There’s Expensive, And Then There’s Normal
A weekend topic to update something we’ve discussed before, starting with this exchange from the past week. “The easy credit echo price bubble participants have been speculators. When it rolls over, it will be spectacular.”
A reply, “Not the case at all. The first bubble, circa 2005, was all built on easy credit. Average Joe getting bigger and bigger houses with no doc loans, no down loans, negative amortization, etc. When the unemployment wave hit post-2008, people couldn’t make the payments and foreclosures soared.”
“The second echo mini-bubble is completely different. Many of the buyers in 2012-13 were cash buyers, private and institutional, looking to swoop up bargains and rent them out. Also enter foreign capital, a good portion of it also cash sales.”
“The next R.E. downturn will not be as deep. There will be many more firm hands that won’t sell as long as the rental income keeps coming in. You can’t foreclose on a property that was bought with cash.”
Many things are different. There are now millions of borrowers seriously underwater. The government is backing 90% or more of house loans. Interest rates are already low, the economy is weak. Supply can come from surprising places. The Sturgis Journal. “The city of Sturgis will try an inventory reduction sale to find owners for 27 undeveloped residential lots, part of a subdivision that has had little building activity in more than a decade. Sturgis city commissioners voted Wednesday to offer a package of lots to developers who are willing to bid a minimum $5,000 per lot. Any remaining unsold lots would be available for $5,000.”
“There have been no new lot sales there for 11 years and officials hope reduced cost could spur renewed interest. City Manager Michael Hughes estimates the city could realize more than $100,000 annually in tax and utility revenue if $150,000 homes were built on all the available lots. At that rate, he said, the city could recoup its infrastructure investment in about five years and have some new housing stock. Some current homeowners in the subdivision have objected, saying they paid market prices for their lots a decade ago. But some commissioners argued that the market has changed in the interim, claiming the lots have generated little interest at costs of about $20,000.”
From CTV News. ” Alberta’s economy is in a slump, but those who still have money to spend on real estate are finding great deals on luxury homes that have become a hard sell. Sales of high-end homes are slow, so prices have been dropping dramatically in recent months. Two luxury homes in Priddis, Alta., located about 40 kilometres southwest of Calgary, were auctioned off in August at deep discounts. The first home on Hawk’s Nest Hollow, a sprawling four-bedroom, 5,500 square-foot mansion, was initially listed at $2.9 million. It sold for less than half that price — $1.1 million.”
“Just a few doors down, another luxury home was listed at $3.9 million, but sold for $1.5 million. Rachelle Starnes, a Royal LePage realtor, said real estate agents and homeowners have to get creative if they want to attract bidders. That can include anything from drone videos of sprawling estates or wine and cheese gatherings for potential buyers. Starnes is trying to sell her own luxury home and has listed it for $2.25 million, even though ‘it should be about 2.8.’”
The global real estate bubble is larger than ever before, and related effects such as the commodity crash are different too. Speculators and money launderers can change their behavior quickly. The New Zealand Herald. “A window of opportunity has opened up for first home buyers in Auckland as a result of a massive decline in interest from Chinese buyers, says one mortgage broker. John Bolton, chief executive of Squirrel Mortgages, said the Chinese market had literally stopped on a dime over the last two weeks.”
“Bolton said the change had been driven by restrictions introduced by the Chinese government on people taking money out of the country and investor policy changes here. ‘Between the Chinese government policy and the policy here…a sledgehammer has been applied to that gopher. It has been well and truly wacked. It really has turned into a buyers market at the moment just because of the speed as which the Chinese have come out of the market.’”
The financial condition of potential buyers is different too. ABC 15 Arizona, “Part of the American Dream is owning your own home, but school loans are keeping a good chunk of the population out of the housing market. Right now, Millennials make up about 27 percent of the U.S. population and less than half own their own home. Part of the reason is the fear of purchasing a house and massive school loans.”
“Realtor Jason Mitchell with The Mitchell Group in Scottsdale says he’s never seen anything like it when it comes to the amount of clients with excessive debt from college. ‘To sustain a market and to have Millennials sit on the sidelines is doing nobody any good,’ says Mitchell. ‘We need to come up with guidelines and products in the financial markets in order to get Millennials to want to buy, to be encouraged to buy.’”
One thing to consider that could be very different; prices might go lower than the past. Maybe a lot lower. And there is the question of the soundness of policy at the government and central bank. D Magazine, “Analyst Danielle DiMartino Booth is making national waves with her criticism of the Federal Reserve, which she says has addicted the U.S. to the ‘heroin’ of low interest rates. DiMartino Booth served from 2006 until this year as a key adviser to Federal Reserve Bank of Dallas president Richard Fisher, the widely respected inflation hawk who stepped down from his post in March.”
“She’d caught the Fed’s eye while writing a controversial daily business column for several years for The Dallas Morning News. There, DiMartino Booth was a lonely voice of reason about the easy-mortgage boom, which she argued was introducing ’systemic risk’ into the entire financial system. For her efforts, she was roundly criticized as an anti-business spoilsport and a ‘nattering nabob of negativism’ (including, full disclosure, by yours truly). As it turned out, of course, her critics were wrong and she was right.”
“These days DiMartino Booth is continuing to rail against the Fed’s cheap-money policy, as well as the institution itself. (It’s opaque and ‘bloated,’ she says, with ‘delusional’ leadership.) She contends, in a nutshell, that by ‘artificially’ keeping short-term interest rates at near zero since the 2007-2008 financial crisis, the Federal Reserve has ‘criminalized’ saving, ‘enabled and financed and underwritten’ the soaring and unsustainable national debt, worsened income inequality, and propped up short-term corporate profits at the expense of productive, long-term business investment.”
“At the same time, she argues, the Fed’s easy-money policy has allowed politicians in Washington to borrow and spend more, creating a ‘veneer of prosperity’ when, in fact, the ‘country as a whole is still weighed down by a tremendous amount of economic stagnation.’”
“As a result, DiMartino Booth says, the nation’s central bank has been ‘boxed in’ by its zero-interest policy—no matter how much it might want to let rates rise to their natural levels, say, to 3 or 4 percent. ‘They’ve been so low for so long—the heroin, if you will, the drug, of low-interest rates—it’s become really hard to take the patient off the drug,’ she says. ‘They’re trying to get out of a canyon this time.’”
“By raising rates to their ‘natural’ levels, I ask, playing the devil’s advocate, wouldn’t everyday people be hurt, because it would become more expensive to borrow money? ‘Well, there’s expensive, and then there’s normal,’ DiMartino Booth replies. ‘It’s a crime in this country to save money, to be conservative, to be in your retirement years and try to [increase] your portfolio, what little portfolio you have. Retirees don’t have the option of going down to Bank of America and putting their money in a five-year CD.’”
“Because the rates are so low? ‘Yes. The rates are so low that savers have been punished for years and years,’ she says. On the other hand, ‘I don’t know why anybody should have the right to have a 2.5 percent mortgage for 30 years. It actually puts borrowers in a bind, because they end up buying more than they can truly afford, because they’re basing it on a very false level of interest rates.’”
“By keeping rates near zero, though, hasn’t the government maneuvered somewhat adroitly past the Great Recession, with a relatively low unemployment rate, for example? As for unemployment, ‘You have 93 million Americans who are out of work who could be in the workforce,’ she says. ‘I would call that nearly a third of the population who could be working who are not working, out of the labor force entirely. Then there’s the third that is this growing population of people who are part-time—some of them involuntarily, some voluntarily. Then think of the final third as being true, full-time workers, highly productive. They have all the pricing power when it comes to wages, while the other two cohorts have none.’”
“But, the unemployment rate is still around 5 percent, I say. ‘Sure it is, because they don’t count these people,’ DiMartino Booth replies. ‘It’s very conveniently measured. Trust me; I’ve been hanging around economists for the last nine years. You can measure anything any way you want.’”
“‘So, there should be a timeline limit to how long policymakers can be ‘well-intentioned’ in their decision-making framework. [We needed to say], ‘Wait a minute, we’ve got a lot of silly investing going on, and there will be a price to pay.’ Whether the price is Congress abdicating all of its responsibility to policymakers … who provide the groundwork, via very low rates, to paint the veneer of prosperity, which works until it stops working. And then we go into another crisis, which is what we’ve been doing for cycle after cycle after cycle.’”
