December 12, 2017

Many People Are Living In Fantasyland

A report from CNBC. “Bitcoin is in the ‘mania’ phase, with some people even borrowing money to get in on the action, securities regulator Joseph Borg told CNBC. ‘We’ve seen mortgages being taken out to buy bitcoin. … People do credit cards, equity lines,’ said Borg, president of the North American Securities Administrators Association, a voluntary organization devoted to investor protection. Borg is also director of the Alabama Securities Commission. ‘This is not something a guy who’s making $100,000 a year, who’s got a mortgage and two kids in college ought to be invested in.’”

From Reuters on Canada. “Canada’s two largest housing markets, Toronto and Vancouver, are being held aloft by booming condo markets as investors and developers stick to an asset they love, fueling charges that the market is geared toward building fortunes rather than homes. Data released on Friday showed urban construction starts for multiple-unit buildings, typically condos, surged 16.9 percent in November to 175,016 units, a record high even after a decades-long boom.”

“Beneath a skyline of cranes, the majority of condos being built are one-bedroom or studio apartments aimed mostly at buyers betting on price appreciation, along with some first-time buyers seeking a foothold, rather than families or so-called end users seeking a house that will grow with them. ‘Investors are looking for product that they can put the least amount of money down for and realize a profit when they resell it down the road,’ said Michael Ferreira, principal at consultancy Urban Analytics.”

The Orange County Register in California. “California doesn’t have a housing bubble — yet. But look out if mortgage interest rates go up, or if there’s an ‘economic shock,’ such as a major stock market correction. Those could be the ‘tipping points’ that ignite a market turnaround, ending a 68-month streak of steadily rising home prices, a recent California Association of Realtors report concluded.”

“The report, drafted by state Realtor economists, seeks to explore ‘the B word,’ addressing whether California is in another housing bubble. Bubble fears are a real issue after almost six years of steadily rising home prices, and after disastrous miscalculations a decade ago put the economy in a tailspin and led to 7.8 million U.S. foreclosures, according to CoreLogic.”

“‘Prices are rising rapidly in California, and both housing affordability and homeownership are trending downward at an alarming rate,’ said the report. ‘This … has led many to begin to question if home prices have reached a level that is no longer sustainable,’ the report added. ‘We’ve begun to hear the ‘B word’ again: Have home prices gotten out of whack again? Are we at the tipping point yet? How much longer can this go on?’”

“‘Incomes simply have not kept pace,’ the report said. ‘The current trend is worrisome from an affordability and, thus, a price sustainability standpoint.’ The Realtor association ‘does not believe we are at the tipping point for home prices yet,’ the report concluded. But, it added, ‘residents in the Bay Area and Orange County will be well served by keeping close tabs on broader economic conditions. … If prices do fall, they will hit those areas the hardest.’”

From Community Newspapers in Florida. “Would you go to a Toyota dealer advertising a Corolla for $85,000? How about a pizza joint with a $62 pie? Of course not! Which is why, as a real estate professional, it infuriates me to see homes priced well above their eventual sales price. Many in the media would lead you to believe Miami is a hot market. And, in certain neighborhoods, this is true. But in the vast majority of Miami-Dade County there is an over-supply of homes and unrealistic expectations. In short, if you are a seller in this market it’s time to put on your big-boy pants.”

“If you travel through Pinecrest and Palmetto Bay, you’ll see loads of FOR SALE signs, even on the shortest drive. And yes, most of them have been there long enough to start serving as landmarks. I am amazed by the conversations I have with people who (a) believe they magically know the market better than anyone else, (b) think their house is perfect and (c) feel they can outsmart the market and make a disproportionate amount of money. In short, many people are living in Fantasyland.”

From ABC News. “Richard Thaler does a good line in one-liners. Shortly after picking up the Nobel Prize for economics in Stockholm a few weeks back — for questioning whether we really behave rationally when it comes to self interest — the behavioural economics pioneer was asked how he would spend the $1.4 million cheque.”

“‘I will try to spend it as irrationally as possible,’ he quipped, much to the amusement of reporters and those in the Royal Swedish Academy of Sciences.”

“But on what? There’s so much to choose from when it comes to behaving badly or, if you’re looking for excuses, irrationally. From an investor viewpoint, perhaps Professor Thaler should look at bitcoin. For not since the dotcom boom, or our very own housing market, has there been a better opportunity to abandon any form of common sense.”

“So, what spurs us to part with our cash in this way? Human beings, far from being rational, instead are unpredictable and often, deeply flawed. Rather than examine all the evidence and carefully weigh it up, we often look for information that merely backs up our existing beliefs or, even worse, just react to the last thing we heard. And given we’re social animals, we herd. We’re sheep. If we’re not trying to outdo those around us, we’re desperately trying to be just like them.”

“So when everyone’s buying uber-expensive houses with oodles of cash borrowed at the lowest interest rates in the history of mankind, pushing prices even higher, we’re tempted to jump on board.”