August 11, 2013

A Divergence From Underlying Fundamentals

Readers suggested a topic on housing shortage. “I know Ben just made a statement yesterday that there is no housing shortage anywhere. Here is my simple question: If there were a housing shortage in a particular market (physical homes vs. people who want to live there), how would that condition manifest itself in the data? In other words, what data should we be looking for in order to see if there IS a housing shortage in a market?”

“From what I understand of markets, what you should see are ALL of the following conditions:

1. High prices;
2. Low vacancy rates (including vacant homes held by financial institutions, and vacant homes that are in the middle of foreclosure);
3. Problems with overcrowding; and
4. A high ratio of population to housing units (related to #3).

If you do NOT have ALL of these, then whatever perceived ’shortage’ is due to circumstances that can easily change.”

A reply, “I think the more specific question could be, ‘Is there an organic housing shortage, versus an engineered housing shortage?’ What does an organic (market-driven) housing shortage look like? What does an engineered (government, large financial entity-driven) housing shortage look like? Enron was able to make it seem like there was an electricity shortage in California. Goldman and JP Morgan are doing that sort of thing with certain metals.”

One said, “There is no shortage of housing nationwide, assuming we were in a ‘free market,’ and people could take their jobs with them. But in a country where jobs are being concentrated, governments at all levels are pulling out all the stops to artificially keep housing prices high (and to keep out the riff-raff), there are going to be areas with manufactured ’shortages.’”

“NYC apartments……$3 million? Compared to not untypical prices in typical BFE (in this case, Eastern Colorado): Strasburg……1996 1500sf modular home, on 20 acres, with 2 car attached garage and 30 x 50′ metal barn/shop. = $275K. Byers…….1919 built, remodeled in 1960 1600 sf house (IOW, a fixer)
with 40 acres and outbuildings = reduced to $215K. ”

“I don’t know about you, but if we go full-on Zombie Apocalypse, I’ll take my chances in Eastern Colorado. Maybe I’m old fashioned, but 3 mill for an apartment is defacto evidence that somebody is insane. Of course, $3 million is cheap, if you are a Goldman Sachs blood sucking squid, stealing $150 million a year from Grandpa’s pension funds.”

One had this, “There is an alleged shortage here in Pinellas County, FL. I drove through a neighborhood today that had several abandoned properties. One had kudzu growing through and about the entire pool cage, roof, and front.”

And finally, “The only satisfying answer you will get is the one you have already made up. As the largest housing mania in history unwinds, none of the changes will make any sense to you. I met a couple in their 60s on the Canadian waterways. They had given up their retirement home to move to Kingston, so as to ‘help’ their two sons. The boys are rising RE speculators and are buying up houses to rent and flip by the hundreds. Everyone wants to live in Kingston. There is a housing shortage in Kingston. Prices are high in Kingston.”

“Down along the shore a few miles is Toronto, from which a shock wave is emanating. Kingston just can’t feel it yet. More properties for sale along the Rideau waterfront than I have ever seen. Numerous whole islands for sale, which hasn’t been seen in my lifetime.”

From MyWealth. “AMP Capital’s chief economist Shane Oliver says that although he has been concerned about Australian housing for a decade, it is not in a bubble. ‘It is expensive by global standards with house prices still running above long term trends,’ Oliver says. ‘Rental yields have gone up but they’re still pretty low and price to income ratios are quite high so on my analysis it is still overvalued and it is vulnerable, but I don’t think it’s in a bubble.’”

“Oliver argues that when you look at bubbles historically, they are characterised by a divergence from underlying fundamentals and a momentum of their own, with price gains feeding on price gains. While we may have been in this position a decade ago around 2003-04, Oliver says that this pressure has now largely eased and that ‘in the absence of a trigger for a collapse it’s hard to see a sharp fall.’”

“That trigger which would drive the devaluation of property could be one of two things, according to Savanth Sebastian, economist at CommSec. The first could be a surge in interest rates which, Sebastian says, is unlikely given the Reserve Bank of Australia has been cutting interest rates and believes inflation is well contained. The second trigger would be an increase in unemployment. ‘Massive job losses would mean people rethinking paying off their property,’ Sebastian explains. ‘And yes – the mining services sector is pulling back but there’s a significant amount of other hiring that’s taking place in finance, education and health. It’s very hard to see unemployment go past 6% and I think that seems to suggest property will remain relatively resilient.’”

“The other factor that Oliver says would suggest we are not in the midst of a housing bubble is the lack of new construction that usually accompanies a bubble’s rising prices. ‘There was a bit of that a decade ago, but now vacancy rates tend to be quite low. Most estimates I’ve seen suggest we’ve been underbuilding to the tune of about 30,000 houses per year,’ Oliver said. ‘I know that a lot of people look at that and point to houses up and down the coast which are vacant, but they are holiday homes which people aren’t going to put in the market.’”

The Santa Cruz Sentinel in California. “Something statistically unusual in real estate popped up for the first time this year: Three homes in Santa Cruz sold for $1.5 million or more in a single day. This real estate trifecta is a relatively new phenomenon, according to a spreadsheet of million-dollar sales created by Gary Gangnes of Real Options Realty. It happened three times in 2000, the year of the dot-com boom, once in 2011 with the dot-com bust, but not at all in 2002, after the economy was shaken by the Sept. 11 terrorist attack the year before.”

“In 2004, sales for more than $1 million took off, and trifectas became more frequent. In 2005, there were six. In 2006, there were two trifectas and March 30 marked the first and only time the county recorded four sales for $1.5 million or more. Since the housing market collapsed, the trifecta has become a once-a-year phenomenon at best. Agents Steve and Dianne Pereira, who specialize in beachfront homes, reported ‘the upper end is still slow.’”

“Tom Brezsny of Monterey Bay Properties, whose average sale for five boom years was $1 million, is mystified that demand for homes priced above $2 million has disappeared. ‘It has been a long dry spell,’ Brezsny said. ‘We haven’t had one sale above the $2.5 million mark for seven months.’ As an agent with a sale for $3.75 million last year, he clearly is dismayed. Notice how the asking price for two of the homes in the trifecta was more than $2.5 million and the owners accepted less.”

“Brezsny said nine sales this year have been for more than $2 million, the highest being $2.55 million. Only three are pending at that price point, including an 87-acre ranch on Two Bar Road in Boulder Creek. With 53 homes listed above $2 million, Brezsny wonders, ‘How long it is going to take to sell those 53?’”

The Oakland Press in Michigan. “Holly resident Monzella Foster shared with us some photos from her childhood growing up in Pontiac. The first photo she shared with The Oakland Press shows a horse-drawn milk wagon driven by her father, Lee A. Stallard, circa 1934-1935. Foster and her brother, Billy Lee, sit atop Dobbin, the wagon’s steed. This picture was taken on E. Beverly Street off Baldwin in Pontiac.”

“Foster gives a little more information about the house she grew up in on Beverly Street: ‘My folks built a home on Beverly in 1929 — it was ordered from Sears-Roebuck and came into Pontiac on a flat bed rail car on Oakland Avenue,’ she said. ‘I just sold the home this past December. I found all the paperwork on it.’”

“Foster discovered that her family had paid $3,300 (equivalent to about $44,954 in 2013 when adjusted for inflation) for the home, and it had three bedrooms, a living room, a dining room, a kitchen and a full bath, plastered walls and oak flooring. Foster said her mother used to keep records on everything; she found out that her parents built two fully furnished, one-bedroom apartments in the basement of their home. They rented it for $1.50 in 1932 — a little more than $100 per month today when adjusted for inflation.”

Bits Bucket for August 11, 2013

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