Weekend Topic Suggestions
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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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The Inverted Yield Curve:
Whac posted something on the inverted yield curve (short term rates higher than long term rates) this week, but I did not have time to fully focus on his message.
I believe he was saying:
1) the inverted yield curve has predicted 8 of the last 9 recessions and
2) we have an inverted yield curve now, it is just disguised by the Fed’s policies which are keeping short term rates lower than long term rates (10-year T at 2.5%)
Whac, please elaborate. Thank you, Jingle Male
I frankly have no idea how to interpret the yield curve at the moment, given that fundamentals which normally govern the long end of the curve are masked by QE3.
It’s twisted.
The Inverted Yield Curve”
That used to work but I doubt you could tell much from the yield curve now ?
I think HP saying they are laying off 16,000 more is also a pretty good recession predictor.
Average US 30-year mortgage rate falls to 4.14 pct
WASHINGTON (AP) — Average U.S. rates on fixed mortgages fell this week for a fourth straight week. The low rates could give a boost to the spring home-buying season, which has started slowly.
Mortgage buyer Freddie Mac said Thursday that the average rate for a 30-year loan declined to 4.14 percent from 4.20 percent last week. The average for the 15-year mortgage eased to 3.25 percent from 3.29 percent.
Warmer weather has yet to boost home-buying as it normally does. Rising prices and higher rates have made affordability a problem for would-be buyers.
U.S home construction surged in April to its highest pace in five months, the government reported last Friday, but nearly all the increase came from the volatile apartment sector — a sign that Americans are still struggling to buy single-family homes.
And sales of existing U.S. homes rebounded slightly in April, but the pace of buying remained below last year’s level, according to data released Thursday by the National Association of Realtors.
The average rate on a five-year adjustable mortgage fell to 2.96 percent from 3.01 percent. The fee held at 0.4 point.
And housing demand falls some more.
I think HP saying they are laying off 16,000 more is also a pretty good recession predictor.
More of a sign of HP’s incompetence. They put all their eggs in the inkjet printing basket and suddenly printing has become obsolete. Meanwhile they underinvested in Enterprise Systems and the competition is eating their lunch.
Bartering for Rent?
How commonplace is the following or similar scenarios as rents increase and wage earner cash becomes increasingly tight?
Had a conversation the other night with a friend who mentioned he could no longer afford rent (We are in South Orange County, Ca).
Instead he found a “rent barter” arrangement to help an individual with health issues (who could no longer afford to pay a health care nurse) in exchange for live-in rent.
Both individuals in this exchange benefit because no cash exchanges hands, no taxes paid, no costs of paid nurse overhead.
I heard some nightmare stories about such arrangements just yesterday.
Here is the scam:
1. Home healthcare worker gets free room and board as part of their arrangement.
2. The person who is infirm ultimately passes away.
3. Home healthcare worker claims that the recently deceased “told them they could stay as long as they wanted.”
4. Without a written contract, the home healthcare worker is in a “he-said, she-said” argument with the deceased family…the courts are siding with the home healthcare worker.
5. Home healthcare worker then extorts money from the deceased family to leave.
In other words if, as a landlord, you want to do something like this “off books” rent barter there is some risk.
You make them look honest.
Rental Watch
Thanks for heads up.
In my friends case, the person he is taking care of are long time friends, but these days, who knows?
But you bring up a very interesting point concerning oral contracts and real property.
For example, if I agree (orally) to help a neighbor fix their plumbing in exchange for a weekend in that neighbors mountain cabin and the neighbor reneges who has the upper hand legally?
In my own neighborhood, (Irvine, Ca) I can’t say that I have seen a lot of pure barter arrangements, I suppose because of the time and effort required to find a equal swaps.
However, I *can* say that the amount of underground cash money floating around to pay for rent, childcare, gardening and the like is just off the charts.
I heard that story yesterday from my parents who had lunch with a 40+ year veteran in the conservator industry. She’s very bright, very good, and is seeing the scam over and over again…apparently is also applies to material goods. She was trying to help a family with an estate sale, and the home healthcare worker was claiming that the decedent told her that they could use various items “as long as they wanted.”. They were barred from selling the items…even without a written contract.
I big part of it is whether you trust the person on the other side of the barter.
Ditto on the cash money for things like childcare. We pay for childcare using fully legal means (payroll service, paying employer taxes, withholding, etc.)–my wife is an attorney, and even if we had no problem defrauding the government (which we do), there is too much to risk with her bar license, etc.
That said, we know of other attorneys who pay for such things with cash, under the table….shocking.
6. Home healthcare provider gets elderly to sign a “new will” giving them everything.
How about a weekend topic on all the new hotels springing up?
Hotel construction/renovation is at the intersection of residential and commercial real estate, and it seems the industry is currently booming with the same yield-chasing easy money flows as residential real estate.
Just look at the staggering number of new hotels planned around the world this year, hitting all the housing bubble hotspots:
http://www.hotelchatter.com/story/2014/1/6/145643/8147/hotels/The_Master_List_of_Worldwide_Hotel_Openings_in_2014
“As we predicted last year, 2014 is going to be a busy, busy, busy year for hotels. The NYC area alone is expecting at least 19 new hotels, one of which will be the tallest hotel in North America… Miami Beach will see at least seven new hotel openings while Chicago is expecting five. Out in Vegas, all eyes will be on the SLS which should open in the fall….
We’re also, if things go right, going to see the launch of a few new hotel brands in the U.S.–Virgin Hotels, Even Hotels, and 1 Hotels & Homes, among them.
Internationally, as it has been for the past few years, China, India and the Middle East are getting a ton of new hotels (mostly from Starwood who cannot get enough of those areas) but we were also excited to see Australia and New Zealand getting a few new hotels as well as Japan which will welcome the Andaz Tokyo and the Ritz-Carlton Kyoto which will open next month.”
–
Every article I have looked up about the hotel industry since I noticed the current boom has striking parallels to the residential real estate market:
- Like real estate speculation, hotels are extremely dependent on boom-bust cycles (remember the “stay-cations” circa 2009?)
- Like rents, hotel rates have been going up for the last few years:
“We have been increasing RevPAR [Revenue Per Available Room] every single year for the past three to four years,” Shah said. “We’re optimistic that summer will be no different.”
- Like the current real estate market, the hotel sector seems to be relying entirely on the 1% (or .001%), hoping that everyone else will pick up the slack in the future as the economy “improves.” But of course the wealth of the 99% is not growing, so, as one HBB post last week asked, what happens when we run out of rich people? And when middle class people run out of credit?
- The hotel industry seems to be characterized by an almost NAR-like excessive optimism:
“Occupancy [at US hotels] is expected to increase 1.8% to 71.2%; average daily rate is expected to rise 4% to $116.44; and revenue per available room is predicted to increase 5.8% to $82.90 during June, July and August when compared to 2013… “We’re expecting continued demand increases fueled by an improving economy, which has positive implications for both transient business and leisure travelers… We are now also expecting a pickup in group room demand,” which has alluded the industry for the past few quarters.”
- Finally, from what I remember of 2008, tomorrow’s failed hotel is next year’s condo conversion, and vise-versa.
–
Source for quotes: http://www.hotelnewsnow.com/Article/13763/Another-busy-summer-forecast-for-US-hotels
London is a good example of a city with both a luxury housing bubble and a luxury hotel bubble - there have been at least 20 major luxury hotels opening in the last year and a half: http://www.justopenedlondon.com/category/hotels/
Using one article as a case study, there are a lot of similarities between housing and hotels:
1) SuperPrime Cities
“London now matches Hong Kong as the top destination worldwide with the greatest concentration of 5-star properties”
2) Bidding Wars
“There is stiff competition for the limited real estate available, both in existing hotels and potential conversions.”
3) Future Overcapacity
“One of the big issues going into this year was the capacity that was added last year ahead of the Olympics, and there was the fear or something of an overhang in excess of supply.”
4) Outperformance by the Luxury Sector
“There are little real signs that the economic uncertainty in the eurozone has had an impact at all on the luxury sector. If you look at the data for the London market… it pretty much shrugged off 2009 quite quickly, and we’ve had continued very high occupancy rates and great (revenue-per-available-room) performance.
5) Market Plateau
“Luxury hotels in greater London saw a 4.8% decrease in average daily rate attributable to 2012’s Olympic premium rates… Meanwhile, occupancy flatlined, with an insignificant 0.3% decrease showing demand is keeping in line with supply growth.”
6) Reliance on Foreign Money
“Key markets such as China and the Middle East have supported substantial growth in the [London hotel] luxury sector.”
7) Spurious Supply and Demand Arguments
“Prime London is definitely one of the strongest markets in the world. We believe that this will remain the case as long as the very simple formula of supply and demand continues. We do not see any competition for Prime London in Europe, and we think that demand will continue to grow as uncertainty remains in other markets.”
“Although London is unique, no market is immune from unforeseen circumstances… ‘London is a truly extraordinary market…The problem is things don’t go in a straight line forever, and one fears slightly that at some point the additional supply will have a detrimental impact’”
9) Squeezed Middle Class
“Continued growth in the luxury segment coupled with an influx of supply at the opposite end of the spectrum in the budget sector could create pressure in the mid-market… ‘The budget operators have… been adding a lot of capacity, and they seem to be doing quite well in that market. With the luxury segment doing reasonably as well I think there might be a danger of something of a squeezed middle.”
10) Potential Cliff Ahead - But Why Worry?
“We’ve had three or four years of quite high supply, which has been pretty much absorbed in a very buoyant market, but for whatever reason if London’s tourism goes down I think there’s going to be a bit of a problem,” Ellis continued. “There are quite a lot more luxury rooms coming on to the market, and I think this could potentially be a concern. But at the moment everything seems to be going along pretty well.”
Source: http://www.hotelnewsnow.com/Article/12399/Londons-luxury-segment-keeps-shining
I don’t know why my point number 8 turned into a smiley face with sunglasses. It must be a memorial day miracle!
The “8″)” (without quotes) is the Wordpress ASCII code for the “cool” emoticon. “:”)” gives you a
and “:”D” gives you a 
.
I haven’t seen many new luxury hotels, but I’ve seen a lot of low-price hotels. Months ago HBB asked what happened to old-fashioned boarding houses. They are still there, but they are now Extended Stay America. Cookie cutter box hotels like Hampton Inn are popping up right near office complexes to house business travelers.
To me Extended Stay America is not the new boarding house, although I can see why some might see it that way. It’s the corporate sponsored one I suppose. If I’m at a boarding house and paying for it, I want it to be cheaper with enough food to live on included.
The new boarding house is an RV park. BYOB.
Topic idea: Mortgage servicers and banks still not complying with the law in how they help homeowners, according to survey of 66 housing counselors in CA, and report also includes 11 homeowner stories, and challenges they faced, ranging from modifications getting lost when servicing is transferred, to banks lying about investor not allowing the modification, to widowed homeowners facing red tape in assumption of mortgage: http://calreinvest.org/news/new-report-finds-ongoing-servicer-mistakes-push-homeowners-to-foreclosure
I don’t know if this has been addressed before: why shouldn’t an appraised value of a property be based SOLELY on some multiple of rents?
As my partner says, the answer is money…now what’s the question?
Just because an appraisal says the value is $x, doesn’t mean that someone won’t pay more than $x. It just means that the person doesn’t get a loan for the full amount that they want. If you think that people will restrict their buying to logical prices if appraisals are changed to ONLY be logical prices, thus limiting lending, I think you’re mistaken. (see China, where bank lending to homebuyers is far more limited than here–higher down payment requirements…they are doing fine with the creation of a massive bubble)
So, let’s say the appraisal is based on rents. And let’s say people get stupid because they want to buy a house regardless of the mortgage cost relative to rents.
What happens next?
Non-bank lenders will start to take business away from banks, since they’ll lend more than such appraisals might suggest is reasonable (they’ll charge higher rates, they’ll look at other comps as rationale). Do banks then stop writing mortgages? Or do they find a way to justify lending more than the appraisal? My money is on the latter, so they can compete with non-bank lenders.
And now as an appraiser, you risk becoming irrelevant to the process…all because market prices have become unhinged from price/rent fundamentals (as they do frequently at various points in the cycle).
Rents are tied to what people earn. Sell prices of SFHs are based on what people can/will borrow.
Topic suggestions:
1. How will whatever comes next compare to 2008?
2. How do we get rich Lahde-style off this thing?
“How will whatever comes next compare to 2008?”
We don’t know, but we have the prototype under a microscope. To paraphrase the Amish; expect the best, prepare for the worst. Consider that this will just be the second step in a flight of stairs. One thing we know is that tens of millions have been washed out of the mania and will not participate in the next stage.
” How do we get rich Lahde-style off this thing?”
By taking unreasonable risk.