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The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
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Name:Ben Jones
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The way central banks all over the world are manipulating the markets, would it ever get real again. I spoke to someone and he said it is real because people are making real money. But my point is it is not organic and all rigged with printed money all borrowed money. Is it sustainable?
The RE markets all over like Aussie, Canada, Singapore, HK, India etc. are taking forever to burst. So much intervention from Govts. and central banks. Would these countries be able to face austerity when shit hits the fan. And it will eventually. Why can’t they get it and prepare acordingly.
‘The RE markets all over like Aussie, Canada, Singapore, HK, India etc. are taking forever to burst. So much intervention from Govts. and central banks.’
Some of this is in the desk clearing post today, but here’s a little more:
‘RBA Governor Glenn Stevens…’I would have thought by this point we have to conclude that simply expecting to clean up after the credit boom is not sufficient anymore; the mess might be so large that monetary policy ends up not being able to do the job when the time comes,” he said.’
‘’Moreover, if the monetary policy clean-up after the asset price bust involves interest rates low enough to prompt some other sector of the economy to leverage in order to spur the growth, then the clean-up itself might leave its own toxic consequences.”
“He didn’t refer to the continuing debate about the protracted period of loose monetary policy in the US – the “Greenspan put” – that some believe played a major role in the creation of the massive credit bubble that blew up so destructively in the global financial crisis. He does, however, appear to subscribe to the view that there are two types of bubble, one of which is far more dangerous than the other.”
“A former Federal Reserve governor, Frederic Mishkin, made that distinction during the first phase of the financial crisis when he described the dangerous bubbles as those that created positive feedback loops between rising asset prices and the leverage against them. When that feedback loop reverses it creates crises and taxpayer-funded responses by governments and regulators. The more benign kind, “the pure irrational exuberance bubble” as Mishkin described it, is less dangerous because it doesn’t involve the cycles of leveraging and therefore doesn’t ultimately infect the financial system.”
So these guys have made it so far as to distinguish between beenie babies and debt-fueled housing bubbles! But at least in Australia, the central bankers are starting to ask if the ‘clean up’ of flooding money, low rates, etc, will do more harm than good. The obvious next question; should bubbles be stopped? Now we’re in a third type of bubble; where govts/central banks actually revive bubbles and try to perpetuate them. How destructive can this be? It’s never been tried before.
This discussion is pretty two dimensional. How about the govt and central banks just not participate? Don’t print money every time wall street might lose some money. Stay out of the lending biz, and don’t fiddle with interest rates. And don’t bail bubble gamblers out.
But see now, these suggestions involve govt/central banks losing a bit of power and clout. Not to mention the ability to help their corporate buddies make tons of dough, and then hand out tons of dough when it blows up. So maybe the discussion of what to do should be taken out of their hands, since it’s pretty clear what they’ll want.
Anyway, this new type of bubble shouldn’t be looked at as a movie that is too long, IMO. It was already the biggest mania in history. Now we are going to see the greatest financial blunders of governments and central banks in history on top of it.
The way central banks all over the world are manipulating the markets, would it ever get real again. I spoke to someone and he said it is real because people are making real money. But my point is it is not organic and all rigged with printed money all borrowed money. Is it sustainable?
Well…. here’s the thing….. They own the media. They create their own reality however false it might be and pump it out to the public and they’re too stupid to know any better. Truth is obscured. Truth be damned.
“A former Federal Reserve governor, Frederic Mishkin, made that distinction during the first phase of the financial crisis when he described the dangerous bubbles as those that created positive feedback loops between rising asset prices and the leverage against them.”
Uh…doesn’t that describe exactly the type of housing bubble the Fed is attempting to reflate RIGHT NOW, AS I TYPE?!
To what extent is the weak economy we are in the result of the aftermath of the housing bubble?
And to what extent is it merely the economy we would have had all along, absent soaring indebtedness?
I’d say the latter, except that there would be more housing development going on without the excesses and overhand of the bubble years, and thus somewhat more normal unemployment.
You’d still have falling wages, a falling standards of living, and people moving into retirement or being pushed sans pensions. Those are 30-year trends.
Roger on those 30-year trends.
And, take heart, people. The fact that these trends are now being recognized for what they are — a move in the wrong direction — is a good thing.
Topic: the mythical Fed exit.
There has been much discussion over the past 5yrs, by Fed Governors themselves, reassuring the markets that when it comes time to “exit”, that they have the tools available to do so.
Why would they ever exit, except perhaps to combat runaway inflation?
Historically, they have not exited in the past. Before the current crisis became common knowledge, the Fed had holdings on their balance sheet of just under $1T (IIRC–don’t have the data in front of me right now). Presumably that was the accumulation from all of their open-market activities previous to that. And no one complained much about it.
Why should we believe that they would ever return to historical numbers, given the above? Will the Fed balance sheet from here on out just be maintained at $4T? $6T? $10T?
Did Volcker reduce the size of the Fed’s balance sheet when he was combating the last round of serious inflation in the late 70s?
What factors other than runaway inflation could cause the Fed to even want to reduce the balance sheet, much less follow through on doing so?
The Fed’s policy from its creation has been to destroy the value of the dollar by asset inflation for the rich. That’s what they do.
It’s all they do.
There is NO “exit strategy”. There doesn’t need to be. Take a look at Japan.
Over 20 years of Zero interest-rate policy, producing a period of the “Yen carry trade” with printed paper.
Their society hasn’t collapsed. They just have a general devaluation of Real Estate and markets, but they keep printing money and “investing” in the infrastructure, as they call it.
We will do the same.
After chastising the Japanese for their money-printing schemes more than a decade ago, the same people (bernanke & co.) have done exactly the same thing: Used the Central Bank as a “wealth creation” fraud, that prints up paper and allows people who control its distribution to “cream off” the remnants of societal wealth, leaving the majority of the population all the poorer.
Banksters, world-wide, have been living better than emperors with simple Paper Printing. What a sham.
And the American voters? Completely ignorant.
Topic:
The SFH rental strategy…long-term implications if the big groups buying homes to rent are correct. Specifically, they believe:
1. That they can effectively manage large numbers of homes; and
2. That the rental yields are today 6-8%, but that over time, and in the public arena (as public REITs), that investors will accept yields more akin to what apartment investors accept (5% to 5.5%).
Again, I’m not asking whether they are correct are not, but the long term implications if they are correct–because all we can say at this point is that the jury is out on the strategy.
Anything over a 5% ROI is gravy. And very difficult to sustain over the long run.
Such returns are not as difficult to sustain if you start at a low enough cost basis.
The questions here are 1) is the actual unleveraged yield on cost (cap rate) 6% to 8% based on today’s rents/today’s purchase price; and 2) will the market in time accept 5%-5.5% as an acceptable market cap rate?
The Rental Pimp Strategy
Lie, Lie and Lie some more.
Can I get any serious thoughts here, or does everyone believe 100% that the single family home rental strategy is a loser?
There are more than 10 million+ mom & pop landlords in the US (more single-family home rentals than apartments), and this is the first large-scale effort to institutionalize the practice of renting homes.
Has anyone other than me thought about the implications to the single-family housing market if they are successful in turning this into a new REIT asset class? Anyone at all?
The REITs will have some economy of scale because they will have salaried maintenance workers. Do I understand they are buying fairly new houses that aren’t going to face the big ticket expenses - roof, furnace, etc? I suppose the strategy is to offload the properties before the big ticket repairs come up.
Do you know the price, rent, and age of a typical REIT SFH?
I can imagine if ten million Americans become Landlords, then we will see a Ben Jones Landlord Bubble Blog. Going into business buying up SFHs and renting them out seems too complicated and I am sure there is a far more lucrative way to make money. Become a company director is one way. I saw people who do not know $hit from shoe shine become directors. They don’t have to lift a finger and they get all the dough and perks. It is not for me. I prefer infesting in various asset classes and rebalancing while working on embedded software for things like automobiles and commercial airliners.
10 million Americans ARE landlords. We now have big business moving in on their territory.
Topic: helping family members who have been extravagant but are now needy
WaPo:
I received a question from a reader asking what to do to help relatives who lost their house in New York. But, the reader noted, the family had also “squandered” a $300,000 inheritance received a few years ago, buying luxury items such as “two expensive cars, a high-end computer and tech equipment, which were all also lost in the storm. This is a pattern that has been repeated a few times with this particular couple.”
Unfortunately, there wasn’t enough insurance to cover their losses (they didn’t have flood insurance). “What do I and the other concerned siblings do in such an event?” the reader asked. “We could all provide some form of help, though none of us is wealthy by any means. I find myself debating not funding my child’s college education for a year to help them out. But I become so angry at the thought of all the money they wasted.”
You will always drive your self crazy giving gifts of money to people who don’t live as frugally as you do, especially when you know that they need to do it alot more than you do.
If possible, the best way I know around it is to give them the gift of your talents/skills. I have friends who are broke a lot. It is an income thing with them rather than high living, but they are still kind of broke a lot of the time. I help them with their taxes every year. It is multiple hours of my time (more of theirs) every year. When I was helping them get caught up with back years (they got three years behind), it was more hours. Despite having done this for a while, it still makes them nervous so it is emotionally taxing for me as well. Still a far, far better thing to do than to hand them a check - which they would never take anyway.
Yes, it is a little manipulative. Gifts are manipulative. When I give my niece a kit to write her own books I am approving of and enabling certain activities (writing a story, reading, loving books) and not enabling others (playing dress up with sparkle shoes). It is a harder game to play with adults. There has to be trust there. But giving people money when you are about 95% sure what will happen with it and that it will anger you and make you resent the recipient and worry about your own kid, well, it is worth playing the game.
Anyone who bails out squanderers is a fool.
I see stuff like that happen in families all the time. The squanderers are frequently in some sort of trouble, and that is used as leverage against other family members. Group shaming happens, and the squanderers get another bump of charity, which is then (you guessed it) squandered.
A lot of working middle class that I know, can’t get ahead, since there’s always some squanderer in their midst. Family inheritances get divided up and wasted; it goes beyond just dividing up X by Y; each X/Y piece is whittled away due to all sorts of stupid plans that rarely turn out, like buying cars that get lost due to repairs or accidents.
Climbing out of the lower part of the middle class from family assistance really only works if there isn’t one of these squanderers around to suck up the excess family financial margin.
I see it in my own family. Going back several generations, you can see significant wealth (old pictures from pre-depression with holidays around the world)…but it never made it to my parents’ generation (on our branch of the family).
One particular generation of relatives, you could see three siblings who were all given a fair bit of money as inheritance, and all dealt with it differently.
One squandered it…lived overly nice, spent on things they shouldn’t have, ended up living with family at the end of his life, without much left.
One hoarded it, not knowing what she had…always cried poor, never truly understood how wealthy she actually was, didn’t spend enough to enjoy her life, and now her daughter is doing the same thing with the money…sad.
One understood exactly what he had. He took the view of only spending the income that came from the assets, paid attention to dollars and cents over the years (knew what he had), stayed invested through cycles (during the downturn, he applauded those who were buyers of securities into the mouth of the market fear), and enjoyed life, his “extravagant” spending was on family–paying for family vacations so he could spend time with kids and grandkids. At the end, he paid his own way in a retirement home of his choosing close to his family, and still had some wealth to pass on. He was critical of waste, but also of penny pinching to an extreme–a great man (WWII vet), I miss seeing him tremendously, he was the last of the three to pass away, in his early 90’s, just a couple of years ago.
How can the stock market reach a “market top” if the Plunge Protection Team can prop it up at whatever level they choose?
Dec. 14, 2012, 8:01 a.m. EST
Leading indicators of a stock-market top
Commentary: How market’s sectors tend to do prior to tops
By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) — A top in the stock market may be closer than you think.
That, at least, is the disturbing conclusion that emerges from an analysis of the relative performance of the market’s various sectors prior to tops. The sectors that typically shine during the last months of a bull market have done quite well in recent months, while at least some of the sectors that typically do poorly have been struggling.
In drawing this conclusion, I am relying heavily on a study conducted early last year by Ned Davis Research, entitled “Leading Sectors for Calling Bull Market Peaks.” The study focused on performance over the last three months of each stock bull market in the U.S. since the early 1970s.
The study’s finding: “Financials and utilities have tended to underperform in the months leading up to bull market peaks, while consumer discretionary and consumer staples have outperformed.”
Unfortunately, in the case of 3 of these 4 sectors, returns over the last three months are consistent with a top being formed. (The table below reports returns, courtesy of FactSet.)
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What was it that these guys were hiding? I guess the American people will never know.
“NOBODY COULD HAVE SEEN IT COMING!”
Or if they could, the record has been shredded.
New York Fed slams window into key crisis-era deliberations
December 14, 2012, 4:53 PM
The New York Federal Reserve Bank slammed on Friday a window into the 2007-2008 financial crisis when it released minutes of its board of directors meetings from those two years that remove all meaningful discussions.
As the subprime mortgage crisis moved in early 2007 like a slow trail of lit gunpowder that lasted for months and months to eventually to explode in the fall of 2008 into a global economic crisis, many of the leading players in the crisis, including, on occasion, Richard Fuld, former Lehman Brothers CEO, Jeffrey Immelt, the CEO of General Electric, Jamie Dimon, the CEO of J.P. Morgan Chase and then-New York Fed President and now-Treasury Secretary Timothy Geithner, met to discuss conditions.
During this time, the New York Fed engineered the rescue of Bear Stearns by J.P. Morgan Chase in March 2008, and played a starring role in allowing Lehman Brothers to collapse, and helped rescue the troubled global insurance company AIG in the fall of 2008.
In a move only a central banker could love, the New York Fed trumpeted the release of the scrubbed minutes as greater transparency. That’s because the regional Fed bank is going to release the minutes going forward with a six-month lag.
But this will offer little solace to historians. With most of the key discussions redacted, the only thing left for them are discussions of such relative minutia as the closing of the New York Fed’s branch in Buffalo and renovation of the kitchen at New York Fed headquarters.
– Greg Robb
Anyone up for watching a game of fiscal cliff chicken?
Time For Plan B On ‘Fiscal Cliff?’
by The Associated Press
December 14, 2012 7:30 PM
WASHINGTON (AP) — It’s beginning to look like it’s time for Plan B on the “fiscal cliff.”
With talks between President Barack Obama and House Speaker John Boehner apparently stalled, the leading emerging scenario is some variation on the following: Republicans would tactically retreat and agree to raise rates on wealthier earners while leaving a host of complicated issues for another negotiation next year.
The idea is that House GOP leaders would ultimately throw up their hands, pass a Senate measure extending tax rates on household income exceeding $250,000, and then duke it out next year over vexing issues like increasing the debt ceiling and switching off sweeping spending cuts that are punishment for prior failures to address the country’s deficit crisis.
It’s easier said than done.
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