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The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
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Name:Ben Jones
Location:Northern Arizona, United States
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Is the housing market turning now, or is it just the usual seasonal slowdown?
At this point I’ll most likely be renting until the kids are through high school. This is a good thing since the type of house I am renting for my family is very different than what I would buy for retirement. Perhaps I will simply pay cash for a small, modest house when I am in my mid-fifties.
In Florida, there is a huge price difference between 3/2 SFH in 55+ and the 3/2 SFHs on the open market. 55+ cost about 40% less for identical size and quality.
FWIW, it looks like Biggert-Waters will be delayed for 4 years, which means my time on the beach may be limited as my LLs (if they have any brains) should dump this house before unsubsidized flood rates kick in.
BTW, Halloween was amazing last night. My ‘hood has had a generational turnover, and we’re now in the middle of a good mix of all ages. When we moved here it was nearly all retirees and/or snowbirds.
“At this point I’ll most likely be renting until the kids are through high school.”
Given that U.S. birth rates are currently at or near the lowest point in a century, this may work out well for you. Those who buy now in good districts may see the education premium in the value of their homes shrink over the next couple of decades along with the dearth of school-aged kids coming up the pipeline.
Either rent in a district with good public schools and pay the education premium, or else have your kids go to private school and rent in a livable area (i.e. reasonably low crime rates) where the public schools are not as highly rated, making it cheaper to live there. Save or invest the money you don’t waste on an overpriced house. Make sure to save enough so that by the time your kids are through with high school, you and your lovely wife can easily downsize your household to any part of town you choose.
Given the QE3 taper is on hold, why did Mr Market turn gloomy after the FOMC statement?
With the S&P above 1750, the elite are verrryy happy. I just think some of the more prudent are cashing out for the moment. Even though HeliBen is in denial, even a high school student in Econ 101 can notice an asset bubble this big.
Capitalism, if you look at as pure mathematical algorithm it will consume everything and concentrate the essence of wealth and power to a singularly.
It’s also mathematically impossible for it function if ether the source of raw materials or labor(energy+workers) enter a terminal decline. There maybe a point of diminishing returns:
“200 Year” US Coal Supply Could Run Out by 2035″
http://gas2.org/2013/10/31/200-year-coal-supply-run-2035/
Most U.S. coal is buried too deeply to be mined at a profit and should not be categorized as reserves, but rather as ‘resources.
Energy Information Administration (EIA) reports 200 billion tons of coal “reserves” are not likely to be extracted economically. In fact, significantly less than 20 percent of US coal formations will likely be economically recoverable for mining purposes.
“Red Queen effect can make production slow down in a hurry”
http://fuelfix.com/blog/2013/10/30/red-queen-effect-can-make-production-slow-down-in-a-hurry/
“Petrohawk’s McMullen County well had initial production of 1.39 million cubic feet of gas per month. By October 2010, the Petrohawk well was making 24 million cubic feet of gas per month.
This year, the same well is making around 8.9 million cubic feet of gas, according to the Texas Railroad Commission.
More than 11,100 wells have been permitted in the Eagle Ford since 2008, but the research firm DrillingInfo estimates there are around 85,000 more wells left to drill in the field.”
The total amount of solid* waste we humans generate will peak in 2100 at approximately 11 million tons per day—close to three times the amount produced today.
http://phys.org/news/2013-10-global-solid-peak-million-tons.html#jCp
*Note: doesn’t include byproducts of production like nitrogen, liquid runoff, CO2 or other gases.
We HBB’ers will all be dead before we hit the wall
Would taxing foreign investors on their high-end real estate holdings be an effective way for the U.S. to raise revenue?
ft dot com
October 31, 2013 4:45 pm
Treasury considers tax raid on foreign property owners
By George Parker, Kate Allen and Vanessa Houlder
London’s booming high-end property market – fuelled by cash-rich foreign investors – has been targeted by ministers for a new tax raid, as George Osborne tries to fill a £1.2bn hole in the public finances.
The chancellor needs cash to fund two party conference spending commitments: the Liberal Democrats’ £600m promise to give free school meals to all infants and the Tories’ own £600m plan to reward marriage through the tax system.
Treasury officials are looking at ways to generate more revenue from the property boom in certain parts of London – an idea backed by Nick Clegg, Lib Dem leader, who has long favoured higher taxes on expensive properties.
…
Tax and Spend, that is all the liberals know. “The problem with socialism is you run out of other peoples money”; Margaret Thatcher.
“There is no society” — Margaret Thatcher
Highly recommend the films of Mike Leigh depicting life in Thatcherite Britain:
http://m.imdb.com/name/nm0005139/
But if foreign real estate investors are throwing money your direction, why not take advantage of the situation? It’s not socialism unless you redistribute wealth among your own citizenry.
This approach seems to offer numerous advantages:
1) The government could raise money without taxing its own citizenry.
2) International criminals would be discouraged from parking their loot in high-end housing.
3) Housing affordability would improve.
Where is the downside?
In part, for us to solve our deficit issues, we need to money from overseas to flow back into the US, which is why the ability to export shale hydrocarbons is so important.
Direct foreign investment is also a way for this to occur. When they buy US real estate, yes, it impacts prices, but unless they are buying from another foreigner, the money ends up in the hands of a US individual, who generally is going to spend the money here in the US.
Whatever happened to tariffs? For most of the history of the U.S. we had tariffs for the main source of revenue and no income taxes, no capital gain taxes, no dividend taxes either. At the state level there were no property taxes.
How come the general public (frogs) got so used to their boiling pot of water (taxes) that the progressives imposed on them? So used to them that on blogs you see JQ Public arguing on how to change a tax but keep the same level, like substitute a national sales tax. This is not what American history was about.
The world ran well. The U.S. had no steady source of tariffs and the “progressives,” in the guise of redistribution of property from producers to the poor, campaigned for all these taxes over 100 years ago. The beauty of this scheme is in reality it gave a steady source of revenue to the politicians to enact programs. The USA could become the world bully this way. And it did.
Progressivism is militarism, in the end.
Is this going to work ??
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&ved=0CD8QqQIwAA&url=http%3A%2F%2Fwww.bloomberg.com%2Fnews%2F2013-10-31%2Fstarwood-said-to-plan-reit-ipo-buy-waypoint-management.html&ei=HapzUsqnNYLoiALO3oGAAw&usg=AFQjCNGndxv4hHHI-D_y8c4jhCI7jGOp2A&sig2=hNAa2EyEvPEF8rLF-YoGpA&bvm=bv.55819444,d.cGE
Got “SUCKER” written all over it.
It’ll work for financial advisers who have the elderly and pension funds among their accounts. They’ll market it as a new avant-guard investment that can only go up…
Then they’ll charge their transaction fees and wait for it to tank. It will be found that the Techno-Wizards made a minor miscalculation.
+ 1.
Define “work”.
When is price fixing legal and when not?
Fannie sues 9 banks over Libor-related losses
Kevin McCoy, USA TODAY 5:32 p.m. EDT October 31, 2013
The lawsuit is the latest legal action focused on suspected bank manipulation of crucial financial benchmarks.
* Manipulation allegedly cost mortgage finance giant at least $800 million in losses
* Libor is used to set rates on mortgages, credit cards, loans and some financial derivatives
* Four of the banks sued previously agreed to more than $3 billion in Libor-related settlements
Fannie Mae sued nine major banks Thursday for allegedly causing the mortgage finance giant at least $800 million in losses by rigging a financial benchmark used to set rates on trillions of dollars in mortgages, credit cards, loans and financial derivatives.
Widening an international legal battle over the manipulation, Fannie Mae accused the banks of “pervasive” manipulation of the London Interbank Offered Rate to favor their own trading.
The lawsuit targets U.S. banks JPMorgan Chase, Bank of America and Citigroup, along with global banks Barclays, UBS, Royal Bank of Scotland, Deutsche Bank,Credit Suisse and Rabobank. The action also accused the British Bankers’ Association, which administers Libor.
The banks declined to comment on the action. However, UBS, Royal Bank of Scotland, Barclays, Rabobank and a major inter-broker dealer have previously acknowledged wrongdoing in the Libor scandal and agreed to pay more than $3 billion in settlements.
Libor rates are set each weekday morning based on what global banks operating in London say they would expect to pay for short-term loans from each other in numerous monetary currencies for varying time lengths. But court records in the settlement cases and other lawsuits showed that some bank traders regularly conspired to push Libor rates up or down to favor their own trading positions.
Outstanding interest rate contracts linked to Libor were valued at about $450 trillion in the second half of 2009, the Bank for International Settlements estimated. Nearly all 2008 subprime adjustable rate mortgages in the U.S. were similarly pegged to Libor, according to a Federal Reserve Bank of Cleveland report.
…
Is there any significance to all the recent Nasdaq glitches?
NASDAQ Has Halted Trading In Its Options Market
Julia La Roche 10 minutes ago
Nasdaq appears to be having another tech issue.
The exchange says that it has halted trading in its Nasdaq Options Market.
From Nasdaq Trader:
This is the second issue the exchange has had this week. On Tuesday, Nasdaq halted trading of a bunch of indicies due to an issue with disseminating their values.
…
The technical glitches obviously indicate that the entire idea of NASDAQ idea is fatally flawed. Why, Horace and Doris in Iowa couldn’t sell their stock in time and lost $1.53 of their retirement. NASDAQ should be repealed and dismantled immediately.
Where is the Fed on to taper or not to taper?
Nov. 1, 2013, 11:34 a.m. EDT
Fed officials disagree on future of bond-buying plan
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Oct. ISM manufacturing index edges up to 56.4%
Fed’s Plosser more worried about the exit
By Greg Robb, MarketWatch
WASHINGTON (MarketWatch) — It didn’t take long for Federal Reserve officials to show how divided they remain about monetary policy.
In the first speeches since the central bank decided not to cut back the $85 billion-a-month bond buying program, Charles Plosser, president of the Philadelphia Fed, and James Bullard, president of the St. Louis Fed, disagreed on the right path for policy and the risks posed by the Fed’s record $3.8 trillion balance sheet.
Plosser is ready to taper. In an interview on CNBC, he said the central bank “clearly missed an opportunity” to reduce the pace of purchases in September.
Plosser said he doubted whether the bond-buying program is working or that the Fed can dial the size of the program up or down depending on the data. He will be a voting member of the Fed’s policy committee next year.
Just an hour later, Bullard said he was sure that the bond-buying program has been effective.
Prior to this week’s Fed meeting, he had argued that October might be too soon to reduce the pace of purchases. He said the Fed wants “reassurance that any progress made in labor markets will stick” before tapering. If labor markets continue to improve, the likelihood of a taper will continue to rise, said Bullard, who is a voting member of the Fed’s policy committee this year.
…
Commodities Falling,
Bonds Yields Rising,
Stocks on the Verge of Correction;
Oh where, Oh where shall the QE3 go?
All $85 Billion a Month.
I miss Aladinsane’s rhymes. He could make a good one out of that.
Ya gotta love the range of contingencies covered in the Fed’s planned 2014 stress test scenarios!
Nov. 1, 2013, 2:00 p.m. EDT
Fed reveals stress-test scenarios for 2014
By Steve Goldstein
WASHINGTON (MarketWatch) — The Federal Reserve on Friday revealed the 2014 stress-test scenarios, which include one where the jobless rate jumps 4 percentage points, the stock market is cut in half and house prices crumble by a quarter. The tests are similar to last year’s but include a sharper drop in housing and turbulence in emerging-market countries. The Fed also will require banks to undergo a test for conditions similar to a mild global recession and a steepening of the yield curve. A total of 30 banks will go through the testing, which is up from 18 last year, and the Fed will use the results of the tests to determine whether they can conduct stock buybacks and pay dividends next year.
But the results must be kept secret because we all know what would happen elsewise. And the results will have grades of:
Pass with flying colors
Pass with mild applause
Pass with silence
Nov. 1, 2013, 2:51 p.m. EDT
How to know if Bernanke failed
By Ivan Martchev
At the end of January 2014, Ben S. Bernanke will step down as Chairman of the Federal Reserve. He is likely to be celebrated as a great success having navigated the economy through the Great Recession. In my view, even though Chairman Bernanke was infinitely more qualified for the job compared to his predecessor, he has accomplished little more than buying time.
Chairman Bernanke’s greatest accomplishment is that few investors understand the quantitative-easing (QE) rabbit he pulled out of his central banker’s hat. We are on the verge QE tapering, and most investors are worried how this flood of QE money will create massive inflation , while the Chairman refrained from tapering in September because, in my opinion, he is worried about deflation .
My view that QE is not well understood stems from reading multiple opinions in the press and research reports that do not grasp the process. On Oct. 22, Yardeni Research had a note commenting on the $328 billion weekly jump in federal debt described in this Washington Times article:
“Of course, all this debt hasn’t boosted bond yields because the Fed continues to purchase $85 billion per month in U.S. Treasuries, agencies and MBS. As a result, the monetary base continues to gush. It soared to a record $3.6 trillion during the week of Oct. 16, up $2.1 trillion since the first round of QE started on Nov. 25, 2008 (Fig. 6). There hasn’t been much bang bang per buck in all this ‘high-powered money.’ That’s because as it soared, the M2 money multiplier plunged and so did the velocity of money (i.e., nominal GDP divided by M2).” (Emphasis added.)
That long-term interest rates are lower because of QE is a fact, but whoever wrote this passage seems to imply that the money multiplier plunged on its own, and so did the velocity of money. This would mean Chairman Bernanke simply drew the lucky straw, and that if the velocity of money and the credit multiplier simply revert to the mean on their own, there will be trouble on the interest-rate and inflation fronts.
…
Wow. Do I ever agree.
I think this is an interesting discussion of monetary velocity as in conjunction with QE. The author says that QE is designed to keep monetary velocity low.
HOWEVER, the M2 monetary velocity peaked in mid-2006, and was already on its way down prior to QE starting.
The full timeline:
Near term peak velocity per the St. Louis Fed (it was higher in the late 90’s): Q2 2006: 2.034
MV started to decline after Q2 2006, but really started to collapse post Lehman, falling from 1.909 in July 2008 to 1.81 in October 2008.
By the time QE1 started November 2008 ($600B of MBS), velocity had already fallen to 1.81
By January 2009, MV was already 1.734, and QE1 was probably only about half over
QE2 started November 2010 ($600B of Treasuries), velocity was then at 1.74
QE3 started September 2012 (eventually moved to $85B per month), velocity was at 1.62 at that point
Since all the printing of QE infinity, the velocity of money has “only” fallen to about 1.58 from about 1.62…and the most recent decreases have been fairly small, from 1.59 to 1.581 to 1.577 in the most recent quarters.
Did QE cause MV to decline? No. QE hadn’t started when MV started to fall, and a full half of the decrease witnessed had already occurred when QE began, and the momentum was very fast in the negative direction.
This begs the question, what caused MV to fall? My guess is people becoming a lot more conservative in the face of an uncertain economy, moving to cash, investing less, taking less financial risk, etc.
Is it QE that is keeping velocity low now? Maybe.
It could also be that people are still very conservative in the face of an uncertain economy, keeping more money in cash than usual, investing less, taking less financial risk, etc.
Maybe, just maybe, the largest expansion of credit in history is running out of steam. “QE” is soaking up dodgy debt, not creating a new credit expansion. It is to soften the blow. The blow is still going to land.
Excellent characterization.
…And while people spend time and bandwidth talking about mangos, etc, something really big is happening in the housing market. If I’m right, in 6 months or a year, nobody will be talking about mangos.
Looks, based on today’s bits, like the mango bubble is over.
The above are Ben’s words from yesterday’s bits. Ben, what are the events that you are forecasting for 6-12 months from now?
It looks like this year’s “obsolete commercial conversion to luxury rentals” is a colossal flop in backwater NY. The old grain warehouse conversion was completed over the summer and opened for business with fanfare. $1,000/mo. units. My barber told me today that two units are rented out. There must be over 40 in the place. Going to be hard to match that to the business plan I’m guessing.
Is the sucker’s rally over?
A continuation of the nascent trend of reductions in price and volume sold.
“Ben, what are the events that you are forecasting for 6-12 months from now?”
Defaults cascade.
What “fundamental flaw” in his understanding will Bernanke admit to after this chapter in the economic history of the United States is closed?
Greenspan Admits ‘Flaw’ to Congress, Predicts More Economic Problems
PBS NewsHour
Originally Aired: October 23, 2008
REP. HENRY WAXMAN: You found a flaw in the reality…
ALAN GREENSPAN: Flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.
REP. HENRY WAXMAN: In other words, you found that your view of the world, your ideology, was not right, it was not working?
ALAN GREENSPAN: That is — precisely. No, that’s precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.
http://www.pbs.org/newshour/bb/business/july-dec08/crisishearing_10-23.html