May 28, 2016

Bubbles Burst At The End Of Euphoria

A weekend topic on manias starting with Maclean’s written by Bob Thompson. “Every 20 years or so, investor dementia sets in. Memories are wiped clean, allowing individuals to make the same mistakes over and over again. It doesn’t matter if it is real estate markets, stock markets, commodity markets, or tulip markets. They are all the same. Why? Because markets are a reflection of people, and people are hard-wired to have emotional instincts that don’t change. It starts with something actually changing, a new development. There is a valid game changer that starts the boom, and lots of people question whether the valuations of whatever asset we happen to be discussing are overvalued. The underlying asset continues to go up however, seemingly proving the disbelievers wrong.”

“Market bubbles don’t pop during this phase, when there are rational buyers and disbelievers. Bubbles burst, and people’s financial lives are destroyed at the end of the next phase: euphoria. During this phase, caution is thrown to the wind, people’s hard-wired desire to ‘not want to miss out’ comes into full play: ‘I have to get in now, my next-door neighbour is making money and I am not.’”

“During this phase, even the smartest believe that we are in a ‘new paradigm’ and the old ways of valuing things are thrown out. Whatever the asset is, it becomes too expensive for the average investor, which is especially true of real estate. Prices go up, people panic to buy more and they outbid each other in an orgy of greed. Amazingly even the experts begin to extrapolate out recent trends well into the future.”

“Even so-called experts get sucked in during the euphoria stage when all the news is good. That is another absolutely necessary component of any bubble: there is no bad news. The problem is that massive amounts of debt are created in any bubble, and at the end, the market gets crushed under its own weight.”

“Politicians are generally oblivious to the bubble as it is happening, or at least do very little to get in the way of it. After the fact, however, when the catastrophic collapse happens, another necessary component is the blame game. Nobody ever blames themselves for getting caught up in euphoria, which always seems so obvious after the fact. People look to blame someone else for the collapse, pressing politicians and regulators to make an example of someone and to regulate something. Some messenger gets shot, and everyone is happy, and the politicians get to be reactive and the saviours of future generations.”

“Are there irregularities going on right now in the real estate market? Of course there are. Is there some form of fraudulent activities going on or at least a massaging of the truth? The answer is most likely—it is a necessary component of the bubble, an effect of the euphoria. It is also a natural progression of the underlying asset, in this case real estate, which has become too expensive for the consumer to buy. In a competitive system, people will find creative ways to finance the boom.”

An piece by Michael Pento. “It shouldn’t be hard to understand that nearly 90 months of ZIRP has regenerated the equity and real estate bubbles that first pushed the global economy off a cliff back in 2007. In fact, the Fed’s unprecedented foray with interest rate manipulation has caused these assets to become far more detached from underlying fundamentals than they were prior to the start of the Great Recession.”

“The reemergence of equity and bond bubbles are being debated in the financial media. But what is less known to investors is the massive amount of forced hot air that has been blown into the commercial real estate market. For example, commercial real estate prices have increased by double digits for the past six years, according to The National Council of Real Estate Investment Fiduciaries. Also, according to the Real Estate research firm Green Street Advisors, commercial property prices now exceed the 2007 prior peak by 24% overall.”

“And in cities such as Manhattan, preferred office buildings and apartment complexes are 60% higher than what existed during the previous housing bubble. Of course, such lofty values have driven National Retail cap rates down to the subbasement of history, at just 6.5%. But this Fed induced famine has caused yield-starved investors to embrace low income streams in the hopes if they ignore this current bubble it won’t pop in the same manner as it did eight years ago.”

“It should be self-evident that eight years’ worth of unprecedented money printing and interest rate manipulations have caused the greatest distortion of asset prices in history. Therefore, the inevitable conclusion is for an unprecedented economic contraction to occur once the party inevitably comes to a close.”

From Bloomberg by Prashant Gopal. “Miami’s crop of new condo towers, built with big deposits from Latin American buyers and lots of marketing glitz, are opening with many owners heading for the exits. A third of the units in some newly built high-rises are back on the market, though most are listed for more than their owners paid in the pre-construction phase. At the current sales pace, it would take 29 months to sell the 3,397 condominiums available in the downtown area, according to South Florida development tracker CraneSpotters.”

“Some are offering homes at a loss as demand cools. Condo purchases from January through April slid 25 percent from a year earlier, while the average price fell 6 percent on a per-square-foot basis, CraneSpotters data show. ‘The problem is that investors are no longer buying, and now they’re going to be looking to sell,’ said Jack McCabe, a housing consultant based in Deerfield Beach, Florida. ‘And what buyers are going to replace those other than vulture buyers looking for deals?’”

“After several price cuts, one Brazilian owner at Related Group’s new Icon Bay tower is offering his two-bedroom condo for $539,000, 7 percent less than he paid in July. It’s now one of 100 listings in the 299-unit building. ‘We are now the most affordable unit in Icon,’ said listing agent Anthony Giuffrida of Elite International Realty. ‘To sell it quick, you have to put it at the right price.’”

“The strong rental market is giving many would-be sellers the opportunity to cover their costs. But there’s also a flood of new, professionally managed apartments under construction. And apartment vacancies in the downtown Miami area rose to 11.8 percent in the first quarter, double the rate two years earlier, according to property-data provider Reis Inc.”

“‘The ticking time bomb is based on rental rates,’ said Peter Zalewski, owner of CraneSpotters. ‘When some of the foreign investors sitting on the sidelines have to dig into their pockets and subsidize renters, that’s the fuse that will lead to a correction.’”

“Of 14 new Miami towers from downtown to Sunny Isles, the share of resale listings ranged from about 7 percent at MyBrickell tower to about 40 percent at 400 Sunny Isles, according to a report this month by Andrew Stearns, founder of, which provides residential mortgages for foreign nationals. A healthy building should have no more than about 10 percent of its units up for resale at any given time, Zalewski said.’The concern is we’re in a price-discovery phase, and the prices people are trying to get for their condos is a lot higher than the market will bear,’ said Stearns. ‘That may signal a coming price correction.’”