The Housing Bubble

“You can’t buy stock with 0% down.”

Really?

12:37 pm Oct 21, 2013
Markets
Margin Debt Hits New High
By Alexandra Scaggs
CONNECT

Investors borrowed a record amount against their brokerage accounts last month, as margin debt levels made the biggest monthly jump since January.

Last month, investors borrowed $401.2 billion against their portfolios, exceeding April’s record of $384.4 billion, according to the New York Stock Exchange. The Big Board’s member brokerage firms report the level of borrowing, known as margin debt, held against client accounts monthly.

Debt rose 4.8% in September from the previous month, the biggest single-month jump since January. Last month’s jump was larger than the corresponding rise in the S&P 500, which gained 3% despite tensions in Washington that led to the first partial U.S. government shutdown in 17 years this month. Margin debt last hit an all-time high in April, when investors borrowed $384.4 billion against their portfolios.

The last time margin debt made a big jump, Washington tensions were also in the background—but Congress had just reached a deal to avert the so-called “fiscal cliff,” sending the S&P 500 up 5% and margin debt up twice that amount. While September’s rise borrowing in was just about half the size, it came as the budget deadline loomed.

Rising levels of margin debt are generally seen as a measure of investor confidence, as investors are more willing to take out debt against investments when shares are rising and they have more value in their portfolios to borrow against.

But some see the increase as a sign of speculation, particularly if the borrowed money is reinvested in stocks. And some market-watchers have gotten wary that investors buying into stocks now are chasing a rally that has been mostly exhausted. The S&P 500 is up 22% so far this year.

“That is something to be concerned by,” said Sam Stovall, chief equity strategist at S&P Capital IQ. “If somebody is willing to borrow money to invest in stocks, they have a very high confidence level. And if everybody’s optimistic, who’s left to buy?”
…

Yes, really.

Buying on margin requires that you have something to borrow against (typically about 30%–so, if you have $3,000 in your account, you can buy up to an additional $7,000 of securities on margin).

If you went to a broker and asked them if you could open an account with $0, and start buying stock on margin, they would laugh you out of the room.

investors borrowed $401.2 billion against their portfolios,

So renters have “portfolios” now?

“It’s not healthy to be catering to the lowest common denominator.”

I know. We need to continue catering to the top 1%. More tax breaks, more settlements instead of prosecutions- it’s what’s good for America, and it helps the poors!

We should definitely lend lots of money to folks who are renting with little income so they can go out and buy a home…that helps BOTH the 1% (who benefit the most from asset inflation), AND the poor.

Win win.

“Yes, really.

Buying on margin requires that you have something to borrow against (typically about 30%–so, if you have $3,000 in your account, you can buy up to an additional $7,000 of securities on margin).”

Sounds quite a bit like buying a home in the era before low-downpayment federally subsidized-and-guaranteed mortgages and downpayment assistance. For instance, we put down 20% on the last two homes we owned (pre-housing bubble purchases, mind you), which came out to a lot more than $3000 in both cases.

When financial historians tell the story of the Housing Bubble, they will cite the erosion or elimination of margin requirements to gamble on home ownership as a primary causal factor.

“When financial historians tell the story of the Housing Bubble…”

All they’ll cite are the big shops like Ameriquest and Countrywide, et al., were doing god’s work, and place the blame on main street.

“Sounds quite a bit like buying a home in the era before low-downpayment federally subsidized-and-guaranteed mortgages and downpayment assistance.”

When was this era?

My parents purchased a house in the mid-70’s with <5% down.

“My parents purchased a house in the mid-70’s with <5% down.”

The seventies era of inflation particularly in California where dual income households were being the new normal.

Ocean krill have no other choice but to become krill, to become food for the for the whales, because krill is what they are.

But land krill do have a choice of whether or not to become krill and they make this choice because the land whales somehow are able to persuade them to become krill, to become food for them, to become food for the land whales.

Here’s the problem though…..

Even if you’re at the breakeven point(I assert that if you bought a house in the last 14 years, you’re underwater), you’re going to be underwater sooner or later.

Um…I bought in ‘99 and paid off the house last year. It is difficult to imagine a non-fantastical scenario where I would be underwater. I owe NOTHING. So the net worth of the house would have to be negative. So I don’t think I’m ever going to be underwater.

14 years of depreciation, taxes and insurance don’t come cheap.

A notion of finding a sucker to clover those losses is quickly evaporating.

“Anyone who thinks Liberal or Conservative are anything but an artificial construct created for the purpose of dividing the masses amongst themselves is living in the Matrix.”

–Biggvs Richardvs

“Anyone who thinks that Liberals and Conservatives are the same is probably a Conservative who is whining sour grapes that he lost the recent election.”

-oxide

They are different. But the good ones are capable of agreeing to disagree on some things and focusing on what they can agree on for the good of the country. I wonder why we almost never see that?

“Anyone who thinks that Liberals and Conservatives are going to do anything to help this country is out of his/her collective mind.”

-USoCPaB

Notice I didn’t say “Liberals or Conservatives” but rather “Liberal or Conservative.” Of course there are people who divide themselves along those lines - they’re the ones stuck in the Matrix. The construct is designed that way, and furthermore is designed to never have a resolution - like an ant on a mobius strip.

The only real solution is not to play. Put another way: Take the red pill. (no political affilation with the color red intended)

Now we’re talking.

this message brought to you by the national association of realtors

Even if it were, (which it’s not) how would the source negate the fact that my paid off home essentially pays my “rent” every month? Every day, week, months and years.

Like a source of a fact can somehow change that fact or math?

Well you got yours! Now if I can just put together $300k, I can live in Swellsville too!

Most of the people who own their houses with no debt didn’t pay anywhere near today’s house prices.

EddieTard or RioTard?

Maybe REOTard?

Well that’s the entire point of buying with a fixed payment, Ben. And when my house is paid off in 20 years, people will still complain that “when you bought in 2012 you didn’t pay anywhere near today’s house prices.” They, of course, will be paying today’s rent prices, for every today.

Squaddie, I have yet to see the NAR taut the touchy-feely benefits of paying off a mortgage. They don’t want you to pay off the mortgage.

Paying a 250% premium is the point….. which you made the mistake of doing.

‘when my house is paid off in 20 years, people will still complain that “when you bought in 2012 you didn’t pay anywhere near today’s house prices”

So you are assuming two things; one that you will pay off this debt, and two, that house prices will be much higher in 20 years. It will take 20 years to find out if you are right. It will only take 2 or 3, maybe less, to find out if you are wrong.

It will only take 2 or 3, maybe less, to find out if you are wrong.

What if house prices dip in 2-3 years, but then rise again over the next 17-18 years? Then we’ll both be right!

You’ll find out when the value of that shanty goes to early 1990s levels.

“What if house prices…”

The wrench in that is the mania, the size of the mania and what happens after a mania crashes. This is not a normal “business cycle”, it is the biggest housing mania in our history. To assume that today’s prices are some kind of baseline is foolish, simply because of the mania which isn’t over yet. The pain that comes with the end of a mania prevents even the foolish from wanting to play that tune again. The return of a massive credit expansion will come in the lifetime of a generation not yet born.

Squaddie, I have yet to see the NAR taut the touchy-feely benefits of paying off a mortgage. They don’t want you to pay off the mortgage.

Agreed, they want you to keep “climbing the property ladder” as it generates a steady source of fees and commissions for them. Stay in the same house fort 30 years and they starve.

“What if house prices dip in 2-3 years, but then rise again over the next 17-18 years? Then we’ll both be right!”

oxide: Maybe with all the government subsidies you cheated hardworking taxpayers out of (or was that some other sfbuyer?), you found an exception to the idiocy that is buying during this bubble. Why try to lie and say that now is a good time to buy when houses are at 50% premiums to 3-4x median household incomes? I bet you won’t send me any of your income now that you have a house even though my taxes helped you buy yours…

mathguy, that was sfrenter AKA sfbuyer, IRC. Oxide is buying her house the hard way, with a long term mortgage.

Considering that the only - and I mean ONLY - reason that housing is staying as high as it is is that the Fed is running their printing presses and ultimately enabling people to buy houses they ultimately can’t or soon won’t be able to afford, I think I’ll side with not buying. If houses were priced in at 2x annual income, which would arguable be low prices based on fundamentals, then I would be shopping houses *today.*

As it stands, anyone who buys a house today(or in the last 5 years) is betting their entire financial future on whether or not the Fed suddenly decides to protect the value of the dollar. All it would take is China selling off some portion of the $Trillion+ in US treasuries, or the world shifting to a different reserve currency, or any number of other financial events that would necessitate shoring up the value of the greenback and you’re seriously fücked.

They’re still handing out crap mortgages like candy that the buyers can barely afford to pay, and housing in many areas is 4-6x median household income. We’ve shipped nearly our entire manufacturing base to Chindiaexico.

If you want to know how this all turns out, see: Tulip bubble, South Seas Bubble, Mississippi bubble, and the GReat Depression. Note: Unlike the Great Depression, we no longer have a Steel industry any more or oil at $.30 a barrel.

There may be a slight long term numeric/utility advantage to buying right now if macro economic conditions stayed exactly the same or got better, but it nowhere near covers the associated risk premium.

Think about it: We’re simply not trending toward better and better jobs for everyone. And that’s ultimately what determines the price and value of housing.

I am not a buyer in San Francisco. I live in the DC area.

The only “subsidy” I received when I bought my house was that I, as a first-time buyer, didn’t have to pay the 0.5% state transfer tax. It made a dent in my closing costs, but that’s about it. My down payment and closing costs were funded by cash that I spent 10 years saving up. My cash came from a mid-level paying job that required multiple college degrees in a STEM field to get.

And please point out where I said that “now” is a good time to buy. Now is NOT a good time to buy. The best recent times to buy were mid 2009-mid 2012, when there was a dip between the popping of the big bubble and the beginning of the current bubblet. During this dip, house prices were more in line with the historical inflation curve. I caught the tail end of that dip.

I bet you won’t send me any of your income now that you have a house even though my taxes helped you buy yours…

Uh oh. It’s on!

The best recent times to buy were mid 2009-mid 2012

Yet you still overpaid by stunningly large amount.

How do you reconcile your statement with that reality?

I think mathguy is thinking of sfrenter…

As it stands, anyone who buys a house today(or in the last 5 years) is betting their entire financial future on whether or not the Fed suddenly decides to protect the value of the dollar. ”

And if they fail to protect the dollar ? Meaning they try but fail anyway like GB with the Pound.

GB didn’t fail. In fact they were quite successful.

If the dollar fails?(it won’t)

Like paper, houses will become more worthless than they are already.

If houses were priced in at 2x annual income, which would arguable be low prices based on fundamentals, then I would be shopping houses *today.*

Me, too.

oxide:What if house prices dip in 2-3 years, but then rise again over the next 17-18 years? Then we’ll both be right!

What would cause that, another house price run-up?

Many who stampeded to buy houses during the bubble had a herd mentality - “if everyone else is doing it, it must be the right thing to do!” But I wondered WHY prices were doing what they were doing. As it turns out, it was driven by fraudulent lending.

Fast forward to today. The world is in a debt crisis caused by too much debt and toxic debt. The US central bank is directly buying 480 billion a year of MBS, and indirectly more by buying 540 billion a year of government debt, part of which is almost certainly from government lenders (USDA, VA, FHA).

I certainly did not foresee the central bank and the government actively intervening in the real estate market to buoy prices. There might be something like that in the future. I know the government and central bank like to have the populace borrowing and spending, and want to spark inflation to push people into that. But, even with a younger population, in the late 70s and early 80s, half the senate lost their jobs due to the stagflation. And what exactly does inflation do to house prices? There’s an inverse relationship between interest rates and house prices because they still have to balance to a monthly payment that can be paid. Right?

So… what’s going to be the driving factor to push house prices up in the next 20 years? This last run up was from securitization which took off in the late 70s and then financial deregulation, the combination of which caused the housing bubble. And it’s those prices the government and central bank are trying to defend.

In the story Ben Jones posted yesterday, about the centrally planned economy and crony capitalism similarities between the US and China, it seems possible the powers that be are willing to beggar the country for their cronies. As long as there are more registered voters who profit from this than there are who are screwed by it, the system will continue.

House prices are directly tied to how much one can borrow. I think we reached and passed “Peak Debt.” Can that borrowed amount really go up any more? Bernanke is pushing for looser lending, as he can print dollars and firehose them to Wall Street for loans that go bad via the MBS purchases and indirectly via the government debt purchases.

I certainly don’t know for sure where prices are going. I just don’t see drivers for another great run up in house prices as there were during the advent of the securitization and financial deregulation era. Government and the central banks are already massively subsidizing Wall Street. Can that currency pump grow significantly? Are there other drivers?

Carl and Biggvs, the historical house prices at 2x annual income were based on historical interest rates in the double digits. Even at prices of 2x annual income, the howmuchamonth back then was similar to what it is for a 3x house today. In fact, even if interest rates rose to 7%, my house price would have to drop by ~30% to have the same PITI as my 4% mortgage does now.

Will we ever go back to house prices at 2x annual income? My vote says no, for two reasons:

1. Interest rates would have to go back to double digits, or at least 7-8%. Aside from housing, too many corporations (including the government) have built their finances and business plans around low interest rates. Raising interest rates would kill the corporations and the government long before they kill housing. Corporations will buy off the Fed, and the Fed itself would keep interest rates low, long before they allow that to happen. (Recall CNBC when interest rates when down. They bullied Greenspan and Bernanke to lower them just a leeetle bit more…) Therefore, interest rates MUST stay low.

2. Even if interest rates DO go back to double digits and house prices begin to fall, the rich will buy up the houses for cash — thus not caring what the interest rate is — very quickly, creating demand and arresting any price craaaater. I have been saying this for months — There is nothing that says that house prices have to accomodate themselves to the PITI of Joe Six Pack. High interest rates will slowly turn us into a nation of renters, as the boomers and X-ers who bought at low rates die off, and aging Millenial lucky ducks who couldn’t buy because of the high PITIs are forced to rent from the corps who bought with cash.

Cactus: And if they fail to protect the dollar ? Meaning they try but fail anyway like GB with the Pound.

Damn good question! Then we’re double screwed. There will be massive inflation on imported goods i.e. pretty much everything we buy.

The few dollars people in the US still earn will have to be put toward food, fuel etc. leaving even fewer dollars to go toward housing.

My biggest fear would be if they then allowed the wholesale purchase of land/housing by foreign entities using the favorable exchange rate for US dollars. That would pretty much be game over for the middle class(what’s left of it).

Oxide - Some interesting points. The main red flag that occurs to me is the corporate buyout of all these properties - I don’t really see that. Buying all that property, like any other business decision will depend on the expected ROI. If(when!) the housing market crashes, so does the 40 odd percent of our economy that revolves around it, and thus peoples ability to pay even rent. Meanwhile, the corps have to pay property tax, maintenance, etc. Sounds like a break even proposition at best which in a high interest rate environment is an economic loss.

Think of it this way: This already happened in Detroit when all the jobs disappeared. If the corp acquisition theory is correct, pretty much the whole city should have been bought up by these corps making everyone a renter, but instead there are houses there you can basically have for $1 (or extremely cheap) if you’re willing to pay the property taxes etc on it.

Now picture America as one giant extension of Detroit.

The housing market is a like a giant pinwheel, and Bernanke has been keeping it going by blowing on it over and over again, but sooner or later either he’s going to pass out from hyperoxia(hyperinflation), a genuine economic wind picks up(All the jobs come back from chindexico - doubtful), or it will just stop (deflation, depression).

Housing price is just a reflection of prevailing wages, and I’m not optimistic on the long term nationwide employment situation.

Therefore, interest rates MUST stay low.

2. Even if interest rates DO go back to double digits and house prices begin to fall, the rich will buy up the houses for cash — thus not caring what the interest rate is

So you subscribe to the Fed being able to control interest rates forever? I know it feels that way to me sometimes, but I’m skeptical they can really do it long term.

I think the value of the nations housing stock (especially while overvalued) is much higher relative to the investable money held by “the rich”. I don’t think they can buy it all. Only the Fed could…but will they?

‘the rich will buy up the houses for cash’

Yeah, and if take all the billionaires money, we can pay off the government debt.

“Carl and Biggvs, the historical house prices at 2x annual income were based on historical interest rates in the double digits.”

No Donkey. Historical houses prices are founded on the cost to reproduce them. the 2x annual salary is simply an interpolation of that cost.

If house prices finish the next ten years higher priced than now, I GUARANTEE stock indexes will go up far higher than the house prices - pick any broad stock fund of the U.S. It will be higher. And also in 20 years. You are far better off renting a one bedroom apartment or even a room for rent and squirreling (into stock index funds) the money you would otherwise pay on PITI and maintenance on a loser - a house.

“Well that’s the entire point of buying with a fixed payment, Ben.
…
They, of course, will be paying today’s rent prices, for every today.”

Your scenario, which resembles one of the classic Realtor®’s justifications for why it is better to own than rent, depends on ever-rising home prices and rents over the next two decades. But with too-clever-by-half folks investing in rental properties in U.S. real estate markets at unprecedented depth of penetration, coupled with penniless Millennials generating new home buyer demand over the foreseeable future, it seems plausible that rents and home prices will fall over the period.

What makes you so certain that rents and purchase prices are heading up from here?

Where is the housing demand which Oxide envisions driving home prices higher over the next two decades supposed to originate?

Student debt to stall millennial retirements
November 4, 2013, 3:03 PM
By Amy Hoak

Thanks to hefty student loan debts, many millennials will have to wait until 73 to retire, a recent study found. That’s 12 years later than the current average retirement age, 61.

Joseph Egoian, a financial analyst for personal finance website NerdWallet and the author of the study, explains that 73 was the age by which a college graduate with a median amount of student debt and a median starting salary would finally build a big enough retirement portfolio to replace 80% of his peak salary annually. (Also factored in are Social Security benefits beginning at 67, at $11,070 a year.)

Here’s the problem, according to NerdWallet: The median debt for a student when she graduates is $23,300, and the median starting salary for a recent grad (who has a job) is $45,327. Assuming a student makes the average annual loan payment of $2,858 for the first 10 years of her career, that drastically cuts into the amount of retirement saving she can manage. And figuring that missed-out contributions could have been earning a compounded rate of return until retirement, the lost savings due to student debt payments is $115,096 by age 73, according to the report. The report assumes every loan payment would have gone to retirement savings, and that the graduate would save at the historical 30-year national post-tax savings rate of 6.1% after the debt is paid off, Egoian said.

Obviously, the numbers are a little grimmer for graduates with more debt and a below-average salary. NerdWallet labeled as “struggling graduates” those with $40,000 in debt and a starting salary of $40,000; they wouldn’t be able to retire until 75. That says nothing of those who can’t find work. And more than 7 million college graduates are estimated to be in default on their student loans, according to the study.

For grads defined by NerdWallet as “well off” (the scenario in the report has them coming out of school with $10,000 in debt and a $50,000 salary), the picture is much improved: They’d be able to contribute an extra $40,406 during the first 10 years of their careers, amounting to a $446,452 difference in retirement savings by age 73, compared with the graduate in the median debt/salary scenario. Well-off grads would be able to retire at 67, the eligibility age for full Social Security benefits for Americans born in 1960 or later.
…

Another one that paid a 250% premium.

Rent? Yeah… you could have rented the same footage for a fraction of the amount you got ripped off for.

Freedom is having no more money left to lose.

“PRICE MATTERS”

Indeed. Especially considering current asking prices are triple construction costs(lot, labor, materials and profit).

You failed to mention the crushing burden of maintenance costs, taxes and insurance.

Those costs are hardly “crushing” and are certainly less than rent. But if you rent, you’re still paying them through your landlord. I’m NOT asserting that purchase makes sense at current prices. Locally, prices are more than double what I paid in ‘99 and considerably higher than they were just 5 years ago. But at the right price, purchase makes sense.

Nonsense…… Unless you’re practicing LiarsMath.

And let’s just address the other falsehood right now. Expenses are never automatic pass through costs to the end user, EVER.

“current asking prices are triple construction costs…”

Consider this to be an understatement. In the example house Inchby presents, I think maybe six times or more. Consider that these construction costs themselves are at multigenerational bubble highs and will collapse with the housing mania. That and the fact that replacement costs become irrelevant when massive surplus inventory comes into play after a market shock. Just sayin…

Houses in San Diego are selling at $300-$400 /sq ft.. What I want to know is, at these hugely inflated prices, why are so few houses going up for sale?

It’s simple.

There are no buyers and everyone knows it.

Remember…. Housing demand is at 16 year lows…. and falling.

http://www.movoto.com/statistics/ca/san-diego.htm#city=&time=1Y&metric=Inventory&type=0

Oh my word….

What little housing demand there was just collapsed last month.

http://www.movoto.com/statistics/ca/san-diego.htm#city=&time=1Y&metric=Sold%2FExpired&type=0

OMG that San Diego chart is shocking, especially since we personally know a family which recently moved.

I guess that helps explain the sudden return of the “For Sale” signs in peoples’ yards and the “Open House” signs around town every weekend.

“The median listing price in San Diego went down from October to November. There were a total of 222 price increases and 937 price decreases.”

How long will it take those price decreases to show up in official data (if ever)?

Okay, I’ll grant you that costs aren’t actually a direct passthrough. As a much more liquid market with lower transaction costs, it is arguably the RENTAL market which sets the price for the sales market. Houses which can’t rent for less than the cost of taxes, maintenance, and servicing the mortgage won’t be bought by prospective landlords in a normal market. So they influence the availability of housing and only indirectly affect the price/rental rate. But the idea that taxes and maintenance are “crushing” compared to the cost of renting is just stupid. If landlords couldn’t make money they wouldn’t be landlords.* And those who bought foreclosures in my neighborhood a few years ago, before prices started going up again can rent out for a profit. And probably earn a better return than T-Bills, albeit with more work and risk.

* and I’m talking INTENTIONAL landlords, not moronic flippers gone bad.

You can attempt to understate maintenance costs all you want.

The reality is that they’re crushing.

Secondly, you’re saying landlording is a can’t lose proposition. You’re dead wrong.

“…at these hugely inflated prices,…no buyers…”

This is a hallmark of the parabolic meltup phase of a bubble, as prices are chased ever higher by the few dancers still willing and able to move-it move-it out on the dance floor after everyone else has taken a seat. Price collapse is only a matter of time beyond this point unless policy makers step in to apply another round of stimulus to keep it propped up a bit longer.

We witnessed this a couple of times already since 1999 — first with the death throes of the dot com / tech stock bubble and collapse in the early 2000s, followed by the first wave of housing boom and bust from 2006-2009. It’s no different this time, except somewhat shocking to see so many participants who apparently learned nothing from recent pain of collapse and hence are eagerly lining up in droves for another round.

At what point will the world run out of greater fools?

Rent for a fraction of the cost of buying at current massively inflated asking prices.

Indeed. I’m just starting to wonder if the “hedge fund rental trade” is actually overdone or if there is a systemic change happening in our society which will reduce ownership rates (and thus increase rental rates), thus validating this latest hedge fund strategy.

In other words, did the smart money buy early and exit early from the rental game or is the smart money looking at rentals as a long term investment because appreciation is gone and now it’s about cash flow.

Just because money is “hot”, that does not make it “smart”. Hot has a following, smart, not so much.

I’m not just talking about hot money flowing into rentals. Rather have demographic and economic factors in the greater US economy forced a sea-change in home ownership rates going forward. If renting becomes the new normal because more of our population can no longer afford to own homes or choose to not own, does that validate the Wall St. shift into large pools of rental properties?

Census understates vacancy rates.

pension at 55 for a part time job= not bad

Public education has become a racket and the taxpayer is the mark.

They were tired of the corporate side getting all the sweet action.

Public education has become a racket and the taxpayer is the mark.”

Not just education. Government worker pay has uncoupled with private industry. That’s why they are moving up the food chain to the wealthy going after Capital Gains taxes and then flat out wealth taxes.

Need mo Money !!!

Government worker pay has uncoupled with private industry.

Hasn’t this been covered here ad nauseum? I think you meant to say “Government contractor pay…”

(enter goon’s line of who rulz and who droolz)

Play it like the Fireplace loop on your flatscreen. You’ll be fine.

When you are buying stuff on credit so as to be able to make deposits in a retirement savings account, it is just juggling debt. Not paying your credit cards so as to put some cash in a cookie jar is also on net not saving. It’s debt juggling. I have experience with that.

What’s the stigma? That is debt juggling. You have it under control.