Forgetting The Lessons Of The Financial Crisis
Bloomberg reports on New York. “A single apartment at Manhattan’s One57 was sold in the third quarter, leaving about 25 percent of the ultra-luxury tower’s units without buyers more than three years after they reached the market. The most recent contract was only the third this year at One57, where sales have slowed as the tower faces competition from other projects planned nearby. ‘We definitely have seen a slowdown on that super-luxury end,’ said Andy Gerringer, managing director at the Marketing Directors, a new-development brokerage not involved with One57. ‘People know there’s a lot more product coming to the market in that range.’”
The Washington Post. “Only four cities or counties in the Washington region have fully rebuilt their property tax bases since the 2008 recession, a study from George Mason University’s Center for Regional Analysis says, raising questions about the wisdom of tying local government operating budgets to the real estate market. Property values have stagnated in most suburbs since 2005, said David Versel, the senior research associate who wrote the report. ‘People might be surprised to learn how much Montgomery County (in Maryland) and Fairfax County (in Virginia) are struggling,’ Versel said. ‘They’re thought of as powerhouse jurisdictions. But they’re clearly in a transition from affluent suburbs to whatever they’re going to become.’”
The Houston Chronicle in Texas. “The recent sharp drop in oil prices is clouding the region’s economic forecast, potentially threatening to curtail employment growth across industries and perhaps even slow down the multifamily real estate segment, a prominent local economist said. ‘Things have changed in Houston,’ said Bill Gilmer, director of the Institute for Regional Forecasting at the University of Houston. ‘And they changed fast.’”
“Gilmer said there are 24,000 apartment units under construction but there may be a need for only 19,000 units next year. He predicted demand will continue to fall. Apartment leasing can be an indicator of where the economy is headed, said Nipul Patel, regional manager of Wells Fargo Bank. He said that market is strong today, but he agreed that not all projects on the books might get built. For the first time in awhile, real estate observers say some apartments are waiving first month rents and offering other specials to attract new tenants. ‘In 2015 and 2016 there are going to be a fair bit of deliveries on the multifamily side,’ he said.”
The Elko Daily Free Press in Nevada. “According to the Multiple Listing Service, there were 519 homes sold in Elko County through October this year. A year ago, that number was 591 homes. With construction of new homes at a much slower pace than in 2013, the average price of homes has also dropped. Tammy Bawcom, owner of Bawcom Realty in Spring Creek, thought a big part of the decrease in housing sales was the availability of more rentals in Elko. ‘People can take their time deciding where they’re going to move into,’ she said.”
The Daily Chronicle in Illinois. “To Mark Emerson, the vacant sprawl of land across from his home in DeKalb’s Bridges of Rivermist subdivision is a prairie, but to city officials and local developers, it’s a symbol of the city’s stagnant housing market. The land, 85 undeveloped lots along Bethany Road, is in foreclosure, and it appears Emerson won’t have to see homes outside his front door anytime soon. Those lots, along with 20 others, including one with a single-family home, will be sold during a sheriff’s sale as a result of a nearly a yearlong foreclosure suit against the properties’ owners and an even longer battle between the owners and the Homeowners Association.”
“Local developer John Pappas and Park Ridge businessman Peter Iatredes, the two members of Rivermist Unit 5 LLC, which owns the property, made a business decision to walk away, Pappas said. ‘There’s zero growth in DeKalb,’ Pappas said. ‘and there’s nothing I can do about it.’”
The Idaho Statesman. “Northwest Bank Idaho President and CEO Rob Perez tends to zig when others zag. Sitting in his Boise office, Perez told the Statesman that some bankers are forgetting the lessons of the financial crisis. He said the number of banks is artificially high, thanks to bailout money from the Troubled Relief Asset Program, leaving too many banks chasing too few loans. The result is relaxed loan underwriting standards. Banks are also trying to stretch their cash by holding onto long-term assets such as mortgages without hedging them sufficiently, balancing them mainly with short-term investments that could lose value if interest rates increase.”
“Q: Do you see banks backsliding into the dangerous practices that caused the financial crisis? A: Absolutely. The next round of stupid is in full swing: stretching for yield. Making loans that don’t have appropriate equity, real equity. Making loans in higher-risk areas because the yields are higher. Going long-term in investment portfolios even though liabilities or deposits are short-term in efforts to stretch yield on their liquidity. Treating the business like a sales business and focusing on top line growth instead of asset quality.”
“Q: Most bankers I’ve talked to will say some regulatory change was in order to fix the problems that led to the recession. Most also say regulators have gone too far and become burdensome. What’s your take?”
“A: I’m not so sure we haven’t gone far enough to make sure we fix those things. I think it’s helpful to say if you are going to originate and sell mortgages that you have to have some skin in the game. Whether or not that’s enough, I don’t know, but it’s certainly a step in the right direction. I’m not so sure we’ve done enough to make sure there’s a consequence for those people who had these financial instruments that created these layers of risk. If you look at the Wall Street guys that created all this mess - like Goldman Sachs, which is now an FDIC-insured bank - they were involved in putting together these syndications of loans where risk was transferred from investment bankers to unknowing consumers.”
“Q: The local housing market heated up last year, then leveled off. What trends are you seeing in housing? A: Lot and land costs have gone up dramatically. You had finished lots during the downturn getting sucked up for $20,000 to $45,000. Those same lots today are $65,000 to $85,000. The cost of the dirt has ratcheted up the cost of the housing.”
“Q: You were among those who met with Sen. Mike Crapo when he was in Boise to talk about the Johnson-Crapo bill that would wind down Fannie Mae and Freddie Mac. What was your impression of the Johnson-Crapo bill? A: I think you can wind down Fannie and Freddie it in a way that limits damage, but you are going to see increases in mortgage rates. I don’t see any way around it. Will it happen? I doubt it. There will be enough awareness around the increase in rates that there will be public outcry. But do I think reform needs to happen? Yes. Do I think that results in increased rates? Yes. Do I think that’s a problem? No.”
“Q: Would most bankers agree with that? A: If it’s a mortgage banker, probably not. But home ownership is not an inalienable right, and we treat it as if it is. A house is not an investment. An investment is defined as a positive cash flow. A rental might. Your house doesn’t. We have fixation on home ownership, that it’s a good thing. I’m not convinced.”
“Troubled Relief Asset Program”
Truer words, damn …
Ben, since I’m in here early I want to take a minute to express my appreciation for both your work on the blog and your intra-day comments in particular. Watching what’s going on out there the last few years has been gut-wrenching, but the lucidity and moral clarity of what’s on offer here, constantly backed by the news summaries and data, is a very powerful antidote. Thanks very much.
And there is equal effort in the opposite direction to shut down the discussion.
Not really an equal effort, just relentless. When the “my house is my best investment” crowd chimes in, they never stick around to examine their math. Never. The next day, it’s Groundhog Day all over again.
Perfect example on the Bits Bucket today asking why there are so many For Sale signs now (no offense).
Considering that I’ve examined and re-examined more math than most of HBB, and stuck around for all the abuse with very little back up, that was rather unfair.
Whether my house is my “best” investment is a moot question. The only necessary metric is whether purchasing a house was a better investment than renting. So far, it appears to be breaking even when including the maintenance, with the edge toward buying increasing a bit each month. But the real value in a house comes when it’s paid off. Buying has always been a long game.
That’s priceless.
Then show your math. No more hiding, ducking and weaving.
“more math than most of HBB…”
Indeed, though not with facts. Hard to do math without facts. Wild claims, “RENT IS CASH IN THE TRASH” is not math.
We are pretty convinced that your investment model is simply based on ever rising prices and rents. That’s as far as your math goes here. So, it will be that, or the other thing.
We hear that rents/prices are on the decline in the DC area. Should be interesting.
If you stick it out, I’m pretty sure you will be in the halfamillionmore club. You are not alone.
If for no other reason, we need a good crash to purge the idiots who way over built empty super luxury housing. Wouldn’t it be a pure joy to see stupidity go down the tubes?
How can you possibly keep invested in the stock market at this point where it obviously has no relation to economic reality? Will you be crying when they press the button?
Do freshly printed electronic dollars suit you better? How about bit coin? Or gold pegged at $1200 per ounce?
The sidelines suit me better right at this moment. Cash in my pocket ain’t gonna decrease 30 percent over the next year.
It might go up 30% as prices fall apart.
Only the banks get free “freshly printed electronic dollars”. You and I must borrow them to have any. Are you ready to support the next credit expansion?
Me neither.
“Sidelines” = $s? How do you know the stock and housing markets won’t go up like gangbusters from here, leaving those holding electronic paper wondering what happened to the value of their cash by comparison?
Diversify and hedge against big moves.
Seems like the way to go. While most can theoretically do this, doing it in a cost efficient smart manner is much more difficult. I don’t have a good formula…reducing risk to a greater extent always costs more than you think–the market is efficient that way.
I frankly don’t see how you can go wrong buying stocks. The stock market clearly can only go up from here.
Need to Know
Stocks are crazy expensive, but here’s why 2015 could feed the bull
Published: Dec 3, 2014 9:49 a.m. ET
By Shawn Langlois
Markets reporter
The energy sector may be a mess, but, hey, at least Enron isn’t crushing souls anymore. That saga came to a bankruptcy head 14 years ago this week when blind-sided investors and employees were left to pick up the pieces of their portfolios and careers.
There’s a different kind of pain raining down on the oil patch these days, as traders grapple with plunging commodities and a relentless rally that just saw the Dow nail yet another record high.
Our call and chart of the day reflect the confusion that seems to have settled over this market. One highlights a potential tipping point in valuations, while the other makes the case for another strong year ahead. If you’re looking for a consensus, you won’t find it on Wall Street.
And if you do, run the other direction.
A key point in assessing this broader market is trying to figure out what the drop in crude means. This is a topic that’s pretty much owning the cyber waves in recent days.
Mike O’Rourke of Jones Trading drilled into why it’s a negative event for investors. The energy sector, he points out, is the least expensive sector in the S&P (SPX, +0.21%) Along with financials and telecoms, they are the only groups that trade at a discount to the market multiple. Together, they represent a little more than a quarter of the index, though they make up about 35% of earnings.
“The obvious problem is that energy earnings will be turning lower here and estimates will be coming down,” he said. “That means the least expensive part of the S&P 500 is not as ‘cheap’ as it appears.”
Meanwhile, the U.S. market, long the dominant force and as strong as it’s been, is getting smoked by China. The Shanghai Composite is cruising along at three-year highs and is destroying all 92 of the world’s benchmark equity indexes, according to Bloomberg.
Who’s next to deliver the goods, Africa? No, seriously. Mark Mobius, Templeton’s shiny global guru, said he believes the region “could be the ‘emerging market’ story of the next decade.”
…
Are you missing out on the fantastic rally on Wall Street?
What is holding you back from joining in?
ft dot com
Global Market Overview
Last updated: December 3, 2014 6:59 pm
Wall Street flirts with fresh record high
By Dave Shellock
Wednesday 18:55 GMT. An encouraging batch of US economic releases kept Wall Street near record highs and the dollar at a five-year peak as the market focus shifted away from sliding oil prices and back to the outlook for global central bank policy.
By midday in New York, the S&P 500 equity index was up 0.2 per cent at 2,071, just a point or so away from a record closing high set a week earlier. Across the Atlantic, the FTSE Eurofirst 300 rose 0.5 per cent to within sight of its highest close since January 2008.
The Nikkei 225 in Tokyo added 0.3 per cent to end at yet another seven-year peak.
The dollar, meanwhile, rose 0.4 per cent against a weighted basket of currencies to its best level since March 2009, as the latest economic figures reinforced expectations that US interest rates will start to rise by mid-2015 – while monetary policy remains accommodative elsewhere.
…
Oh no…just when it appeared the stock market had achieved a permanently high plateau, the dreaded Hindenberg omen had to rear its ugly head yet again. Quick, run for cover!
Hindenburg Omen cries bear market, again
Published: Dec 3, 2014 3:15 p.m. ET
Hindenburg Omen has a good track record of appearing before big selloffs
Not again!
By Tomi Kilgore
Reporter
The Hindenburg Omen, which is supposed to warn of an impending stock market crash, is crying wolf—or bear market, in this case — but investors don’t seem to care.
And why should they? The bulk of the previous sightings of the infamous technical indicator, which was created by the late Jim Miekka, have failed to lead to any weakness at all, much less a bear market.
A new Hindenburg Omen appeared after the market closed on Tuesday, according to Tom McClellan, who writes the investment newsletter McClellan Market Report. Meanwhile, the Dow Jones Industrial Average (DJIA, +0.18%) edged higher in afternoon trading on Wednesday. The benchmark was on track to close at an all-time high for the 33rd time this year, despite multiple Hindenburg Omen appearances over the last 12 months.
…
Bulletin Dow industrials, S&P 500 end at new records
“33rd record high”
Isn’t that about 1 day out of 11 when a new record was set in 2014? (365/33 = 11).
“Q: Do you see banks backsliding into the dangerous practices that caused the financial crisis? A: Absolutely. The next round of stupid is in full swing: stretching for yield. Making loans that don’t have appropriate equity, real equity. Making loans in higher-risk areas because the yields are higher. Going long-term in investment portfolios even though liabilities or deposits are short-term in efforts to stretch yield on their liquidity. Treating the business like a sales business and focusing on top line growth instead of asset quality.”
Interest rate suppression appears to be working.
After reading the articles what do you see?
Collapsing demand. Grossly inflated prices(now falling), excess empty inventory everywhere, defaults, delinquencies.
Remember… A ‘housing recovery’ is falling prices to dramatically lower and more affordable levels by definition.
“Only four cities or counties in the Washington region have fully rebuilt their property tax bases since the 2008 recession, a study from George Mason University’s Center for Regional Analysis says, raising questions about the wisdom of tying local government operating budgets to the real estate market.”
Bahahahahaha … it wouldn’t be so bad if it were only the OPERATING BUDGETS that were tied to the real estate market but, no, it’s not just the operating budgets, it’s also the FINANCING BUDGETS that are tied to the real estate markets.
What a bunch of dummys: Borrow from and against and commit yourself to an apparently endless - ENDLESS! - rise in real estate prices and then SPEND the money you borrowed (as opposed to investing the stuff) and set it up so your economy is dependent - is TOTALLY DEPENDENT! - on spending this borrowed money in order to keep it chugging along.
And then … and then when the real estate market turns down (not if it turns down but WHEN it turns down) you … are … screwed.
And the people you borrowed from are also screwed BUT NOT ALL OF THEM! Some of them get a pass, some of them get to be bailed out. Some of them are considered to be …
(drum roll)
… Too Big To Fail.
Bahahahahahahahahahahahahahahahahahahahahahaha
Do you really think the Sheiks made this move without clearing it with DC and Russia first?
DC yes, Russia no.
Take away the easy oil money and the Texas miracle evaporates.
Evaporating……
University Park, TX(Dallas) Sale Prices Plunge 15% YoY; Craters 12% QoQ and 7% MoM
http://www.zillow.com/university-park-tx/home-values/
When I was in Dallas a few months ago, I happened to check the house listings in the north. There were already lots of price reductions.
‘The drilling boom that has resurrected Texas’ oil industry is showing signs of slowing down. In West Texas, where a new generation of wildcatters has turned Midland into a boomtown again, drillers are starting to pull back from marginal areas where prospects are less certain. The Texas Railroad Commission reported Tuesday that it issued fewer oil drilling permits in October than it did the previous month, a rare event in a state where production has more than doubled over the last three years.’
‘With crude prices down 30 percent since July, motorists and industry have enjoyed a reprieve from high gasoline prices. But for the oil industry, cheaper crude has put into question a hydraulic fracturing boom that just a few months ago seemed to have no end in sight.’
“It’s more what I’m hearing than what I am seeing,” said Steve Pruett, an oil executive and former chairman of the Permian Basin Petroleum Association in Midland. “In the core areas west of Midland, the activity is unabated out there. But we’re seeing less activity on the fringes over the last two months. And more importantly, there have been announcements of companies [shutting] down rigs.”
‘Oil executives taking questions from analysts on how much they will cut back on drilling next year are often short on answers. “We’re sailing into a fog here. There’s a lot of things changing. And one thing we can tell you is we don’t see a lot of virtue in giving a lot of guidance in this rapidly changing environment,” said Thomas E. Jorden, CEO of Denver-based Cimarex Energy, which operates in Texas.’
‘In Midland, the recent price decline has resurrected memories of the 1980s bust, when overnight, drillers were closing down their offices. Pruett, who started his career during that period, said a realization was setting in that the next two years were likely to be difficult. “We’re all going to dial back our hiring and spending. The froth is going to cool, and we’re going to be drinking black coffee instead of lattes,” he said.’
“drinking black coffee”
Some of us are years ahead of you.
‘a realization was setting in that the next two years were likely to be difficult’
Also, when I was in Dallas recently, there was construction everywhere. Roads especially, as the new subdivisions are out on old farm to market grids. We are talking thousands and thousands of houses.
Nothing like throwing good money after bad right there.
“We are talking thousands and thousands of houses.”
Make way for the California real estate refugee population!
I suggested this in yesterday’s Bits Bucket: Why not fight the OPEC oil glut with massive U.S. domestic oil production subsidies? Our industry would be protected from the blatant attempt by the sheiks to kill off the fracking industry, and U.S. consumers would continue to enjoy low oil prices.
By contrast, a tariff would drive prices up, quickly ending the recent period of affordable gasoline.
Or just do nothing, and let the market sort itself out.
Let prices crash, destroy the Venezuelan government, cause pain in Saudi Arabia, reduce tar sands activity, reduce new drilling in more expensive fracking areas, let prices stabilize at lower levels.
No reason to cost the taxpayers more money in order to save the taxpayers money.
And housing too? The ironies you provide so freely Rental_Fraud.
Yes. Housing too.
There are three ways governments in the US are involved:
1. Through Fannie/Freddie (most noted)
2. Through Fiscal and Monetary Policy (frequently noted)
3. Through local land use laws/restrictions (least noted)
The problem with believing the abolition of Fannie and Freddie will cause prices to fall is that we have PLENTY of test cases in the world, where there are no government sponsored lenders, and prices are still too high–in many cases higher than the US relative to local incomes.
Would the rapid abolition of Fannie/Freddie overnight cause prices to fall? Yes. Would the long-term winddown of Fannie/Freddie cause prices to fall? Probably not in the near-term. In the long-term? Maybe, but possibly not at all if what people do is gravitate toward ARMs (as they do elsewhere in the world–which is why prices are also high elsewhere in the world).
Would the abolition of Fannie/Freddie stop the boom/bust cycle of home prices? With the rest of the world as evidence…no. Doesn’t mean we shouldn’t get rid of the GSEs, but I don’t think it will stop the boom/bust cycles.
So, you need to go deeper. Abolish the Fed. Interest rates would still go up and down (causing housing cycles), but interest rates would no longer be a tool of the government to manipulate housing prices.
My guess is that it will be a cold day in hell before the Fed is abolished. People have been convinced that some level of inflation is good, and so we NEED the Fed. And the government isn’t about to give up the kind of power that the Fed has unless they have no other choice.
Take away mortgage deduction? Sure, but it’s not as big a deal as people think since at today’s interest rates, most borrowers don’t get beyond the standard deduction on their tax return with mortgage interest.
And third is land-use restrictions-
You like to say that there is plenty of supply of housing. It all depends on where you live. Try to tell that to someone trying to rent a place in the Mid-Peninsula, or SF. Clearly there is more demand than supply, and more supply is needed. However, local restrictions on growth artificially reduce development, causing prices to be higher than they should be than if growth was unrestricted.
You only need to go as far as Dallas to see what happens without growth restrictions. Job creation caused increased demand, with the aid of low interest rates, prices went up too fast, development ramped up quickly, now there will soon be an oversupply, and it will bring down prices. Ask yourself what would happen to home prices in Dallas if Texas had the equivalent of CA’s CEQA law. Supply would ramp up much less quickly, and prices would go even higher before an increase in supply caused prices to come back down.
In general, the greater the land use restrictions, the more extreme the boom/bust cycles, and the higher the cost of housing.
I’m definitely a proponent of freer markets, and believe that the less free a market is, the more distorted pricing becomes. But I’m not naive enough to believe that many of the policies and institutions in place will go away anytime soon, and so any thinking about the housing market needs to take into consideration the fact that those established, moneyed interests have a relatively high probability of continuing to get their way.
Nonsense. And worse yet, now prices are falling as fast as demand across California Rental_Fraud.
4. MID
5. $500K capital gains tax exclusion for sale of primary residence
6. Federally guaranteed lending not just through Fannie and Freddie, but through the FHA, USDA, VA and probably any number of other federal lending programs
7. Fed-sponsored mortgage interest rate suppression and MBS purchase program (not exactly traditional monetary policy!)
8. Affordable lending programs designed to turn all minority and low-income households into homeowner households
9. Probably ten or so other programs of which I am personally unaware
How do political strategists come up with such kooky housing subsidy programs?
Meanwhile, REI pressure on appraisers to “hit a number” is back.
http://www.zerohedge.com/news/2014-12-03/housing-fraud-back-–-real-estate-industry-intentionally-inflating-home-appraisals
To borrow and expound on a comment made yesterday;
Appraisers provide a thin veneer of legitimacy over a sketchy transaction at a grossly inflated price.
Subprime never went away, neither did low credit lending. In Atlanta, we got a ton of million dollars homes for sale, and the market for the 300-500k are asking to much. Like the stock market, the housing market is due for a correction, but when ? They can manipulate, rig, inflate, QE, low credit scores, lower down payments, lower income requirements, then we can stay liquid. You read about all that’s bad, but nothing ever happens, the games just goes on.
Not really. The more rigging and price fixing, demand sinks even lower and supply continues to skyrocket.
Sit back and enjoy the show.
“Q: Would most bankers agree with that? A: If it’s a mortgage banker, probably not. But home ownership is not an inalienable right, and we treat it as if it is. A house is not an investment. An investment is defined as a positive cash flow. A rental might. Your house doesn’t. We have fixation on home ownership, that it’s a good thing. I’m not convinced.”
Finally someone who sees housing for what it is a depreciating commodity used for living in.
Flippers beware!!!
“If you have to borrow for 15 or 30 years, you can’t afford it nor is it affordable.”
Analyst,
Consult a dictionary about the word “affordable” because you are obviously are ignorant of the meaning of the word.
And oil up your trolling motor becuase that high pitched whine is becoming annoying to educated ears to say the least.
Cheers!
Hello Helpless…..
“Affordable” seems to be a U.S. federal government code word for taxpayer-funded giveaways to politically favored constituencies
Examples:
1) ACA => giveaway to health insurance industry
2) Affordable Housing => giveaway to REIC
Others?
When Texas crashes this time, I’ll be ready.
Tales of $45,000 3500 and 5500 series trucks selling, a year old for $12,000 to whoever had the cash are the pearls I remember from their last crash…bar and grille parking lots full of them. I’m saving the cash so as to capitalize on them this time.
The lower rates have cost some of us a million or so in just the difference between a planned five percent return and the welfare rates we’re pumping in to redistribution plan now.
Texas will fall again. And those with cash will win.
Not just Texas. Parts of New Mexico, Colorado, Wyoming, North Dakota, Alberta. What do they all have in common? A boom in construction and sky high housing prices.
So if I’m up in WA, let’s say, what’s the easiest way to find these deals? Craigslist? Auto Trader? I’ve had more than one person tell me that the best way to get a deal on a truck (1 ton 4×4 crew cab diesel) is to go to Texas.
Give it time. You’ll be surrounded by lightly used pickups and tens of thousands of excess empty houses.
I’m right in the middle of SFO-north (Seattle area) a mile away from Microsoft, so I doubt that I’ll see many excess houses - DINK techies flush with cash are keeping prices and demand very high in my area (everybody wants to live close to work). Even if prices do collapse (say, from the 900s in my nabe, down to the 500s), it will still be very expensive to live here and inventory will remain tight.
Now in the exurbs . . . well, that’s another story altogether!
You already have plenty of them. And by the way, prices are down in Seattle YoY.
Sit tight.
SFO north! lol! It is in Redmond, not even Seattle.
Is Albuquerque, now Santa Monica East?
If you pay retail, you overpay EVERYTIME!!!
“Northwest Bank Idaho President and CEO Rob Perez tends to zig when others zag. Sitting in his Boise office, Perez told the Statesman that some bankers are forgetting the lessons of the financial crisis.”
Common sense again from fly-over country.