The Housing Bubble

What’s your mid-year housing bubble predictions? From 6 months ago. “My prediction for 2016 is that Europe and the EU will be the big story. At least one terrorist incident will occur. More Libyan/Syrian/Iraqi/Afghan migrants will arrive, at the same time a recession does. Frustrated, unemployed young people will riot somewhere. More countries become like Greece; that is, they have an anthem and a flag, but otherwise lack more than nominal political or economic independence, which was ceded to the EU and ECB, who serve an ephemeral belief and large private banks, respectively. Anti-EU parties gain more support. Having been failed grotesquely by all politicians, Greece suffers either an armed insurgency or a military coup. At least one country schedules a referendum on continued EU membership.”

“This country will be interesting. We are one big recession or large-scale domestic terror attack away from radical change, and I don’t think the change will be for the better either. But on economic matters, with a presidential election pending, my thinking is the same as it was for 2015. Much as I would like to see the echo housing bubble, and other asset bubbles, dissipate, and they all will eventually, I think they will continue in the short-term, whether the Fed makes minimal rate changes or not. We bet everything on propping up assets, and therefore we’ll do anything and everything to make that bet win, to include reversing course or changing the rules in the middle of the game. We’re stuck in a highly self-destructive paradigm. This road goes over a cliff, but we’re stepping on the accelerator.”

One said, ” Here in Oregon I see copious vineyard plantings; let me add some other bubbles: wine, craft beer, leased cars, cable channels ( do some of them have <50,000 viewers? ),and RV’s."

And another, "Housing price spread narrows with QE ending. Market for high end homes (continues) to soften while demand for affordable entry level properties holds up. Overall market declines in both volume and prices. Long, soft landing–except for where things are really out of whack (Vancouver, Bay Area)."

"Oil recovers sooner than expected. Commodities markets typically overcorrect. There’s just too much being shut down too fast right now. Still–oil likely won’t see boom times again because of increasing pressure to phase out fossil fuels. Dot com has shake out version 3.0. 2002, 2009, 2016… (Predicted above also.) Another effect of QE ending: dot coms have to show profits not just growth. Money ain’t so free anymore."

And this, "After 10 years on a massive commodities bubble roller coaster, the double peak and retreat to 2006 prices has completed. It’s a classic tits up picture on the Commodities Price Index. There is still another 50% drop to return to the relatively stable ‘92 to ‘02 level. I don’t know about 2016, it could take several years of liquidations to wring out the most obvious excesses. A third spike to extreme bubble pricing is unlikely as it would require another credit expansion and building boom of gigantic proportions. Who is willing and able to step up to that?"

"I expect we have already entered a decades long period of deleveraging and deflation, despite the foolish efforts of central planners. If you are going long commodities, debt and housing, best of luck."

From one year ago. “Denver will continue double digit rent and used house price increases for the next two years. Everybody wants to live in Denver.”

Another said, “I predict an increase over the next few weeks in news stories about Chinese investor suicides.”

And finally, ”
1) There’s a high level of debt and it’s increasing again: http://www.newyorkfed.org/microeconomics/hhdc.html#/2014/q4

2) The economy seems to be improving, which puts upward pressure on interest rates. But that increases the cost of debt, putting a brake on the economy.

That feedback loop is pretty important it seems to me.

Also, the recovery seems highly stratified, with people at the upper ends of the income spectrum doing quite well, but the younger, and lower paid types not doing so well.

Average household income in the US: https://research.stlouisfed.org/fred2/series/MEHOINUSA672N

Labor force participation by age: http://www.bls.gov/emp/ep_table_303.htm

I see more of the same in the housing market for the next six months with an eventual flattening in house prices.

The longer term problem is the whole food chain issue - plankton (lower income buyers) buy cheaper houses, allowing move up buyers to move up. Right now, it seems like a lot of wealthy players driving the housing market, at least from media reports. And not so many plankton.

I think there will be without question a generational change in the attitude towards real estate as a path to riches. Peak debt was reached, the mortgage finance market was nationalized, and this seems to be the system going forward. But it was with the run up in debt that also sparked the runup in house prices. So, in the future, the experience of homeowners will be more “meh, it’s a lifestyle choice, better to raise kids in, but wait till you can afford it” rather than the older generation telling their kids, “OMG you have to buy RIGHT NOW and AS MUCH AS YOU CAN because it’s only going to go up in price and inflation’s going to make it affordable eventually” and that was exactly their experience. Plus they had affordable mortgages, before the evolution of the debt markets to their current go-go form.

I think there’s going to be a big voter dichotomy going forward, with large divides between younger have-nots, and older, wealthier asset- and job-holers. That labor force participation change for younger people, from previous years to now is a significant indicator.”

A weekend topic on the housing bubble starting with Bloomberg. “The yuan’s worst quarterly performance on record is raising the risk of capital flight. China’s currency has slumped 2.9 percent since the end of March, the most since the nation unified the official and market rates at the start of 1994, to trade near its lowest level in five years. After turmoil in its currency and stock markets in the past year shook investor confidence, China stopped granting quotas for residents to invest overseas and clamped down on illegal fund transfers to restrain capital outflows. Policy makers are trying to guide the currency lower versus its trading partners as the economy slows while simultaneously damping expectations of faster depreciation.”

“There is plenty of evidence that local investors want out of China, while foreigners have so far shown little appetite to jump in. A program allowing some domestic and Hong Kong mutual funds to be sold on either side of the border has seen about 37 times more money leave China than enter so far this year. A link between the Shanghai and Hong Kong stock exchanges has to date enabled southbound outflows that are 39 percent more than the amount that’s moved north. In the first quarter, Chinese residents poured a record HK$13.2 billion ($1.7 billion) into Hong Kong’s insurance products, a popular way to move funds offshore.”

“There are ‘fears in the market over a sharp devaluation in China,’ Goldman analysts wrote in the note summarizing views from Chinese metals traders, producers and investors.”

The Nikkei Asian Review. “There are two kinds of cash rushing out of China right now: money actively looking for outside investment opportunities and funds that are simply fleeing. Both kinds are flooding into Silicon Valley and elsewhere in the U.S. This not only reveals the changing economic balance of power, it also betrays China’s precarious economy. In San Francisco, in the state of California, investment bankers cater to the high-tech venture companies nearby. For the past 30 years, Eric Edmondson has been one of them. These days, he is seeing more startups hoping to be snapped up by BAT.”

“That would be Baidu, Alibaba Group Holding and Tencent Holdings, high-tech giants from China now busy gobbling up businesses and trophies around the world. But not everyone in Silicon Valley welcomes Chinese money. Some folks call it ‘dumb money,’ according to a 30-something American entrepreneur. The unflattering term is meant to imply that China Inc. is being too generous, even putting its money in iffy startups that U.S. venture capitalists stay away from.”

“So put ‘dumb money’ in the ’simply fleeing’ category. Or perhaps under ‘has fled.’ According to the Institute of International Finance, a network of global financial institutions, a net $700 billion or so left China in 2015. This is a historic figure. The pace has slowed this year, but rivers of cash are still flowing out of the country. Since the top priority is to simply get the cash out of China, investment decisions tend to lean over the border of ill-conceived.”

“Bill Gross, who co-founded and turned Pimco into a globally renowned investment company, thinks the money gushing out of China is a warning sign. He has been paying attention to China’s private-sector debt, which, by one estimate, has surpassed 150% of the country’s gross domestic product. Paying off its massive debt and making interest payments will soak up most of corporate China’s profit. Very little will be left for productive investment, Gross believes. China could buy time by lowering interest rates. This would allow problems to remain hidden — for a while. Gross added that the Chinese people themselves realize their money will run out if the country continues down its current economic path.”

“Gross is currently a portfolio manager at Janus Capital Group, and he can see the same ’simply fleeing’ effect from his office in Newport Beach, California. The enclave of luxury homes and resorts is also being flooded by Chinese money.”

The Los Angeles Times. “A cooling market for the most expensive homes is costing hotel and casino magnate Steve Wynn some money. Two years ago, Wynn paid $16.25 million for an 11,000-square-foot mansion perched on nearly an acre above the Bel-Air Country Club. Less than a year later, he sought to unload the home with a paneled library and staff bedroom for $20 million. No luck. Then he tried $17.45 million. No luck again.”

“In May, Wynn dropped his price to $15.95 million, $300,000 less than what he paid for the property in 2014. The home went into escrow ‘very close’ to that price last month, said Coldwell Banker agent Mary Swanson, who confirmed Wynn would be taking a loss.”

It’s not just Wynn who isn’t getting as much money as he hoped. Even before Britain’s vote last week to leave the European Union jolted investors worldwide, there were reports of a slowdown in the ultra-luxury housing market. In Los Angeles, agents were seeing more price cuts. Condo sales on New York’s Billionaires’ Row were slowing. Luxury developers shelved projects in Miami. And prices at the tip-top end of the London market were on their way down.”

“So far, in Los Angeles, Wynn’s experience aside, the effect has been minimal, given the nature of Southern California ultra-luxury development – which largely consists of one dramatic hillside estate at a time, rather than a condo tower with multiple units. But a spate of new construction is on the horizon. By one estimate, there are about 30 new hillside homes priced above $30 million that could hit the market in the next year and a half.”

“In Manhattan, the slowdown has taken a sharp toll. The number of previously owned homes that sold in the first quarter for $10 million or more fell 40% from a year earlier to 15, according to appraisal firm Miller Samuel. ‘More has been constructed in New York,’ said Stephen Kotler, chief revenue officer of real estate brokerage Douglas Elliman. ‘You have some sellers [in Los Angeles] getting more realistic, but in New York you are seeing more.’”

“Like elsewhere, local agents put much of the blame on a pullback by international buyers who had flooded Los Angeles in recent years. Turmoil in their economies, along with a strong dollar, have many from Russia, the Middle East and China second-guessing a purchase here. ‘It used to be, if they like it they buy it, or more like, if they like it they buy two,’ said Cindy Ambuehl, director of residential estates for the Agency. ‘Now they are keeping their hands in their pockets and they are waiting.’”

From PBS Newshour. “Editor’s Note: Central banks continue to create new money through quantitative easing. But should they? Harvard economist Terry Burnham warns against quantitative easing: Global monetary policy in the developed world is the loosest it has been since the German hyperinflation after World War I. That is, central banks in America, Europe and Japan have been printing money like mad. What have we gotten in return for monetary easing? The stated goal of monetary looseness is to create jobs and economic growth. By this yardstick, monetary policy is a failure.’”

“However, if the goal of printing money is to pay for government expenditures, monetary policy has been an enormous success. Central banks have taken more than $10 trillion dollars from their citizens. Not only have central bankers taken wealth in historic amounts, they have been cheered for their expropriation.”

“Governments have two ways to pay for their expenditures. They can take the money from their citizens through fees and taxes. Or they can have the central bank create new money. (Borrowing the money can be thought of as a third way, or it can be viewed as simply deferring the choice between taxing and printing).”

“Printing more money does not alter the size the economy; it simply reduces the value of each dollar. The seductive aspect of having the Fed pay for government expenditures is that, unlike taxes, the cost of printing money is invisible. Given the choice between printing money and taxing people, governments reliably take the easy way out and print.”

“In fact, every announcement of monetary easing has been greeted with global cheers. And until the cheering stops, the printing will continue. In fact, if printing money is good for the world and essentially free, why not, you might ask yourself, replace all taxes with newly printed money?”

“How will the coming massive round of printing money end? There are two ways that the world can end printing money. 1. Governments can reform themselves. Central banks can decide that printing money takes resources from people in exactly the same way taxes do. Even though the world does not currently express outrage at the extraction of wealth via printing money, governments can reform themselves, stop printing, cut spending, raise taxes and act responsibly.”

“2. Financial markets can reform governments. Under this scenario, the political cost of printing money increases to the point where fiscal restraint is less costly to decision makers than printing money. Governments will reform because they are forced by financial crises. The exact form of how the market would end the current easy money bonanza is not clear. However, it must be the case that the reaction to future monetary easing will become negative. The political cost of printing money must exceed the political cost of the alternatives — cutting spending or raising taxes.”

“Given these alternatives, the most likely outcome is financial crisis. As the crisis unfolds, we should expect people to claim, ‘NEVER AGAIN.’ You can get ahead of the crowd. Say it now. ‘Monetary policy cannot make us rich; we will never again try to print ourselves to prosperity.’ Open the window and scream it: ‘NEVER, NEVER, NEVER again.’”

“And then hope you die before the next round of monetary printing. Many elderly Germans who lived through the 1930s cannot believe the current situation. They are mad as hell, but there are too few of them alive to alter the outcome. The seed of future monetary shenanigans grows with each funeral of people who lived through the prior crises.”