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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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Living in a rental will never feel like a real home.
Your posts are repetitive and insipid. Thanks for doing your part to keep the NAR’s reputation intact.
And all your posts about bonds are repetitive and insipid.
But they do correctly predict that mortgage rates will be going up soon, and as everybody knows, when rates increase home prices increase too, so smart home buyers should buy now to lock in a low interest rate at an affordable purchase price before rates and prices go up.
“And all your posts about bonds are repetitive and insipid.”
Intelligent readers will make the connection to rising mortgage rates.
I meant the part about how when mortgage rates rise, those who recently bought homes are going to lose alot of money — ALOT.
*Realtors are liars
“…everybody knows, when rates increase home prices increase too,…”
‘Fess up: Did you flunk Freshmen economics?
High school economics. No degree required for NARSCUM.
Mortgage rates normally rise as the inflation rate rises. Inflation leads to a rise in wages and house prices will rise as wage inflation occurs. In this case we have a disconnect with the Mortgage rate artificially low and little sign of wage inflation, so I rather doubt house prices will rise, unless wages do. If wage inflation fails to occur house prices will drop, as people will be unable to support the higher cost of home ownership.
There is no inflation, but there is interest rate repression (QE3) and a frequently-discussed plan to end it (”Fed tapir“).
I know that and you know that, but Amy either doesn’t or more likely doesn’t want to know that.
“Inflation leads to a rise in wages and house prices will rise as wage inflation occurs.”
Not against a backdrop of globalization and automation.
Wages are going nowhere. The only thing that can drive prices higher at this point is artificially constrained supply and lower interest rates.
The millenials had their future completely sold out from under them, and are awash in debt at graduation, with no job prospects that will allow them to pay it back. They were the foundation of the housing food chain, and this will become more apparent as the oldsters die off.
Correct Russ.
The genesis of inflation is in wages… not the other way around.
Actually my rental feels just like a home. I enjoy my life with my kids without the worry of working my butt off to pay for an atrocious mortgage, and if something breaks I call the landlord and he fixes it. I enjoy the day with my family while other schmucks spend hundreds of dollars at HD every Saturday. My wife may get a new job and we may move (from suburban MD to suburban VA), and when we do we will just pack up and rent another place. No realtors, no open houses, no losing sleep over not being able to sell my house. Piece of mind is something a house can not give me.
And before you give me the “losing money renting” thing, I have investments that are outpacing any house I could buy. Buying a house may be a good purchase for an individual, but it is a horrible investment.
Buying a house for an individual is not a good purchase. Assuming individual is alone. It takes a lot of precious time to keep it maintained. That is too much work for one. Been there. The bonus for an indivual renting is that he can rent small, yet luxurious. I use the web apartment ratings before I go to my next apartment. I have always seen an honest assessment. Those that have low ratings and noise problems especially are what I avoid.
Like you, the money I saved by renting and the opportunities I took b breaking my leases in the last sixteen years increased my net worth far beyond where I would be if I was paying a mortgage.
Raising children in a rental is child abuse.
Haha! Really, that’s the best you can do?
Don’t you have some magnets to mail out?
Raising children in a rental is child abuse.”
from what I read on this blog only people on section 8 have kids now
The Government has made housing a manipulated investment vehicle just like it has, I’m guessing, with your “investments”.
I posted yesterday about Zion’s Bank (because of the Volcker rule now coming into effect) having to put a portion of their CDO’s on the market and the approximately $400 million dollar loss that would result because of it.
http://www.businessweek.com/news/2013-12-16/zions-says-volcker-rule-leads-to-387-million-charge-for-cd0s
I evidently forgot that the Banks will never be allowed to fail:
http://www.bloomberg.com/news/2014-01-14/u-s-regulators-said-ready-to-ease-volcker-cdo-limits-for-banks.html
homes selling at 200x rent in 22151
betting on hitlery spending it up
http://goo.gl/aB1gim
county RE tax increases- is a big grab coming?
I think there will be some shocks in CA.
People who bought recently won’t be shocked…they will be limited. However, folks who are underwater and bought a long time ago had their property assessed downward, which reduced their taxes. Prop 13 won’t protect them from going right back up to where they were before the crash.
You’re in for the surprise of your life.
Are not only houses, but also stocks, now overpriced relative to other asset classes (e.g. bonds)?
The Plunge Protection Team seems to be pumping a lot of Viagra into the stock market this morning. How much will it take to permanently harden the bull?
When Fed takes stock, Fed really takes stock
By John Crudele
December 24, 2013 | 1:30am
Back some 15 or so years ago, when I started suggesting that the stock market was being rigged, I’m sure everyone thought I was crazy.
The logic behind that opinion didn’t matter. I explained that a former Federal Reserve governor recommended in 1989 that such a thing be done. And I explained how Ronald Reagan had formed a committee called the President’s Working Group on Financial Markets that could take care of such things.
And I even said that, in my humble opinion, this was good because the market is a dangerous animal when it gets loose of its senses and decides to plummet for no reason. That was clear during the crash of 1987 and the near crash of ’89.
I also mentioned that this remedy for market crashes should be used sparingly. The Fed guy who proposed this, Robert Heller, said as much.
So I had to laugh when I discovered that the Fed’s rigging of the stock market is now discussed openly on the Public Broadcasting Service.
The issue of the Fed’s rigging of stocks came up on Wealthtrack, a Dec. 20 PBS show hosted by Consuelo Mack. The show was supposed to be a look back on the Fed, which is celebrating its 100th birthday, but it veered off the homage track a bit.
The guests were Jim Grant, one of the few financial gurus on Wall Street who does have a clue, and Richard Sylla, the Henry Kaufman Professor of the History of Financial Institutions and Markets at NYU’s Stern Business School.
I don’t know Sylla, but I do know Henry Kaufman, a famous financier. And I think Henry would have had a stroke to hear what Sylla said.
“The Fed seems to have — I think almost deliberately — is trying to push the stock market up,” said Sylla, with a bit of a grammatical hiccup. “I’ve watched this stuff for 40, 50 years now, and this is the first time in my memory when it seemed to be official US government policy that the stock market goes up.
“And the Fed likes this because it thinks that when the stock market goes up, people who own stocks feel richer, they’ll go out and spend more money, and the unemployment rate will come down.”
Grant concurred. “New thing — [the Fed] is in the business of talking up the stock market. The Fed is manipulating prices, especially on Wall Street.”
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Everybody knows the stock market is in the bubble zone, though nobody can predict how long it will remain there.
Inflating Market Bubble Not Quite Ready to Pop
BY Richard Suttmeier | 01/08/14 - 09:25 AM EST
NEW YORK (TheStreet) — The major equity averages began 2014 with three down days, followed by a strong rebound on Tuesday. This resiliency simply means that the market’s inflating bubbles are just not ready to pop. This is not surprising, as pivots from my proprietary analytics have kept volatility trendless.
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Be Careful in an Overvalued, Overbought Market
BY Richard Suttmeier | 01/17/14 - 09:58 AM EST
NEW YORK (TheStreet) — I debuted my themes for the 2014 stock market on Jan. 2 in, “Stocks Begin 2014 With Inflating Bubbles.” I explained that even if new intraday all-time or multiyear highs continued to occur, the downside risk exceeds the upside potential for the five major equity averages. Overly simplified, my market call for 2014 is that the major averages will test their 200-day simple moving averages at some point during the year.
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Market overvalued says Buffett indicator, but could still have room to expand
David Pett | January 15, 2014 | Last Updated: Jan 15 1:36 PM ET
More from David Pett | @DavidPett1
The world’s most famous investor Warren Buffett.
The U.S. equity market is overvalued according to one of Warren Buffett’s favourite gauges, but that doesn’t mean it can’t go higher before suffering an inevitable pullback, says Sheldon Liberman, editor of the Leading Hedge Investment Letter.
“Historically, the market will become more overvalued than this before a meaningful correction occurs,” said Mr. Liberman. “It does imply, however, that the expected return from this point to the eventual peak is lower than when the indicator reflected a higher value, assuming no dramatic and unexpected rise in GDP.”
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Goldman’s Kostin: Stocks are starting to look overvalued
January 13, 2014, 8:55 AM
Equity investors take heed: One prominent strategist thinks the S&P 500 index’s valuation is “lofty by almost any measure”.
David Kostin of Goldman Sachs writes that the current price-to-earnings multiple on the S&P 500 (SPX -0.09%) is about as high as it can get under these current conditions, both as measured by the aggregate index (15.9 times) and the median stock (16.8 times).
After a surge higher in stocks in 2013, Kostin doesn’t see the ratio widening to 17 or 18 times, as “many investors expect”. Rather, a continued rally in stocks will hinge on profit growth.
In a somewhat ironic twist, the sellside is now advising the buyside to temper its optimism, rather than the other way around. Kostin notes that some buysiders have year-end 2014 targets on the S&P that range between 2000 and 2200, which is above his projection, and, we’d add, that of many others on the Street.
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Investing | 12/17/2013 @ 1:25PM |15,949 views
Here’s Why The Stock Market Bubble Deniers Are Completely Wrong
A bubble.
As U.S. stocks rose to record levels in the past few months, a flurry of pundits have come out of the woodwork to claim – and deny – that stocks are experiencing another bubble.
I’ve also published a detailed report in which I laid out the case for why stocks are experiencing a bubble, though I believe that this bubble can continue expanding in the course of what I call the Bubblecovery or bubble-driven economic recovery before popping.
In this column, I will outline and debunk the most common arguments that are being used by high-profile U.S. stock bubble deniers, which includes former U.S. Federal Reserve chairman Alan Greenspan, Fed chair candidate Janet Yellen, Blackrock’s Russ Koesterich and Larry Fink, and Charles Schwab’s Liz Ann Sonders, to name just a few. Take note of the fact that these individuals have a vested interest in encouraging the public to risk their hard-earned money in stocks regardless of market conditions, and did not predict or warn about the global financial crisis, as I did. According to them, “it’s always the right time to buy stocks!” (similar to the argument used by Realtors ®), so please take their advice with a very large grain of salt.
Here are the most common, but logically unsound arguments being used to deny the fact that U.S. stocks are experiencing a bubble:
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The Stock Market Is Overvalued
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By Dan Dzombak
November 20, 2013
The Dow Jones Industrial Average (DJINDICES: ^DJI ) broke new ground this week, hitting 16,000 for the first time ever. At the same time, the S&P 500 (SNPINDEX: ^GSPC ) briefly touched 1,800. With the DJIA and S&P 500 hitting record highs, it’s worth checking where the market is and how it got there. Signs indicate that stocks are overvalued, earnings are abnormally high, and risks and low returns are ahead for investors.
S&P 500
For 2013, the S&P 500’s earnings are expected to grow just 1.5% from 2012’s level to $109.6. At current price levels, that means the earnings yield on the S&P 500 is 6%. But earnings are likely inflated because of where we are in the market cycle. The cyclically adjusted P/E is higher at 25, indicating a 2% earnings yield. At the same time, as earnings are high and stalling, the market has jumped nearly 30%. This means the stock market’s rally has been based solely on people paying more money for the same amount of earnings — this is known as “P/E multiple expansion.”
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Investing
The Dow is way overvalued!
Published: Monday, 25 Nov 2013 | 12:09 PM ET
By: Thomas H. Kee Jr. | President and CEO of Stock Traders Daily
The Dow Jones industrial average is up 22 percent year to date, and it’s time to party like it’s 1999!
The markets are flying, investors are throwing caution to the wind, and everything seems to be going up in tandem. Every time there is even a slight hint at selling pressure buyers come in, and the best performing market year to date, the Russell 2000, has barely retraced 5% when it pulled back.
2013 has been a stellar year for the stock market, but when we peel back the layers the actual growth rate of the Dow Jones industrial average should cause investors to scratch their head and question the rally. The observations I have conducted using the comprehensive earnings calculators at Stock Traders Daily reveal the true growth rate of not only the Dow Jones industrial average, but the S&P 500, and all stocks and sectors accordingly.
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With all of these articles saying it is overvalued, it must be going up in 2014!!! Where are the articles that say you can’t lose in stocks?
This isn’t a direct answer to your question, but I expect that bonds will move downward faster with higher interest rates than lots of asset classes (ie. bonds are more overpriced…especially longer duration bonds).
If you look at commercial real estate cap rates, the spread between those cap rates and the 10-year treasury is actually quite wide relative to history. In other words, prices didn’t fully adjust to long-term interest rates falling–the buying market seemed to assume that the ultra-low long-term rates were an anomaly.
I saw a study recently (can’t remember who published it) that looked at cap rates over a long period of time, they looked at the correlation between cap rates and interest rates and found about a 0.6 correlation. In other words, cap rates tended to move with interest rates, but not perfectly in lock step.
Forward expectation of interest rates explains this less than 1 correlation and why sometimes the spread between cap rates and the 10-year treasury widens, and narrows.
There are even times in history when the spread becomes negative (cap rates are lower than the 10-year treasury)…there is an assumption then that part of the return will come from the current level of rental income (thus the use of a cap rate in value determination), but that another part will come because there will be an expectation that future rents will be higher (inflation).
You can do the math with respect to bonds. There is no help from inflation.
“I expect that bonds will move downward faster with higher interest rates than lots of asset classes (ie. bonds are more overpriced…especially longer duration bonds).
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You can do the math with respect to bonds.”
You are correct; I can do the math.
But your comments call into question whether you can. Did you realize there is a simple deterministic relationship between ‘interest rates’ (i.e. Treasury bond yield rates) and prices?
What I’m saying is that the value of bonds relative to interest rates IS deterministic (ie. one determines the other), and that the value for other assets is not deterministic (there are other factors at play). There is a correlation certainly, but correlation is not the same as being deterministic.
The spread between cap rates and interest rates widened as interest rates went down (ie. commercial real estate values didn’t go up with interest rates in a deterministic fashion), and that over a long period of time such movement is not unusual…the correlation between interest rates and cap rates is 0.6 (ie. NOT deterministic).
In other words, with respect to commercial real estate, there is something else in play that determines value…namely expectation of future rental streams (either related to replacement cost and supply/demand dynamics, or other inflation expectations).
Let me make sure I’m clear (because I see what you might think I’m saying):
1. Interest rates DETERMINE the value of bonds.
2. Cap rates DETERMINE the value of commercial property based on the income in place.
3. Interest rates are correlated with cap rates, but are NOT deterministic.
4. Cap rates didn’t go down as much as interest rates following the crash (and so it is logical to believe they won’t go back up as much either).
http://www.prea.org/research/compendium.pdf
See Exhibit 10 (page 14) for my point.
“1. Interest rates DETERMINE the value of bonds.”
A better statement is that Treasury yields are deterministically equivalent to the values of corresponding bonds; i.e., if you tell me the coupon and yield on a Treasury bond whose duration matches one of the published Treasury bond yield curve rates, a simple (high school algebra) invertible function* can be used to convert interest rates into market value.
* Not to suggest the average NAR member could grasp this…
P.S. The other thing to understand is that long-term Treasury yields are an artificial construct to characterize the market value of long-term Treasurys in terms of a single “yield to maturity.” In reality (as was seen last year), interest rates are stochastic and vary by the day. The adjustment goes into the market values of long-term Treasurys, as once issued, their coupons are fixed until the end of their terms.
Yes, I understand this. Frequently fixed-rate commercial loans (especially CMBS) are tied to spreads above the imputed yield to maturity for a Treasury with essentially the same maturity as the borrowings. The spreads that I note are typically calculated between the 10-year treasury YTM (that varies by day, even though the coupon is fixed) and market cap rates.
I think the reason they use this rate, is that a very common fixed-rate CMBS loan has a 10-year maturity (that uses a 10-year YTM).
Do you understand my point about the weaker linkage between interest rates and cap rates?
Jan. 17, 2014, 1:19 p.m. EST
Six ratios say this market is very overbought
Opinion: The time to build a larger cash position may be near
By Mark Hulbert, MarketWatch
The U.S. stock market is more overvalued than it was at the majority of the past century’s peaks, according to six well-known valuation ratios.
That doesn’t mean the bull market is coming to an end, of course, since some past bull markets were even more overvalued when they topped out. Furthermore, no two market peaks behave the same way.
Nevertheless, the evidence suggests that risks are high. You may want to consider selling some of your stock holdings and building up cash.
To compare current valuations to those that prevailed at past market tops, I relied on a comprehensive list of past bull-market tops compiled by Ned Davis Research. The list is based on a set of criteria focusing on the speed, magnitude and length of market movements.
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Can gold continue dropping and stocks continue levitating in 2014?
Jan. 17, 2014, 10:35 a.m. EST
Gold contrarians say it’s time to start buying
By Myra P. Saefong, MarketWatch
SAN FRANCISCO (MarketWatch) — Most investment banks aren’t expecting gold to rally this year — that’s why some investors are betting that it will.
It’s known as the contrarian approach to investing, and there’s a lot more talk about it after gold’s hefty 28% plunge last year and as analysts slash their forecasts on gold for the year. Investors are selling low and contrarians have an opportunity to buy cheap.
“The analyst landscape is uncommonly bearish,” said Dennis Gartman, editor and publisher of The Gartman Letter. “Even the ‘gold bugs’ are neutral of gold and that is stunning, really.”
His view: it’s “time to be quietly bullish.”.
Last year, gold prices dropped 28% for its worst year since at least 1984, when FactSet began tracking data.
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Investor Alert
Jan. 17, 2014, 9:00 a.m. EST
3 signs stocks are overpriced
These indicators all look bearish now
By Brett Arends
Wall Street will tell you stocks are still a good investment because they are reasonably valued when compared with last year’s earnings, using the “trailing price-earnings ratio.”
Wall Street will tell you stocks are still a good investment because they are reasonably valued compared with next year’s forecast earnings, using the “forward price-earnings ratio.”
Wall Street will tell you stocks still offer good value because the Federal Reserve is keeping interest rates on bonds and bank deposits so low—what we might call the “Quantitative Easing” argument.
Wall Street will tell you stocks must be a good investment because they have done so well over the past thirty years.
Wall Street is spinning you a line.
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What are the choices of those people with cash?
Hold onto it and rent for half the cost.
Spot on. Hold onto it.
Save now, buy later for one third current price.
What are the choices of those people with cash?”
invest in CD’s at .35% 1/10 the rate of inflation
That’s not a realistic response. The cost of food, housing (buy or rent), travel, etc is going up across many large metropolitan areas.
You’re effectively losing moneh by not doing anything with it.
Sure it is.
Remember… rental rates are half the cost of buying at current inflated asking prices of resale housing.
Keep your money safe.