December 14, 2017

People Thought Their Investments Could Only Go Up

A report from National Public Radio. “Ten years ago this month, you may not have noticed the cracking and crumbling under you. Federal Reserve policymakers were offering reasons for calm, saying they expected strong consumer spending. But the Fed was wrong: In December 2007, an economic earthquake already was convulsing the country. It marked the beginning of the Great Recession. A Federal Reserve Bank of San Francisco study concluded the recession grew out of ‘an enormous speculative housing bubble.’” That happened when low interest rates combined with ‘lax lending standards, ineffective mortgage regulation, and unchecked growth of loan securitization,’ it said.”

“On Wednesday, Fed policymakers nudged up interest rates for the third time in 2017. The federal funds rate is now up from near zero to 1.5 percent. That remains far below the pre-recession level of 5.25 percent, but it’s closer to ‘normal’ — just like the economy itself. ‘There’s less to lose sleep about now than has been true for quite some time,’ Fed Chair Janet Yellen said.”

From Vice Magazine. “Remember that guy who made news for buying two pizzas with Bitcoin back in 2010? Had he held onto the Bitcoin and shelled out regular cash, he’d be well over $100 million richer today. Predictably, this news and its attendant promise of easy money has made Americans go insane. As CNBC reported Monday, citing an Alabama securities regulator, people are actually taking out mortgages to invest in Bitcoin, perhaps hoping to turn $20,000 into their entire retirement fund.”

“How does what’s happening with Bitcoin hew to the classic definition of a speculative bubble? ‘Some of the hallmarks to me involve the FOMO idea—the fear of missing out and never being able to get in. People see other people making a lot of money and they just want in on it. The housing bubble is a good example of that. People thought another person would always want to buy their house from them at a higher price,’ said Angela Walch, a law professor at St. Mary’s University in Texas who studies cryptocurrency and financial stability.”

“People are allegedly starting to take out mortgages to buy Bitcoin. Can you explain to someone who might be thinking about doing this why it’s a really bad idea?”

“‘I saw that headline, and that really frightened me, because taking out debt to invest is how people end up getting into trouble. That was at the heart, in many ways, of the financial crisis. People thought their investments could only go up, and when they went down, they couldn’t pay back the debt. If enough people do that and can’t pay back their debt that they borrowed to buy Bitcoin, the lenders can eventually be affected by that, and it can just spiral through the system,’ Walch said.”

The Press Democrat in California. “Sonoma County’s fire-ravaged housing market last month posted the most sales for November in 13 years, even as the median price rose slightly to a new record high. November’s median increased 14 percent from a year earlier. ‘We’re seeing the market push it up 15 to 20 percent on some of these listings,’ said Lori Sacco, managing broker for Vanguard Properties in Sebastopol.”

“In making offers, Pacific Union International senior vice president Rick Laws said he has seen buyers exceed sellers’ asking prices by more than $100,000. ‘There’s been multiple offers on nearly everything that goes under contract,’ he said.”

From KIVI TV in Idaho. “Dozens of people across the Treasure Valley claim they’ve lost millions of dollars, in some cases their life savings in what their lawyer said is a shady real estate Ponzi scheme, and now they said they hope to warn others not to fall victim. For five years, Frank Preston invested in property deals set up by Nathan Pyles and his company Shiloh Management. ‘For the first five years it went extremely well,’ said Preston. ‘ Preston stands to lose his life savings. ‘One million and ninety seven thousand dollars,’ said Preston.”

“But Preston isn’t the only one who claims he lost everything. ‘I’m upside down with Shiloh Investments roughly 750 thousand dollars,’ said Roger Button. ‘We currently had three investments with him each at 200 thousand,’ said Janelle Nelson. A lawyer representing some of the victims said he believes there are 100 people or more who lost money with Piles. ‘I would say it’s a classic Ponzi scheme,’ explained attorney Gery Edson.”

From Greenwich Time in Connecticut. “Since September, four Greenwich estates have fetched sale prices above $20 million. That contrasts to zero homes sold above that benchmark last year, and just one closing for more than $20 million in 2015. What happened this fall to prompt the uptick in high-end home sales? According to some real estate professionals, the answer is simple: pricing and the economy.”

“At one extreme, there’s a home on Lake Avenue listed for $26.5 million in September 2013 that was snapped up a few days later for $25 million. At the other end of the spectrum, a backcountry property on Old Mill Road languished for nearly three years before selling for $24 million, which was $15.5 million below its asking price.”

“Typically, the properties sold for millions, and in some cases many millions, less than their list price. The latest example is last month’s sale of Greenwich’s largest estate in the backcountry gated community of Conyers Farm. Originally listed in 2015 for $65 million, the price was reduced several times until it finally closed more than two years later for $21 million. The seller, billionaire Thomas Peterffy, had paid $45 million for it in 2004.”

“Those steep discounts don’t necessarily mean the properties lost value, according to Jonathan Miller, a real estate appraiser and consultant who provides Greenwich market analysis for Douglas Elliman. ‘The pricing of a lot of these properties reflects a different time. It’s not reflecting the current market,’ he said. ‘The discounts are very large because they’re discounts from prices that were never close to what the market conditions actually were.’”