February 1, 2013

Irrational Exuberance Then And Now

It’s Friday desk clearing time for this blogger. “In activity reminiscent of real estate’s bubble years, the number of homes statewide selling at more than $5 million reached an all-time high last year. Foreign buyers spent 24% more on U.S. real estate last year than in 2011, according to an annual survey by the National Assn. of Realtors. Asian shoppers are particularly interested in California homes, the study said. Sandra Miller of Engel & Volkers, a broker who specializes in international buyers and luxury properties, said that ‘the money is really coming from everywhere.’ While her office is dealing with an onslaught of Italians, buyers are coming from London and Germany. Chinese buyers are snapping up homes in the $1-million to $5-million range for their children, she said, but not ultra-luxurious estates. ‘The very, very large sales last year were done with Russian money,’ Miller said.”

“A tear-down in the so-called Tree Section of Manhattan Beach drew 20 offers in March, selling for $1.352 million — $250,000 above the asking price. A 2,600-square-foot Midcentury-style house in need of work in the same block attracted 15 bidders. Listed at $1.6 million, it sold for $1.88 million. ‘Everybody is shaking their heads,’ said Dave Fratello, an agent with the Real Group in Manhattan Beach. ‘This is crazy.’”

“Niu, the owner of a factory that supports a chain of clothing stores in his hometown in Fujian province, is looking in New York City for a second home, and he’s willing to pay as much as $3.5 million for it. Although he can barely speak English, Niu - he asked that his full name not be used - needn’t worry that the language barrier could impede a deal. That’s because brokers who aren’t native Chinese speakers can take a course, Mandarin for Real Estate Professionals, starting next month at New York University’s School of Continuing and Professional Studies.”

“Zhang Qi, a 28-year-old Beijing native who came to the US in 2007 to study, is currently working at a New York consulting firm. He pointed out that policies in China prevent second-home purchases, to prevent overheating in the housing market. ‘If you already have a piece of property in Beijing, the policy doesn’t support your purchase of a second one,’ Zhang said. ‘The purchase-limit policy in China is to control and cool down the real estate market,’ he said, though it has also sparked a ‘crazy’ jump in housing prices.”

“Auckland homeowners are being encouraged to sell their houses to wealthy Chinese investors in a television marketing push. For $7000 a month a Chinese television producer is offering to aggressively advertise Auckland houses in daily 30-second commercials to potential buyers in mainland China, Hong Kong, Singapore, Malaysia, Taiwan and Australia. Ian Thornhill of Barfoot & Thompson raised concerns after an Epsom deal when a Chinese investor bought a house then left it empty, saying he worried about the future for his family. ‘I don’t think it’s a good thing at all. Kiwis are getting really upset. They can’t compete with Asians who have the money and they pay more,’ Mr Thornhill said.”

“In Vancouver, foreign buyers, mostly from China, have been blamed for increasing housing demand and prices and turning friendly neighbourhoods into ghost towns by not living in the properties.”

“A taxi driver in Toronto said he remembered seeing Asian-looking men lining up in the rain outside a new residential development, two days before its grand opening. Intrigued, he approached them and asked some questions. Many turned out to be Chinese students lining up for interested buyers for some quick cash. Most of the others he tried to talk to were Chinese nationals who couldn’t speak a word of English. ‘It was the most mind-blowing scene I’ve ever seen in my life,’ the unnamed taxi driver later told his customer, Chinese businessman Zhu Weijun, himself an investor in Canada’s property markets.”

“It’s not just Toronto that was feeling the impact of a stream of wealthy Chinese. Another residential development of 150 units in Canada’s New Westminster sold out within two hours of its opening. It turned out 40 per cent of the buyers were Chinese, said a report. Sheng Mingchang, a Chinese investor who has bought houses in different countries, said he had learned that contrary to what the Chinese had expected, many locals are not grateful that their properties are gaining value.”

“‘The locals now have to pay a higher property tax after the appreciation, which means they will sacrifice their vacation budgets and skip more movie trips because of the foreigners’ buying,’ he said.”

“The possibility of a farmland bubble dominated the sixth annual Iowa Land Investment Expo, where speakers explored whether the blistering pace of price increases gives way to a disruptive decline or a soft landing. Iowa prices surged 24 percent to $8,296 an acre in 2012, after jumping 32.5 percent in 2011 and 16 percent in 2010, according to the annual Iowa Land Value Survey published by Iowa State University. An 80-acre tract of land in Sioux County, home to some of the nation’s most productive land, sold for $21,900 an acre in October.”

“‘The cure for high prices is high prices,’ said Jim Knuth, senior VP of Farm Credit Services of America. ‘Are we in a bubble? The answer is yes, but it’s not the bubble you think. We believe we’re in a profit bubble.’”

“A U.S. housing-market revival may prove illusory and the threat of further weakness remains, said Robert Shiller, a professor at Yale University. ‘It’s a good housing market in the sense that mortgage rates are very low and prices have come down to normal levels, so yes, it’s a good time to buy if nothing bad happens,’ Shiller said. ‘But it’s also a very bad housing market in that most of the mortgages are being supported by the government, and we have the Fed and this buying program. It’s a very abnormal market.’”

“‘We’ve been five years in a slow economy, and it could go quite a bit longer,’ he said. ‘We’ve seen gross domestic product growth at sub-normal levels.’ He added, ‘I think we’re pretty far from irrational exuberance, maybe 50 years away.’”

“An Indiana economist said Tuesday’s economic report from the Commerce Department confirms that the United States is almost certainly in another recession. The economy unexpectedly shrank from October through December for the first time since 2009. ‘The shrinking of the economy in fourth quarter by a slight 0.1 percent almost certainly marks a new American recession,’ Ball State University economist Mike Hicks said in his weekly column. ‘Indeed, because we have good data back to World War II, there has been no quarterly decline in GDP on record without a recession.’”

“Williamson County conducted a property loan audit that revealed some major red flags. The county clerk said 60,000 home ownership deeds and documents have not been filed properly in the clerk’s office, and that could mean possible foreclosure for some homeowners. It was a full house Tuesday inside Williamson County Commissioners Court. Homeowners filled the room asking why they could lose their home. ‘It’s the American dream,’ said Williamson County homeowner Kevin Bierwirth. ‘What people want, I mean, everyone wants a house to feel free.’”

“Bierwirth is also a real estate agent. Bierwirth said he fell behind on his payments, and when he began looking for help he claimed the loan documents were in shambles. ‘I always believed that if you can’t pay, you can’t stay,’ he said. ‘You either walk away, which I was not about to do because I am trying,’ he said. ‘Don’t take my house. It’s not that I don’t pay, it’s not that I can’t pay.’”

“In September 2011, initial foreclosure filings in Nevada totaled about 4,700, on par with a yearslong trend of thousands of such notices each month. In October 2011, the number of notices of default plummeted to about 1,200, according to Realtytrac. Initial foreclosure notices have since crept up, reaching over 1,500 in December, according to Realtytrac, but they’ve never returned to their previous levels. Many point to AB 284, an ‘anti-robo-signing’ state law that took effect that month.”

“Rocky Finseth, who lobbies for the Realtor association, recalled appearing on a radio talk show and fielding a call from a taxi driver who said he’d heard about the law and stopped paying his mortgage. ‘It sent out a mental shift to the homeowner — ‘I’m going to sit here and kinda live rent-free,’ said Keith Lynam of NVAR.”

“‘There aren’t enough homes going on the market. That’s absolutely creating an artificial, temporary bubble,’ said Victor Joecks of the Nevada Policy Research Institute, a conservative think tank that supports repealing the law. ‘When the bubble bursts, there’s going to be a fall. Do we want to drag it out, or have some pain in the short term and experience recovery?’”

“Home prices will rise between 7 percent and 8 percent in the Seattle area this year, an increase not seen since the housing bubble in 2006, according to the National Association of Realtors’ chief economist Lawrence Yun. ‘The difference between then and now is that prices are much lower now, even though they are rising,’ Yun said.”

“Another difference: There’s no easy credit anymore, and lenders have much stricter criteria for borrowers taking out a home loan. The result is a housing market that is driven by solid market fundamentals, such as job growth, so ‘these price increases are genuine,’ Yun said.”

“The housing market is supposedly roaring back. Home prices are seeing their biggest annual gains since 2006. Renters must be rushing back to buy, right? Not exactly. According to a recent Raymond James report: ‘Renter household formation remains at the strongest level in decades. Roughly 1.32 million new renter households were formed in the past year (including owner conversions), while the number of owner-occupied households declined by 175,000. Resident turnover and move-outs to homeownership remain near historic lows for most operators. Incoming leasing traffic is more than offsetting move-outs while paying higher rates.’”

“The home ownership rate declined yet again in the fourth quarter of 2012, according to a new report from the U.S. Census. It now stands at 65.4 percent, down from 66 percent a year ago and from a high of 69.2 percent in 2004. If you include the 5.3 million borrowers who are delinquent on their mortgages or in the foreclosure process, per LPS, the real home ownership rate is even lower.”

“‘The fact that the housing recovery is being driven principally by investor demand means that the slight decline in the homeownership rate in the fourth quarter is unlikely to be the last,’ notes Paul Diggle of Capital Economics.”




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110 Comments »

Comment by Pimp Watch
2013-02-01 06:47:45

“Foreign buyers spent 24% more on U.S. real estate last year than in 2011″

That accounts for most of the demand….. even so, housing demand is at 1997 levels and falling.

And imagine how ugly housing gets when Chinas business cycle goes into recession.

Can you say Japan 1989?

Comment by Cantankerous Intellectual Bomb Thrower™
2013-02-01 08:04:32

Isn’t it great to know that all-cash Chinese investors are raking in the dough, thanks in no small part to the Fed’s $40 bn / month in MBS purchases and the FHA’s federally-guaranteed “low-income housing” loans in excess of $600,000?

Comment by Ben Jones
2013-02-01 08:45:34

Or how about this:

‘because we have good data back to World War II, there has been no quarterly decline in GDP on record without a recession’

So even with unprecedented money creation by the central bank, a zero interest rate policy, the US is slipping back into recession. Now the federal govt is laying people off and raising taxes. BTW, Germany is going into recession as is the UK. China is overbuilt and thus the commodity boom is cracking, putting Australia in a spot. Bubbles everywhere you look.

The confirmation of silly statements is present:

‘it’s not the bubble you think. We believe we’re in a profit bubble.’

And the classic denial of the ivory tower rounds it all off:

‘I think we’re pretty far from irrational exuberance, maybe 50 years away.’

Comment by Cantankerous Intellectual Bomb Thrower™
2013-02-01 08:53:12

“So even with unprecedented money creation by the central bank, a zero interest rate policy, the US is slipping back into recession.”

Exactly my thought. It looks like the Fed is all-in, yet the economy is still on the verge of recession.

Are they really out of bullets at this point, or do they merely appear to be really out of bullets?

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Comment by polly
2013-02-01 09:26:17

Out of bullets you are willing to use isn’t the same thing as out of bullets. If they wanted to, they could try to increase inflation substantially. They have said they aren’t really willing to do that. That is why BB has said that fiscal policy (he has no control over that) should be part of the mix.

 
Comment by Cantankerous Intellectual Bomb Thrower™
2013-02-01 09:59:29

Polly — I agree. They haven’t (fully) played the inflation card yet, and in that sense, they are not out of bullets.

 
Comment by Ben Jones
2013-02-01 10:40:49

‘If they wanted to, they could try to increase inflation substantially’

Oh sure, we’ve got 14 central banks with either zero rate policies, massive asset purchases or both. But: ‘They have said they aren’t really willing to do that.’

‘BB has said that fiscal policy should be part of the mix’

See, this is the delusion; that if people in DC will tinker with the tax code just right, cut rates, make loans, and stimulate this and target that, we’ll all live in prosperity forever. It’s just bunk. That’s not how the economy works. So let me propose a theory; the people in charge couldn’t run a cool-aide stand. They are fools, who are advised by bigger fools. And everybody stands around wondering why things keep getting worse.

I’ve said this a million times, and it truly is Economics 101: recessions are how the economy purges bad investments. Keeping bad investments around (or increasing them, as we now see) does not eliminate the root cause of what’s ailing the economy. Add to that mis-allocated capital, people working in businesses that should have gone into a different line of work, and so on. We’re going to struggle until this bad stuff is liquidated. The Fed is just making everything worse and postponing the recovery.

It still blows me away that the media doesn’t ever stop and ask, why are we sitting around watching house prices like a tech stock? We didn’t used to do that. That alone shows houses have become just one more dangerous casino these people have talked us into.

 
Comment by Cantankerous Intellectual Bomb Thrower©
2013-02-01 10:55:01

“It still blows me away that the media doesn’t ever stop and ask, why are we sitting around watching house prices like a tech stock?”

The MSM financial journalists are a bunch of frogs sitting in a pot of water slowly approaching the boiling point. I don’t expect many of them to jump before the frog stew is fully cooked.

 
Comment by DudgeonBludgeon
2013-02-01 11:01:40

It’s all about “engineering” a soft landing. They just don’t talk about it. Heck, they don’t talk about any landing at all because to acknowledge the landing is to acknowledge the fall. Perception is reality.
And economics has turned into a propaganda machine. I am sure there are wonks still working in academia but the smartest folks are part of the problem and working on Wall Street or in the City.
Posters here have no agenda and call it as they see it. Do you realize how incredibly rare that is? Most everyone has a dog in this hunt and are actively working to maintain the facade.
Nothing has fundamentally changed, we are right back to 2003 and the too big to fail monsters are even bigger, the economy is less secure, the derivatives market is just as opaque as it ever was and there is a creaking and groaning coming from so many corners that you would have to be deaf to ignore the inevitable.
Seriously. It truly is terrifying.

 
Comment by Avocado
2013-02-01 11:11:43

I think posters on here have an agenda: short if you are in cash, long if you own a home. We see it in their posts.

 
Comment by DudgeonBludgeon
2013-02-01 11:12:33

The focus on Chinese investors is utter propaganda. Do you really believe Chinese billionaires are responsible for this market? What a convenient scapegoat. Ignore monetary policy, ignore the shadow inventory, ignore ignore ad nauseum. But look at these Chinese! They are wealthy and foreign and inscrutable - they don’t speak english!. They are the bad actors here not your neighbors and not your government. No. It’s the “other” making your life difficult.

Granted these markets are so out of wack that they are strongly influenced by activity at the margins. It is likely that large cash purchases have a measurable effect.

 
Comment by Carl Morris
2013-02-01 11:16:40

I think posters on here have an agenda: short if you are in cash, long if you own a home. We see it in their posts.

Is that an agenda, or just walking the walk that goes with their analysis of the situation?

 
Comment by Cantankerous Intellectual Bomb Thrower©
2013-02-01 11:40:02

“…short if you are in cash, long if you own a home. We see it in their posts.”

I don’t know whether I fall under the scope of this accusation, but for the record, I am long housing — through REITs.

The nice thing about REITs is that you don’t have to take the risk of buying “housing” in one big lumpy bundle that can send you off to the poor house if the prices crash. It also frees me up to say what I really think about housing without needing to talk my book…

 
Comment by Ben Jones
2013-02-01 11:41:09

’short if you are in cash, long if you own a home’

I’ve made it clear I have no interest in the ‘buy or not buy’ stuff you see here. I do think that the question of a housing bubble is very important for a lot of reasons. Sometimes that plays out as, ‘houses are affordable’, ‘no they’re not!’ But that’s not the central question as I see it.

Even houses aren’t that important, really. It’s just what this bubble is made of. If I’m right and we are in a housing bubble in 2013, there will be a lot bigger problems ahead than how much one paid for a house.

 
Comment by Ben Jones
2013-02-01 11:50:15

‘The focus on Chinese investors is utter propaganda.’

If I’m looking for evidence of a mania, are the Chinese buyers a sign, or is the propaganda a sign? It was the same with the Californian equity locusts. UHS couldn’t stop talking about it because it justified what was happening in other states. How much of a factor was it? I can’t say. Here’s a couple of examples from 2005:

‘If there is a bubble forming in the housing market, one would expect to see ordinary people buying more home than they need. “I bought it purely as an investment,” says the 58 year old. He plans to use the 2,200-square-foot house, also in Park City, as a rental property. Mr. Lieberman rented it out for two weeks over Christmas, and it is booked for the Sundance Film Festival this month”.

http://thehousingbubble.blogspot.com/2005/01/third-homes-more-common.html

‘As a follow up to the last post, here is a story of some people who found themselves on the wrong side of a home price bubble. “They claim Pulte burned them by inflating it’s home prices and steering them to in house lenders who were all too happy to underwrite their dreams”…”We came with the hopes of buying two houses. We left the first day owning four. Within the next week, owning 6 — all the way up to 19.”

http://thehousingbubble.blogspot.com/2005/02/las-vegas-or-bust.html

So how many people bought 3 houses, or 19? I don’t know, but it was part of the mania.

 
Comment by DudgeonBludgeon
2013-02-01 13:53:43

I have no qualm with anyone pointing out that wealthy investors are buying property, paying cash and helping drive certain markets to unsustainable levels. It’s the “Chinese” and “Russian” part that strikes me as propaganda. Why not just say “wealthy investors” or “wealthy foreign investors”?

Communist thugs with billions of ill gotten cash are coming to YOUR neighborhoods and buying up YOUR precious housing stock to launder their blood money.
They are pricing your children out of their god given right to affordable local housing. These foreigners are making it so that you will not be able to visit YOUR grand babies while without a whit of care for you and yours they dry wash their hands with avarice glee.

 
Comment by michael
2013-02-01 15:20:35

“Communist thugs with billions of ill gotten cash”

ill gotten?

we hand them billions of dollars every year and then borrow alot of it back from them…the extra is just coming home to roost.

using dollars to by dollar denominated hard assets before those dollars lose much more value…that’s all they are doing.

 
Comment by michael
2013-02-01 15:22:11

there i go again…buy not by.

 
Comment by Cantankerous Intellectual Bomb Thrower©
2013-02-01 15:43:23

‘It’s the “Chinese” and “Russian” part that strikes me as propaganda. Why not just say “wealthy investors” or “wealthy foreign investors”?’

As an American federal taxpayer for nearly three decades, and one who cannot afford to own a home in the neighborhood where we are raising our family, I have problems with federally-supported housing price support programs that allow foreign real estate investors to siphon off U.S. ‘tax dollars.’

So I am completely missing your point about ‘propaganda.’

 
Comment by Pimp Watch
2013-02-01 15:44:48

“I think posters on here have an agenda”

And we know what yours is.

Be advised readers.

 
 
 
Comment by AbsoluteBeginner
2013-02-02 05:45:57

‘And imagine how ugly housing gets when Chinas business cycle goes into recession. ‘

This time its different though.

 
 
Comment by Avocado
2013-02-01 11:09:38

How did China get all that money?
;)

Comment by DudgeonBludgeon
2013-02-01 11:20:00

You and I chasing after our dreams for the past 40 years.

Now it’s their turn. Or at least a subset of their turn.

 
 
 
Comment by Arizona Slim
2013-02-01 06:51:28

“The home ownership rate declined yet again in the fourth quarter of 2012, according to a new report from the U.S. Census. It now stands at 65.4 percent, down from 66 percent a year ago and from a high of 69.2 percent in 2004. If you include the 5.3 million borrowers who are delinquent on their mortgages or in the foreclosure process, per LPS, the real home ownership rate is even lower.”

“‘The fact that the housing recovery is being driven principally by investor demand means that the slight decline in the homeownership rate in the fourth quarter is unlikely to be the last,’ notes Paul Diggle of Capital Economics.”

Historically, the U.S. homeownership rate has been in the 62-66% range. So, we’re back to where we have been all along.

Comment by Cantankerous Intellectual Bomb Thrower™
2013-02-01 08:06:55

“The home ownership rate declined yet again in the fourth quarter of 2012, according to a new report from the U.S. Census. It now stands at 65.4 percent,…”

Do these statistics factor in Chinese and Canadian investor home ownership in the U.S.? Because my impression is that the percentage of homes owned by these groups is increasing, as they are crowding American families out of the owner-occupied housing market.

I guess our fearless economic leaders have no problem with throwing this generation of 20-somethings under the bus, in order to favor real estate investment opportunities for the all-cash foreign buyers?

Comment by Ben Jones
2013-02-01 08:15:22

What is significant IMO is that even with rising rents, low interest rates and so called ‘record affordability’, people are still choosing to rent.

Comment by Pimp Watch
2013-02-01 08:33:30

“What is significant IMO is that even with rising rents, low interest rates and so called ‘record affordability’, people are still choosing to rent.”

And this is confirmed given the fact that housing demand is at 1997 levels. Most of the public understands housing is a massive rip-off at current prices. Who’s buying? A few suckers.

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Comment by Ben Jones
2013-02-01 08:38:26

‘Who’s buying?’

Apparently, on net it’s not owner occupants.

 
Comment by Pimp Watch
2013-02-01 08:47:06

Yeaup. If it won’t cashflow, it won’t sell.

 
Comment by Cantankerous Intellectual Bomb Thrower™
2013-02-01 08:49:54

“…it’s not owner occupants…”

I had a conversation with a real estate economist back in 2005 about the historically high share of investor purchases of U.S. housing which used to be owner-occupied by U.S. households. Apparently this was news to him. After I succeeded in calling his attention to the situation, he opined that a major U.S. housing crash was in the works. Guess what: He was right!

Update to 2013: My impression is that the investor share of U.S. home purchases remains historically and unsustainably high, and that another crash lies in wait before this housing mania ends, due to the all-cash foreign investors trying to cash in their chips.

You have been warned.

 
Comment by Cantankerous Intellectual Bomb Thrower™
2013-02-01 10:02:41

Footnote to the above anecdote: The economist to whom I refer happens to be a subcontinental Indian immigrant to the U.S.

I assume that coming from somewhere else frees one’s mind somewhat from the influence of the kook-aide which homegrown U.S. economists seem so fond of drinking. (Typo intended…)

 
Comment by DudgeonBludgeon
2013-02-01 11:25:04

“You have been warned.”

Ha! I love this. I recently noticed that conversations I am hearing - and having - all sound like conversations I had and heard in 2004/2005.

And I’m bored by them… again.

 
Comment by Cantankerous Intellectual Bomb Thrower©
2013-02-01 11:41:35

“…all sound like conversations I had and heard in 2004/2005.

And I’m bored by them… again.”

Troll alert.

 
Comment by DudgeonBludgeon
2013-02-01 14:00:17

No troll. I’m just saying that it’s deja vu all over again.
And I’m already bored by trying to explain that to people.

Now, when housing comes up in conversation, I say, “The housing bubble is dead! Long live the housing bubble!”

 
Comment by Cantankerous Intellectual Bomb Thrower©
2013-02-01 16:34:06

“The housing bubble is dead! Long live the housing bubble!”

I’ll buy that; I may have even said it once or twice.

Anything that could have been said about the housing bubble has already been said by now, but not everyone has had the chance to say it yet.

 
 
 
 
Comment by Rental Watch
2013-02-01 09:44:05

Slim- If you look at home ownership rates by age cohorts, one thing is clear…the older you get, the higher your propensity to own.

I think we’ll find over the next 10-20 years, as the demographic mix in the US changes to reflect the realities of a population with more people (in absolute numbers and on a percentage basis) in the over 65 camp as ever before, that we will see home ownership rates break out of the historical 62%-66% range.

Comment by Pimp Watch
2013-02-01 09:54:21

Hey Liar,

What does that have to do with 75 million boomers dying leaving 35 million excess empty houses in addition to the 20 million excess empty houses?

Comment by zee_in_phx
2013-02-01 10:25:57

PW : name calling is uncalled for, unless you are being nostalgic about being in the 1st grade - fond memories there, huh?
RW is talking about a demographic shift, i don’t see you providing links to support your assertions, — oh wait, you just throw out numbers and want others to ‘verify’ them for you.

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Comment by Pimp Watch
2013-02-01 10:45:17

Refute them. You won’t because you can’t. You can’t because they’re the truth.

 
Comment by Rental Watch
2013-02-01 15:01:43

It’s OK zee.

PW likes to note part of the story and touts it as the whole. The boomers will pass on over a period of a few decades (the last of the boomers are still in their late 40’s), during which time, the roughly 80 million people between 0 and 20 years old will grow up, form households, etc., while at the same time, 20 million MORE people will be born every 5 years on the heels of those 80 million.

And before PW starts talking about lower birth rates, let’s put some numbers to it…the CDC’s preliminary number for births in 2011 is 3,953,593…down from 3,999,386 in 2010. (release date October 2012). This is where I get my approximate 20 million new people every 5 years. The 80 million comes from the 2010 Census.

So, in 30 years, there will be an additional 120 million people entering the 20-50 age cohort that aren’t there today, who will more than backfill the boomers who are passing away. Those 120 million today are everywhere from yet to be born, all the way to 20 years old.

But in PW’s world they don’t count, since all people who are under 20 will evaporate, and not a single child will be born ever again.

And again, for perspective, today there are 18 million vacant homes, which represents 13.5% of all housing units. The LOWEST percentage of vacant homes going back to 1965 was 8.7% in 1972. We haven’t been below 11% since 1986 (10%), so the “excess” PW talks about is more like 3 to 6 million (3 million if you think we should get to 11%, 6 million if you think we should get to 8.7%)…NOT uniformly spread throughout the US.

 
Comment by Pimp Watch
2013-02-01 15:42:15

And there you go again with your lies.

The boomer cohort is already dying off so those fantasy millions of 1 year olds better get buying soon. Isn’t it interesting you flat out lie and suggest the entire cohort will be around in 30 years. Why would you misrepresent that fact?
Furthermore, you take a one year birthrate that’s falling and project it out for 30 years at the same rate? You’re not even honest with numbers.

And truth about excess empty housing? You’re lying about that too. Boomers own most of the housing, many of them 3 and 4 houses and it will be liquidated and the liquidation will be rapid. But in your sickening corrupt world of misinformation, they’ll take the houses to their grave.

You’re fortunate you have a platform to lie from. Here’s a bulletin for you……it’s going to be shared with truth.

Carry on you liar.

 
Comment by Rental Watch
2013-02-01 17:47:48

“many of them 3 and 4 houses”

You say 75 million boomers will leave 35 million homes. How does your statement about many with 3-4 homes make any sense?

“The boomer cohort is already dying off”

2013-1946=67 year olds are the OLDEST boomers. The largest number of births was in 1957, the bulk of the boomers are in their 50’s. The youngest are in their late 40’s.

“suggest the entire cohort will be around in 30 years.”

No, I’m not saying all of them will be around for 30 years, I’m saying that it will take decades for the bulk of boomers to pass away. In 30 years, the boomers who are now in their late 40’s will be in their late 70’s–and there will still be plenty of this younger cohort of boomers around.

I’m projecting the birthrate for 10 years, not 30–if you don’t even get that, you shouldn’t even be trying to do the analysis.

Those born from year approximately 2023 to year 2043 don’t matter, because 30 years from now they will be 20 years old or younger. The 80 million people from age 0 to 20 have already been born (per the US Census in 2010). Even if the birthrate falls to 3 million per year instantly (a 25 % reduction from currently levels)–roughly Japan’s rate now (who is in population crisis), the 40 million additional births over a decade become 30 million. The lower rate of 30 million born PLUS the 80 that are already born (but under 20) EQUALS 110 million people to fill the 75 million void left by the boomers who will be passing away over the next 30 years.

 
Comment by Pimp Watch
2013-02-01 20:23:21

“2013-1946=67 year olds are the OLDEST boomers.”

Wrong. Try 1941. And they’re already dying off.

“I’m saying that it will take decades for the bulk of boomers to pass away.”

Wrong again. The death rate of the cohort has already skyrocketed.

“I’m projecting”

You’re lying. You’re not interested in the truth.

“The 80 million people from age 0 to 20 have already been born (per the US Census in 2010).”

Liar…. 1 year olds aren’t going to be buying houses anytime soon.

“The lower rate of 30 million born PLUS the 80 that are already born (but under 20) EQUALS 110 million people to fill the 75 million void left by the boomers who will be passing away over the next 30 years.”

Liar….. now you’re adding another 30 million people that don’t exist? Your dishonesty knows no bounds.

The truth is you don’t know what you’re talking about.

 
Comment by Rental Watch
2013-02-02 02:13:29

“Try 1941″

Yes, the baby boom that started when the greatest generation was fighting Hitler, and the women were working. The baby boom started AFTER the war ended, the Y chromosomes came home, optimism about the future was at a high, and families started anew.

http://geography.about.com/od/populationgeography/a/babyboom_2.htm

Births US 1941: 2.5 million
Births US 1945: 2.8 million
Births US 1946: 3.47 million (notice the massive increase, or “boom” in babies from 1945?)
Births US 1957: 4.3 million (tied with 1961 as peak)

“The death rate of the cohort has already skyrocketed.”

http://life-span.findthedata.org/l/68/67

The death rate of 67 year olds is between 1.28% (women) and 1.97% (men), the life expectancy for 67 year olds is ANOTHER 15.77 years (men) and 18.32 years (women).

Those at the FRONT end of the boom are expected to live well over a decade from now.

“1 year olds aren’t going to be buying houses anytime soon.”

They don’t need to. The FRONT end of the boom has a long time to go. Those replacing the FRONT end of the boom are in their late teens today, will be in their early 30’s when the FRONT end of boomers start to pass away with greater frequency.

“now you’re adding another 30 million people that don’t exist?”

And you’re assuming that 3.95 million births per year goes to zero? People are going to stop having sex and breeding? Now who doesn’t know what they’re talking about?

The truth is that you can’t think dynamically. Sorry about that.

 
Comment by Pimp Watch
2013-02-02 08:28:00

“The baby boom started AFTER the war ended”

Wrong again you Liar. Take if from a son of a WW2 vet with a brother born in 1941. You don’t know the circumstances then. But then again, you’re a lying POS.

“Those at the FRONT end of the boom are expected to live well over a decade from now.”

It only seems to when you lie about the age of the FRONT end. They’re 71 years old and a full 15% of the cohort DIED ALREADY.

“The FRONT end of the boom has a long time to go.”

When you LIE about the AGE and MORTALITY of the front end, of course they do. The TRUTH is they’re already dying off.

Most importantly, 1 year olds aren’t going to buy a house no matter what kind of sick world you live in.

“The truth is that you can’t think dynamically. Sorry about that.”

Dynamic thinking and LYING aren’t the same. And you’re getting schooled by me everyday on that.

 
Comment by Prime_Is_Contained
2013-02-02 15:27:35

Most importantly, 1 year olds aren’t going to buy a house no matter what kind of sick world you live in.

My understanding was the RW was trying to describe the demand-curve over the next 30yrs. The 1-yr-old isn’t buying a house today, but they certainly might be buying one in 30-yrs, when they are then age 31.

 
 
 
 
 
Comment by Combotechie
2013-02-01 07:05:36

A new Chinese slogan: “Buy American”.

And people here used to wonder just why China wanted to trade their junk for trillions of worthless U.S. fiats.

Comment by Cantankerous Intellectual Bomb Thrower™
2013-02-01 08:08:17

It seems like the “worthless U.S. fiat” contingent who used to regularly post here has gone into retirement.

 
Comment by Cantankerous Intellectual Bomb Thrower™
2013-02-01 08:55:20

I for one am happy that all-cash foreign buyers are stepping up to catch falling knives in American real estate. It will make it far easier for our federal government to make affordable housing available to American families if lower prices come at the expense of foreign real estate investors.

Comment by cactus
2013-02-01 09:55:28

It will make it far easier for our federal government to make affordable housing available to American families if lower prices come at the expense of foreign real estate investors.”

thats one possiblity. I can think of others that don’t work out so great for American Families.

 
 
 
Comment by Arizona Slim
2013-02-01 07:10:19

About the “ghost town” comment in the above article, that problem already exists here in Tucson.

There are parts of town with a lot of second homes. During the summer months, the year-round residents feel like they’re living in a ghost town.

Comment by Avocado
2013-02-01 11:18:33

Albuquerque or Tuscon, which town is nicer to live in and has more job opportunity?

Comment by Steve J
2013-02-01 13:10:33

Tucson hands down.

Unless you are a huge Breaking Bad fan.

 
 
 
Comment by 2banana
2013-02-01 07:19:35

The apex of the bubble in Canada?

“A taxi driver in Toronto said he remembered seeing Asian-looking men lining up in the rain outside a new residential development, two days before its grand opening. Intrigued, he approached them and asked some questions. Many turned out to be Chinese students lining up for interested buyers for some quick cash. Most of the others he tried to talk to were Chinese nationals who couldn’t speak a word of English. ‘It was the most mind-blowing scene I’ve ever seen in my life,’ the unnamed taxi driver later told his customer, Chinese businessman Zhu Weijun, himself an investor in Canada’s property markets.”

Comment by Cantankerous Intellectual Bomb Thrower™
2013-02-01 08:14:49

Once the taxi drivers are onto the bubble, it’s only a matter of time before it bursts.

I had second-hand experience with this in Spring 2006. I was in NYC for an academic duty. When I went out to lunch with the host for my vist, we got onto the subject of the NYC housing mania. He had a friend at MacKenzie who had sold his owner-occupied home and started to rent in order to wait out the crash. He also knew cab drivers who were moonlighting as real estate investors.

I myself first realized just how crazy things were when I bought a car in early 2005. Oddly enough, I soon found myself advising the loan officer who processed my car loan on whether and how soon to sell her investment condos.

 
Comment by Patrick
2013-02-01 15:14:47

The driver’s comments do not reflect current reality. Must be a real estate friend of RAL’s spreading those comments ! !

Has anyone thought about possible government sponsored money laundering by the Chinese. They have two trillion US dollars in reserves. Could they be lending them to Chinese North American buyers so as to reduce their USD inflation risks?

Probably better than bonds. If they are causing a bubble it will break, prices will go down, the gov will then stimulate the economy with work programs and inflation will take off because the BB will get thrown out along with his mystical nonsense.

Perhaps then the cleansing of the usurpers will occur, interest rates will rise - and graveyards will again be able to afford grass cutters.

 
 
Comment by Ben Jones
2013-02-01 08:02:45

‘these price increases are genuine,’ Yun said’

I thought it was funny that he felt he had to say that.

Comment by AmazingRuss
2013-02-01 08:22:10

Was he twiddling his moustache when he said it?

Comment by Arizona Slim
2013-02-01 08:38:45

And was his nose growing too?

 
 
Comment by Pimp Watch
2013-02-01 08:52:59

It’s a clear cut literary inversion a’la Federal Reserve. Life is full of them. Religious texts are jam packed with them.

Now read the previous sentence of his public lie;

“The result is a housing market that is driven by solid market fundamentals, such as job growth”

Did incomes support inflated prices 2006? Surely current incomes don’t support inflated prices in 2012.

In other words…. he lied. Did he mention the fact that housing demand is at 17 year lows and falling? Well that’s the REAL fundamental. Demand. And it’s slipping.

Comment by Young Deezy
2013-02-01 09:36:59

He also had the gall to say lending standards had tightened. I know for a fact that’s completely untrue. I personally know people with a BK and Foreclosure in the last 5 years who were just approved for a home loan 6x gross annual pay. Some of my coworkers know people in the exact same boat.

Of course, I guess there’s no need to worry about a borrowers’ ability to pay when Uncle Sam will step in and guarantee it.

Comment by Pimp Watch
2013-02-01 09:40:21

So some shady lending is available yet demand still craters. (shrug)

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Comment by Avocado
2013-02-01 11:20:39

In CA demand is increasing due to the low inventory. The low end is seeing multiple offers.

 
Comment by Pimp Watch
2013-02-01 11:33:37

In CA, housing demand is at 1997 levels…. and falling.

Let go or be dragged.

 
Comment by JohnF
2013-02-01 11:53:05

It’s not just the low-end….

I live in the Thousand Oaks (CA) area and there are only 33 SFR’s currently for sale - with listing prices from $200,000 to a little less than $2,000,000.

That represents a geographic area that has approximately 45,000 homes in it - less than one-tenth of one percent are listed for sale !!!

You have to hand it to the Fed and our government:

- extremely low interest rates
- permanent buying of mortgage securities
- FHA 3.5% down loans
- FHA/Fannie/Freddie buying over 90 percent of loans originated
- underwater owners being able to refinance at will
- repeal of mark-to-market accounting rules
- regulators letting financial institutions keep underwater loans and REO on the books at par

….it has all “worked” as they intended.

Prices are rising, inventory is low, multiple offers have returned, FHA “EZ-Financing” is available.

And I don’t see any end to it any time soon…….

 
Comment by Ben Jones
2013-02-01 12:00:06

‘it has all “worked” as they intended’

Except for that recession thingy. BTW, there aren’t any multiple offers in Flagstaff that I’ve seen.

‘less than one-tenth of one percent are listed for sale !!!’

Because so many are underwater.

This whole lack of inventory thing is funny. Oh my gosh, there’s only one avocado left, I bid $10!

 
Comment by JohnF
2013-02-01 12:57:24

I hear ya Ben…..

The thing is, I’ve heard for the last five years that “this can’t go on much longer” (meaning the Fed nonsense, etc., etc.), except that it has.

Japan’s been doing the same thing for, what, thirty years?

I get the sinking feeling that the ZIRP, borrow forever, print forever, never mark-to-market - is going to probably outlive me.

I don’t agree with it, I have just accepted it…….

 
Comment by Pimp Watch
2013-02-01 15:32:04

Accept what? Nobody here other than you and the Blog Liar are suggesting these farfetched notions of “low inventory”.

Proceed at your own risk.

 
 
Comment by rms
2013-02-02 00:47:21

“I personally know people with a BK and Foreclosure in the last 5 years who were just approved for a home loan 6x gross annual pay.”

-1 That’s really disgusting.

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Comment by joe smith
2013-02-01 09:33:46

I think it would be a brilliant business idea for some U.S. realtors to make a few trips a year marketing residential properties to Chinese people. I don’t think running TV ads is the smart way to do it. Set up your own site that is Mandarin friendly. And make a trip a few times a year, spending a few days in Shanghai and Beijing, maybe Hong Kong too. Visit smaller or developing areas as needed.

All you’d need is willingness to lie (overpromise). And the properties need to be within driving distance of a major international HUB type airport. So LA, SF, Seattle, Houston, Chicago, anywhere on N.E. Corridor, Toronto for sure. Maybe Miami, Atlanta, Denver and Las Vegas if the Chinese are willing to make a connecting flight (unsure if these cities have direct flights to Asia or if they connect via LAX, EWR, JFK, BWI, O’hare, etc.)

 
Comment by Rental Watch
2013-02-01 09:53:51

A counter-point (because hey, I like counterpoints):

How much of increase in renter households is NOT driven by choice?

1) There are lots of people FINALLY losing their homes…either through short sales or foreclosures. These recent foreclosees are becoming renters–and because of #2, a large number of these homes are becoming rentals.

2) A lot of people who are trying to buy, continually get outbid by people who are buying homes to rent them out–this is short sales, foreclosures, AND traditional MLS sales. In other words, if there wasn’t such a push to buy-to-rent, more of the homes for sale would fall into the hands of owner/occupants, NOT investors.

Per the Census, the year-on-year change in owner households is a NEGATIVE 106,000. I think this can easily be explained by #1 and #2 above.

Comment by Pimp Watch
2013-02-01 09:56:01

Counterpoints typically contain truthfulness. Every post of your demonstrates a deficit of truth.

 
Comment by zee_in_phx
2013-02-01 10:22:03

RW, regarding point 2, seems like a buy-to-own person should be able to pay a marginally higher price for a property versus a buy-to-rent investor, this should create sufficient upward pressure on house price so that a buy-to-own person has first dips on the property for sale. i’m seeing the opposite of this, so what gives? - have the buy-to-rent crowd given up on a decent return rate in order to bank on the mythical appreciation. I’m seeing a lot of houses that got picked up at trustee sales at ok purchase price only to be cleaned up and listed for rent a month later. The price being paid seems to be a little high to support a decent return-on-capital according to the market rental rates. I guess we’ll have to wait (another few years) to see how this turns out, but my guess is its not gonna turn out too well for this buy-to-rent crowd.

Comment by Rental Watch
2013-02-01 10:35:13

You are right, the buy to own person SHOULD be able to pay more than a buy-to-rent investor.

However, the BTO person typically can’t pay cash, the BTR investor typically does. What this means is that for the BTR investor (who most of the time has been used to closing on the courthouse steps), can go non-refundable quickly (sometimes upon contract signing) and close within a week, whereas the BTO person needs to get a loan and hope the inspection and appraisal comes in OK. This allows the BTR investor to “win” the deal even if they offer less than the BTO person. For a seller, often times price is not the only consideration…certainty and speed to close also comes into play.

This won’t last though. I’ve talked to a number of groups doing the BTR strategy in California. The general consensus is that the opportunity to buy at prices that make sense for rentals will last no more than an additional year (one guy thinks 6-8 months).

 
 
 
Comment by Ben Jones
2013-02-01 10:22:52

‘the year-on-year change in owner households is a NEGATIVE 106,000′

You forgot these:

‘the 5.3 million borrowers who are delinquent on their mortgages or in the foreclosure process’

Comment by Rental Watch
2013-02-01 10:27:24

I agree that the dynamic that is causing the lower number of owners will continue for a while. However, you’ve got to take a lot of the “delinquent” out of the picture…even in a great market, people occasionally fall behind, and catch-up.

Comment by Pimp Watch
2013-02-01 10:47:43

Your attempt to diminish the very cause of this mess failed… again.

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Comment by GrizzlyBear
2013-02-01 22:13:07

He needs to include “shill” somewhere in his moniker, even though it goes without saying.

 
Comment by Pimp Watch
2013-02-02 08:19:12

Hmmm… Thank you for pointing that out. I will help him with it.

 
 
 
 
 
Comment by inchbyinch
2013-02-01 10:05:51

Ben-Thank you for this topic.

NPR also ran a housing sector recovery piece. http://www.npr.org/2013/02/01/170764114/jobs-still-lag-but-homebuilding-may-soon-help

Comment by Rental Watch
2013-02-01 10:38:23

Year on year residential construction is up about 20% (numbers out today). Anecdotally, I’m hearing that subcontractors are getting busier and busier, making the contractors get more bold in their bidding (ie. construction costs rising). More jobs should follow.

Comment by Pimp Watch
2013-02-01 10:43:43

And we’re going to keep building and oversupplying the market until resale prices are driven in the ground.

Comment by Rental Watch
2013-02-01 10:47:31

It is against builder’s interest to oversupply the market to a point where prices fall (which has a big negative impact on the value of their land holdings as well). You seem to think people act for the greater good, and not what is best for their own wallet.

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Comment by Pimp Watch
2013-02-01 11:08:34

It is? Since when? We’ve been oversupplying the market since 1999.

You seem to think you understand a contractors motives. You have no idea.

 
Comment by Carl Morris
2013-02-01 11:13:46

If there were only one builder they might hold back. Since there is competition they’re going to race to get as much cheese as they can as fast as they can before the other guy gets it. And then deal with the future when it gets here. That’s what’s best for their wallet.

 
Comment by Pimp Watch
2013-02-01 11:31:52

BINGO!

 
Comment by Cantankerous Intellectual Bomb Thrower©
2013-02-01 11:48:23

What is it about housing prices artificially inflated above fundamental market value that mystifies you so?

 
Comment by Rental Watch
2013-02-01 12:10:01

@Carl-

Builders are doing things that are counter to your comment. The most recent example I’ve heard is builders restricting sales to investors, for fear of having those investors serve as competition later (with the investors being a sign of artificial demand). I’ve also seen sellers of custom lots include “buyback” rights in their sale contracts to ward off speculative buyers of lots (again to discourage speculators from buying and then serving as competition later).

Stable markets are desirable…boom/bust are only fun in the boom, and you pray that the bust doesn’t take your livelihood.

In most markets, there is more than one builder…however, there aren’t a huge number of builders in most markets. In many smaller/medium sized markets there might be 5-10 significant participants. This does change behavior when compared to if you had 50 participants.

@CIBT

When things were crazy, it was commonly said that a sign of market bottom was cash buyers. We also said that a “fair” price for a home was between 100 and 120x the monthly rent.

We have historically high numbers of cash buyers. My own perspective is that the Fed’s ZIRP pushed investors to seek yield wherever they can, and one place they found yield was in buying and renting homes. There is huge amounts of skepticism on this board with respect to that strategy. It doesn’t mean that the math doesn’t work. I reviewed a portfolio of 70 rental homes yesterday in Southern California. The aggregate actual cost of the homes is 124x aggregate monthly rent.

 
Comment by JohnF
2013-02-01 13:00:27

Builders build, because lenders lend….

There is no other logical, economic, or other reason why they build…..

 
Comment by Pimp Watch
2013-02-01 15:29:37

Look Rental Pimp…..

You “heard from builders” which frankly is a bundle of bullshit…. much like your posts.

You’re spreading misinformation, don’t know anything about construction contracts or making profit in the construction biz.. In fact…… you’ve so much as flat out lied many times here.

You’re nothing but a liar.

 
Comment by Cantankerous Intellectual Bomb Thrower©
2013-02-01 16:32:10

“I reviewed a portfolio of 70 rental homes yesterday in Southern California. The aggregate actual cost of the homes is 124x aggregate monthly rent.”

And I will have to guess this kind of sweetheart deal is only available to real estate investors, not retail buyers.

Which helps explain why I am only participating in the real estate market through REITs, not as a greater fool owner-occupant buyer.

 
Comment by Rental Watch
2013-02-01 17:23:00

@CIBT

The 70 homes were purchased one at a time, some on the courthouse steps, some via short sale, some right off MLS, all-cash purchases. This group is one of the many that are doing the buy to rent strategy.

 
Comment by Rental Watch
2013-02-01 17:51:15

@PW

One anecdote was second hand from someone working with a major builder in Phoenix.

The other is direct experience in a project in which we invested.

 
Comment by Pimp Watch
2013-02-01 20:24:59

In other words, you don’t know what you’re talking about.

 
 
 
Comment by Ben Jones
2013-02-01 10:47:57

‘More jobs should follow’

Yes, the old build it and they will come theory. So it’s back to the economy where we all buy and sell each other houses? I guess we can pull out an old HBB motto:

‘It is against builder’s interest to oversupply the market to a point where prices fall’

“CLICK!”

Comment by Rental Watch
2013-02-01 10:57:15

It’s not the “build it and they will come” theory, it’s the “reversion to the mean is a powerful force” theory.

And I’m not talking about selling houses back and forth to one another, I’m talking about constructing shelter to house the new households…renter or not, there were 947,000 new households in the prior 12 months per the US Census, and we added net housing stock of 486,000 housing units (note that approximately 400k are destroyed each year).

While overall, you can point to an excess of housing units, you can’t move those houses to where the demand is located. Over time, more and more geographic areas of the country will become short of physical supply (not a listing shortage), and construction will pick up in those areas. The people building those homes don’t always live there, but they will bring their paychecks back to where they do live, and spend the money…giving others a bit more income to move out of mom’s basement.

We are still below long-term averages in terms of housing (ie. shelter) construction. As we revert to the mean, more shelter will be built, and more construction jobs will reappear.

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Comment by Pimp Watch
2013-02-01 20:28:24

“While overall, you can point to an excess of housing units, you can’t move those houses to where the demand is located.”

Hey Swindler,

Demand is at 1997 levels and falling.

 
 
 
 
 
Comment by Cantankerous Intellectual Bomb Thrower©
2013-02-01 11:44:16

Irrational Exuberance Then And Now

Feb. 1, 2013, 11:38 a.m. EST
Dow passes 14,000 after jobs report, overseas data
Blue-chip barometer breaches mark for first time since October 2007
By Kate Gibson, MarketWatch

NEW YORK (MarketWatch) — U.S. stocks on Friday started a new month with strong gains, as the Dow industrials moved above 14,000, after January jobs report bolstered thinking that the lackluster recovery remains on track.

“We’re back to a level we haven’t been at since 2007, the Dow hitting 14,000 is just like the S&P 500 hitting 1,500 again,” said Darrell Cronk, regional chief investment officer at Wells Fargo Private Bank.

Comment by cactus
2013-02-01 12:58:16

“There’s a newfound enthusiasm for the equity market,” said Jim Russell, regional investment director at U.S. Bank Wealth Management in Minneapolis. ”

sell in May ?

Comment by Patrick
2013-02-01 15:34:40

The stock market is offering a new course of study.

“Swindling 601″

It’s an advanced course and counts toward a piled higher and deeper.

It explains how half the normal volume can influence the Dow’s over $5.00 stocks. And leave all other stocks in dire straits.

Fund managers don’t want to lose their supply of money. They have found a new “price statesmanship” code not available to the retail trade.

 
 
 
Comment by Cantankerous Intellectual Bomb Thrower©
2013-02-01 11:46:34

Feb. 1, 2013, 1:25 p.m. EST
No-money-down mortgages are back
By AnnaMaria Andriotis

Some affluent buyers are getting the keys to their new home without putting a penny down.

It’s 100% financing—the same strategy that pushed many homeowners into foreclosure during the housing bust. Banks say these loans are safer: They’re almost exclusively being offered to clients with sizable assets, and they often require two forms of collateral—the house and a portion of the client’s investment portfolio in lieu of a traditional cash down payment.

In most cases, borrowers end up with one loan and one monthly payment. Depending on the lender and the borrower, roughly 60% to 80% of the loan can be pegged to the home’s value while the remaining 20% to 40% can be secured by investments. On a $2 million primary residence, for instance, the borrower could get a $2 million loan, which would require a pledge of assets in an investment portfolio to cover what could have been, say, a $500,000 down payment. The pledged assets can remain fully invested, earning returns as normal, without disrupting the client’s investment goals.

While these affluent clients may be flush with cash, this strategy allows them to get into a home without tying up funds or making withdrawals from interest-earning accounts. And given the market’s gains combined with low borrowing rates in recent years, some banks say clients are pursuing 100% financing as an arbitrage play—where the return on their investments is bigger than the rate they pay on the loan, which can be as low as 2.5%. Some institutions offer only adjustable rates with these loans, which could become more expensive if rates rise. In most cases, the investment account must be held by the same institution that’s providing the loan. See: Home improvement gets a makeover

These loans also provide tax benefits. Since borrowers don’t have to liquidate their investment portfolios to get financing, they can avoid the capital-gains tax. And in some cases, they can still tap into the mortgage-interest deduction. (Borrowers can usually deduct interest payments on up to $1 million of mortgage debt.)

Comment by Rental Watch
2013-02-01 12:14:48

That’s not 100% financing. They are lending on more than just the house, so the total value of the collateral is more than the mortgage.

Comment by Cantankerous Intellectual Bomb Thrower©
2013-02-01 15:39:39

What if the housing market and the stock market crashed (again) at the same time?

I guess the banks who ponied up for this form of collateral might be able to get made whole by bailouts (again)…

Comment by Rental Watch
2013-02-01 17:19:46

Margin call. They simply sell the securities that support the 20-40% of the loan when things get close…then they hope home values don’t fall by more than that 20-40%.

If there are enough liquid securities to cover the loan, they will usually start selling the securities before the collateral becomes insufficient.

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Comment by STpn2me
2013-02-01 12:17:25

Been looking at homes to rent in N.C. One house is owned, 4 BR, 3 bath, 2500 sq feet, 249000. Right around the corner is a brand new, never lived in, 5 BR, 4 bath, 3500 Sq home for 253000. The person who owns the first house obviously doesn’t know about the home in the next neighborhood over. And they will wonder why their home sits unsold. They would need to lower their price to 220K before we even start negotiations.

People are still unrealistic about how much their homes are worth. All this crap about rising prices is getting people to act stupid with the values of their homes and they are going to get their feelings hurt. Prices are only rising in the sub 100K and less market, where investors are paying cash.

Comment by Stpn2me
2013-02-01 12:20:46

BTW,

When I went looking for houses, I wore my “thehousingbubbleblog.com” shirt. The realtor asked “Where did you get that shirt?” I said, “Been wearing it all while looking for houses”.

Comment by 2banana
2013-02-01 15:23:01

+1000

:-)

 
 
Comment by Steve J
2013-02-01 13:13:39

The first homeowner are probably trying to sell their house for what they owe.

 
Comment by Cantankerous Intellectual Bomb Thrower©
2013-02-01 15:37:31

“All this crap about rising prices is getting people to act stupid with the values of their homes and they are going to get their feelings hurt.”

Not only that, but the market can’t adjust, as sellers are deluded about what they believe their homes are worth, and buyers face the grim reality of their household purchase budget constraint.

The completely predictable results are MSM reports about an ‘inventory shortage’ of affordable homes, and a dearth of sales transactions compared to before the crash.

 
 
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