A Divergence From Underlying Fundamentals
Readers suggested a topic on housing shortage. “I know Ben just made a statement yesterday that there is no housing shortage anywhere. Here is my simple question: If there were a housing shortage in a particular market (physical homes vs. people who want to live there), how would that condition manifest itself in the data? In other words, what data should we be looking for in order to see if there IS a housing shortage in a market?”
“From what I understand of markets, what you should see are ALL of the following conditions:
1. High prices;
2. Low vacancy rates (including vacant homes held by financial institutions, and vacant homes that are in the middle of foreclosure);
3. Problems with overcrowding; and
4. A high ratio of population to housing units (related to #3).
If you do NOT have ALL of these, then whatever perceived ’shortage’ is due to circumstances that can easily change.”
A reply, “I think the more specific question could be, ‘Is there an organic housing shortage, versus an engineered housing shortage?’ What does an organic (market-driven) housing shortage look like? What does an engineered (government, large financial entity-driven) housing shortage look like? Enron was able to make it seem like there was an electricity shortage in California. Goldman and JP Morgan are doing that sort of thing with certain metals.”
One said, “There is no shortage of housing nationwide, assuming we were in a ‘free market,’ and people could take their jobs with them. But in a country where jobs are being concentrated, governments at all levels are pulling out all the stops to artificially keep housing prices high (and to keep out the riff-raff), there are going to be areas with manufactured ’shortages.’”
“NYC apartments……$3 million? Compared to not untypical prices in typical BFE (in this case, Eastern Colorado): Strasburg……1996 1500sf modular home, on 20 acres, with 2 car attached garage and 30 x 50′ metal barn/shop. = $275K. Byers…….1919 built, remodeled in 1960 1600 sf house (IOW, a fixer)
with 40 acres and outbuildings = reduced to $215K. ”
“I don’t know about you, but if we go full-on Zombie Apocalypse, I’ll take my chances in Eastern Colorado. Maybe I’m old fashioned, but 3 mill for an apartment is defacto evidence that somebody is insane. Of course, $3 million is cheap, if you are a Goldman Sachs blood sucking squid, stealing $150 million a year from Grandpa’s pension funds.”
One had this, “There is an alleged shortage here in Pinellas County, FL. I drove through a neighborhood today that had several abandoned properties. One had kudzu growing through and about the entire pool cage, roof, and front.”
And finally, “The only satisfying answer you will get is the one you have already made up. As the largest housing mania in history unwinds, none of the changes will make any sense to you. I met a couple in their 60s on the Canadian waterways. They had given up their retirement home to move to Kingston, so as to ‘help’ their two sons. The boys are rising RE speculators and are buying up houses to rent and flip by the hundreds. Everyone wants to live in Kingston. There is a housing shortage in Kingston. Prices are high in Kingston.”
“Down along the shore a few miles is Toronto, from which a shock wave is emanating. Kingston just can’t feel it yet. More properties for sale along the Rideau waterfront than I have ever seen. Numerous whole islands for sale, which hasn’t been seen in my lifetime.”
From MyWealth. “AMP Capital’s chief economist Shane Oliver says that although he has been concerned about Australian housing for a decade, it is not in a bubble. ‘It is expensive by global standards with house prices still running above long term trends,’ Oliver says. ‘Rental yields have gone up but they’re still pretty low and price to income ratios are quite high so on my analysis it is still overvalued and it is vulnerable, but I don’t think it’s in a bubble.’”
“Oliver argues that when you look at bubbles historically, they are characterised by a divergence from underlying fundamentals and a momentum of their own, with price gains feeding on price gains. While we may have been in this position a decade ago around 2003-04, Oliver says that this pressure has now largely eased and that ‘in the absence of a trigger for a collapse it’s hard to see a sharp fall.’”
“That trigger which would drive the devaluation of property could be one of two things, according to Savanth Sebastian, economist at CommSec. The first could be a surge in interest rates which, Sebastian says, is unlikely given the Reserve Bank of Australia has been cutting interest rates and believes inflation is well contained. The second trigger would be an increase in unemployment. ‘Massive job losses would mean people rethinking paying off their property,’ Sebastian explains. ‘And yes – the mining services sector is pulling back but there’s a significant amount of other hiring that’s taking place in finance, education and health. It’s very hard to see unemployment go past 6% and I think that seems to suggest property will remain relatively resilient.’”
“The other factor that Oliver says would suggest we are not in the midst of a housing bubble is the lack of new construction that usually accompanies a bubble’s rising prices. ‘There was a bit of that a decade ago, but now vacancy rates tend to be quite low. Most estimates I’ve seen suggest we’ve been underbuilding to the tune of about 30,000 houses per year,’ Oliver said. ‘I know that a lot of people look at that and point to houses up and down the coast which are vacant, but they are holiday homes which people aren’t going to put in the market.’”
The Santa Cruz Sentinel in California. “Something statistically unusual in real estate popped up for the first time this year: Three homes in Santa Cruz sold for $1.5 million or more in a single day. This real estate trifecta is a relatively new phenomenon, according to a spreadsheet of million-dollar sales created by Gary Gangnes of Real Options Realty. It happened three times in 2000, the year of the dot-com boom, once in 2011 with the dot-com bust, but not at all in 2002, after the economy was shaken by the Sept. 11 terrorist attack the year before.”
“In 2004, sales for more than $1 million took off, and trifectas became more frequent. In 2005, there were six. In 2006, there were two trifectas and March 30 marked the first and only time the county recorded four sales for $1.5 million or more. Since the housing market collapsed, the trifecta has become a once-a-year phenomenon at best. Agents Steve and Dianne Pereira, who specialize in beachfront homes, reported ‘the upper end is still slow.’”
“Tom Brezsny of Monterey Bay Properties, whose average sale for five boom years was $1 million, is mystified that demand for homes priced above $2 million has disappeared. ‘It has been a long dry spell,’ Brezsny said. ‘We haven’t had one sale above the $2.5 million mark for seven months.’ As an agent with a sale for $3.75 million last year, he clearly is dismayed. Notice how the asking price for two of the homes in the trifecta was more than $2.5 million and the owners accepted less.”
“Brezsny said nine sales this year have been for more than $2 million, the highest being $2.55 million. Only three are pending at that price point, including an 87-acre ranch on Two Bar Road in Boulder Creek. With 53 homes listed above $2 million, Brezsny wonders, ‘How long it is going to take to sell those 53?’”
The Oakland Press in Michigan. “Holly resident Monzella Foster shared with us some photos from her childhood growing up in Pontiac. The first photo she shared with The Oakland Press shows a horse-drawn milk wagon driven by her father, Lee A. Stallard, circa 1934-1935. Foster and her brother, Billy Lee, sit atop Dobbin, the wagon’s steed. This picture was taken on E. Beverly Street off Baldwin in Pontiac.”
“Foster gives a little more information about the house she grew up in on Beverly Street: ‘My folks built a home on Beverly in 1929 — it was ordered from Sears-Roebuck and came into Pontiac on a flat bed rail car on Oakland Avenue,’ she said. ‘I just sold the home this past December. I found all the paperwork on it.’”
“Foster discovered that her family had paid $3,300 (equivalent to about $44,954 in 2013 when adjusted for inflation) for the home, and it had three bedrooms, a living room, a dining room, a kitchen and a full bath, plastered walls and oak flooring. Foster said her mother used to keep records on everything; she found out that her parents built two fully furnished, one-bedroom apartments in the basement of their home. They rented it for $1.50 in 1932 — a little more than $100 per month today when adjusted for inflation.”
I’m pretty sure $1.50 in 1932 is not equivilant to $100+ in 2013.
The inflation calculator from the BLS says $1.50 in 1932 is the equivalent of $25.57 in 2013.
My dad got $1 a day working on a farm in the summer as a teenager back then, plus all he could eat.
They rented it for $1.50 in 1932 — a little more than $100 per month today when adjusted for inflation.”
What is the only conclusion to draw from that statement?
Historical inflation data wildly under-reports inflation.
$100 would get you nowhere near a small 1bd basement apartment today.
That and house prices and rents are grossly overpriced today.
It shows how much larger a percentage of income rents and mortgages are requiring.
When homes were overpriced and went underwater these homes were short sold or foreclosure thus many buyers bought. These buyers were investors who turned around and put these homes for sale immediately and others just wanted to buy a home and live it for the American avg of about 7 years and then try to move up or never move they are happy they got a good deal.
Right now you have many folks who are still buried in their homes but they can make the payments thus these people can’t list. Many, many people never move in their lives they are content with the neighborhood, schools, friends whatever. Others are scared to get caught like their family and friends so they will stay put for many years to come.
Builders are cautious about mega tracts of homes so they buy limited land and sell maybe 20 to 50 home developments.
This is a country that people overseas always want to move to and some US citizens just have it in their blood that every 7 years they want to risk it and try to buy a better home no matter what, the new car thing, lease it they want to look good with family and friends always will be this way in America.
Bottom line, their is a shortage the pure numbers show it listed homes against last years listed homes. Sold out tracts of homes with waiting lines at others, investors, foreigners, move up 7 year buyers, supply and demand will always rule in a country of this size and when the scales tip towards less of something and more demand prices go up very logical folks, just my take of my local market and surrounding areas for the past 7 months to date.
Guess again. Housing is massively overpriced by 250%. And with 25 million excess empty houses and growing, there is no shortage.
Yes and I HAVE TWO GOOD EYES recently in Las Vegas went to several houses developments Fri thru Sunday agents’ writing deals and drove thru neighborhoods people driving up and down looking to see what is left.
Moving vans unloading furniture in new homes, may name is doom but soon to change to upbeat take the blinders off and the pin off the nose smell the roses again in spite of this dismal administration the USA is making a fairly good comeback ?
Well, if you see nothing but success and great opportunity, then you should buy 10 or 20 houses, correct? Do not limit yourself by lack of confidence- buy 50 or 100 houses! Why not? You are convinced that everything is wonderful, how could you possibly lose? Put your money where your mouth is! That seems to be what you are trying to convince others to do. Be a leader- YOU first!
This is the kind of foolish logic which sheep use to buy into an overpriced speculator’s market, not much unlike 2006.
You must not be married. The Seven Year Itch has nothing to do with house lust.
Tell me what city do you live? I see cars from every state with family’s pulling up to housing tracts everyday and tractors running every morning at 7:am some body is buying folks?
My niece lives in Irvine Cal you can’t get a house new homes about 1400 sq ft selling all day for $1.2 million go on the internet pull up Taylor Morrison homes Irvine and see most phases sold out . You people must live in very depressed areas because somebody is buying new cars and homes that is all I see everyday
’somebody is buying new cars and homes’
Ah, yes, I remember 2004 as well. Oh, you’re talking about today.
‘in Las Vegas went to several houses developments Fri thru Sunday agents’ writing deals and drove thru neighborhoods people driving up and down looking to see what is left’
I know a guy who just moved to Las Vegas. He called this morning and told me about a foreclosure he saw on the web at $27/sq ft. Looked like copper theft. So he drives over there and calls me back. Turned out every house on that cul-de-sac is foreclosed or vacant/looks abandoned. Out of 6, only 2 had for sale signs.
‘may name is doom but soon to change to upbeat’
I absolutely think you should buy as many houses as possible. Don’t waste a minute. Maybe you can find a used house salesman who works on Saturday night!
Just for fun, I tested out the name Hopeful here a few years back (it was Fall 2006). My posts under that name emulated the troll brigade that was very prevalent here at the time.
The tide of anger a few trollish (”upbeat”) posts generated was something to behold!
The tide of anger a few trollish (”upbeat”) posts generated was something to behold!
Anyone have bets as to which regular is trolling us under the “doom” moniker? Seems a little too perfectly on-target to not be a regular…
“Turned out every house on that cul-de-sac is foreclosed or vacant/looks abandoned. Out of 6, only 2 had for sale signs.”
Nowhere is the shadow inventory more apparent than in Nevada. Drive down almost any street and you will find vacant, abandoned houses.
“any bets as to which regular is trolling us under the “doom” moniker? Seems a little too perfectly on-target to not be a regular…”
I would appreciate it if one of his monikers introduces a post with, “I’m a realtor”.
“…Bottom line, their is a shortage the pure numbers show it listed homes against last years listed homes. Sold out tracts of homes with waiting lines at others, investors, foreigners, move up 7 year buyers, supply and demand will always rule in a country of this size and when the scales tip towards less of something and more demand prices go up very logical folks, just my take of my local market and surrounding areas for the past 7 months to date.”
So, you have only studied this process for 7 months, in one local market and you already have it completely figured out? That is great! You should buy as many houses as you can and pay much more than the sellers are asking. Success, riches and fame will undoubtedly be yours!
’somebody is buying new cars and homes’
Homes? Thanks for letting us know what kind of jacka$$ we’re dealing with.
The reality? Housing demand has fallen to 1997 levels and the decline is accelerating.
‘Housing demand has fallen to 1997 levels and the decline is accelerating’
Here’s an issue the media doesn’t like to mention. Every month, thousands of people switch from owners to renters, and have for years.
Another thing about housing bubbles that no one talks about; supply and demand curves. If prices are rising like they tell us, fewer people should buy (which is the case, but anyway). To the extent that people are buying when prices are rising, it suggests speculation. Here’s a funny thought; people were walking away and renting in droves even when prices were falling.
“thousands of people switch from owners to renters…”
The majority of these people lost significant money and had their hopes smashed. They will not return for another run at “ownership” for decades if ever in their lifetime, whichever way prices are going.
Ben Jones says:
‘Housing demand has fallen to 1997 levels and the decline is accelerating’
Here’s an issue the media doesn’t like to mention. Every month, thousands of people switch from owners to renters, and have for years.
———————-
If Housing Is Booming - Why Do We Need Another Fix
http://www.streettalklive.com/daily-x-change/1784-if-housing-is-booming-why-do-we-need-another-fix.html
‘They will not return for another run at “ownership” for decades if ever in their lifetime, whichever way prices are going.’
As long as we have home-purchase-to-rental REITs to pick up the home ownership burden from financially defunct U.S. households, where is the problem?
As long as we have home-purchase-to-rental REITs to pick up the home ownership burden from financially defunct U.S. households, where is the problem?
It’s only a problem if the Fed doesn’t cash them out at the end of the night, as promised…
My niece lives in Irvine Cal you can’t get a house new homes about 1400 sq ft selling all day for $1.2 million go on the internet pull up Taylor Morrison homes Irvine and see most phases sold out .
How many sentences are buried in there?
Periodic shortages make one appear less than punctual.
Periodic shortages make one appear less than punctual.
LOL… Nice.
Flagstaff is “landlocked” as one agent said years ago. Building permits recently tripled. A large land owner announced last week opening up 1,400 lots. The median house prices here is double that of Phoenix. Yet, incomes are almost half of Phoenix. A few years ago, the local paper ventured there may be a 40% unoccupied rate. Second homes, that contribute about $1,700 per year to the local economy. Low incomes, high house prices; poverty with a view, as they say.
To say there is a house shortage is to say there is a land shortage. I don’t buy it. From Illinois:
‘Nate Amidon detects a renewed interest in new construction homes in the Reston Ponds subdivision in Sycamore. The sales director for ShoDeen Homes attended the groundbreaking ceremony Tuesday with members of the Sycamore Chamber of Commerce, city government and other public figures. The event commemorated the first of many steps to finishing Reston Ponds, which has 178 vacant home sites.’
‘The subdivision contains just a fraction of the 1,500 planned, but so far vacant, home sites in DeKalb County. City and village officials have said the Great Recession – followed by the housing market bubble bursting – in the late 2000s affected new home development. But with the improving housing market, some of these lots won’t be vacant for much longer, authorities said.’
‘Sycamore can expect to finish the year with 20 to 25 homes being built, Sycamore City Manager Brian Gregory said. The city has more than 800 lots vacant and almost all of them are in the newer subdivisions of the city, he said. The development of Reston Ponds, Parkside Estates, North Grove Crossing and Sycamore Creek slowed to a crawl in 2008 but will have homes built in them this year.’
‘The older sections of Genoa tend to have the most vacant lots, said Joe Misurelli, the city’s part-time administrative consultant for development, planning and zoning. Three subdivisions that also have vacant lots include Riverbend, Derby Estates and Oak Creek. The lots in those subdivisions are platted – or mapped to scale – but are not being developed. Some of the vacant lots can be mistaken for a different kind of space.
“There are lots that are technically vacant lots that if you drove by looks like someone’s backyard,” Misurelli said.’
‘Kingston has 16 lots that haven’t been developed. Kingston Village Treasurer Taunya Fischer, who tracks the lots, said in an email that five of the lots are in subdivisions that have never been finished because of the slow housing market. Most of them are single-family homes. “The other 11 lots are in the original part of town and again, they may be vacant for the same housing slowdown reason,” she said.’
Land shortage or water shortage?
There’s plenty of ground water in N AZ. The house I rent is on a well that supplies a few other houses. The thing is, most people here don’t have any money to drill a well. For the rural areas where the water is deep, they use cisterns. In the time I’ve been here, I’ve never heard of a ‘don’t water your lawn or wash your car’ restriction. We had those in Texas all the time.
And then there’s this:
Buffalo, NY: ‘It’s part of a whole segment of the housing market causing problems in local neighborhoods, cities and suburbs. The ill-maintained homes taken over by banks, sometimes referred to as ‘zombie homes’ are where the banks started to foreclose and the residents left, but the banks didn’t complete the foreclosures.’
‘There’s a house on McKinley Parkway in South Buffalo with neighbors cutting the grass because they can’t get any action from a Michigan bank which owns the property and won’t sell. Buffalo Mayor Byron Brown said it’s a city-wide problem. ‘In other parts of the city, these properties can become so bad, these zombie properties, these uncompleted bank foreclosures that the city has no choice but to send in the Impact Team to try to provide some maintenance so the adjacent property owners and the nearby property owners don’t have to suffer through those blighted conditions’
In North Carolina: ‘According to RealtyTrac, the number of Orange County homeowners filing for foreclosure spiked in May to roughly 15. That number returned to the single digits in June. The last spike was in July 2012, when there were more than 20 filings. RealtyTrac Vice President Daren Blomquist said Orange County is doing much better than the rest of North Carolina and the nation, although nationally, new foreclosures are at their lowest level in six years. A total of 801,359 U.S. property owners filed for foreclosure in the first six months of 2013.’
‘Blomquist said many foreclosures were delayed after the Obama administration launched programs to ease the market crisis. Banks are starting to move on those properties now, he said. “The market is improving, so the banks know they can get more money out of the market than they did three years ago,” he said.’
There is an array of powerful forces controlling trillions of dollars to keep house prices from falling, and they have been at it for decades. Look at the BLM, holding millions of acres, dribbling out a couple dozen lots in the west when prices fell. We don’t know what land and houses are “worth” because the government keeps trying to keep prices higher.
Let’s contrast what happened in the oil states in the 80’s with the situation today. Back then, most lenders were forced to close up and loans were liquidated. Today, regulations were altered to keep lenders from closing or liquidating. Heck, to top it off they were given almost a trillion bucks!
I’ve said for years that the bubble has been going on for much longer than most suspect. The system is terrified that a massive deflation is hanging over asset prices, and have employed several trillion dollars to hold that back. IMO, it is doomed to fail. Handing out ever cheaper loans at inflated house prices doesn’t make house hold balance sheets stronger. Just the opposite. Having renters pay 40-50% of take home pay for rent just leaves that much less to save or spend on other more productive things in the economy. High house prices are killing the economy, but the powers in charge are blindly pursuing an insane policy.
Here’s what happens; an artificially high price will cause the over-production of any given item. And we’re already over-supplied with houses.
“And we’re already over-supplied with houses.”
Isn’t shrinking the oversupply the point of the $15 billion economic stimulus to rehab and demolish vacant lots in areas where the housing market collapse left thousands of empty and unfinished homes?
This is Keynesian ditch digging broken window economics taken to a new level of waste and destruction.
‘Congress should authorize a $15 billion economic stimulus to rehab and demolish vacant lots in areas where the housing market collapse left thousands of empty and unfinished homes, President Barack Obama says in a speech devoted to housing delivered in Phoenix, an area particularly devastated by the collapse.’
‘Obama argues the nation’s financial security depends on a stable housing market, where homes serve as the primary investment for the middle class.’
‘Obama also calls for measures to make it easier for homeowners to refinance at lower rates and for simplifying regulations and red tape snarling the lending process.’
“…a $15 billion economic stimulus to rehab and demolish vacant lots in areas where the housing market collapse left thousands of empty and unfinished homes,…”
Sounds like an effective way to eliminate shadow inventory which has crumbled into desuetude thanks to ongoing efforts to prop up prices by holding homes off the market. Never mind the huge real financial loss due to wanton destruction of housing which cost valuable human labor and natural resources to produce. We are a rich society, and hence can afford to throw valuable assets down the toilet.
‘Obama also calls for measures to make it easier for homeowners to refinance at lower rates and for simplifying regulations and red tape snarling the lending process.’
Federal government efforts to abolish time-tested prudent lending practices culminated in the 2007-08 housing collapse, and were followed by massive denial, including by many HBB apologists, regarding federal government complicity. It seems as though the housing recovery plan depends heavily on hair-of-the-dog measures to once again weaken or scrap lending standards.
Is it different this time, or should we expect a headlong slide down the same path from here to a secondary bubble peak and collapse?
‘Obama argues the nation’s financial security depends on a stable housing market, where homes serve as the primary investment for the middle class.’
An unprecedented recent influx of hot money from Wall Street, hedge fund and foreign investors coupled with Fed-sponsored historically low lending rates have driven up prices well beyond fundamental value. Consequently, at this point buying a home in America is a high-risk financial gamble. Hair-of-the-dog housing market stimulus measures have virtually guaranteed that it will be a long, long time before housing can once again serve as a bedrock of financial security for ordinary middle class American families.
‘We haven’t had one sale above the $2.5 million mark for seven months.’
That poor, poor realtor. I hope he chokes.
“That poor, poor realtor. I hope he chokes.“
+1 On his next client.
I’ll get a photo of that house tomorrow. I’ll be passing through the hood again.
Hang on to it. I’m going to start a new photo gallery.
In that case, I may need to do a little photo shoot of all the vacant lots between Rancho Bernardo and Del Mar that are graded and ready for building out the next wave of high-end tract home development in North County San Diego. For an area which supposedly lacks any remaining land to build on, the number of empty lots graded and ready for building is a rather astonishing sight to behold.
Oh goody!
Ben, I will resend when you fire up gallery 2.0
http://picpaste.com/IMG_2086-aCEjh0nP.jpg
Note: the pyramid shape is the top of the pool cage. You can barely see it:
http://picpaste.com/IMG_2087-xiN464qm.jpg
http://picpaste.com/IMG_2088-QoQcgU2y.jpg
Whoops, the Kudzu pic didn’t take. Here it is, with lines to show you the pool cage:
http://picpaste.com/Slide1-hVVf0loP.jpg
Housing shortage!
Wow! Ok, the pool cage was pretty impressive.
Were you sure it was abandoned? I’ve seen some elderly living with their yards awfully overgrown…
‘Were you sure it was abandoned’
An indication is the vegetation in front of front door. Would you brush past a branch every day or would you snap it off?
I’d bet the door is unlocked. The people coming and going don’t have a key and don’t want to lock themselves out using the inside spinner.
Obama’s bubble talk
Posted by Scott Van Voorhis
August 7, 2013 10:45 AM
OK, can’t exactly call it a warning, nor is President Obama suddenly turned into a housing bear.
But the president certainly alluded to the potential of a new bubble in his big housing speech Tuesday.
Yes, I know, all the housing market cheerleaders keep telling us there is no bubble, that things have changed, that the market will even out, even magically correct itself.
Yet just because all those nasty subprime mortgages are a thing of the past doesn’t mean we are somehow immune from another housing bubble.
We are seeing the housing market heat up far too quickly, driven by the Fed’s campaign to keep interest rates at rock bottom levels, speculative buying of massive tracts of homes and condos by investors and increasingly ridiculous barriers to new construction in Greater Boston and other high-priced, boutique markets.
Of course, the Obama didn’t mention any of those factors - he is trying to sell his plan to disband Fannie Mae and Freddie Mac as a way of preventing a future bubble.
Good luck with that - it’s a little late for prevention and disbanding the Washington-based housing giants will probably take years.
The cat is out of the bag and the market forces driving home and condo prices up - not to mention rents as well - aren’t going to be so easily contained.
In fact, if it’s gotten to the point where the president is starting to warn about the potential of a new bubble, we are probably already well along our way.
Here’s what the president said - you can find a link to the entire text of the speech on The Wall Street Journal site.
The Obama wants to re-inflate the housing bubble on a rock solid foundation…This might just be the tipping point.
He’s great at making promises he won’t keep. I wouldn’t get too excited.
US Housing Bubble II: Euphoria And Other Shenanigans
Tuesday, May 28, 2013 at 5:00PM
The good old days are back. Those days during the last housing bubble when money grew on trees: home prices jumped 10.9% year over year, according to the S&P Case-Shiller 20-city Home Price Index, based on data through March 2013. On a monthly basis, the index rose 1.2%. Prices are now back to 2003 levels. The usual suspects: Phoenix soared 22.5% year over year, San Francisco 22.2%, Las Vegas 20.6%. You can’t lose money in real estate. I’m already hearing it again.
Flipping houses is back in vogue. People are jabbering about it on their cellphones while crossing streets without looking. Entire articles have been written about it, backed with reasonable-looking numbers, such as RealtyTrac’s “25 Markets Where Flipping Homes is Most Profitable.” The top three? Orlando, Las Vegas, and Phoenix. Visions of 2005!
The smart money is once again running national radio ads on how-to-flip-houses shenanigans. Pull out your credit card, call that 800-number, and get rich quick. On NPR, an “economist” said this morning that the housing market was “on fire.” That’s the sort of hard “data” that puts real gloss on NPR’s perspicacious coverage of the US economy. And everybody fingers the “tight” inventory – as hundreds of thousands of vacant and for-sale homes have evaporated, and as bidding wars are breaking out over what’s left. Or so it seems.
But vacant homes don’t evaporate. Private-equity funds have poured tens of billions into gobbling up vacant single-family homes in specific markets. And now some of them are planning IPOs as a way of dumping this stuff into funds that unsuspecting worker bees hold in their 401(k)s. It’s called an exit, and they have to do it before it blows up in their faces. Meanwhile, they’re hoping to rent out at least some of these vacant homes on their books, but vacancy rates of single-family homes are sky-high in these markets, with the stock of vacant homes having simply been moved from the for-sale list to the for-rent list where it languishes unnoticed by the gurus. That’s what free and unlimited money will do. I’ve hammered on this theme before…. Housing Bubble II: But This Time It’s Different.
Euphoria even shows up in the numbers. The Conference Board Consumer Confidence Index rose in May to 76.2 up from 69.0 in April, the highest level since February 2008. Not everyone was euphoric. Which was why the index hasn’t hit the stratosphere yet. But those among the respondents who benefitted from the Fed’s money-printing binge and the bubbles it engendered in corporate bonds, farmland, housing, the stock markets, even junk bonds… they felt flush; and just like in 2006 or 2007, when “Merger Monday” had become a day of the week, they felt wise for having made smart decisions. Forgotten were the fiscal cliff – whatever that had been – the payroll-tax hike, and the sequester. For the lucky ones, these inconveniences were drowned out by euphoria.
The Walmart crowd wasn’t so lucky, however, and if it hadn’t been for their presence, the index would have been soaring. So there were some hiccups: only 10.8% of the respondents thought that jobs were “plentiful”; while dismal, and a reminder of reality, it was up from an even more dismal 9.7% in April.
Everybody loves bubbles.
…
http://www.fhfa.gov/?Page=14
There is a 4Q appreciation by state mapif you scroll down a bit. The appreciation/bubble fairy isn’t equal opportunity. Some states have negative appreciation.
Even within metro areas, like Denver, some nabes appreciate at bubble rates (say Broomfield) while others, just miles away, many with nice houses, but no local quality employers (like Brighton) languish in foreclosure hell.
‘Obama argues the nation’s financial security depends on a stable housing market, where homes serve as the primary investment for the middle class.’
Stable used to mean housing was in line with local incomes, and people didn’t mortgage themselves at 5x+ their annual incomes. Stable meant a house could be paid off as part of a retirement strategy.
Not sure what Obama means by stable, but my guess is if you pay some crazy price for a house, it’s all good.
“Stable used to mean housing was in line with local incomes, and people didn’t mortgage themselves at 5x+ their annual incomes. Stable meant a house could be paid off as part of a retirement strategy.”
+1 If you can’t pay-off your mortgage in ten years you paid too much.
“Not sure what Obama means by stable,…”
1. Keep bubble reflation going through the 2016 election season.
2. Let continued bubble maintenance become the next guy’s (gal’s) problem.
“Not sure what Obama means by stable,…”
That means “don’t move or look back” while Larry Summers and his buddies prepare to implant the American Dream embryo where it can gestate, feed off of you.
August 5, 2013
The Fed’s Money Trap
Housing is perhaps the canary in the coal mine telling us that things are not going well and danger is close by.
http://www.americanthinker.com/2013/08/the_feds_money_trap.html
Not so.
Bonds are the canary in the coal mine. Housing is the coal which is about to get set on fire, once the bonds have already gone up in smoke.
Next Market Crash Will Start in Bond ETFs
Friday, 09 Aug 2013 07:46 AM
By Michael Carr
Bonds are set to once again be at the center of a financial storm. This time, the problem will start on Main Street, when individual investors see interest rates rise.
When interest rates rise, bond funds will drop in price. If investors sell to stop their losses, the market might not be liquid enough to meet their demands.
Unlike stock markets, bond markets are not very active. On an average day, total trading in corporate bonds totals $20 billion. The Vanguard Total Bond Market exchange-traded fund, with about $110 billion in assets, holds $20 billion worth of corporate bonds. If the fund needed to sell quickly to meet redemption requests, the bond market could quickly become stressed.
As a group, mutual funds hold more than $500 billion in corporate bonds, an amount equal to about five weeks worth of normal trading volume.
In a market panic, liquidity becomes the most important factor. This was the reality that led to the founding of the Federal Reserve.
In October 1907, a market crash was caused by a single speculator using borrowed funds and too much leverage in an attempt to corner the market in a stock called United Copper. Knickerbocker Trust, the bank that made the loans, suffered a liquidity crisis. The looming failure of this bank threatened the entire financial system. Treasury Secretary George Cortelyou enlisted the help of banker J.P. Morgan. Teaming up with other bankers, Morgan redirected money between banks, found additional sources of credit and bought oversold stocks of healthy companies. Within weeks the Panic of 1907 was over.
A similar story unfolded in 2008. Speculators used borrowed funds and excessive leverage led to the collapse of several large Wall Street firms. In 2009, the Fed stepped in and provided liquidity to the markets, an action that ended the bear market.
This time, Wall Street firms have sold illiquid investments to Main Street under the illusion of liquidity.
When bond investors try to take their money out of bond funds, which is likely to happen when interest rates rise and account values drop, the bond market lacks the liquidity to meet their demands. The Fed might be at the limit of what it can do, and the market crash sure to follow could make the 2008 bear market seem like a mild correction.
the bond market lacks the liquidity to meet their demands.
I call BS. There is still some market-clearing price for all of the bonds.
Liquidity will always be found, at some price.
Whac! I concur with your acknowlegment more so…
If rates do not go up, a severe disconnect develops between the bond markets and the economy itself. Eventually the bond vigilantes will saddle their horses and as history has shown, they will have their way, and in the process destabilize arrogant governments. It has happened before, sometimes to the point of collapse.
Damned if we do. Damned if we don’t.
This is what happens when we elect leaders who brazenly ignore mathematics and the laws of economics.
Math wins.
We lose.
And you can take that, my friends, to the bank.
Read more: http://www.americanthinker.com/2013/08/the_feds_money_trap.html#ixzz2bjApoXI9
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Speaking of divergence from fundamentals, how is the U.S. bond market faring these days?
Investment Outlook
August 2013
Bond Wars
William H. Gross
Adaptation is tantamount to survival in the physical world. So argued Darwin, at least, and I am not one to argue with most science and its interpretation of natural laws. Adaptation has been critical as well for the survival of countries during wartime, incidents of which I am drawn to like a bear to honey, especially when they concern WWI. Stick with me for a few paragraphs on this – the following is not likely to be boring and almost certainly should be instructive.
…
To briefly summarize: All bonds have carry in the following form:
1) Maturity risk
2) Credit risk
3) Volatility risk
4) Curve risk
5) Currency risk
It is, however, maturity risk that most investors fear most in their bond portfolios. It is the reason why bonds were such a successful competitor to stocks since 1981 as yields came down from 15¼% to 2½% in June of 2012. It is also the reason why returns have had a negative cast since then. What to do now?
Well as I argued in the opening paragraphs, there will always be a need for fixed income and therefore maturity extension in investors’ portfolios. Fixed liability institutions demand it and aging boomers worldwide require it. So let’s not compare a 5–10 year Treasury note to a British horse. Still, in a rising interest rate environment over time, a portfolio manager might rely less on maturity “horses” and depend more on the “machine guns and flamethrowers” associated with credit, volatility, curve and currency.
Now at first, second or third blush this might seem rather obvious. Gross may have taken many of you through a WWI moment only to confirm what many of you have already figured out. Your reallocations to unconstrained strategies, alternative asset, and even lower duration portfolios are ongoing, and it is those products that predominantly contain non-maturity extension carry. If you are leaning in that direction, then we are in sync even for classic bond strategies such as the PIMCO Total Return Strategy. Less carry from duration, more carry from credit, volatility, curve and currency in the future years ahead.
But can it be that simple? No, because adaptation is required not just philosophically at war colleges in anticipation of evolving weaponry, but on the battlefield itself during the heat of the battle. There will be times when duration is advantaged at the expense of credit, a time when volatility and curve perform less well than a 30-year Bund denominated in euros. What is commonsensical and relevant to disclose in an Investment Outlook meant primarily for clients, is that we are aware of the choices, that we know maturity/duration extension is becoming a tired horse, but that it may still have a place on the battlefield under certain conditions. Will PIMCO charge the machine-gun-laden front lines with consistently overweighted durational bond strategies? No, but we might try to outflank them if yields rise too much like today. Will we be aware that credit, curve, volatility and currency have their risks as well and could be outdated just as easily? Yes. In fact, the total carry of a portfolio is perhaps the risk most critical in today’s bond/unconstrained/alternative asset or even equity wars. The total carry or the total “yield” of a portfolio is PIMCO’s dominant focus, not duration reduction. In a highly levered economy/financial marketplace, all forms of carry can go up or down at the same time. They did for successive weeks in May and June. They may do so again. The diversifying aspects of one form of carry vs. another may hold form in most future time periods, but when they don’t, almost all investors will regret not focusing on total carry as opposed to discriminating exclusively against maturity extension.
How much carry should a portfolio manager/PIMCO hold for its clients today relative to their desired indices? Here’s a helpful guide: Capitalism depends on the successful offering and capture of carry in its multiple forms. If capitalism is faltering (recession) in developed/developing economies and yields are close to the zero bound, then portfolios should have less carry than before. If prospects are mediocre, portfolios should be overweight carry. If prospects are very bright, they should again be underweight bond carry. If we can be mindful of this, and accurately forecast it, we will be successful. This may be the most important conceptual change I have ever written about in an Investment Outlook. Readers who have stuck with this Outlook at least to this point have a scoop, if not a magic feather.
So, fellow generals in this bond war, today’s war college lesson is to be mindful of evolution and the necessity to adapt. Know that maturity extension worked well for 30 years and will work less well with yields close to zero. Know that there are other weapons at your disposal, but they too contain risk and their combined carry is itself probably the most critical variable in future asset return wars. And know that bonds – while containing a certain amount of maturity risk by very definition – will never be antiquated. The secret to using them will be to strategically position their component and combined carry to maintain positive absolute returns. Unconstrained strategies, alternative assets and stocks will be flexible choices in a dynamic future environment. We want to continue managing them for you. But don’t give up on bonds. Flexible bond managers can adapt as well. PIMCO will not go down at the Somme.
Bond Wars Speed Read
1) Bond managers must adapt to a new world of near zero bound interest rates and the likelihood of lower total returns.
2) Reducing maturity is not the only potential strategy to win this new war; in fact because of near 0% money market yields, at times it may be counterproductive.
3) By focusing on “carry” and its diversifying characteristic components, a bond manager can help protect downside risks.
4) Carry consists of maturity extension, credit spreads, yield curve differences, volatility, and currency components.
5) Stick with PIMCO, we’re going to win this new war!
William H. Gross
Managing Director
*Included as an attachment is an earlier 1986 version of my first “Bond Wars” which in retrospect seems pretty insightful.
Even briefer summary: Try not to let your bond investments get mowed down by German machine guns.
Say what you want about Gross, but you cannot deny that this analogy is brilliant.
Bingo! In fact, the fastest way to resolve the “pension crisis,” provided fund managers are adequately hedged against the risk of higher bond yields, would be for interest rates to continue their upward trajectory towards historic norms.
Sadly, this would take away one of the Republican propagandists’ favorite talking points, which is the claim that it was overspending on public union pensions that led to the pension crisis, not the advent of yield suppression.
Whac
I always thought pensions played more in the stock market than in bonds.
With record stock indices their pensions should be fat.
My point was mainly about the liability side of the equation, not the asset side. The lower the interest rate, the higher the present value of future pension payments, and this liability is a key determinant of the financial position of a pension plan (i.e., financial position = assets - liabilities, with the latter defined as the present value of future benefit payments).
which is the claim that it was overspending on public union pensions that led to the pension crisis, not the advent of yield suppression.
Weren’t most pension funds significantly underfunded even before the yield-suppression began?
Nice paraphrase of The Bard.
veni, vidi, oops
‘In some ways, Philadelphia is like Detroit. Both had thriving manufacturing sectors that disappeared. Both suffered huge outflows of households to the suburbs. Philadelphia, once the nation’s third-largest city, has lost 25 percent of its population and is now the fifth-largest city. Detroit lost more than 40 percent of its residents and is now just the 18th largest.’
‘The negative impact of the massive thinning of the population on the cost of government has not been recognized. Detroit was built to hold more than two million people. It is down to 700,000. Similarly, Philadelphia could house 2.5 million people, but the population is roughly 1.5 million.’
http://www.philly.com/philly/business/homepage/20130804_Failure_to_Adapt.html
In the same paper:
‘On a recent hot summer day, the principal of Grasso Holdings Realty was conducting a tour of the 22-story Reef - once part of that acreage, and the third of what were to have been five residential towers built by Isle of Capri Associates. In late 2011, Grasso, now 42, was appointed the Reef’s receiver by the lender Union Labor Life Insurance Co., which took back 118 unsold units from the developer, Doron Gelfand.’
“He built a wonderful project,” Grasso said of the developer, “but he got caught in the market. He would have been fine had he not built the third building.” Only 37 units were sold before foreclosure.’
‘We’re selling four a month,” said Grasso, who put the average sale price at $413,000, including the $1.7 million penthouse and a $910,000 mini-penthouse. That’s about $315 a square foot, although the 1,455-square-foot 19th-floor condo Grasso was showing lists at $575,000, or $395 a square foot.’
http://articles.philly.com/2013-07-27/news/40817265_1_northern-liberties-capri-associates-condo
So the shortage of housing is why these boxes of air in the sky are selling for 400k or so?
“Philadelphia is like Detroit”
I’m guessing that with a tiny bit of effort, one could compile a list of thirty or so once-prominent American cities whose post-WWII economic trajectories closely resemble that of Detroit.
Detroit is merely the canary in the coalmine.
Todays San Francisco is tomorrows Detroit. It’s always been that way and always will be.
Someone already compiled an awesome list of U.S. city population decline!
Got shrinkage?
Shrinking cities
City 1950 population Peak population (year) 2010 population Decline from peak % decline from peak
Akron, Ohio 264,605 290,351 (1960) 199,110 91,241 34.50%
Albany, New York 134,995 134,995 (1950) 97,856 37,139 27.50%
Baltimore, Maryland 949,708 949,708 (1950) 620,961 328,747 34.60%
Birmingham, Alabama 340,887 340,887 (1950) 212,237 128,650 37.70%
Boston, Massachusetts 801,444 801,444 (1950) 617,594 183,850 22.90%
Buffalo, New York 580,132 580,132 (1950) 270,240 309,892 53.40%
Camden, New Jersey 124,555 124,555 (1950) 77,344 47,211 37.90%
Canton, Ohio 116,912 116,912 (1950) 73,007 43,905 37.60%
Chicago, Illinois 3,620,962 3,620,962 (1950) 2,695,598 925,364 25.60%
Cincinnati, Ohio 503,998 503,998 (1950) 296,943 207,055 41.10%
Cleveland, Ohio 914,808 914,808 (1950) 396,815 517,993 56.60%
Dayton, Ohio 243,872 262,332 (1960) 141,527 120,805 46.10%
Detroit, Michigan 1,849,568 1,849,568 (1950) 713,777 1,135,791 61.40%
Erie, Pennsylvania 130,803 138,440 (1960) 101,786 36,654 26.50%
Flint, Michigan 163,413 196,940 (1960) 102,434 85,465 43.40%
Gary, Indiana 133,911 178,320 (1960) 80,294 98,026 55%
Hammond, Indiana 87,595 111,698 (1960) 80,830 30,868 27.60%
Hartford, Connecticut 177,397 177,397 (1950) 124,060 53,337 30.10%
Jersey City, New Jersey 299,017 316,715 (1930) 247,597 69,118 21.80%
Minneapolis, Minnesota 521,718 521,718 (1950) 382,578 139,140 26.70%
Newark, New Jersey 438,776 442,337 (1930) 277,140 165,197 37.30%
New Haven, Connecticut 164,443 164,443 (1950) 129,779 34,664 21.10%
New Orleans, Louisiana 570,445 627,525 (1960) 343,829 283,696 45.20%
Niagara Falls, New York 90,872 102,394 (1960) 50,194 52,200 51%
Philadelphia, Pennsylvania 2,071,605 2,071,605 (1950) 1,526,006 545,599 26.30%
Pittsburgh, Pennsylvania 676,806 676,806 (1950) 305,704 371,102 54.80%
Providence, Rhode Island 248,674 252,981 (1930) 178,042 74,939 29.60%
Reading, Pennsylvania 109,320 111,171 (1930) 88,082 23,089 20.80%
Rochester, New York 332,488 332,488 (1950) 210,565 121,923 36.70%
Scranton, Pennsylvania 125,536 143,333 (1930) 76,089 67,244 46.90%
South Bend, Indiana 115,911 132,445 (1960) 101,168 31,277 23.60%
St. Louis, Missouri 856,796 856,796 (1950) 319,294 537,502 62.70%
Syracuse, New York 220,583 220,583 (1950) 145,170 75,413 34.20%
Toledo, Ohio 303,616 383,818 (1970) 287,208 96,610 25.20%
Trenton, New Jersey 128,009 128,009 (1950) 84,913 43,096 33.70%
Utica, New York 100,489 101,740 (1930) 62,235 39,505 38.80%
Washington, D.C. 802,718 802,718 (1950) 601,723 200,995 25%
Wilmington, Delaware 110,356 112,504 (1940) 70,851 41,653 37%
Youngstown, Ohio 168,330 170,002 (1930) 66,982 103,020 60.60%
Billion dollar question:
How many of those cities in decline are soon to follow Detroit down the path to bankruptcy?
Is it wrong for me to look forward with eager anticipation to the day when lotsa rich guys lose a bundle, after it turns out that Detroit was merely the first of many Rust Belt cities to go bankrupt?
s it wrong for me to look forward
Nope. Or at least, it doesn’t seem so to me.
I look forward to this with interest as well. I think Meredith Whitney will be proven right on scale, and merely wrong on the timing, with her muni forecast.
Most of these cities have terrible weather too, humid summers packed with mosquitoes and snowy couch-potato winters.
I can deal with the weather, but I find the thought that a guy might jump out from behind a bush and club me over the head to take my wallet quite disturbing. This can happen anywhere, but it happens more often in many of the above listed cities than where I live now.