper because we had a release valve. Just move to Texas for a 4K sq foot 400,000 home was realistic.

I think 20% is conservative. Interest rates are likely going to rise another couple percent, and that alone would be enough to bring prices down 20% without any other factors (as mortgage payments would be the same). Although inflation is working against housing prices coming down.

In Canada, I think it'll be a massacre. Unlike the US, where people can get 30 year fixed mortgages, most Canadians are on 5 year terms that they have to renew. A bunch of people are going to be renewing from ultra-low rates over the next year, and it's going to be unmanageable for many. Further, many Canadians go with adjustable or variable rate mortgages. As interest rates rise, many have seen their mortgage payments increase by 50% (here's a thread on Reddit about it). Also, there are fixed payment mortgages that have become rather popular, where your payment stays the same, but the bank just reduces how much goes to principal if rates go up. Some people are basically paying every dime to interest. And once the next hike comes, it'll 'trigger' an actual increase in their monthly payment. Many of these people aren't aware that their payments are all going to interest, and likely think they've been building equity this past year.

When they go to renew, they'll be faced with the prospect of much higher interest rates, making their payment bigger, and the fact that they basically paid nothing on their mortgage, but 5 years of their term has passed. So we'll likely see people refinance. But refinancing may not be so easy if your mortgage is underwater or have little equity. So that means foreclosures and short sales will put more downward pressure on housing.

I don't know what the US is facing and how it'll affect things. But I'd imagine if mortgage rates climb ~3%, then a 20% drop in prices is basically guaranteed (aside from the government coming in and tossing money around). Though housing prices haven't dropped as much as I'd have thought (especially in Canada) with the increasing interest rates.

Notably Canada's also set for a much harsher recession than the US.

Both Toronto and Vancover have massive percentages of their economy and employment tied up in selling real estate to the world's wealthy that just isn't the case in the US outside NYC or California...

If housing crashes it will become a reinforcing cycle since thenhundreds of thousands employed in real estate would lose their jobs and be forced to downsize their houses.

Canada is actually a much poorer country than the US... depending on the swing of the dollar it's per capita GDP is closer to 40k compared with America's 60k... Canada is far more comparable with France where 1mil will buy you a literal castle in terms of it population's actual income... so if the housing market falls out, its probably not going to come back for a generation... especially when you consider Chinese migration and money is drying up

Timeframes wrong on 20%, prices will almost certainly fall that but it will be in real terms not nominal and take about 5 years. Very solid analyst with long term correct trade records (including me are in this camp)(calculated risks for one). And many big wall st investors have posted on this - Kyle Bass, David Einhorn, Ricky Sandler. A lot of these guys aren’t your go go bull guys especially Bass. Einhorn and Sandler have both been out bullish homebuilders. Bass just bought size in developable land in Texas.

What you are missing is the housing market is under supplied now. Anyone who bought before year end 2021 either has an origionally issued or refinanced mortgage at 2.5%. Leverage ratios for real estate PE etc are much lower than 2008.

The result is you wont see a crash in nominal prices of real estate. There won’t be enough forced sellers. People with 2.5% mortgages aren’t selling. Those things can be rented etc at fat profits.

So you will get a 25% real correction but it’s going to take years as new construction gets priced at construction costs and more units are built. Confidence - 100% - I don’t get these things wrong

Still a good time to sharpen your pencils for some distressed real estate as their will be a few people who over levered and look at some foreclosures but it’s not going to be many.

Proxies - buy big discounts in banks who make more money off higher rates but won’t get massive defaults due to less systemic leverage, buy homebuilders at 3-4 pe with a runway of demand and have clean balance sheets

Edit - had real and nominal backwards fixed it

prices will almost certainly fall that but it will be in nominal terms not real

I am sure we will enter a deflationary environment any day now

To clarify I believe the guys I’m referencing expecting 25% real decline is from peak real prices. So would already bake in some inflation.

OER going to hold up inflation for a bit. Depends how fast fed pivots on whether we get deflation,

So prices will fall in real terms after all?

I cannot understand your comments.

I’ve this entire time called for 20-25% fall in housing prices this cycle.

About 10% in nominal terms 10-15% inflation during that time.

So 20-25% fall in real terms

Well, your first comment said there will be no fall in real terms, so I think my confusion is reasonable.

You right I had real there where I meant nominal and nominal where I meant real. I guess I should proofread more

"Confidence - 100% - I don't get these things wrong"

Do you know that saying something like that makes me lose confidence in you? No one should be 100% confident about vague future things, and not realizing that is a pretty big strike against you.

(FWIW, I agree that any housing drop won't be that big -- I think also because there's a global move to finding 'safe assets' (still) and real estate is a pretty good one, at least in bigger cities. I'm only about 60% confident though, because I really don't do much in that economic space.)

Confidence - 100% - I don’t get these things wrong

Do you know that saying something like that makes me lose confidence in you? No one should be 100% confident about vague future things, and not realizing that is a pretty big strike against you.

It reminds me of a story Russ Roberts at EconTalk tells about about the Stanford professor Ron Howard. Ron used to require students to assign a confidence to each of their answers on an exam. He would adjust the points they got based on their certainty - the higher the probability the student assigned to his or her answer, the more points they got if it was right. And he implored students to never ever assign 100% probability to an answer, because if you assign 100% probability to an answer and it's wrong, you get negative infinity points and you fail the exam. Alas, some students still put 100% probability.

It seems unlikely that this professor had come up with a scheme where the optimum thing to do is to state your actual confidence in your answer, so exams would be passed mostly by finding the optimum ffunction of fake confidence to real confidence to put down. Having exams that get passed mainly on whether you can hack the scoring system rather than on whether you get the right answer is a bad idea.

Having exams that get passed mainly on whether you can hack the scoring system rather than on whether you get the right answer is a bad idea.

Agree because the world should be fair, but disagree because it isn't. Learning to "hack the exam" works very well in any organization, not just the academy. He's unwittingly preparing his students to play the stupid games they will play in real life.

That was heavy sarcasm at the original poster with no experience giving 90% confidence.

Especially since he entirely missed anything related to real estate finance on existing real estate.

Well, I'll just say I missed that entirely. I'm not sure if that's Poe's law, or something else (my own shortcoming? forsooth!)

Tangential development that isn’t yet large enough to be a systemic problem but is small-scale horrifying:

Since the refi boom is over and sales are slowing, originations departments are looking for ways to lower costs for consumers, so they can write more loans. One old, bad idea being kicked around again is attorney title opinion letters. And Fannie Mae has begun accepting them in limited amounts.

The attorney title opinion is a written letter from a lawyer that says based on the public records they were able to review, the title on the property you are buying is clear. It’s a cheaper alternative to title insurance, but what it isn’t, is title insurance.

Now, title insurers make good money. As an industry, they bring in billions in premiums versus paying out hundreds of millions in claims. But they also protect consumers against error and fraud.

Most homebuyers would surely love to save several hundred dollars in closing costs. But the ones that get burned and wind up in contested law suits are going to be out five figures in legal costs. Uncontested title resolutions run $1,500 to $5,000.

Most obvious application for Blockchain combination of NFTs and Cryptocurrency to eliminate the title insurance industry, n'est pas? Assign an irrevocable NFT to the ownership of the property, create an automatically executing contract upon the receipt of the correct amount of bitcoin, eliminate trust issues in real estate transactions.

Unfortunately actually setting up and maintaining that probably costs as much as the current title insurance scheme anyway.

If the bank forecloses on your house, or if the IRS puts a lien on it, how do they seize the NFT from an uncooperative owner? If you lose the password to the wallet with your house's title NFT, or if someone steals it, do you become homeless, or is there a process to issue you a new one? If so, how is the old one invalidated, and how does a buyer know that he's buying the legit NFT instead of a previously voided NFT? How do you end up not just having to buy NFT title insurance to check all of this stuff and insure against the risk of some weird edge case, on top of all of the gas fees you now also have to pay?

As most people here know, I'm a lawyer and I mostly work in the oil and gas industry doing titles, and while I've only done a few real estate titles in my career, O&G titles cover all of the same ground and then some, so I consider myself especially qualified to respond to this given that I spend all day looking at property records. This is a completely unworkable proposition.

First, there are interests other than outright ownership of the entire property that would affect the validity of title. Mortgage holders, holders of easements for utilities, oil and gas lessees, etc. The way it works now is that the property owner executes an instrument conveying the interest and it's the responsibility of the person receiving the interest to record it with the county. So who has the authority to edit the NFT? That's sort of a trick question because NFTs can't be edited, though the metadata can. The problem there is that if I can edit NFT metadata I can also edit away any pesky title defects and the whole issue is moot; I can't just mosey down to the local recorder's office and tell them to delete my mortgage from their records because I don't feel like paying for it. And it really would have to be editable by anybody because there are a lot of instruments relating to your property that are totally one-way transactions that you'd prefer not get on there. Like judgment liens, mechanic's liens, tax liens, condemnations, lis pedens, etc. And all this metadata would have to be viewable by the general public because there are a surprising number of people out there who need to know what is going on with property.

But these are all just technical problems; suppose you could create a publicly-viewable NFT system that can only be edited one-way that anyone can theoretically add to. Well, now you've just gotten us to the level of security of a title opinion and not title insurance. Because the real risk isn't what's out there but what isn't. I'll use an example to illustrate my second point:

Suppose an old man owns a piece of property and dies seized of it. He leaves no will, and has four surviving children. One of the children is appointed administrator of the estate and, along with the three remaining children, he executes a deed conveying the property to a third party. Except the old man actually had five children, one of whom moved across the country decades ago and has been dead for years. He had two children who aren't close to the rest of the family by virtue of distance and were minors at the time of the old man's death. The administrator didn't hire an attorney and no one in the family is particularly sophisticated when it comes to probate law. Years later the grandchildren find out about the property that had been sold out from under them and to which they were entitled to a share of the proceeds. The third party has since sold the property to you, and the grandchildren are now suing you to quiet title. Regardless of the outcome of the case, you're now stuck paying to litigate this, and this isn't the kind of thing that a diligent title search would uncover and isn't the kind of thing that could be entered into the blockchain, since no one knew about it until well after the transaction was already completed. In other words, this is exactly the kind of situation title insurance is supposed to deal with.

So who has the authority to edit the NFT? That's sort of a trick question because NFTs can't be edited, though the metadata can. The problem there is that if I can edit NFT metadata I can also edit away any pesky title defects and the whole issue is moot

The trick to this is that you have the ownership represented in an NFT and then have additional NFTs pointing to the title NFT to represent things like liens. This gets you to public and anyone can modify it. Then you have the normal legal infrastructure in place with a backdoor ability to void NFTs and punish people minting them illegally.

Yep. That could work. And then you've essentially replicated the existing system except with NFTs instead of instruments recorded with the county. Except without a team of clerks screening the instruments for basic legal requirements and making sure everything is indexed properly. So now it's like a recorder's office where there are signs and pamphlets telling you what to do but where everyone is left to their own devices jamming things into folders and creating their own index entries. And this is supposed to eliminate the need for title insurance?

It's supposed to essentially centralize things, ironic for crypto I know. Especially from a bank perspective being able to see at a glance the state of a title without digging through obscure county records is a win even if it doesn't completely eliminate title insurance. Hell, you could probably run automated health checks on securities this way.

I don't know what you think the current system is like, but to a large degree it already is centralized, at least as centralized as it could possibly get using blockchain; what do you think a county recorder's office is for? Computerized records and uniform parcel identifiers have made things a lot easier, at least as far as instruments recorded in the past 20 years or so are concerned. Hell, I'm at a recorder's office right now and I can enter a parcel number into the computer and it will tell me every instrument cross-referenced to that parcel number that was recorded since they started doing these things. And the system is available remotely. If I want to record something in this system I have to follow specific guidelines set by the county to make sure that I actually identify the property correctly, include all the necessary notary stamps, etc. And they will take time to make sure that everything is appropriately indexed and cross-referenced. Switch over to a blockchain that anyone can theoretically edit and now you're going to have every Joe Schmo who has no idea what he's doing entering instruments that only cause more title defects and situations where things aren't appropriately indexed or cross-referenced. If you don't think this will happen, go to your local recorder and ask the clerk for some war stories about people who try to write their own deeds without the assistance from an attorney, or how many people ask about "getting someone's name on the deed", or off the deed. Or go to a recorder's office in rural parts of West Virginia and try to run a title and see how things were done there prior to the 1990s, when clerks would apparently record anything and everything that was presented to them. And this doesn't even get into all the specific oil and gas stuff where things really get wild and wacky.

Isn’t the big issue that all of this can be recorded in a government database instead of a blockchain. And a government judge is the one who at the end of the day decides all these title issues. Being that the government still has the monopoly on violence and the blockchain doesn’t have a single soldier it’s the government that ends up enforcing the title.

And the people trying to enforce their title sort of prefer the titles recorded with the person with the monopoly of violence.

Title for blockchain has been around for 7-10 years.

Honestly the only blockchain thing I believe has some potential is ad attribution that Antonio Garcia’s doing but maybe I just don’t know the intricacies of that industry.

Russia proves the problem with blockchain for a lot of contracts. You want the enforcer of a contract to have a violent force. The Minsk Agreement on a smart contract doesn’t stop Russia from invading.

Yeah, that's part of it, but it wasn't the particular point I was trying to make. The bigger point I am trying to make is that land titles aren't simple A --> B transactions; they're really complicated. Various interests in a piece of property can be divided and subdivided and sold and reconstituted with the parent tract and each one of these interests would need a separate NFT created for it and yeah, maybe you could theoretically do this but at best you'd just end up with a more complicated version of the existing system. And then you add the complicating factor that a lot of things that affect title aren't filed with the recorder, but with the civil court, or with the probate court, or the tax assessor, and now you essentially have to put every shred of paper in the county government on the blockchain somehow in order to make sure everything is covered.

And even then you still wouldn't eliminate the need for title insurance, because title insurance largely protects against issues that occur outside the existing system. You can implement as many recording requirements as you want, but there will always be title issue which, by their very nature can't be determined simply by looking at records. I would add that blockchain for contracts may be a thing but deeds aren't contracts and title insurance isn't insurance against someone not following through on their end of the deal. Honestly, I'm not entirely sure what your getting at here or what your understanding of the current recording system here in the US is, so I apologize if I'm misunderstanding you, but I'd be happy to answer any questions you may have.

Isn’t the big issue that all of this can be recorded in a government database instead of a blockchain. And a government judge is the one who at the end of the day decides all these title issues. Being that the government still has the monopoly on violence and the blockchain doesn’t have a single soldier it’s the government that ends up enforcing the title.

This is part of it: existing proof of work is absurdly inefficient compared to a trusted database. Even proof-of-stake is still much more complex if a trusted party exists.

But I'd also point out that blockchain-related attempts to create their own governance have been doomed to slowly recreate much of the existing governance stack. There are already instances of "code is law" being worked around because software developers can find the same sort of loopholes that lawyers are famous for. I'm not going to say it's completely insurmountable, but it seems quite likely that these sorts of issues will continue, requiring the creation of a legal apparatus that looks a lot like a centralized court.

Many of the interesting use cases for "blockchain" (much of the traceability) really depend on Merkle trees that are ubiquitous in cryptocurrencies. Merkle trees are really useful, but don't strictly require the expensive distributed proofs in many interesting cases.

Candidly, my knowledge of the housing industry outstrips my knowledge of cryptocurrency.

But, my first thought is that, no, I do not want decentralized titles. I explicitly want centralized titles. I want a lawyer, and a county clerk, and a judge, all talking about who owns what for most people will be the most expensive purchase(s) of their lives, if there is any sort dispute. I do not want ownership of my home tied to password security. I want wet signatures, and I’m bringing a blue pen, so I know if a document presented at a later date has been so much as photocopied.

But, my first thought is that, no, I do not want decentralized titles. I explicitly want centralized titles.

Right now titles aren't really that centralized, which is the whole purpose of title insurance. What I'm proposing is centralizing them.

What I'm proposing is centralizing them.

Then why not just have the state run a database instead of using the blockchain? At least a database doesn't come with gas fees, and errors can be corrected via legal process.

This is called Torrens title, and it is the norm in the world outside the US. The goals of the system are the mirror principle (the register reflects the title, so that anyone who knows they are dealing with the registered proprietor can buy the property without needing to investigate the title or pay for insurance), the curtain principle (anything not needed to deliver the mirror principle, such as the identity of the beneficiaries if the registered owner is a trust, is off the register), and the indemnity principle (anyone who loses money due to the registrar's error, such as allowing a forged deed to be registered, is indemnified at public expense). The details of how this is achieved varies subtly between jurisdictions, but in all case the key is that a State-maintained centralised register is inherently as trustworthy as the underlying State-enforced land title (so blockchain adds no value).

Googling suggests a widespread lack of curiosity as to why the US has not adopted Torrens titles. The best good reason I found is that land law is a State function, and the States cannot impose a register-it-or-lose-it rule on the Feds as applied to e.g. Federal tax liens, meaning that a State-issued Torrens title could not be a true mirror. The likely bad reason is that title insurers have successfully lobbied against the change.

The S&P 500 is down 22% YTD.

The real damage is in the bond market. Brutal. And also Nasdaq. the DJIA has done well though .

everyone looking at the CPI https://fred.stlouisfed.org/series/CPIAUCSL

The selling seems overdone. CPI gained 14% over the past 2 years from 260 to 296. Assuming a baseline increase of 2.5%, this is an overshoot 9% over 2 years, or around 4.5%/year. Yet this was enough to obliterate fixed income and cause a bear market elsewhere. I think it's much more likely CPI will revert to the long-run 2.5% trend than stay at 7%/year. A 10 year bond at 4% means a real return of -3%/year if CPI stays at 7%/year for the next decade, which would be worse than the 70s.

The real damage is in the bond market. Brutal.

My HFEA experiment has definitely not been happy the past couple of months...

If I believe this—though I definitely find 90% too high—how can I take advantage of it? Bonus points if the strategy doesn’t I involve options.

I want to get into a house within the next year or two. Most of my assets are pretty liquid, and I can afford a decent down payment.

You could go for a short real estate ETF:

https://etfdb.com/etfs/inverse/real-estate/

Though it's likely their internal implementation uses options, that's opaque to buyers.

those decay really fast, so you have to get the timing right almost exactly. There are not really any good ways of betting against real estate that does not involve market timing. A better way would be to combine an ETF short with a long-stocks play. Something like going long SPY and shorting VNQ would have worked well. This takes advantage of the high correlation of the two but the tendency of VNQ to be weaker then the S&P 500.

I think there's an interesting phenomenon where if somebody says "I'm pretty sure X will happen" then people are like "yeah, okay, I could see that" or "nah, I don't think that's true" whereas if somebody says "I think there's an 80% chance that X will happen" people will respond with "WHOA there, look who's larping as an economist with his fancy percentage points"

Possible solution: Say "I'm pretty sure X will happen. Let's say 80% sure." Sounds very unassuming that way.

The problem is cultural. Around here, when someone makes an 80% prediction of a specific event, we know they're publicly stating their priors to make themselves clear and so they can check / other people can check their rationality later. To general internet-goers, making a quantitative prediction that specific sounds ludicrously overconfident. (Not only will it happen, but you know down to the percentage point how likely it is? Mind showing your math, Mr. Silver?)

so that gets us to the question of how much of a difference in practice there is between "80% +-20% chance" vs "80% chance +- 0%" of a thing happening. I suspect in practice not much? Since anything that feeds into your meta-level uncertainty about a probability score should also propagate down into your object-level uncertainty of the actual thing happening.

Could somebody please convince me that "80% +-20% chance" is a coherent thought.

If I say "there's a 10% ± 5% chance AAPL will increase by $100 today" and you say "there's a 10% chance ± 30% chance AAPL will increase by $100 today" and then it happens, who do you trust more?

For the record I'm definitely not convinced that "80% +- 20% chance" is a coherent thought.

Here's a thought experiment: I give you a coin, which is a typical one and therefore has a 50% chance of landing heads or tails. If I asked you the probability it lands on heads, you'd say 50%, and you'd be right.

Now I give you a different coin. I have told you it is weighted, so that it has an 80% chance of landing on one side and 20% chance of landing on another (but I haven't told you whether or not it favors heads or tails.) If I asked you the probability it lands heads when flipped, you should still say 50%.

That's because probabilities are a measure of your own subjective uncertainty about the set of possible outcomes. Probabilities are not a fact about the universe. (This is trivially true because a hypothetical omniscient being would know with 100% certainty the results of every future coinflip, thereby rendering them, by a certain definition, "nonrandom". But they would still be random to humans.)

My first thought was that I agree with you. The second thought was that you can have a confidence in your confidence. My third thought was that that should baked into your primal estimation, and that if you're saying 80% +/- 20%, you're really saying something like 70%. Does it really make sense to be saying, hey, there's a chance I'm 99% sure, but it's only 10%??

These things really only make sense with repeated results anyway. A single event happens or it doesn't.

If you felt a real need to give more details on your prediction, I think it would be more interesting to give buckets, e.g. I expect the housing market to

5%: shrink > 15%

30%: shrink 5 - 15%

60%: stay flat, changing [-5, +5]

12%: grow 5 - 15%

3% grow > 15%

OTOH, thinking about this more (which makes me think that someone smarter and with more statistics has thought more about this), this still doesn't capture the idea of confidence. What if I don't know what a house is, and you ask me this? Can I really make any meaningful statement? I think I could say 50/50 grows or shrinks, or 90% doesn't change more than 95% (because few things do), but it's hard to capture what it means to have little certainty.

i think if it's a binary choice 50% is exactly right since if you don't know what a house is, no process of reasoning could get you better than a coin flip as to the right answer. Similar if you have N different choices where you can't distinguish between them in any meaningful way.

If you never get any subsequent information about the problem, there's no difference. Either way, you'd let an ignorant stranger bet with you (in any amounts large enough to ignore transaction costs and small enough to ignore decreasing marginal utility of money) if they were willing to at less than 4:1 odds, but not at any higher odds.

Once you allow for updating on subsequent information (including as little as "there exists a possibly-non-ignorant stranger willing to take the other side of the bet"!) ... I'm not sure how to interpret the "+/- N%" chances quantitatively for N>0, but there's at least a qualitative difference between "I don't care if the President of Thing has already pushed the Make Thing Definitely Happen Tomorrow Button, there's still a 20% chance the button's broken" and "a drunk at the bar wants to put up his $20 against my $80, and with that kind of high-rolling stake maybe he knows something I don't; better not risk it after all."

Trying to figure out how many yearly predictions you'd need to make to calibrate error bar estimates. "out of 7163 80%+/-10% predictions, my average error was 7.3%..."

I think the normies are at least partly correct here. I think it's a mistake to say "I don't have a methodology for actually calculating my Baysean priors, but let me put a number on it anyway just to make myself more clear." You are not actually clarifying your position, you are obfuscating it.

In science, the concept of significant figures is extremely important because you have to represent the precision of your knowledge accurately. Lets say I have 1kg of lead and lead has a density of 11342 kg/m3, how many m3 of lead do I have? 1/11342 = .0000881679. Is it accurate to say I have ".0000881679m3" of lead? No, because that's representing an inaccurate degree of precision in my knowledge.

I think people reporting a Baysean prior of "90% confidence" are usually committing the same mistake -- they're misrepresenting the precision of their knowledge. Normies pick up on this and interpret it (correctly) as ludicrous overconfidence.

I do wonder how precisely the human mind can really internally assign confidence, without augmenting it with external tools. If most people can only hold 7 items in working memory, maybe there are just seven buckets of confidence; offering a probability out of 100 just comes off as wildly overconfident, unless you actually show your work. With that understanding, someone saying something will happen is communicating the precision more accurately compared to someone saying they assign a 90% probability to something.

The way to test this is to go around saying, "90% of confidence plus or minus blah blah blah"

If normies intuitively understand significant figures and uncertainty, the blah blah amount will influence their reaction.

If normies are disgusted by numbers and wanna-be-economists, then the uncertainty wouldn't ever matter.

90% of confidence plus or minus blah blah blah

Unless you are using some transparent methodology to calculate the confidence interval, this is even worse than just saying 90% because you are now claiming to know both your priors and the uncertainty of your priors with high levels of precision.

The normie can, and probably will, also doubt how accurately your confidence interval is calculated.

(And that assumes a normie who understands the term. Intuitively understanding X is not the same as understanding all the terms used to describe X.)

Probably because these things are hard to quantify. To say that there is an X-percent chance of something happening with a high degree confidence means you need a lot of datapoints, which the OP doesn't have. It's a problem with forecasting in general, not just finance.

Eh, I doubt it's anything that logical. "Pretty sure that X" is, I think, just a colloquialism whose meaning is synonymous with "roughly 80% chance of X", similar to how "I'm basically certain of X" cashes out to "roughly 98% chance of X". Do you think of these statements as being fundamentally different in some way?

Humans can't count as high as 100, and {"maybe", "possibly", "probably", "likely", "definitely", "almost certainly"} aren't shorthand for different numbers. Remember that, at scale, people don't differentiate between 95p and 99p and 99.99p.

I was accused of "LARPing as an economist" and "pulling these numbers out of my ass", so I thought I'd post them here for the Motte to give me a more rigorous examination.

If true, that still only makes you like most redditors. On a legitimate econ sub (and I'm really only thinking of Badeconomics here) you would probably at least get people giving you some counterarguments if you posted something with this much effort. You might be overconfident but there's nothing wildly wrong at my initial read.

Almost anyone who closed on a house in the United States in the last month paid more for that house than it is worth today. Where I live, homes saw about a 65% increase in value over the last 2 years. In the last few months, they've decreased by between 5% and 10%. Will they lose another 10% in the next 6 months? That doesn't seem like a completely crazy prediction to me, I've lived through enough housing cycles to know how wildly prices can swing. But anyone who owned their home before COVID-19 will still be "up" well over 30%, and most will have mortgages in the 3%-4% range. By contrast, in 2008 it was common for people to be carrying mortgages at over 8%, and second mortgages covering their "down payment" (to evade the cost of PMI) at well over 10%. Barring an extreme and sudden spike in unemployment, people are just not going to be losing houses the way they did in 2008.

(In my own area, inventory is a tiny fraction of what it was five years ago. As prices cool ever-so-slightly, supply might finally be starting to catch up to demand... but it's not going to close that gap overnight.)

Recession, yeah, I think there's a pretty broad consensus on that happening. I think we get some hard numbers a week from today? But the practical implications are unclear to me. I think the whole world is still, essentially, finding its footing post-COVID. In the U.S. we responded by debasing our fiat currency to an unprecedented extreme, so we can't expect a quick return to equilibrium.

I'm conflicted about this; on the one hand, international relations are disintegrating all over what with Russia and China events, and we can expect this to cause even further mass disruption in the economy. On the other hand, large language models seem to be the real deal in terms of AI taking over more and more low-skill tasks, and that's going to unlock a huge amount of productivity as we continue to scale up. This would be mostly in the US where all of this is taking place.

I do not believe the vast majority of major economic actors are particularly tuned-in to all the crazy shit going on in AI and why it matters; this is evident from, for one thing, the fact that neither third-party nor first-party analyses of Shutterstock (hobby horse of mine, I know) do not even mention AI as a plausible risk factor in the coming year in spite of the fact that groups are already successfully using AI-generated images as a stock image replacement. Admittedly instances of this aren't frequent, yet, but I'd be shocked if this didn't change in the coming 1-2 years, especially if we do see a depression (leading to cost-cutting across the board.)

That makes me believe even very-obviously-incoming AI advances are not actually priced into most economic indicators, including stock prices. Not sure whether, on net, we can expect economic indicators to improve or degrade going forward given all these facts.

I agree with you that people are sleeping on the huge recent advancements in AI.

But I don't think there's much of a sweet spot between "productivity gains" and "destruction of the human species". Maybe a few years at most. Certainly, there have been almost no productivity gains in the last couple decades in the Western world (less than 1% per year).

Yeah, I'm concerned about the "destruction of the human species" angle. I've been mulling over whether in surviving timelines TSM is disproportionately likely to get destroyed by China, thereby stalling AI advancement and also plunging the world into a depression since everyone needs their stuff.

We don't need TSMC for AI. If TSMC were destroyed tomorrow, it might set us back a year or two but it's not really a bottleneck. Software algorithms advance by orders of magnitude while hardware advances only linearly.

Moore's law says that hardware advances exponentially - and a lot of progress in modern AI is about adding more computing power to relatively simple algorithms.

If I needed an AI to tell me how to fight Omega in 2032, I would take 10 more years of Moore's law used to add more nodes to GPT3 over 10 more years of AI research used to implement better algos on existing hardware.

already successfully using AI-generated images as a stock image replacement

Can you point me to any examples? Besides that one Atlantic article that used an AI picture of Alex Jones

Sure. https://stratechery.com/2022/the-ai-unbundling/ did it for their article and https://www.thebulwark.com/trumps-save-america-scam/ credits midjourney for their cover art-- the latter is significant because the article has nothing to do with AI. I'd expect this kind of thing to start with small, cost-conscious, less fearful-of-controversy venues and then to accelerate to larger venues as it becomes normalized.

EDIT: I probably shouldn't use the stratechery article as an example, since it's actually about AI advancements and I figure it's better to discount that sort of article in gauging ai art acceptance.

Can you expand on what you mean by housing crash?

A wave of defaults and foreclosures? We don’t have the same ARM bomb exploding. John Q. Public has a fixed rate loan, today.

Residential mortgage investment vehicles losing value? Home prices losing value? Supply still does not need demand in many, many metro areas where people want to live. There’s left- and right-NIMBYism rampant in zoning laws and planning commissions across the country. Lenders are currently laying off 25% of their originations staff, because no one is refi-ing into a 7% fixed-rate, and the price of homes is starting to level off, but there might not be a dramatic fall in prices because of the housing shortage in desirable areas. A moderate drop in home prices combined with a significant decrease in the rate of home sales is a very reasonable possibility, as buyers who can’t pay cash hold on to their current homes.

And, unsolicited advice for anyone who didn’t put 20% down on their mortgage. If you think we’re at the top of a bubble, now is a good time to call your lender, schedule an appraisal, and if you still have it, see if you can drop your PMI, because you now hopefully have 20% equity in your property.

I predict that the housing market will experience a fall of at least Edited to "about" 20% within the next 6 months. I have about a 90% certainty in this.

Is a large percentage of your net worth currently invested into puts on real estate ETFs/indices? if not then your numbers don't make sense. That is incredible confidence to have in the domain of markets and you could make a lot of money if you're right.

VNQ (Vanguard REIT index) is already down 31% YTD. Most REITs already trade well below their net asset value. So if you want to speculate by buying puts, you're late to the party. Speculators have already priced in a huge decline.

I wonder: I currently have a significant and leveraged position in real estate. My expectations for medium-term performance of real estate are now lower than what they were originally; exiting that position is expensive, though. What's the rational way to compensate?

I'm not sure you can compensate. All the real estate proxies are down much more than property prices. For example, Vanguard REIT index (VNQ) is down 31% this year. Investors are already pricing in the future decline in property prices.

So I guess maybe do the opposite. Sell the properties if you can, and then buy VNQ instead, which trades far below net asset values.

Edit: If you long-term loans locked in at low rates, then do nothing. Your properties might look bad now, but a 30 year loan at 3% is gift that may never come again in our lifetime.

Investors are already pricing in the future decline in property prices.

A price drop in VNQ could reflect an expectation that property prices will fall, but it could also reflect an expectation that the rent-price ratio will fall, that the risk-free interest rate will rise, or that volatility will rise. How can you tell which it is?

The main way a risk in the risk-free interest rate hurts REITs is by causing a fall in the price-rent ratio, and therefore in property prices. So I don't think the distinction you are trying to make here matters.

You claim the main effect is interest rate hike -> home prices down. This makes rational sense.

However, when interest rates literally doubled and then halved during the 1970s and 1980s, housing prices didn't budge. This contradicts both what you'd expect if home-buyers were making rational decisions and what you yourself are claiming is happening now.

The price-rent ratio varies dramatically across cities despite a single national interest rate.

Both these facts should make you suspicious of models that assume home buyer (and therefore home prices) are rational.

Moreover, the fact stocks have declined by 22% suggests that the same thing caused both the decline in the VNQ and the stock market. The most parsimonious hypothesis imo is that interest rates caused institutional investors to deleverage and made bonds look relatively more attractive.

My expectations for medium-term performance of real estate are now lower than what they were originally

Your current expectations vs your previous expectations isn't actually what matters. It's your current expectations vs the markets current expectations. If you expect real estate to do worse than the market is implying this creates an incentive towards exiting your position. However given the structure of the real estate market there are also incentives towards holding your position (ie you live in the house and would incur significant costs to sell and move), unless your disagreement with the market is particularly strong your best bet is probably to suck it up and hold your position while continuing to deleverage (ie paying your mortgage)

Monthly mortgage payments have historically been fairly stable so one would think that the recent increase in mortgage interest rates will cause a drop in prices. Lending tree's mortgage calculator tells me that a loan on a $360,000 home (20 pct down) at 3.5% --> a monthly mortgage of $1293. At 7%, that same monthly mortgage translates to a home price of about $245,000 (though if you put the same %72,000 down as you did on the $360,000 home, you can afford a home of $270,000)

The market should have crashed in 2020, but it didn't because COVID. All of a sudden millions of people had the flexibility to move away from their place of employment because of work from home. Fully 60% of the home-buying surge was fueled by this trend according to the Fed, whose numbers I have no reason to mistrust.

I think this undersells the extent to which home prices were a product of the increase in monetary supply. We're looking at increase in M2 from ~$15.5 trillion to $18 trillion in one quarter, then continuing up over $21 trillion in the next few quarters. The United States has never spiked monetary policy to that extent and any naive observer would assume that the money created is going to go somewhere. With the combination of fiscal stimulus and constrained supply of normal goods, I was completely unsurprised when housing prices spiked sharply.

I think you're right that interest rates should suppress the rise and maybe even cause a slight downturn, but I think you're underestimating just how large the impact of adding 30% to the money supply is. I would also expect the change in interest rates to have something of a lock-in effect - sure, the demand for new mortgages is going to drop, but so is the supply.

We're looking at increase in M2 from ~$15.5 trillion to $18 trillion in one quarter, then continuing up over $21 trillion in the next few quarters. The United States has never spiked monetary policy to that extent

For some reason any analysis of M2 or money supply I see completely ignores the FED policy of paying interest on reserves that was introduced in 2008 with specific purpose of sterilizing effect of quantitative easing on inflation - which is a stupid policy if you ask me, but it is what it is. Interest on reserves basically turns money supply into substitute for treasury bills and thus renders analysis of most amateur economists who like to show "exponential growth of money printing" moot.

Could you expand on this?

It is really simple. Since 2008 FED pays interest on cash that banks "deposit". So let's say FED buys government bonds from bank by printing money, but it also offers interest on money that the bank deposits with FED. So there is no incentive for banks to do anything with that money such as loan it or buy some other instruments. The cash basically becomes interest yielding vehicle. As you see right now FED pays 3.15% interest to any bank that does not move money from their reserve account. So they don't do it, easy as that.

Lay doomer take.

I’ve been expecting a recession since late 2020 and was surprised that it took until q1 2022 to actually arrive. You think the fundamentals aren’t as bad as 2008 - I disagree. The 2008 financial crisis was a US-created speculative bubble that had knock-on effects in other countries. The EU was stronger then. China was ascending. Russia was not engaged in self-immolation. There were limits for how much damage US housing speculation could inflict.

Right now, all I see are dominoes. Europe is facing a major energy crisis. Russia’s economy is being strangled. China was always a house of cards. The current US administration does not appear capable of recognizing things that have already happened, let alone accurately predicting coming events. We ate a lot of seed corn during COVID, and have continued feasting afterwards too. What possible backstop is there against a major downturn?

—

I think your evaluation of legal hiring is a bit optimistic, though your identification of “safe” areas of law is apt.

Since 2008, the big 4 consulting firms have been building larger legal services departments. It has really only been large corporate legal departments, which are almost entirely composed of biglaw alumni, that has kept corporate finance from moving the largest part of legal work to cheaper legal services providers. Recession-type hits to the bottom line should be enough to force gc’s to look for ways to trim the legal budgets, which will mean moving significant amounts of money away from biglaw. Cut off those revenue streams from biglaw firms, and I think you will see hiring freezes generally while law schools continue to churn out new grads. If and when the law firm hiring picks up again (expect a lag behind the end of the recession) you’ll have double or triple the number of applicants looking for the same number of jobs.

I predict the major earthquake for law to be ABA permitting Arizona-style changes to rules about who can own a law firm, meaning Deloitte can have its own subsidiary law firm covered by MSAs that already exist with most fortune 500 companies. If that happens, biglaw is going to take more than a haircut.

I predict the major earthquake for law to be ABA permitting Arizona-style changes to rules about who can own a law firm, meaning Deloitte can have its own subsidiary law firm covered by MSAs that already exist with most fortune 500 companies. If that happens, biglaw is going to take more than a haircut.

Could you elaborate on what you mean by changes to rules about who can own a law firm? I'm a 1L so I'm only just starting to get a grasp on these sorts of things.

Current ethics rules in most jurisdictions state that lawyers cannot be managed by non-lawyers. This extends to ownership of law firms - they can’t be owned by corporations or other non-lawyer entities.

In 2021, Arizona broke with the majority and made it so that non-lawyers can hold an equity stake in a law firm. It has been piquing interest from legal-adjacent entities.

https://news.bloomberglaw.com/us-law-week/litigation-finance-companies-eye-law-firm-ownership-in-arizona.

Biglaw took a major hit in 2008 that it never really recovered from and will take another one when tight belts force companies to get creative in how they deal with legal needs.

Ethics rules typically prohibit non-lawyers from entering profit-sharing agreements for legal services. Arizona has loosened these restrictions in recent years to allow non-lawyers to be partners in law firms. The reasoning behind this move was that lawyers aren't necessarily the best business people so larger law firms could get an advantage by hiring experienced corporate managers.

As an attorney whose practice includes bankruptcy (though not so much lately), while recessions can certainly cause bankruptcies, the bankruptcies themselves normally don't happen until the recession is over and recovery begins. The one caveat is that this is true of consumer bankruptcies; I can't speak for business bankruptcies since I don't handle them. But basically, a person doesn't immediately go bankrupt upon a recession happening. First, there's normally a lag between the recession hitting and job loss. Sales slowly decline, work dries up, people are gradually let go. Then they get unemployment for six months, which they may or may not be able to make ends meet with. Some people are already overextended and the job loss is a disaster. But either way it takes a while before the credit card charges start to add up. Then it gets to the point where even making minimum payments becomes a challenge. Then the recession ends and they get a job making comparable money to before but there's so much extra debt and various arrearages that it doesn't solve the problem. I would add that if we're still in the throes of recession and an unemployed client approaches me about bankruptcy, I'd probably advise against it for the simple reason that it won't do anything. Bankruptcy is only worth it if the debtor will be on sound financial footing afterwards. If debt is eliminated but the person is immediately forced into taking on more debt due to lack of income, they're quickly back in the same position but without bankruptcy as an option. On average, I'd say it usually takes about 9 months to a year after a recession hits before consumer bankruptcies start to pick up, and they don't really peak until 2 or 3 years afterward, for the simple reason that bankruptcy is the kind of thing people put of as long as possible, even if it isn't the best strategy.

I predict that the housing market will experience a fall of at least Edited to "about" 20% within the next 6 months. I have about a 90% certainty in this.

You can bet on this, indirectly, by shorting RET etfs, but I think the likelihood of this happening is low. I think it's vastly more likely bitcoin will fall 20% than home prices. Home prices rose in the 80s and 90s despite high interest rates.

and the S&P500 drop 57%. The DotCom crash saw Real GDP fall by 1.6%, unemployment reach 5.9% (a rise of about 2%), and the S&P500 drop 62% (S&P drop pulled from here). I believe that the coming recession (if it happens - see above) will not be as bad as 08 because many of the co-factors that made 2008 so bad do not exist here, but that it'll probably be worse than the Dotcom crash because the Dotcom crash was largely caused by over-speculation on internet companies (hence "dotcom" crash) and low interest rates.

I would not be bearish on stocks , for two factors: record corporate profits, strong consumer spending both domestic and aboard, such as China. Even with high inflation and high interest rates, this will not change much unless there is a major recession like 2008 again. The economy and stock market did well in the 80s and 90s despite even higher interest rates than today. The fed is trying to get unemployment to rise to tame inflation, but this may not be enough to spark a bad recession, maybe only a mild one like in 2001.

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