March 22, 2017

The Markets That Have Recovered Too Much

A report from the Denver Post in Colorado. “There were 25 percent more starter homes available in metro Denver at the start of 2017 than at the start of 2016, and about a fifth more trade-up homes, according to Trulia. Something may be changing in the market. The starter-home inventory has seen annual increases for four straight quarters, and with each passing quarter, the percentage change is getting larger and larger.”

“Trulia’s chief economist Ralph McLaughlin puts Denver in the category of markets that have recovered ‘too much’ — along with cities like Seattle and San Francisco. If home-price gains outstrip income gains by too wide a margin, or if the price gaps between each tier are too large, it can make it harder for a housing market to function. ‘If it is difficult to afford your next house, you may be more inclined to stay put and renovate your existing home. It won’t ever go on the market,’ he said. That depresses inventory, further driving up prices.”

“For the bottom-third of earners, adjusted to exclude renters, affording the median-priced starter home would consume 41.1 percent of income. Most lenders would reject that loan, absent a very large down payment to bring that ratio down.”

“That might offer one explanation for the rise in the starter home inventory — more would-be buyers of starter homes are now priced out of the market. Another explanation comes on the supply side. The Denver Metro Association of Realtors found a large 19.2 jump in the inventory of condos available for sale last month, which it linked to more mom-and-pop landlords, who snapped up bargain properties during the downturn, now taking advantage of higher prices to cash in.”

The Union Tribune in California. “The San Diego County median home price dropped 1 percent in February to $492,000, CoreLogic said. Typically one of the slowest months of the year, the February median price has increased on average just 1.4 percent from January since 2000. San Diego’s median hit $507,500 in October but has been under half a million dollars since. It is still below the nominal 2005 peak of $517,500 (or $644,487 in 2016 dollars). There were 2,605 home sales in February, down 405 homes from its average since 2000. Chris Thornberg, economist and founding partner of Beacon Economics, said three factors may impact buying as the year goes on — higher mortgage interest rates, economic uncertainty with Trump administration policies and a possible slowdown of American home purchases by foreigners.”

“‘Any of those could be a realistic reason for slowing activity,’ he said, ‘and any of these reasons could say to us this summer won’t be as good as last summer from a sales and price perspective.’”

“The February resale home median price in San Diego County was $535,000. The newly built home price in February, $565,000, was at one of the lowest points in the last two years, likely the result of few single-family homes being built. There were just 170 newly built homes sold in February — roughly half of what was sold in the summer.”

From Bloomberg on New York. “In Manhattan’s East Village, buying an apartment beats renting within four years. In the Soho area just a few blocks away, it would take 31 years before owning makes more financial sense. That analysis of the so-called tipping point—the amount of time it would take for the cost of renting to equal or exceed the cost of buying a comparable home—is based on Bloomberg’s new exclusive, interactive map of real estate prices by neighborhood in Manhattan and Brooklyn, using fourth-quarter data from StreetEasy.”

“In a market weighed down by a glut of new luxury developments and resale listings that continue to pile up at ambitious prices, buyers have more choices and negotiating power. The leasing market too is facing a supply surge, and as landlords offer concessions and cut prices to keep vacancies in check, renters looking to buy have added reason to delay a purchase—or bargain harder.”

“In midtown Manhattan, sales in the three months that ended Dec. 31 carried median discounts of 8.3 percent from their initial asking price—the biggest reductions in the borough. Buyers in the West Village got median reductions of 5 percent. In Chelsea, sellers whittled a median of 4.6 percent from their asking prices to strike a deal. In many of Manhattan’s established neighborhoods, more than 40 percent of sales listings in the quarter got a price cut. On the Upper West Side, 42 percent of listings were discounted, and on the Upper East Side, the portion was 45 percent. The Lenox Hill area had the highest share, with 51 percent.”

The Miami Herald in Florida. “The middle of the South Florida home sales market is hot while the rest of the market is not. this mid-market boom comes as sales of existing single-family homes and condos each decreased 10 percent year over year, from a total of 2,039 to 1,835. Inventory increased for condos and decreased in the single-family category. Single-family homes have a 5.9-month supply, which indicates the top end of a seller’s market. Condo supply grew to 13.7 months, which indicates a strong buyer’s market.”




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164 Comments »

Comment by Ben Jones
2017-03-22 15:59:44

‘If it is difficult to afford your next house, you may be more inclined to stay put and renovate your existing home. It won’t ever go on the market,’ he said. That depresses inventory, further driving up prices’

You know Ralph, this sounds kinda like a wash to me because if they stay put, they don’t buy and don’t decrease inventory. The thing that would bring down prices is if speculators sold stuff they didn’t live in.

‘The Denver Metro Association of Realtors found a large 19.2 jump in the inventory of condos available for sale last month, which it linked to more mom-and-pop landlords, who snapped up bargain properties during the downturn, now taking advantage of higher prices to cash in’

Oh…

Comment by 2banana
2017-03-22 16:31:14

What a sec…

What happened to the property ladder?

Comment by In Colorado
2017-03-23 12:32:48

This topic came up with the lunch bunch. As I have mentioned in the past, the Santa Clara colleagues don’t want to move out here, even though they could get a 4000 sq ft McMansion for about half of what their 2 bedroom, 1000 sq ft, 50 year old shack costs in Silly Valley. Why? Because they are afraid that if they leave they will fall off the Bay Area property ladder, and will not be able to get back on it should they choose to return. This fear, of course, is built on the presumption that house prices only go up. It’s pure FOMO.

Comment by Carl Morris
2017-03-23 12:44:22

True. I’m one of those people who would rather be in Colorado, but in their defense…it’s not just the property ladder. If you go to Colorado you will probably never get a decent raise again and when layoff time comes you will be very vulnerable…because you are probably “highly compensated” compared to the people who have spent their whole career in Colorado. And when the layoff comes…THEN you are screwed. It will be very difficult to find an equivalent job in Colorado.

It’s a one way trip. Only a few people are ready to make that commitment.

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Comment by Rental Watch
2017-03-23 13:01:18

I hear frequently of employees who decide to NOT take jobs outside of SV, for fear that if the company fails after they move their family, they will then have to move back and may have lost “connections” to people who might get them their next job here…I haven’t heard the comments really relate to housing as much (but could certainly see that could be the case if they owned a home).

One family I know moved to AZ, but didn’t sell their house here, since the rents were high enough to pay the mortgage here AND there–it also gave them an avenue to return.

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Comment by oxide
2017-03-23 07:08:07

Hey Ben, I guess those people were supposed to use their savings to upgrade to a house in a more expensive tier. At the moment, the upper tiers have more inventory. So if all those living in a starter home bought the upper tier inventory, then they would sell their starter home, thus increasing the inventory of starter homes.

Of course, those pesky people are realizing that by the time they can afford to upgrade out of their starter home, they don’t want to move. By that time, the kids are in college so they don’t need the space, but they aren’t ready to downsize. So they decide to stay put and spend $30K on a new kitchen instead of on *ahem* the realtor fees for the upgrade transaction. No wonder Ralph is p-o’d.

Comment by Ben Jones
2017-03-23 08:02:39

Is this really necessary?

‘further driving up prices’

This is what I mean. Trulia is just a REIC shill. What part of data collection/reporting is throwing in boosterism at every made up opportunity? And they’re all like this anymore: Case, Corelogic, Attom, Redfin, Zillow, all of them.

Comment by Ethan in Northern VA
2017-03-23 08:17:38

It’s fun to go on there and mess with them though. On Trulia you can post public questions for the Realtors and other folks to reply to. It’s fun to reply to the other people asking questions with bubble topics.

I need to get back on there. “So with the increasing interest rates how long until sellers start lowering their principal asking prices?” Simple questions that rain on the Realtor(TM) parade.

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Comment by Sean
2017-03-23 08:25:53

19.2 percent? Doesn’t that shoot the hole in the “We’d sell more if we had more inventory” theory?

 
Comment by Apartment 401
2017-03-23 08:49:28

The quality of life in Denver has been steadily deteriorating for a few years now.

Don’t move here, you’ll be really disappointed if you do.

 
Comment by In Colorado
2017-03-23 08:59:03

“The Denver Metro Association of Realtors found a large 19.2 jump in the inventory of condos available for sale last month, which it linked to more mom-and-pop landlords, who snapped up bargain properties during the downturn, now taking advantage of higher prices to cash in.”

I guess that sounds better than “now rushing to the exits”

Comment by oxide
2017-03-23 11:01:17

Does it bother anyone else that a condo is now considered a starter home? Shouldn’t a starter home be an SFH where you start a family, not a bachelor pad? If condos are included in the price range, then $233K median is far too high.

Comment by Carl Morris
2017-03-23 11:40:36

Two factors:

1. If that’s all “starters” can afford, then it will naturally come to be seen as a “starter” home.

2. I think people in general are much less interested in yard work and gardening than they used to be. I hear about pressure to not be in an apartment before having kids but I don’t think that applies so much to condos/townhomes as long as there are enough bedrooms to satisfy everyone and it “feels” like a situation where you can’t be forced to move involuntarily.

So anyway, it’s not surprising to me.

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Comment by oxide
2017-03-23 11:56:11

Yeah, it seems that this is the way it’s going, condo PUDs with sky-high HOAs. I guess I’m stuck in the Levittown 50’s.

 
Comment by ibbots
2017-03-23 14:12:48

‘people in general are much less interested in yard work and gardening ‘

I have some friends in their 40’s that are ditching the SFR and yard work for a condo. Their reasoning was what you mentioned, they’ll have more time to both work and play. It helps that the one child one of them has from a former marriage is in the custody of a former spouse.

 
 
Comment by MightyMike
2017-03-23 11:46:02

It’s not a problem. Plenty of kids spend their entire childhoods in two-bedroom or three-bedroom apartments. Some of the condos in question might be pretty big.

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Comment by In Colorado
2017-03-23 12:39:18

In Europe, unless your parents are VERY well off, you will grow up in an apartment if you live in a city. My late FIL was a VP at large German firm (Thyssen). They had a SFH with a yard. My wife told me about the first time her friends from school came to the house. She said that they were VERY impressed, kind of like if your dad had a Ferrari in the garage.

 
 
Comment by In Colorado
2017-03-23 12:35:35

Does it bother anyone else that a condo is now considered a starter home?

Condos were considered starter homes in San Diego in the late 80’s.

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Comment by Race Bannon
2017-03-23 12:30:32

Remember…… I can ask $50k for my 10 year old Chevy pickup but where is the buyer at that price?

So it is with all depreciating assets like houses.

Coppell, TX Housing Prices Crater 4% YoY

https://www.zillow.com/coppell-tx/home-values/

Comment by new attitiude
2017-03-23 14:20:22

So… it is an 07, tell me more about it? Does it have heated seated seats? Engine block heater? Any special deicers?

 
 
 
Comment by Ben Jones
2017-03-22 16:02:23

‘Any of those could be a realistic reason for slowing activity,’ he said, ‘and any of these reasons could say to us this summer won’t be as good as last summer from a sales and price perspective.’

Do they have crows in San Diego? Cuz I think of one guy who will probably be needing a few.

‘The February resale home median price in San Diego County was $535,000. The newly built home price in February, $565,000, was at one of the lowest points in the last two years’

Dang, that new build price is getting pretty close to resale. And we all know what happens then!

Comment by 2banana
2017-03-22 16:20:09

Not giving it away?

 
Comment by new attitiude
2017-03-22 16:24:25

Also…. if I have a 30 yr loan at 3.5%, do you really want to sell and lose that?

I hope inventory increases soon!

Comment by palmetto
2017-03-22 16:59:07

Oh, there’s plenty of inventory. They just don’t want to release it. Like I said, they’d sooner let it rot and plow it under before they’d give anyone a shot at a decently priced home. Especially in Cali.

Comment by PitchforkPurveyor
2017-03-23 12:28:41

I could show you bank-owned houses empty for nearly 10 years now, rotting away. They’ve pretty much accomplished it.

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Comment by scdave
2017-03-22 17:06:28

if I have a 30 yr loan at 3.5%, do you really want to sell and lose that ??

That’s part of the decision process. But you need to add it all up. Move up buyer out of a starter house went in likely with minimum down. Even with appreciation the “cost of exit and then entry” is typically a very high percentage of their equity.

Point is, unless they have other reserves to add to the move up dowpayment it becomes either unaffordable or just to much to stomach.

So, the decision is just stay put and maybe add on or remodal.

Comment by Ol'Bubba
2017-03-22 20:14:01

If you have a 30 year loan at 3.5%, then you are amortizing the loan more quickly than if you had a higher interest rate. As interest rates rise, more interest is paid during the early years of the loan and the amortization shifts towards the later years.

Since the early 1980’s, interest rates have been moving downward so subsequent refinances at lower interest rates have been fairly common. It will be interesting to see how the yield curve moves in the coming years. Will it bounce around where it is right now for an extended period? Will it slowly rise? Will it quickly rise? Or will it keep falling?

I have no clue, and anyone who claims they do know is fooling themselves.

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Comment by oxide
2017-03-23 07:32:49

Yes, you are amortizing more quickly, but you have a LOT more to amortize, so it doesn’t really matter.

Case in point: currently I pay quite a bit extra to principle on my monthly nut. I had planned to increase that extra principle a little bit each year, thinking to shorten the term years of mortgage. So I played around with the amortization tables and found something funny: putting a little extra on the principle didn’t significantly reduce the term. The best way to shorten my mortgage is to save up for the next ~15 years and just pay it all off early.

I think the reason is that If you start out with a high price and low rate, as I did, there’s nothing good to refinance into. You’re still stuck paying off that principle.

Of course, the middle and late boomers made off like bandits. They bought their houses in 1995-2000 at 6+% interest and lower price, and they’ve been refinancing ever since. GenX got to the party late. Dumb GenX bought in 2004 and got caught in the bubble. Smart Genx (me) got stuck with relatively high historical price and low interest rate, so there’s much refinancing I can do. Oh well, I’m still better off than renting.

 
Comment by oxide
2017-03-23 08:07:14

Ooops, that comment came out wrong. I meant that adding even more extra principle on top of the extra principle I’m paying now doesn’t seem to decrease the term of the mortgage. I think the reason is that I don’t have much interest to pay with 3.5%, and that this interest is front-loaded in the first 7 years. My five years of extra principle is already burning through whatever savings in interest I can get. Adding extra principle won’t save much more in total interest; it’s just eating away at principle. It seems to be better to grow my money somewhere else for now, and pay off the principle in ~15 years, with inflated dollars.

 
Comment by Rental Watch
2017-03-23 10:12:07

Said simply Ox–if you can earn more than 3.5% nominally on the money you were planning to use to pay down the mortgage, you are better off NEVER paying off the mortgage on an accelerated basis.

Once you have saved enough to pay off the mortgage in one fell swoop, you could presumably simply let the investments continue to work for you, and have the investments pay off the mortgage. This is especially the case if you have a low basis in the investments (and thus tax due upon sale of the stock).

As an example, my mortgage rate is 3.75%. I own a basket of REITs that pay a dividend of 3.8%. So, it appears to be a wash. I could presumably de-lever my life by selling the REITs and paying off my mortgage.

However, I would need to pay approximately 25% of my proceeds in tax if I were to sell, so the dividend yield I’m actually getting on my AFTER TAX proceeds is more like 5.1%.

And I know that past performance is not an indicator of future success, but the REITs have generally been increasing their dividends (if not every year, every other year). My mortgage rate is fixed.

While I probably won’t sell stock to pay off my mortgage, I may pay off my mortgage as I have cash generated elsewhere and I feel that I can’t get that money to work safely enough.

 
Comment by ibbots
2017-03-23 10:48:12

‘putting a little extra on the principle didn’t significantly reduce the term. ‘

That’s interest. I pay extra on the principle and have taken a couple years off the term so far. As I get further into the note, maybe your strategy is better. PMI goes away next year so I’ll put those funds to principle as well.

 
Comment by oxide
2017-03-23 11:13:38

Oops, my interest rate is 4%, not 3.5%. But the concept still stands.

ibbots, with the extra principle I pay each month, I will pay off the mortgage in 22 years total (17 years from now).* But if I add a little extra on top of that, say another $50 or $100, I couldn’t seem to get the term below 21 total. I don’t have the calculations in front of me, but I remember thinking that: the cheapest way to take another two years off the mortgage is to simply save up $20-25K and pay it off two years early, on the back end.

—————-
*the rule of thumb is that if you put in a 13th monthly full PITI payment each year, that knocks a 30-year mortgage to 23 years.

 
Comment by Rental Watch
2017-03-23 12:11:49

Oxide, if you have the ability to make the additional payment, you might want to consider a refinance into a new 15-year term from today. Even with the recent rate increases, your rate would be in the range of 3.25%.

You would pay meaningfully less overall over the next 15 years, but wouldn’t have the ability to stop the extra payments if you ran into any financial difficulties.

Ignore all the rules of thumb about interest cost in the first few years of a loan–those rules of thumb I find are the wrong way to think about mortgages.

The only two things that matter are rate and term. A lower rate is always better, if the term that such rate comes with results in a payment that is manageable and safe for your circumstances.

 
 
Comment by In Colorado
2017-03-23 12:43:55

That’s part of the decision process. But you need to add it all up. Move up buyer out of a starter house went in likely with minimum down. Even with appreciation the “cost of exit and then entry” is typically a very high percentage of their equity.

Plus the monthly will be bigger. In the old days when annual raises were a given, people would stretch to upgrade, with the expectation that in a few years with the raises that it would be “comfortable” again. Now, you know you might go years without a raise, while your other expenses will consistently go up. Makes pulling the trigger a lot harder.

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Comment by Blue Skye
2017-03-22 17:32:35

You’re kinda like a chicken with its head cut off.

Comment by scdave
2017-03-22 18:35:58

And you are palmy’s cell mate.

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Comment by palmetto
2017-03-22 18:48:18

What the heck is the matter with you, dave?? dave???

Jeebus, you’re so blinded by frustration and hate you can’t even tell who or what Blue was responding to. Clue: it wasn’t you.

Whatever it is that’s bugging you, no one here created it, that’s for sure.

 
Comment by PitchforkPurveyor
2017-03-23 20:03:00

He does it all the time. He’s a thin-skinned partisan hack.

 
 
 
 
Comment by junior_kai
2017-03-22 20:18:11

Crow: its whats for dinner!

Reading more anecdotes about prices in SD fading. Good! People shouldnt have to go into insane levels of debt just to put a roof over their heads. Make America Affordable Again!

 
 
Comment by Senior Housing Analyst
2017-03-22 16:03:58

Boulder County, CO Rental Rates Dive 5% YoY On Falling Housing Prices

https://www.zillow.com/boulder-county-co/home-values/

 
Comment by new attitiude
2017-03-22 16:08:49

No fall back job for the Realturds.

Payless Is Said to Be Filing for Bankruptcy as Soon as Next Week

Comment by azdude
2017-03-23 05:32:20

I havent been in one of those places in years. Seems they went cheap imports bigtime.

Comment by In Colorado
2017-03-23 09:01:18

Low barriers to entry. Anyone can sell cheap shoes made in Asia.

Comment by new attitiude
2017-03-23 10:26:25

Brick and mortar is dead. Amazon won.

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Comment by In Colorado
2017-03-23 14:38:54

There are some things I won’t buy online, and shoes is one of them.

 
Comment by new attitiude
2017-03-23 17:26:20

Free returns, no gas, no mall. if you like New Balance and you are replacing a pair, it is easy-peasy.

 
 
 
Comment by oxide
2017-03-23 11:25:07

It probably wasn’t Amazon this time. Women’s shoes are harde to fit than men’s shoes, so they prefer to try them on. No, Payless got killed by WalMart and Target and probably Kohl’s.

Comment by In Colorado
2017-03-23 14:43:06

Yup, cheap, but “stylish” shoes made in Asia are sold everywhere now.

Heck, I bought a pair of Clark’s and they’re made in Vietnam. Half off in the after Christmas sale.

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Comment by 2banana
2017-03-22 16:28:59

Joyce, manning the detonator, breaks cover and stabs Saito to death. Aghast, Nicholson yells for help, while attempting to stop Joyce from reaching the detonator. As he wrestles with Nicholson, Joyce tells Nicholson that he is a British officer under orders to destroy the bridge. When Joyce is shot dead by Japanese fire, Shears swims across the river, but is fatally wounded as he reaches Nicholson. Recognizing the dying Shears, Nicholson exclaims, “What have I done?” Warden fires his mortar, mortally wounding Nicholson. The dazed colonel stumbles towards the detonator and collapses on the plunger just in time to blow up the bridge and send the train hurtling into the river below. Witnessing the carnage, Clipton shakes his head muttering, “Madness! … Madness!”

–The Bridge on the River Kwai

=====

This New Bubble Is Even Bigger Than The Subprime Fiasco
Zerohedge - Mar 22, 2017

In 1988, a bank called Guardian Savings and Loan made financial history by issuing the first ever “subprime” mortgage bond.

The idea was revolutionary.

The bank essentially took all the mortgages they had loaned to borrowers with bad credit, and pooled everything together into a giant bond that they could then sell to other banks and investors.

The idea caught on, and pretty soon, everyone was doing it.

Wall Street claimed that it had learned its lesson, and the government gave them all a slap on the wrist.

But it didn’t take very long for the madness to start again.

By 2002, banks were already loaning money to high-risk borrowers. And by 2005, all conservative lending standards had been abandoned.

Borrowers with pitiful credit and no job could borrow vast sums of money to buy a house without putting down a single penny.

It was madness.

By 2007, the total value of these subprime loans hit a whopping $1.3 trillion. Remember that number.

Over the last decade or so, there’s been an absolute explosion in student loans, growing from $260 billion in 2004 to $1.31 trillion last year.

So, the total value of student loans in America today is LARGER than the total value of subprime loans at the peak of the financial bubble.

And just like the subprime mortgages, many student loans are in default.

According to the Fed’s most recent Household Debt and Credit Report, the student loan default rate is 11.2%, almost the same as the peak mortgage default rate in 2010.

That’s because hundreds of billions of dollars of these student loans are either owned or guaranteed by the United States government.

So as borrowers stop making payments, it’s the taxpayer who will suffer yet another massive loss.

Comment by phony scandals
2017-03-22 17:00:19

Frank’s fingerprints are all over the financial fiasco

By Jeff Jacoby
Globe Columnist / September 28, 2008

The roots of this crisis go back to the Carter administration. That was when government officials, egged on by left-wing activists, began accusing mortgage lenders of racism and “redlining” because urban blacks were being denied mortgages at a higher rate than suburban whites.

The pressure to make more loans to minorities (read: to borrowers with weak credit histories) became relentless. Congress passed the Community Reinvestment Act, empowering regulators to punish banks that failed to “meet the credit needs” of “low-income, minority, and distressed neighborhoods.” Lenders responded by loosening their underwriting standards and making increasingly shoddy loans. The two government-chartered mortgage finance firms, Fannie Mae and Freddie Mac, encouraged this “subprime” lending by authorizing ever more “flexible” criteria by which high-risk borrowers could be qualified for home loans, and then buying up the questionable mortgages that ensued.

http://archive.boston.com/bostonglobe/editorial_opinion/oped/articles/2008/09/28/franks_fingerprints_are_all_over_the_financial_fiasco/

 
Comment by taxpayer
2017-03-23 07:10:57

then bama booty put smelly mel watt in charge
he wanted mortgages for welfare warriors and in a way he got it

the best is the ag loans w $0 down as farm land craters

so many bubbles,so little time

 
 
Comment by Senior Housing Analyst
2017-03-22 16:39:30
 
Comment by Carl Morris
2017-03-22 17:08:14

Recent conversation got me wondering what happened to Casey Serin. Looks like he has changed his last name in preparation to ride it down again (see end just before references).

https://en.wikipedia.org/wiki/Casey_Serin

Comment by 2banana
2017-03-22 17:47:26

OK! Game on!

In 2016, Serin legally changed his name to Casey Constantine. In Facebook comments, he stated that the name change is a sort of rebranding for the next chapter of his career/business in real estate, and that it will allow him much more control over his search results online, somewhat of a clean slate.

Comment by AbsoluteBeginner
2017-03-22 22:49:28

Maybe he and Kato Kaelin can get a few cameos on ‘The Deed’ .

 
Comment by Young Deezy
2017-03-23 07:52:54

Name change huh? Typical means of doing business it would seem for those from the former Soviet Bloc countries. There’s another Russian realtor chick here in Sac who’s done the same thing, probably because a google search of her real name brings up someone (a relative, or husband, perhaps?) who has had real estate fraud charges against him in Nor Cal and Seattle.

Comment by somedewd
2017-03-23 09:37:14

Not dissimilar from home builders producing a crap and stealing from clients before declaring bankruptcy and coming back under a different name.

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Comment by oxide
2017-03-23 11:30:25

Or banks or defense contractors for that matter. Anyone remember what Xi’s name used to be? Or what GMAC changed its name to?

 
Comment by Race Bannon
2017-03-23 14:07:09

Hey Donk

 
 
 
 
 
Comment by Raymond K Hessel
Comment by taxpayer
2017-03-23 07:12:21

farm,auto,student,cre,MALL stores,

need more?

 
 
Comment by sleepless_near_seattle
2017-03-22 17:32:27

Well, I heard it today from a realtor I *had* half-respected. Says rates are going up so now’s a good time to buy because demand will be going up and prices will be rising. (That doesn’t jibe with all the properties going on 100+ DOM. Everything is wildly overpriced.) Went on to say price rises won’t stop for at least 2 years when they’ll flatten out for a year at worst.

At the same time, feel like I’m about to get Suzanned as the wife is angling to move on from the rental. Not good. C’mon Yellen, kill this thing!

Comment by Blue Skye
2017-03-22 17:37:05

C’mon Sleepless. Higher interest rates don’t make prices go up. Get a grip.

Comment by palmetto
2017-03-22 17:42:30

I wuz gonna say. Conventional wisdom says prices go down as rates go up. However, there’s not much wisdom around these days, conventional or otherwise.

 
Comment by sleepless_near_seattle
2017-03-22 17:42:39

Of course not. He was the last chance I had for a realtor acquaintance that hadn’t taken the blue pill.

 
 
Comment by palmetto
2017-03-22 17:39:48

You just got the three minute warning.

Comment by sleepless_near_seattle
2017-03-22 17:44:24

They’re closing in. Where’s the Defender Smart Bomb when you need it?

Comment by junior_kai
2017-03-22 19:32:55

Can you open up like 50 credit cards or *ahem* fake an id theft so your credit rating gets hosed and you have some breathing room? Dont want to end up like Al Bundy hating life like most of this planet.

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Comment by Ethan in Northern VA
2017-03-23 08:26:20

Coworker just bought a house, points out that interest rates are going up. People are scrambling in this area to do so.

Comment by sleepless_near_seattle
2017-03-23 09:41:12

That’s the short term. In the medium to longer term, as rates rise, all else held equal, prices will fall to re-align monthly amount paid to what people can afford.

In my area (Portland, OR) prices went up around 2000-2002 as rates began their fall and got even worse as “creative financing” rose.

Comment by Rental Watch
2017-03-23 10:32:47

“That’s the short term. In the medium to longer term, as rates rise, all else held equal, prices will fall to re-align monthly amount paid to what people can afford.”

I recall seeing someone who looked at this historically…the effect of higher mortgage rates on home prices. He studied times when rates rose meaningfully, and the effect on home prices after that rise in rates. He didn’t really see an effect on home prices in the data.

He attributed this to the fact that higher rates typically coincide with a better economy (higher wages, etc.).

This is also seen in longer-term cap rate/interest rate analyses for commercial real estate. The theory is that higher interest rates will lead to higher cap rates more or less in lock-step. However, that doesn’t play out in reality.

The longer-term correlation that I saw on CRE was about a 0.5 (this was from a pension newsletter)…meaning that on average, a 100 basis point move in interest rates will result in a 50 basis point move in cap rates, which makes sense if you assume that higher interest rates correspond to stronger economies, and greater rental growth (akin to higher wage growth leading to a greater willingness and ability to pay higher mortgage rates on the residential side).

In a similar vein, a friend of mine worked for a large public REIT. The board asked that they do research into the effect of higher interest rates on cap rates for their particular investment strategy. Apparently the board was surprised at how little higher interest rates moved cap rates.

Said another way, it is easy to say that if rates rise, all-else equal, values fall–just like bonds, right?…however, it is highly unusual for rates to be rising with all-else that effects value/pricing remaining static.

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Comment by sleepless_near_seattle
2017-03-23 12:57:19

What did those studies say about lower rates?

“Said another way, it is easy to say that if rates rise, all-else equal, values fall–just like bonds, right?”

Could be true, as things change in local economies or certain areas (like Portland) become popular, etc, so it’s hard to say what is no longer equal. Those things could also explain why prices began to go up more in Portland in 2000-2002. But things were fairly stagnant until rates fell. I’d say for about 9-15 months based on what I saw prices didn’t change much then started taking off.

My suspicion is that people could shell out the same per month but get a bigger, more expensive place. My suspicion is that the reverse will happen as rates rise.

 
Comment by Rental Watch
2017-03-23 13:10:53

What did those studies say about lower rates?

They didn’t say, but from my experience in buying CRE post-crash, the move down in cap rates lagged interest rates moving lower pretty meaningfully.

Soon after the crash, interest rates fell, and cap rates didn’t fall immediately (it took years). They didn’t fall right away because people were scared the income generated by the properties would also fall. It took until the economy stabilized, with vacancy rates stabilizing (with rents no longer falling) for people to start to get more aggressive in their pricing (lower cap rates).

The story was similar with housing. Rates fell considerably, but prices continued to fall for quite some time before bottoming. I attribute this mainly to leveraged buyers being uncomfortable buying in the context of home prices falling (and their down payment being wiped out quickly). So, pricing needed to work on a rental basis, with unleveraged buyers…that that took a while to be reached.

Debt to income ratios are certainly a part of the equation, but they are certainly not 100% of the equation, and at many parts of the cycle, they are not the driving force.

 
Comment by sleepless_near_seattle
2017-03-23 15:35:00

I would agree there was/is a lag. Same happened here. Prices held as I said for at least 9 months but as transactions picked up speed, prices increased. There might have been some other factor, but it’s not obvious what it was. The influx wasn’t quite in full swing and we were in a recession.

 
Comment by sleepless_near_seattle
2017-03-23 15:36:17

…for a time, you could get the same house for less monthly outlay or more house for the same monthly outlay.

 
Comment by Rental Watch
2017-03-23 16:12:27

I would agree there was/is a lag.

Doesn’t this fly in the face of the thesis that any increase in interest rates will result in price reductions?

If it were the case…that prices were almost entirely determined by interest rates, there would be no such lag.

There might have been some other factor, but it’s not obvious what it was.

There are multiple other factors that come into play:

Confidence about your job security. If you are worried about your job, you are less likely to buy, even if it is affordable.

Perception of price movement. Once people felt that the bottom was here (or that price reductions were decelerating sufficiently for the down payment to not be at substantial risk), they started getting comfortable borrowing and buying again.

Wages and wage gains. If you feel confident that you will be making more money each and every year, you might stretch just a bit farther than you would otherwise.

 
Comment by Race Bannon
2017-03-23 17:02:34

Do you really believe wages will triple or quadruple to meet grossly inflated prices?

Of course not.

Housing prices will continue falling to dramatically lower and more affordable levels meeting wages.

 
Comment by sleepless_near_seattle
2017-03-23 20:34:14

“Doesn’t this fly in the face of the thesis that any increase in interest rates will result in price reductions?”

No. It takes time for momentum to build.

“There are multiple other factors that come into play”

I was talking about the economics of Portland. There wasn’t an obvious factor at that time.

 
Comment by somedewd
2017-03-23 22:35:35

As with any economic question, it comes down to the research methodology and source. Changing interest rates affect pricing, but degree will differ based on other factors and may be delayed in presentation. Prices are semi-elastic and *possibly* stickier on the way down. What will be interesting is whether memories of 2006-2008 cause a quicker race to the bottom as sellers attempt to get out before being stuck.
——————————————-
http://www.frbsf.org/economic-research/files/el2015-28.pdf

“Two years after a 1 percentage point increase in the short term interest rate, real house prices are estimated to decline by over 6%, while real GDP per capita declines by nearly 2%.
This implies a ratio of 3.3 in terms of the decline in house prices for a 1% decline in the level of output after two years. Looking at a longer time horizon of three or four years (not
shown in the figure), the ratio rises to about 3½. ”

” First, monetary policy actions have sizable and significant effects on house prices in advanced economies. That is, an increase in interest rates tends to lower real (inflation-adjusted) house prices. Second, this reduction in house prices comes at significant costs in terms of reductions in real gross
domestic product and inflation. A typical estimate is that a 1% loss in GDP is associated with a 4% reduction in house prices.”

https://larseosvensson.se/files/papers/The-effect-on-housing-prices-of-changes-in-mortgage-rates-and-taxes.pdf

“A permanent increase in the mortgage rate has a substantial effect and a permanent increase by 1 percentage point reduces housing prices permanently by about 7 percent if the capital-gains tax is disregarded, about 6.5 percent if the capital-gains tax is fully internalized.”

http://www.sciencedirect.com/science/article/pii/S0022199614001561

While the prior 2 papers were regarding downward pricing pressure with rising interest rates, this paper describes inflating prices due to artificially lowered interest rates.

“An exogenous one percent decrease/increase in the short rate results in about one-half percent decrease/increase in the long rate and on impact, on an increase/decrease in mortgage loans to GDP of about one half percent. However, the dynamic pattern indicates that the effect of the initial perturbation keeps building over time, and by year four there is about a three percent increase/decrease in mortgage loans
as a ratio to GDP.”

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2535912

This study shows how worthless and biased surveys are. Why we poll for economic data and call it a “study” is beyond me.

 
Comment by Rental Watch
2017-03-24 09:04:26

Thanks somedewd…good stuff.

 
 
 
 
 
Comment by palmetto
2017-03-22 17:36:38

“The middle of the South Florida home sales market is hot while the rest of the market is not. this mid-market boom comes as sales of existing single-family homes and condos each decreased 10 percent year over year, from a total of 2,039 to 1,835.”

Oooh, the used house dealers call it “mid-market”, instead of “lower end”. Whatever, it’s still panic buying at the lower end, no matter how much lipstick you put on the pig.

However, ole’ palmy can report that a new twist is about to throw a bit of chaos into the Florida RE market: fracking. Un-be-stinking-lievable. To frack or not to frack in Florida, that is the question. Yes, Florida, with one of the most sensitive and just about tapped out aquifers in the country, and this is even a “debate”. That oughta cool off the RE market in a jiffy. Perhaps I shouldn’t have been so hasty to make fun of CA’s lead-in-the-water problem. That’ll teach me.

Comment by Ol'Bubba
2017-03-22 19:50:31

Fracking? Why are they fracking in Florida?

I thought fracking was a technique to get the last bit of production out of an aging oil or gas well.

Oklahoma’s had an elevated level of earthquakes in recent years and they’ve been blamed on fracking in the oil and gas fields.

Comment by palmetto
2017-03-22 20:02:33

To my knowledge, there isn’t any fracking in Florida at this time. The Republicans (shocker!) are looking to ban it, however, there seems to be a “split” in the legislature about it. OTOH, this could just be some sort of media-driven “controversy”.

http://www.naplesnews.com/story/news/local/florida/2017/03/22/florida-fracking-ban-supporters-rally-bill-faces-trouble/99486110/

Some years ago they tried to pass a bill to allow fracking and it was shut down. Now they’re trying to ban it and some people want to allow it. The local media, of course, tried to paint this as a good idea. It’s not as dire as I first thought it was. Just some stoopit media spin.

 
Comment by In Colorado
2017-03-23 09:04:16

Does the Florida Department of Transportation own any snowplows?

 
 
 
Comment by Senior Housing Analyst
2017-03-22 17:50:39

West Sacramento, CA Housing Prices Crater 7% YoY

http://www.movoto.com/west-sacramento-ca/market-trends/

 
Comment by Raymond K Hessel
2017-03-22 17:53:38

I’m a little hazy on some of ABQ Dan’s predictions, but didn’t he assure all and sundry that oil was headed HIGHER?

https://www.bloomberg.com/news/articles/2017-03-22/oil-tightens-its-noose-around-currency-market-as-rout-deepens

Comment by Ben Jones
2017-03-22 18:29:53

‘The discovery of a huge natural gas deposit in Egyptian waters has boosted hopes of other such finds in the eastern Mediterranean that could help meet Europe’s energy needs, a senior official with Italian oil and gas company Eni said Tuesday.’

‘Eni SpA Chief Exploration Officer Luca Bertelli told a gas conference Tuesday that his company’s “milestone” discovery of Zohr, estimated to hold 30 trillion cubic feet of gas, has reinvigorated the interest of other major oil and gas companies in the region.’

http://www.arabnews.com/node/1068471/business-economy

Comment by Raymond K Hessel
2017-03-22 18:51:09

But…but…peak oil!

 
Comment by MightyMike
2017-03-22 20:39:47

other such finds in the eastern Mediterranean that could help meet Europe’s energy needs

Dan’s not going to like that. It’s bad news for Putin.

Comment by oxide
2017-03-23 05:30:43

Good point, Mike. And that’s going to throw a real monkey wrench into all those middle eastern wars about who is going to run whose pipeline where. Wasn’t the much of the cause behind the finagling over Syria?

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Comment by PitchforkPurveyor
2017-03-23 20:18:11

It doesn’t matter. I used to argue with him over oil, maintaining it would crater, and he just blathered on about how it was going to go up, up, up. He did come back to say he was wrong, but then he said it’s going up, up, up. The guy is a broken clock.

 
 
Comment by Raymond K Hessel
2017-03-22 18:53:16

Populism is at its highest since the 1930s because globalism benefits only the 1% at the expense of everyone else.

http://www.marketwatch.com/story/why-ray-dalio-says-populism-is-at-its-highest-since-the-1930s-2017-03-22

 
Comment by palmetto
2017-03-22 19:28:51

Ray Dalio is basically a wise guy running a numbers game.

https://en.wikipedia.org/wiki/Ray_Dalio

 
Comment by California Renter
2017-03-22 20:20:52

This worked out pretty well last time.

http://www.cnbc.com/2017/03/22/mortgage-applications-fall-nearly-three-percent-as-borrowers-turn-to-riskier-loans.html

“Borrowers are now turning to shorter-term, adjustable-rate loans, which offer lower interest rates. Their share of total applications has doubled to 9 percent since the election. That is the highest level since October 2014.”

Comment by Raymond K Hessel
2017-03-22 20:39:45

Odd, this uncanny sense of deja vous…but our central planners have matters well in hand. The corporate financial media assures me of this daily.

 
Comment by sleepless_near_seattle
2017-03-23 09:43:52

Good, maybe this means that we’re closer to collapse as at the end of manias things happen faster and faster.

 
 
Comment by Raymond K Hessel
2017-03-22 20:38:14

Oh dear…iron ore prices are plummeting which means…which means….that China’s epic attempts to boost its GDP by building ghost cities and bridges to nowhere have failed, and that China’s official economic data is so much BS, notwithstanding ABQ Dan’s assurances to the contrary.

https://www.bloomberg.com/news/articles/2017-03-22/iron-ore-battered-as-risk-off-mood-follows-forecasts-for-slump

Comment by In Colorado
2017-03-23 09:06:18

There has to be a pile of unneeded rebar as big as Mt McKinley somewhere in China.

Comment by PitchforkPurveyor
2017-03-23 20:54:14

Have you seen their giant iron ore piles which are like a city of their own?

 
 
 
Comment by Senior Housing Analyst
2017-03-22 20:41:38
 
Comment by Crispy&cole
2017-03-22 20:58:58

Since I’m just catching up on the bubble, after being gone for 8 years…what are the top bubble us cities?? Houston has to be way up there

Comment by azdude
2017-03-23 06:01:44

PATSY:
a person who is easily taken advantage of, especially by being cheated or blamed for something.

 
Comment by taxpayer
2017-03-23 07:13:59

DC,if the fed head cuts go through

Comment by Ethan in Northern VA
2017-03-23 08:28:57

Government never gets smaller.

Comment by palmetto
2017-03-23 08:50:12

Actually, sometimes it does, when a country falls/fails. Then it gets real small.

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Comment by In Colorado
2017-03-23 09:10:22

“Government never gets smaller.”

I know a guy who is a .gov attorney. I asked him if he ever worries about the deficits and potential .gov layoffs (this was a few years ago).

He laughed his head off. Layoffs are a foreign concept to .gov employees. Only private sector taxpayers have to worry about those.

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Comment by Sean
2017-03-23 09:27:32

It’s worse than people think in DC. Most folks here are a two income household and you need both incomes to pay the mortgage. If one loses their job it may be time to punch out of the DMV.

We live here and rent, I already told my wife if she loses her job we are out of here. Nice place, but we can make due on my salary somewhere else.

 
 
Comment by oxide
2017-03-23 11:49:15

The biggest bubble area by far is San Fran and Silicon Valley. Then after that, probably Denver, Austin, Houston, Seattle, Dallas, SoCal, Portland OR. Other cities are overheated and overpriced, but not to the same extent.

DC-area: Northern Virginia is much more bubbly than the Maryland counties. A nearly identical ranch will cost $100-$150K more in NoVA than in Prince George’s county in Maryland. Sean is right: for a typical middle-class “white” neighborhood you need two incomes. In an older neighborhood of Latino-packed houses you can get by with one income.

The new problem here is that developers are popping their own bubble by overbuilding luxury apts and McMansions. The boomers want to retire cheap, GenX are quietly staying put, the first-wave Millenials aren’t ready to upgrade yet, and the second-wave Millenials are still in mom’s basement. None of them need or want new luxury. Everyone else is shacking up so much in groups of 2-4 that there aren’t enough physical tenant groups to fill the new units.

Comment by Carl Morris
2017-03-23 12:35:47

The biggest bubble area by far is San Fran and Silicon Valley. Then after that, probably Denver, Austin, Houston, Seattle, Dallas, SoCal, Portland OR.

If you’re a tech worker that’s your “where the jobs are” list in a nutshell…except Houston and Dallas. Is that oil?

The boomers want to retire cheap, GenX are quietly staying put, the first-wave Millenials aren’t ready to upgrade yet, and the second-wave Millenials are still in mom’s basement. None of them need or want new luxury.

Nicely put. But I’d say most people want new luxury if it’s affordable. Just not at these prices/salaries.

 
 
 
Comment by Ol'Bubba
2017-03-23 05:06:35

I saw this on LinkedIn this morning. It’s a 3 minute video by Danielle DiMartino Booth and titled “How the Fed went from lender of last resort to destroyer of American wealth”

https://www.linkedin.com/pulse/how-fed-went-from-lender-last-resort-destroyer-american-booth?trk=v-feed&lipi=urn%3Ali%3Apage%3Ad_flagship3_feed%3BkM%2BYiqeEPh6JqwRDo5yy7Q%3D%3D

I’ve started to read “Fed Up”. I had to reserve it at my local library and it took about 2 weeks before it came in.

Has anyone else here read the book or started to read it? Ben Jones - I think you said its on your “to read” list.

Comment by butters
2017-03-23 07:56:32

Mr. Chairman, get to work!

 
Comment by Karen
2017-03-23 12:47:55

The Fed has always been a destroyer of the average person’s wealth. It was designed by plutocrats to funnel money to themselves.

Comment by junior_kai
2017-03-23 14:04:45

No truer words have been spoken!

 
 
 
Comment by azdude
2017-03-23 05:25:04

good morning

Comment by palmetto
2017-03-23 07:57:39

Got I-Phone? Say hello to your buddies at the CIA.

The stuff is flying so thick and so fast since yesterday, it’s like driving in Florida during love bug season. Splat! Splat! Splat!

Forget houses, get a yurt, sit back and enjoy the show. Wheeee!

Comment by Apartment 401
Comment by In Colorado
2017-03-23 09:13:48

Other than on College “safe spaces” and at SPLC staff meetings, I don’t think those narratives have much traction these days.

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Comment by PoohEmoji
2017-03-23 09:04:58

Seeing ahansen mentioned the other day reminded me of this gem:

“Comment by ahansen
2013-03-01 12:09:41
While I don’t wish this coming denouement on anyone, there’s a part of me that thinks it’s high time America, the country, gets a taste of its own medicine. The United States of America has been inflicting itself on the rest of the planet throughout my entire lifetime, always justifying its uncivilized activities as “promoting liberty and freedom” or “making the world safe for democracy” or some such vague sloganeering to cover its rapacious greed.

It has derided the voices of conscience as “commies”, “peaceniks”, and most recently,”liberals” (as if that were somehow a bad thing), and branded those of us with the temerity to call out our government’s thirty-year economic war on the middle class as “unpatriotic”. All while ignoring the philosophical inconsistencies of their professed ideology courtesy of a feckless (if not criminally complicit) mass media.

I gave up playing Cassandra decades ago when I realized where Reaganomics was taking us, but there is truly no excuse for the excess wrought by the turn-of-the-millennial cronyism and war-mongering that ruined our nation and looted our treasury while everyone was distracted by rhetoric and “reality” circuses.

I tell people who “want their country back”, “You wanted your war of revenge, you wanted your cheap crap from China, you wanted quick riches and easy credit. You got it. Now you get to pay for it. Not ‘the government’ and not ’someday’. You. Now.”

Welcome to the new austerity.”

Comment by In Colorado
2017-03-23 09:24:50

and branded those of us with the temerity to call out our government’s thirty-year economic war on the middle class as “unpatriotic”

And yet, the masses rejected the elites who openly mock and ridicule them, even calling the masses “deplorable” and elected the candidate which the media and the deep state repeatedly said had no chance of winning. And now the deep state is doing everything it can to derail his presidency.

And of course, the deep state will crow as Europeans, who have been suckling on their governments’ teats for so long that they can’t envision life any other way, will chose the status quo while their leaders continue to preside over the barbarian invasion of their homes.

Comment by Apartment 401
2017-03-23 11:16:13

You’re not allowed to use that kind of language here.

 
Comment by Tarara Boomdea
2017-03-23 11:20:14

NSFW -tasteless, but true.
Dear Parliament

Comment by rms
2017-03-23 12:21:46

Pantyhose… are they tossing the ladies under the bus too? I thought it was exclusive to white males, aged 25 to 56?

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Comment by Ben Jones
2017-03-23 09:35:27

I read this morning that one in three US citizens can’t scrap together $2,000. Boy, does this rant sound all knowing. Just curl up in a ball. stick a gun in your mouth and pull the trigger. Nothing is ever going to get better because I gave up long ago - the problem is YOU. What a bunch of fatalistic crap.

It reminds me of the discussion yesterday about rents. It’s inflation, compounded! We are all destined to be poor unless we hit the housing jackpot. And if there isn’t a jackpot in your town, move to California and get on the gravy train. Don’t listen to those bitter renters or people who express disgust with stupid prices. You are looking at it all wrong. Stop worrying and love the bubble!

Uh, the price of a boob job is down. Why does the cost of a band-aid in a hospital always go up? Why does every town and crick of the country have a shortage of shacks? Or is that just REIC horse-hockey? If you’ve ever flown in a plane you know there’s no shortage of land. Anywhere. Feck austerity. Feck this bed wetting fatalism. Stand up on your two legs and find a backbone. Think! Think for yourself and stand for something, even if it’s simply rationality itself.

Comment by Race Bannon
2017-03-23 09:44:11

A nation of feckless debtors on one side and lying fraudsters on the other.

Go ahead…… join in.

Comment by azdude
2017-03-23 10:08:51

prices got out of control when banks were basically able to create endless credit and debt. That is the problem.

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Comment by Blue Skye
2017-03-23 11:48:34

You are the junkie who took the loan, bought what you could not afford and raised the price of everything for the rest of us. That is the problem.

 
 
 
Comment by Blue Skye
2017-03-23 11:46:27

I just shook my head while reading the dialog between the strategic debtors/gamblers above. Gambling with borrowed money is irrational.

Comment by Carl Morris
2017-03-23 12:04:05

Gambling with borrowed money is irrational.

Is it? If you can create a situation where you keep your winnings and walk away from your losses it seems rational to me. Seems like that exact situation started at the top and now everybody is trying to get in on it.

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Comment by Race Bannon
2017-03-23 12:39:12

But thats what degenerate gamblers do. Characterize their losses as a win.

Not a winning strategy.

 
 
Comment by Rental Watch
2017-03-23 12:24:45

I have determined that in my circumstances (where my liquid assets are a multiple of my mortgage amount), that it is not worth it to me to pay 33% of my mortgage balance in taxes in order to be debt free.

It would be irrational to do so.

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Comment by Blue Skye
2017-03-23 15:16:08

” I would need to pay approximately 25% of my proceeds in tax ”

The key to good story telling is to be consistent.

Anyway, you will pay your mortgage with after tax dollars no matter what. You are just convinced your Real Estate investments are a sure thing.

 
Comment by Rental Watch
2017-03-23 16:05:11

“Anyway, you will pay your mortgage with after tax dollars no matter what. You are just convinced your Real Estate investments are a sure thing.”

There are only two sure things in my analysis, that my mortgage interest rate will stay at 3.75%, and that if I sell, I need to pay taxes before I pay down my mortgage.

$100 in securities (with a basis of $30), currently generates $3.80 per year of dividends (which is the precise math).

I can either a) sell the $100, pay long-term capital gains and CA tax on $70, which is approximately 23.8% (Fed PLUS Obamacare tax) PLUS 13.3% CA tax, or 37% on $70 = $26, and then use the remaining $74 to pay down my mortgage, saving $2.78 per year in interest cost.

So, I can give up $3.80 in pre-tax income, to save $2.78 in tax-deductible expense. The $2.78 won’t change. With the source of the dividends being REITs, the $3.80 will tend to go up over time with inflation.

For retirement, I would prefer to own liquid, income producing assets. If I were to sell, pay my tax, and pay off my mortgage, I then would need to, over time, make fresh investments to build back up that cash-flow. Will I find as good a time as 2009-2011 to buy such assets before retirement?

If you were in my shoes, you would de-lever because you are convinced that there is another such crash right around the corner. I’m much less convinced of that.

 
Comment by Race Bannon
2017-03-23 16:20:24

It depends how you define a crash. Housing already crashed given the fact housing demand is at 20 year lows and falling. What’s left? Prices. Now prices are eroding.

 
Comment by Rental Watch
2017-03-23 16:31:40

It depends how you define a crash.

Finally, a fair point.

I’m defining crash as something akin to what happened in 2008-2011.

I fully expect to see price movements like we’ve seen in the early 80’s and early 90’s…and while I don’t expect to see another “Great Recession” anytime soon, conditions for another one might arise if prices don’t cool off and/or credit loosens up to the level of stupid again.

It’s good news that you think prices are eroding right now…that means we will likely have a more traditional cycle, as opposed to a blow-off-the-top housing crash like last time. But I’m not so sure that we are having broad enough price declines yet to avoid another major crash.

 
Comment by Race Bannon
2017-03-23 17:00:09

2008-2011 wasn’t a crash and barely a correction. At it’s lowest point, prices were still 250% higher than long term trend.

 
Comment by Blue Skye
2017-03-23 17:20:10

What happens to the REIT if CRE corrects by 50%?

 
Comment by Rental Watch
2017-03-23 17:58:15

Corrects how? Value? Or Net Operating Income?

Most of the prognostications of CRE correction is because people expect cap rates to go up, so I’ll start on the value side.

A correction in value (higher yields demanded by the market) would be the lesser of two evils. That means instead of the REITs trading at a 3.8% dividend yield, they would be trading at a 7.6% yield (assuming the dividend isn’t cut). The implication of this being that interest rates and/or inflation have gone way up.

The vast majority of REITs that I follow had “near death” experiences, and so they have reduced debt levels, converted much of their floating rate debt to fixed rate, and pushed out the maturity of those loans. So, while these REITs would be valued lower, they would have rising rents for a while before they had meaningful increases in interest cost. They might cut their dividend, but given the amount of fixed rate financing they have, high inflation/interest rates is probably the least likely scenario where they would need to cut their dividend.

Worse would be a stagflationary environment. Little or no rent growth, but high interest rates. So, if the 50% value reduction happens in this environment, you would be faced with no rent growth, and interest cost growing in time.

One REIT that I own (that probably is in the weakest position in terms of balance sheet) has a fixed charge coverage ratio of more than 2.5x. So, if you hypothetically doubled their cost of capital, they would still be able to pay all expenses–however, that wouldn’t happen overnight, due to fixed rate, longer duration debt. This would be somewhat protected by contractual rental increases in leases, but that protection won’t go on forever.

If such an environment persisted (and wasn’t considered temporary), they would probably cut their dividend.

The more difficult situation is if CRE values fell because vacancy spiked, and rents collapsed. In CRE, this is usually brought on by overbuilding…and similar to residential, overbuilding is only happening in select markets…not broadly. But for the sake of argument, let’s assume we have a spike in vacancy and a collapse in market rents.

This was effectively what happened during the last crash. Vacancy rose, rents fell, but the starting point for many of the REITs was lots of floating rate debt. So, they cut their dividend, and preserved cash, hoping to survive another day. However, even during those times, when many of the REITs lost 90% or more of their stock market value, they were collecting enough rents to more than pay their fixed charges.

They were able to continue to collect enough rents because unlike apartments with 12 month leases, commercial leases can go for many years…even with market rents falling, REIT revenue falls more slowly (since it takes time for all the leases to roll to the lower market rents).

A lot of the stocks that I purchased, I bought when they were paying no dividend, needed to raise equity, diluting shareholders, etc., so that could certainly happen again.

 
Comment by Race Bannon
2017-03-23 18:10:01

In case you missed it…

What happens to the REIT if CRE corrects by 50%?

 
Comment by Rental Watch
2017-03-23 18:24:56

Since apparently you don’t understand subtlety.

Last time, CRE crashed by about 40% (Green Street CPPI). REITs got CRUSHED, in large part because they were overleveraged with floating rate debt.

This time, if CRE crashes by 50%, due to the stronger balance sheet positioning (less leverage, fixed rate debt), REITs will fare better. Instead of being CRUSHED, they will just be crushed.

 
Comment by Race Bannon
2017-03-23 18:27:18

Not will be. Is. The entire mess is coming apart.

San Rafael, CA Housing Prices Crater 13% YoY

https://www.zillow.com/san-rafael-ca/home-values/

 
Comment by Rental Watch
2017-03-24 09:08:39

The key to good story telling is to be consistent.

Now I see what you are referring to…25% vs. 33%.

If my mortgage is $100, and my tax rate on sale is 25%, then I need to sell approximately $133 in stock to generate $100 of after-tax dollars to pay off the mortgage.

So, I pay $33 in tax, or 33% of the mortgage amount in tax in the process of paying off the mortgage with a 25% tax rate on the stock sales.

 
Comment by Race Bannon
2017-03-24 19:03:53

This is no “cycle” my good friend. This is an unprecedented mania.

Current market conditions are;

-Falling rental rates
-Falling housing prices
-collapsing demand
-Inflation Adjusted Housing prices 300% higher than long term trend line
-Record housing inventory
-Rising delinquencies
-Foreclosure moratoriums
-Rampant subprime lending

 
 
 
Comment by rms
2017-03-23 12:24:18

“Uh, the price of a boob job is down.”

Awesome… might as well toss in a labiaplasty too.

Comment by Apartment 401
2017-03-23 13:08:42

+1

You can almost see the results of that walking around Cherry Creek every day.

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Comment by palmetto
2017-03-23 12:30:42

“Nothing is ever going to get better because I gave up long ago - the problem is YOU. What a bunch of fatalistic crap.”

Amen.

“I tell people who “want their country back”, “You wanted your war of revenge, you wanted your cheap crap from China, you wanted quick riches and easy credit. You got it. Now you get to pay for it. Not ‘the government’ and not ’someday’. You. Now.”

This is what I don’t get. Please tell me what “war of revenge” it was that I wanted. I loathe cheap crap from China, but got called a racist because I objected to it.

Easy credit? No thanks. The only thing I’ll cop to on the “your fault” rant is wanting “quick riches”. That’d be OK with me, but guess what? I never got it. So I ain’t payin’ for it.

A bitter bluenose harangue. At the wrong people, I might add.

Comment by MightyMike
2017-03-23 13:12:41

When she wrote you wanted this and you wanted that, you shouldn’t have taken it literally. She didn’t mean that anyone and everyone who might read those words wanted those things.

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Comment by In Colorado
2017-03-23 12:49:06

Uh, the price of a boob job is down. Why does the cost of a band-aid in a hospital always go up?

FWIW, a boob job is elective surgery. Your health won’t be affected if you can’t afford one.

If you break a leg or need your appendix removed, you can’t just “tough it out”. You won’t negotiate the price. You’ll just get it done, ASAP.

 
 
 
Comment by In Colorado
2017-03-23 09:29:24

http://www.cnn.com/2017/03/23/opinions/westminster-attack-security-services-russell-opinion/index.html

“Westminster attack was long overdue and couldn’t have been prevented”

So all those cameras that are ubiquitous in London, all the cell phone and and email spying, which are in place for “our safety” are utterly ineffective at doing what they were promised to do.

Well, knock me over with a feather!

Comment by new attitiude
2017-03-23 10:28:48

just cameras, not armed robots.

Comment by In Colorado
2017-03-23 12:27:33

But wouldn’t have all that snooping detected the the dude’s plan to go on a rampage? If it’s ineffective then why have it? It seems that it’s only there to snoop on the law abiding citizenry.

Comment by MightyMike
2017-03-23 13:26:06

I suppose that you could say that about any law enforcement measure. If some people ignore the speed limits, efforts to enforce the limits must be a waste of time.

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Comment by In Colorado
2017-03-23 14:52:02

The whole point of the surveillance state is to “keep us safe” from the bad hombres. And yet, as we see over and over again in Europe, it doesn’t deliver on its promise. Keeping the bad hombres out in the first place is far more effective, but that doesn’t fit the narrative. So instead we post solidarity filters on our Fakebook pages and light candles, and then it happens again.

 
Comment by MightyMike
2017-03-23 15:02:08

Look at it this way. Sometimes the authorities say that they prevent attacks before they happen using such techniques. If they’re right, your criticisms would be unreasonable.

 
Comment by In Colorado
2017-03-23 16:58:56

I don’t seem to recall any such incidents. The only thwarted attack I recall was when an off duty US Marine overpowered an armed man on a train in Europe.

 
Comment by new attitiude
2017-03-23 17:27:47

“If it does not work 100% then we can’t use it in CO.”

 
 
 
 
Comment by rms
2017-03-23 12:32:56

The debrief will eventually reach the Palestinian situation.

 
 
Comment by Senior Housing Analyst
2017-03-23 09:47:24

Santa Monica, CA Housing Prices Crater 6% YoY

https://www.zillow.com/santa-monica-ca/home-values/

Comment by azdude
2017-03-23 13:58:42

You have to love the ca sunshine and households leveraged to the hilt.

 
 
Comment by ZH
2017-03-23 13:09:06

http://www.zerohedge.com/news/2017-03-23/israeli-teenager-arrested-over-phone-threats-jewish-community-centers

Israeli Teenager Arrested Over Phone Threats To Jewish Community Centers

 
Comment by new attitiude
2017-03-23 14:07:32

If everyone thinks this 8 yr bull stock market needs to crash, and the crash is a great time to get in, will it crash?

captain obvious chimes in:
http://www.businessinsider.com/tony-robbins-ray-dalio-investing-advice-2017-3

Comment by Rental Watch
2017-03-23 14:38:49

I used to joke that in my investment science classes that if no matter the question, you answered “diversification”, you would get a “B”.

Comment by butters
2017-03-23 14:55:35

investment science

Science? LOL

No wonder you spread the housing propaganda.

 
 
 
Comment by Crow Breath
2017-03-23 15:22:56

This is off-topic political but it involves the Internet and thought it was interesting. Today, the Senate voted in favor of removing the restrictions for your ISP to sell what web sites you visit without your approval, to either advertisers or “other companies”. It still has to go through the House and President.

https://arstechnica.com/tech-policy/2017/03/senate-votes-to-let-isps-sell-your-web-browsing-history-to-advertisers/

Of course, the NSA records everything already, but I think that legislation sucks. Your entire browsing history, up for sale.

Comment by redmondjp
2017-03-23 21:53:10

Hmmmm, so one will be getting popup ads for adult toys if they have been visiting certain sites then?

 
 
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