May 17, 2015

This Kind Of Synchronized Boom Has Never Happened

A weekend topic on the state of the housing bubble. The Denver Channel in Colorado. “Flowers, letters and other gifts are no longer just for dating. These days, first-time home buyers are courting Denver metro homeowners in hopes of competing in a real estate market that’s gone over the top. According to real estate brokerage firm Redfin, Denver’s real estate market had its sixth straight month of price growth, rising nearly 17 percent in April, and the average home sold in just five days. It’s no surprise to real estate agent Karen Mistrot. ‘Everything from buyers leaving flowers for sellers after they’ve looked at the house, and leaving nice notes in the house telling them how much they like it before submitting an offer,’ said Mistrot.”

The Star Tribune in Minnesota. “Home buyers in the Twin Cities are facing a vexing situation: There are thousands of more listings compared with a year ago, but the number of options is shrinking. And higher home prices have made many would-be sellers hit the pause button in hopes that prices will rise even more, creating the kind of price-speculation that led to inventory shortages shortly before the latest housing crash.’

“Sarah and Jordan Wein began shopping in December for their first house. It took several months and 50 to 60 showings before finding anything worth an offer and that didn’t already have a buyer. The first house they bid on sold for nearly $30,000 more than the list price. The second time around they found a house in the Como Park neighborhood that was priced in the mid $200,000s. They didn’t waste a minute before making an offer. ‘We had to make a ­decision really quickly,’ said Sarah Wein.”

From Cinncinati.com. “From Cincinnati’s urban neighborhoods to Northern Kentucky suburbs, competition is hot for prime properties. Art Reed, president of the Northern Kentucky Association of Realtors, said he’s looking for a house for his son in Fort Thomas and it’s tough even for him because properties are scooped up quickly. ‘When something really good comes out, they (other buyers) are watching as hard as we are,’ Reed said. ‘They’re starting to see there’s a real value to jumping on it right away.’”

“Cincinnati’s housing market was the local economy’s hardest hit sector during the recession, said Janet Harrah, senior director of the Center for Economic Analysis and Development at Northern Kentucky University. Its recovery has been slower than expected as the region suffered from foreclosures and families suffered losses of employment, income and investments. But Harrah said that doesn’t mean people should be rooting for a return to overvalued prices and sales levels of the mid-2000s. ‘Those values … weren’t fully sustainable to begin with,’ she said.”

From MarketWatch. “Strategists at Citigroup, led by London-based Robert Buckland, have come out with a note breaking down how bubbles form and what might be looking a bit bubbly at the moment. Past bubbles have centered around ‘new paradigms’, such as the transformative impact of the Internet. A potential theme this time around could center on the idea of ’secular stagnation,’ a condition in which growth, inflation and interest rate are persistently low. Ample liquidity is also a prerequisite for bubbles. This time around, there is no shortage thanks to aggressive easing by global central banks.”

“Other components include a ‘demand/supply’ imbalance as demand for a new investment idea—such as tulip bulbs in the 17th century—outstrips supply, the strategists write. Since the financial crisis, security issuance has fallen while central banks have stepped up purchases, making for net issuance of zero. With demand for financial assets on the rise, it’s no surprise prices are rising and inflating potential bubbles, they said.”

“Then there is business and career risk, the strategists noted, recalling a client who described a bubble as ’something I get fired for not owning.’”

The Wall Street Journal. “Janet Yellen’s comment that stock prices are ‘quite high’ hardly captures the frothiness in U.S. financial markets. The Federal Reserve chair’s admission also stopped short of acknowledging the role of free money in inflating the price of stocks—as well as the price of bonds, houses and every other financial asset. At Morgan Stanley Investment Management, we have analyzed data going back two centuries and found that until the past decade no major central bank had ever before set short-term interest rates at zero, even in periods of deflation.”

“The Fed’s defenders quibble that houses are less pricey than in the bubble of 2007, or that stocks are less pricey than in 2000, which misses the difference this time around. In the past 50 years, valuations of U.S. stock prices have been higher than they are now for less than 10% of the time, and similar figures hold for bonds and houses. This kind of synchronized boom has never happened, not even before the last two major meltdowns. My research team’s composite valuation for the three major financial assets in America—stocks, bonds and houses—is currently well above levels reached during the bubbles of 2000 and 2007.”

“The Fed now leads a culture of central bankers who see their job as reducing unemployment and stabilizing prices for consumer goods only, come what may in the markets.”

The New Zealand Herald. “The latest Reserve Bank Financial Stability Report concludes that New Zealand’s financial system is sound and operating effectively. However it identifies three main risks: Soaring house prices - house prices are overvalued on several measures, particularly in Auckland, and individual debt is high relative to income. Dairy industry debt - financial stress in the dairy sector could rise markedly if low global milk prices persist beyond the current season. Loose global financial conditions - global interest rates remain extremely low and have encouraged investment in riskier assets. The Reserve Bank believes the ‘current benign [global] market conditions could unwind in a disorderly fashion, affecting the cost and availability of offshore funding for New Zealand banks.’”

“The Financial Stability Report, which is published every six months, is the fifth consecutive document to identify soaring house prices and mortgage debt as the main risk to the country’s financial system.”

The Nelson Mail in New Zealand. “There was a nice picture of Nick Smith in the Nelson Mail this week. A young Auckland couple have just moved to our region and purchased a house. Good news story, because good news stories on the first-home housing front are few and far between. ‘Young couple actually buy house’ - it’s depressing that it’s so newsworthy.”

“Initially the headline had something about ‘affordable housing’ in it, but by the time I re-clicked, the headline had changed to ‘Sky-high Property Prices in Auckland Draw People to Nelson.’ I’m pleased the change was made. The word ‘affordable’ like the word ‘bubble’, is a contentious one. ‘Affordable’ to someone living in Auckland doesn’t mean affordable to someone in Nelson.”

“The cost of housing needs to be addressed. We spend too much on it. Either that or we don’t on average earn enough. People should be able to buy an entry level house without mortgaging the next 30 years of their life away and crossing their fingers and toes and hoping nothing financially adverse happens to them – like, heaven forbid, interest rates go up or their employment changes. It’s been this way for over a decade.”

“I must have read a dozen or more stories in the last week from these groups telling us there isn’t a housing bubble in Auckland. I might not know much about the housing industry but I know a vested interest when it repeatedly slaps me in the face. Unfortunately according to the government there hasn’t really been a problem either – at least not one they would have us believe they can do much about. In the meantime, the latest pecuniary list shows our current crop of MP’s haven’t been slow to invest in the property market themselves.”

“If property ownership of our MPs is anything to go by, it would appear everyone in New Zealand owns an Auckland investment property. According to Winston Peters; ‘This is not to criticise any of the investments that MP’s might have taken but it sure explains their prejudice against taking the right steps to flatten out the Auckland housing market…’”

“Underpinning the debate on housing is an absurd lack of information gathered from buyers. How much is rampant speculation fuelling the market? How big a part do overseas buyers play in the market? How big a part will Auckland buyers play in the Nelson market? Anecdote won’t cut it. In refusing to gather useful information the government is being wilfully negligent.”

“Speaking of the unrealistic value of land and the debt levels required to get your hands on it - the Reserve Bank says 37% of dairy farmers had negative cash flow given the current forecast payout. At least one farm consultant says half of dairy farmers are going backwards and are going to be in real financial trouble. Rockstar economy my arse.”




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86 Comments »

Comment by Ben Jones
2015-05-16 07:52:15

From the WSJ:

‘To critics who warn that pumping trillions of dollars into the economy in a short period is bound to drive up inflation, today’s central bankers point to stagnant consumer prices and say, “Look, Ma, no inflation.” But this ignores the fact that when money is nominally free, strange things happen, and today record-low rates are fueling an unprecedented bout of inflation across asset prices.’

‘Faith in the Fed’s easy-money policies has encouraged a dangerous complacency. The mantra on Wall Street is that good economic news is good news for the markets, but that bad news is also good news, because it will encourage the Fed to keep rates lower for longer. This has led to one of the longest rallies the U.S. stock market has ever experienced, without even a 10% correction. Returns since 2012 are the highest for any three-year period in recorded history, after adjusting for the risk of holding stocks.’

‘The Fed’s approach has spread to central banks in Europe, Japan and China, creating a new world in which investment decisions are guided by the availability of easy money, not opportunity. Over the past three years, global stock prices have risen rapidly despite tepid economic growth. Oh well, the central bank responds: We target consumer prices, not assets.’

Comment by Combotechie
2015-05-16 08:18:19

“The Fed’s approach has spread to central banks in Europe, Japan and China, creating a new world in which investment decisions are guided by the availability of easy money, not opportunity.”

Available money = borrowed money.

It also means: Other People’s Money, aka investment money.

Comment by Professor Bear
2015-05-16 09:00:27

“Available money = borrowed money.”

Technically, creating more money through the printing press is not borrowing.

Comment by Combotechie
2015-05-16 09:05:15

Nevertheless it works just the same.

Borrowed money, printed money - EARNED MONEY - the buying power is the same.

(Which is a bit unfortunate for those who actually have to toil for the stuff.)

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Comment by Professor Bear
2015-05-17 02:19:25

Exactly my point (printed money = EARNED MONEY), except for who gets to spend it

 
 
 
 
Comment by Professor Bear
2015-05-16 08:58:54

It seems like pumping so much money into assets creates a great risk of deflation, not inflation, over time, as never-ending demand stimulus for investment eventually results in a massive glut at price levels where nothing will sell. Falling prices are the natural consequence.

Exhibit A: Japan, circa 1990

Exhibit B: China housing, today

Exhibit C: Cargo ship glut

Exhibit D: New York (and other financial capital) luxury condo glut

and the list goes on…

 
Comment by Professor Bear
2015-05-17 15:47:15

“But this ignores the fact that when money is nominally free, strange things happen, and today record-low rates are fueling an unprecedented bout of inflation across asset prices.”

When discount rates equal zero, asset prices are unidentified, in the sense that any price whatever is consistent with an interest rate of zero.

Got random valuations?

 
 
Comment by Ben Jones
2015-05-16 07:54:53

The NZH:

‘Governor Graeme Wheeler wrote in the May 2014 Financial Stability Report that “the restriction of high-LVR mortgages appears to be having the desired effect of bringing activity in the housing market back towards a more sustainable level, with both house price inflation and credit growth moderating in recent months. These effects of the LVR policy are expected to be reinforced by the increase in interest rates projected in the March 2014 Monetary Policy Statement”.

‘The Reserve Bank Governor wrote in the November 2014 Financial Stability Report that “the Reserve Bank intends to ease or remove the (LVR) restrictions when a sustained moderation in house price inflation is achieved, and when there is little risk of a resurgence in housing market activity. The reduction in house price inflation and housing credit growth are welcome developments, along with indications of increased residential building”.

‘Wheeler’s optimistic comments six months ago were premature, particularly as far as Auckland is concerned. Since then Auckland’s REINZ median house price has soared 12.4 per cent, a remarkable rise in just six months.’

‘It is worth noting that Dublin house prices never increased by more than 12 per cent in any six-month period during the height of the Irish residential property bubble in the early 2000s.’

‘The Auckland residential property boom has developed some of the characteristics of the Dublin bubble a decade ago. These include upbeat media stories about surging house prices, frustrated purchasers queuing overnight to purchase a section or newly-built house and banks offering cash incentives on home loans.’

‘Dublin house prices plunged 56 per cent between 2007 and 2010 and had a devastating impact on the Irish banking and financial system. The vast majority of Dublin home buyers a decade ago had no idea that prices could fall, let alone by more than 50 per cent.’

Comment by Ben Jones
2015-05-16 07:58:33

Ahem, ‘upbeat media stories about surging house prices, frustrated purchasers queuing overnight to purchase a section or newly-built house and banks offering cash incentives on home loans’

And it’s not just ‘Cahlifornia’ or some other supposedly magical place. It’s going on in Minnesota and Cincinnati! I’ve asked many times, how do we get a shortage in every cow-town and corn-stalk burg in the US, at the same exact time?

Comment by scdave
2015-05-16 08:42:43

get a shortage in every cow-town and corn-stalk burg in the US, at the same exact time ??

Its a good question with IMO, a uncomplicated logical answer…Historically low interest rates…Locking in 30 year loans in the 3% range is compelling if your forward planning is long term…My lifetime has been accustomed to rates between 8-12%…

Comment by Ben Jones
2015-05-16 08:57:48

‘And higher home prices have made many would-be sellers hit the pause button in hopes that prices will rise even more, creating the kind of price-speculation that led to inventory shortages shortly before the latest housing crash.’

As we have seen, inventory has increased in markets where price increases merely slow down.

If you go here:

https://research.stlouisfed.org/fred2/series/DGS30

And click on MAX time line, you’ll see interest rates have been declining for 30 years. This is well before QE.

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Comment by Professor Bear
2015-05-16 09:04:37

Still have 2.5% of crawl space between recent levels and 0%.

 
Comment by Ben Jones
2015-05-16 09:05:09

‘The largest Bond ETF (BND) with over $27 billion in assets (Vanguard Total Bond Market ETF) has a yield of only 1.95%. The second largest Bond ETF (AGG) with $24 billion in assets (iShares Core U.S. Aggregate Bond ETF) has a yield of only 1.85%. The U.S. 10-year Treasury yield is currently 2.27%.’

‘What does this have to with returns? As it turns out, everything. In the bond market, the beginning yield has been the best predictor of forward returns bar none. The lower the starting yield, the lower the future return.’

‘As you can see, we are in uncharted territory today, off the graph in terms of an extremely low starting yield. There is not yet a six-year precedent for future returns starting from such a low yield. But unless the math on bonds has changed, we should be expecting among the lowest returns in history in the coming years.’

‘In the end your total return is likely to closely mirror the beginning the yield. This is true for government bonds. For riskier issues like high yield bonds and leveraged loans, investors will also have to factor in default risk and a potential haircut to their return of principal.’

‘For over 30 years, interest rates have been falling, a tailwind for both stock and bond investors.’

‘But what can an investor do? Some options include:’

‘(1) Saving more, spending less, retiring later.’

‘(2) Taking more risk with an increased weighting to higher yielding bonds in the U.S. or emerging markets.’

‘(3) Taking more risk with a higher weighting to equities.’

‘The second and third options require changing ones risk tolerance which is neither easy nor advisable for most investors, particularly those nearing retirement. They also assume that returns will be sufficiently higher in those asset classes to compensate you for the additional risk, which may not be the case given the low yields in junk debt and high valuations in U.S. equities.’

‘Which leaves us with the most unpalatable but also the most realistic option: expecting lower returns in the years to come and adjusting your lifestyle accordingly. Which is why it is the elephant in the room; who wants to talk about that?’

http://charliebilello.tumblr.com/post/118951408949/bond-math-and-the-elephant-in-the-room

 
Comment by Professor Bear
2015-05-16 09:08:35
 
Comment by Professor Bear
2015-05-16 09:11:39

I was trying to explain the high correlation between mortgage rates and Treasury yields to Oxide yesterday. Maybe those graphs will help?

 
Comment by Combotechie
2015-05-16 09:12:51

“(1) Saving more, spending less, retiring later.”

This is a good idea unless everyone does it. Then it become a bad idea.

But so far the is no danger of this happening.

 
Comment by Blue Skye
2015-05-16 10:06:33

“(1) Saving more, spending less, retiring later.”

I’ve been working on the saving more, spending less, retiring earlier strategy. Apparently this is not popular enough to make the short list of strategies.

 
Comment by Professor Bear
2015-05-16 10:08:56

I ran a regression of 30-year mortgage rates on 30-year Treasury yields, using all available monthly data back to March 1977. The R-squared value is 97% (near-perfect correlation between 30-year mortgage rates and 30-year Treasury yields).

The bottom line: My recent posts on the crash in long-term Treasurys portend reduced housing demand and housing price declines.

 
Comment by Professor Bear
2015-05-16 11:29:14

I added an indicator (”dummy”) variable to my regression specification for whether the observation was after the advent of QE (March 2009), at which point it was clear the GSE-issued MBS were too-big-to-fail. The results indicate a 38 bps drop in the spread of mortgage rates over Treasurys in the post-March 2009 period. Anyone who happened to be short Treasurys and long MBS coming into the QE period could have made a killing.

 
Comment by Prime_Is_Contained
2015-05-16 20:27:30

Anyone who happened to be short Treasurys and long MBS coming into the QE period could have made a killing.

Yeah, we talked about that here—the implicit guarantee beoming explicit… Yeah, I should have made that trade—they were essentially identical in guarantee…

 
Comment by Puggs
2015-05-17 13:04:25

“This is a good idea unless everyone does it. Then it become a bad idea.”

Not everyone does therefore it benefits those of us who will.

 
 
 
Comment by Professor Bear
2015-05-16 09:03:01

1. Generation-low interest rates
2. Relaxed (and relaxing) lending qualifications
3. Federal subsidies to home ownership
4. Perception that a dollar devaluation might be necessary to deal with the national debt driving the masses into real assets
5. Belief that home ownership is the path to riches

 
Comment by In Colorado
2015-05-16 09:32:23

And it’s not just ‘Cahlifornia’ or some other supposedly magical place. It’s going on in Minnesota and Cincinnati! I’ve asked many times, how do we get a shortage in every cow-town and corn-stalk burg in the US, at the same exact time?

One stark difference between this bubble, and the previous one, at least in my little burg, is the number of new houses being built. Last time it was breath taking. IIRC, at the peak they where building over 1400 new houses one year. I believe today the number is in the 300-400 range, though from what I hear that number is growing.

I don’t know what is holding the builders back. Perhaps the mom-n-pop builders are being held back by the banks, who aren’t handing out building loans with wild abandon like last time. Another explanation I often hear is a lack of developed lots, which I think is hokum. There is plenty of empty land in my town, how hard can it be to lay utilities and pave streets? Unless someone is deliberately keeping that from happening.

Comment by Ben Jones
2015-05-16 09:45:37

‘I don’t know what is holding the builders back.’

I’ve been documenting this for a while. They are and they aren’t. Here and there they will say, there isn’t much demand. Well, not if land doubles in Bozeman Montana in 3 years and all the can build is $300k houses. Still, building there is up 75% in that category. Then the glut word comes out.

Nobody is holding back luxury condo builders in Miami or Manhattan.

To answer my own question, how can you get a shortage almost everywhere at the same time? You can, and there isn’t. Other things have to explain what’s going on.

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Comment by Housing Analyst
2015-05-16 09:58:32

Which leads to the painful question;

Why would contractors break ground on spec houses when demand is at 20 year lows and there are 25 million excess empty and defaulted houses out there?

 
Comment by Ben Jones
2015-05-16 10:16:01

‘A joint 489-unit apartment and condominium project along East Capitol Avenue and Montague Expressway has advanced. Milpitas City Council voted 4-0 Tuesday to adopt a resolution approving a conditional use permit for Lennar Corp.’s high-density 450 Montague project, located on a 10.5-acre site within the city’s Transit Area Specific Plan.’

http://www.mercurynews.com/milpitas/ci_28069991/milpitas-council-approves-nearly-500-unit-condo-apartment

 
Comment by Ben Jones
2015-05-16 10:18:19

‘The new homes in Pasco County are being bought as fast as they’re being built, and some even before they’re built. “If there wasn’t a demand for their houses they would not be building them,” said Carl Stratton, who is a broker and general manager at Dennis Realty in Lutz.’

‘Stratton says the latest numbers, according to our partners at the Tampa Bay Times, put the Tampa Bay area 4th in the nation for all cash sales aren’t necessarily bad. “I think there are still are investors buying houses. There are a lot of houses in disrepair that can’t get a loan for so you have to pay in cash,” said Stratton.’

‘Stratton says it’s not just the hedge fund investors taking advantage of the properties. The buyers also are the folks up North buying their second home in the Bay area taking advantage of cash-only deals.’

‘With all the real estate on the market and homes still being built, Stratton says the value is now because prices are only going up. “It’s a bargain, you know, folks are coming here and getting a lot more for their money in Tampa Bay. It’s a good time to be a real estate agent,” said Stratton.’

http://www.wtsp.com/story/news/local/2015/05/04/all-cash-sales/26888519/

 
Comment by Dman
2015-05-16 17:46:39

There are still plenty of abandoned subdivisions in my area, or ones that contain only a few homes, from the last bubble. And this in some of the fastest growing and pricy suburbs of Detroit. But apparently people can’t see the evidence right in front of their eyes. But Colorado is right, the number of new houses being built isn’t nearly as obscene as before. When this bubble pops, I don’t think the construction industry will be as unprepared as they were before. But that’s because the construction jobs that were lost then never came back.

 
 
Comment by Rental Watch
2015-05-18 16:51:33

“There is plenty of empty land in my town, how hard can it be to lay utilities and pave streets? Unless someone is deliberately keeping that from happening.”

You can believe this or not, but this is what we are seeing:

Along the coast in CA, development costs are not the bottleneck, but the ability to get approvals and availability of land is the issue. Farther inland (Western Inland Empire, etc.), the issue is weak demand at prices that justify development of lots.

Contrary to what HA says, the cost to get to a “Finished Lot” (the common definition in So Cal includes hard and soft costs PLUS fees–exclusive of building permit cost) from raw land in So Cal is +/- $100-$120k. And that is if the land is free. So what you see in the market is very few new lots being developed.

The rule of thumb is that finished lot cost is up to approximately 1/3rd of the cost of a house. So, this is $300k-$350k homes…if the raw land is free.

If you look at homes that are being sold in Western IE, a lot of the active subdivisions are priced in the mid-$300’s, and sales range from not good, to kind of OK. So, there is no enthusiasm on behalf of builders to buy raw land much above $0, and there is no enthusiasm on behalf of land owners to sell the land at close to $0.

I don’t know what the math is in CO to develop lots (a lot of the cost in So Cal is in the fees), but if you were to ask me why homebuilding in So Cal is doing so poorly, the answer would have to be that it is too expensive to develop land into finished lots.

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Comment by Housing Analyst
2015-05-18 18:24:01

Flat out BS^

Worse yet… there is no reason to build more given the millions of excess empty and defaulted houses in CA.

 
 
 
 
 
Comment by Ben Jones
2015-05-16 08:15:42

‘Seth Lipsky at The Wall Street Journal reports that Alan Greenspan, the former chairman of the Federal Reserve, has backed out of a conference on monetary policy this summer because of a scathing blog post written by Paul Krugman in The New York Times.’

‘According to the group, Greenspan bowed out because of a recent post by Krugman called “The Worst Ex-Chairman Ever.”

‘Krugman has criticized Greenspan for his failure to recognize the housing bubble that led to the 2008 financial crisis, and his subsequent warnings that the central bank’s stimulus efforts could lead to spiraling inflation.’

Comment by Combotechie
2015-05-16 08:30:08

“According to the group, Greenspan bowed out because of a recent post by Krugman called ‘The Worst Ex-Chairman Ever’.”

So - presto! - he went from being The Maestro to The Worst Ex-Chairman Ever because of a recent post in the New York Times?

And for this he backs out of a conference?

How about calling him Mister Insecurity?

 
Comment by Dman
2015-05-16 17:51:18

I wonder what Krugman’s opinions of the current bubble are? He’s one of the leading proponents of ZIRP. How will he try to explain away the current bubble in light of that?

Comment by Professor Bear
2015-05-17 13:13:05

I expect today’s ZIRP proponents to remain very silent after the mania works through its end game.

 
 
 
Comment by Professor Bear
2015-05-16 08:49:48

“Then there is business and career risk, the strategists noted, recalling a client who described a bubble as ’something I get fired for not owning.’”

This suggests a potential edge in mania conditions for individual investors who don’t get fired for not owning.

Comment by Combotechie
2015-05-16 09:00:44

“This suggests a potential edge in mania conditions for individual investors who don’t get fired for not owning.”

And there it is!

This “potential edge” is called cash.

Comment by Professor Bear
2015-05-16 09:10:34

Also the flexibility to move into cash when a slow burn crash is underway and move back into the asset class after the fire is out.

Comment by Combotechie
2015-05-16 09:14:52

This is the plan.

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Comment by Professor Bear
2015-05-16 10:12:44

US bond market downturn no rout, investors believe
Min Zeng
The Wall Street Journal
May 14, 2015 12:00AM
Former Fed chairman Ben Bernanke. Source: AFP

Investors in US government bonds are licking their wounds after a three-week rout that has raised the spectre of the 2013 “taper tantrum”. But many money managers believe that sharp sell-off, sparked by the Federal Reserve’s plan to withdraw its monetary stimulus, won’t be repeated.

They point to two key differences with the events of two years ago: tempered economic expectations and more balanced positioning by investors.

Government bond prices have tumbled in recent weeks following a sharp run-up, sending the yield on the 10-year Treasury note as high as 2.366 per cent during intraday trading on Tuesday, its highest level in six months. Later the yield fell to 2.256 per cent. Bond yields move inversely to ­prices.

Former Federal Reserve chairman Ben Bernanke during congressional testimony in May 2013 suggested the Fed could begin tapering its monthly bond purchases sooner than investors had expected. The ensuing taper tantrum sent bond yields soaring.

A yield spike would be damaging to many investors because of the lower prices. Traders and analysts also are anxious because global government bond markets have been roiled repeatedly over the past year by large, sudden, largely unexplained price moves such as the October 15, 2014, “flash crash” in US treasury yields and a spike in German bund yields last week.

Yet many bond investors believe the turmoil will be contained this spring, despite some bouts of volatility.

They cite a combination of soft global economic growth, which tends to hold down rates; muted inflation expectations, which are supportive of higher bond prices; and, somewhat counterintuitively, the fact that many investors are already betting bond prices will fall. Large bets that prices would keep rising are seen by some investors as a factor exacerbating the 2013 yield rise.

Most important, many traders said, is that US economic results have weakened recently, pushing back expectations for the first short-term rate increase by the Fed since 2006. Many investors expect the Fed to raise rates this year.

While unemployment has dropped by nearly half from a peak in 2009, wage growth remains soft and productivity gains have been slow, limiting pressure on policy makers to raise rates.

“The data in the US does not support this move higher in yields, so if we get a spike higher in yields it may not be sustainable,’’ said Jim Caron, global fixed-income portfolio manager at Morgan Stanley Investment Management. “There have been a lot of false starts.”

Fed Chairwoman Janet Yellen said last week that long-term interest rates were at very low levels. She warned that investors could see “a sharp jump in long-term rates” after the Fed started raising interest rates.

 
Comment by Professor Bear
2015-05-16 11:10:16

“…first short-term rate increase by the Fed since 2006…”

We’re only nine years out at this point. The last time I checked, it appeared the first time short term rates increased by a significant amount after the onset of a similar episode in 1933 wasn’t until 1948 — 15 years.

Based on the only historical precedent, we could have another six years ahead before short term rate liftoff.

 
 
 
 
 
Comment by taxpers
2015-05-16 09:01:31

1987 Denver = Dallas
Takes a year for the oil collapse to spread to the money centers

Comment by In Colorado
2015-05-16 09:16:33

Colorado oil production is a tiny fraction of what Texas produces. The oil crash will definitely have an effect in Colorado, but not like it will in Texas.

Comment by Ben Jones
2015-05-16 09:21:20

‘A California company has purchased a large student housing complex near the University of Colorado, in what is believed to be the most lucrative per-unit and per-square-foot sale in state history, among multi-family transactions over $10 million.’

‘The Plaza on Broadway complex sits on 1.44 acres at 955 Broadway, directly across from the CU campus at the intersection of Broadway and 17th Street. Marcus & Millichap, a commercial real estate investment firm with offices in Denver and dozens of other cities in the U.S. and Canada, announced Friday afternoon that it had brokered the sale of the 39-unit complex at a price of $24.05 million.’

‘That figure equates to $616,667 per unit and roughly $474 per square foot.’

http://www.dailycamera.com/news/boulder/ci_28127873/24m-sale-boulder-complex-sets-per-unit-per

Comment by Ben Jones
2015-05-16 09:23:48

‘Merely a month after an Associated Press report showed that Denver’s rental prices are rising faster than anyplace in the United States—including the notoriously hellish markets in the Bay Area—new statistics show that our numbers are now historically challenging. This week, a Colorado-based housing economist released an analysis that shows the average Metro Denver rental costs increased more than 12 percent, year over year, in each of the past two quarters.’

‘This marks the first year-over-year, double-digit increases in local rents in more than 20 years, and it brings the average cost of an apartment rental here to more than $1,200 per month. This area has typically experienced annual rent hikes of closer to 4 percent since the early 1980s.’

‘Regardless of the reasons for these price concerns, they aren’t sustainable over the long haul. If we can’t find some middle ground on affordable housing—not just for lower-income folks, but for everyone—all this growth our city and state leaders are counting on and trumpeting is in danger of becoming a massive civic and economic headache.’

http://www.5280.com/news/digital/2015/05/denvers-rent-too-damn-high

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Comment by Ben Jones
2015-05-16 09:31:16

Warning PDF.

‘The increase of available funds and the pursuit of real estate lending by thrifts and commercial banks led to the financing of income-producing real estate to a point of extreme oversupply. The lending frenzy may have been even more pronounced in Texas than elsewhere in the country.’

‘Texas lending institutions that had been badly burned by energy loans were searching for new investments, and they chose real estate…In 1986, the Texas construction sector entered a prolonged decline.’

https://www.dallasfed.org/assets/documents/research/er/1994/er9402b.pdf

 
Comment by Ben Jones
2015-05-16 09:48:27

I don’t see a date on this:

‘Oil has strange effects on communities. Right now, the Bakken commercial real estate market is experiencing a great boom, but this has happened before. In the 1980’s, North Dakota experienced an oil boom, then it experienced an oil bust. The whole world did. As an astute investor, you might ask if it can happen again.’

‘Why Today Is Different’

‘The three factors that drive the 1980s oil boom and bust aren’t present today. The United States has had systemically low inflation for years, going with its low inflation. The Middle East is becoming a less vital part of the world’s oil supply, making the ongoing unrest there less of a factor.’

‘Finally, much of the world’s “easy” oil has been found and extracted. The days of drilling a shallow well and tapping a nearly limitless supply of oil such as happened in places like Saudi Arabia’s Ghawar Field, are long over. What this means is that oil that takes some effort to extract – such as the fracking that drives shale oil production in the Bakken – is closer to the norm, making North Dakota oil more cost competitive than in the past.’

‘The picture for the prospects of Bakken commercial real estate and the greater Bakken economy are even rosier. When the oil bust happened in the 1980s, the world didn’t have a great deal of demand pressure. Back then, China and India were largely dependent on non-motorized transportation and parts of the USSR got around in animal-driven transportation. Today, the 37 percent of the world’s population that lives in China and India – the equivalent of more than eight USAs – are rapidly transitioning to car-based transportation. The Iron Curtain has fallen and middle classes are growing in once Third-World countries. This all bodes well for global oil demand.’

‘The greater macroeconomic picture appears to indicate that today’s Bakken oil boom is nothing like booms of the past. The hope is that the growth will be long-lasting and systemic and support high values for Bakken commercial real estate for many years to come.’

http://www.opulentregroup.com/north-dakota-oil-gas-information/is-an-oil-bust-coming/

 
 
Comment by Combotechie
2015-05-16 09:46:59

“A California company has purchased a large student housing complex …”

“Student housing complex” probably means the units will not be occupied all year round, but nevertheless …

“That figure equates to $616,667 per unit and roughly $474 per square foot.”

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Comment by Ben Jones
2015-05-16 09:51:33

Cuckoo for Coco-Puffs. And somebody out there probably loaned them the money at 5%.

 
Comment by Mr. Banker
2015-05-16 09:57:35

“And somebody out there probably loaned them …”

…somebody else’s money …

“… at 5%.”

That would be me.

 
Comment by In Colorado
2015-05-16 10:01:45

“Student housing complex” probably means the units will not be occupied all year round, but nevertheless …

My son and friends rent a house near UNC in Greeley. From what he told me, all student rental contracts are for 12 months.

 
 
 
Comment by Housing Analyst
2015-05-16 10:05:14

“Colorado oil production is a tiny fraction of what Texas produces. The oil crash will definitely have an effect in Colorado, but not like it will in Texas.”

Guess again.

CO is fifth largest in natural gas reserves and in the top ten in oil reserves not to mention being in the top 5 states in gas and oil services.

Comment by rms
2015-05-17 00:08:05

I know someone who lost about half of their working career investment in housing when the bottom fell in Casper, WY. He’s still very bitter over the experience.

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Comment by Professor Bear
2015-05-17 13:14:05

Did he sell low?

 
 
 
Comment by taxpers
2015-05-16 13:03:33

The late 80s was weird,what %of CO gdp was oil ?

 
 
 
Comment by Ben Jones
2015-05-16 10:22:14

‘Last month, I wrote that the condo market could be poised to come back in Charlotte, but it’s been dormant so far since the recession. Now, it looks like a developer is ready to take the plunge, with uptown’s first new condo building in years. RTG Holdings, a Boston-based developer, is exploring a 28-story condo building on a parcel of land at Brevard and Fourth streets.’

‘What’s interesting about the Brevard Street project is that, unlike other developers who are building apartments that could later be converted to towers, the Brevard Street building would start as condos. The project would be the first new-built condo tower since the aftermath of the recession, which saw prominent condo buildings such as the 51-story Vue tower converted to apartments when the condos didn’t sell.’

‘I asked Littlejohn if the market is ready for a condo project like this. “We wouldn’t be doing it if we didn’t think we could succeed,” said Littlejohn.’

http://www.charlotteobserver.com/news/business/biz-columns-blogs/development/article20834058.html#storylink=cpy

Air-tight logic.

 
Comment by Ben Jones
2015-05-16 10:25:01

‘The reporting is breathless: Millennium Tower penthouse goes on sale for $37.5 million. A condo in a 19th-century Commonwealth Avenue townhouse sells for $7 million. Luxury apartments, rentable or buyable, going up in the Fenway and in the Seaport.’

‘These new projects add expensive housing to the already-pricey neighborhoods in downtown Boston.’

‘The buyers differ only a little. They are empty nesters realizing that city life is more interesting than that in the suburbs or dot-com youths spending their high salaries or bonuses or foreign billionaires parking their money in safe North American investments.’

‘Beacon Hill is an example of what is happening now throughout the city. Large institutional buildings are becoming luxury housing. Three buildings owned by Suffolk University, the former St. John the Evangelist church property and the former Beacon Press building—all near the State House—are either on the market or have recently been bought by developers.’

‘It is no longer the city selling property at affordable prices. Instead it is non-profits who understandably want to reap big rewards from their buildings in pricey neighborhoods. A buyer usually must build luxury housing to cover costs and generate a profit.’

“The highest and best use happens to be luxury condos,” said broker Jason Weissman, head of Boston Realty Advisors, about downtown residential buildings.’

http://beaconhilltimes.com/2015/05/14/oldwhite-and-rich/

 
Comment by doom
2015-05-16 10:39:55

Flowers, letters, candy, whatever, this is of course the hysteria that RE agents and brokerage love to spread. If it is so easy to sell a house in 5 days (?) then sellers why hire a RE agent save the commission. Buyers, who needs them to tell you where the nearest florist store is, make a deal with the sellers, tell the agents to go pound sand, do you really need a go between when a so called market is on fire?

Comment by In Colorado
2015-05-16 10:49:48

If it is so easy to sell a house in 5 days (?) then sellers why hire a RE agent save the commission.

I’m seeing the return of the FSBO.

Comment by Tarara Boomdea
2015-05-16 11:12:35

I’m seeing the return of the FSBO.

The owners of the rental (Vegas) we are being kicked out of are doing this.

The wife wants to show the place while we’re living here. That sounds comfortable.

Comment by Housing Analyst
2015-05-16 12:37:30

Lotsa losses on housing going around these days.

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Comment by GuillotineRenovator
2015-05-17 12:01:54

Don’t even bother cleaning before the showing. In fact, leave a full service of dirty dishes from the previous night’s meal out. Maybe even make it a fried chicken night so the grease permeates the air.

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Comment by TBoom
2015-05-17 14:29:55

GR said: Don’t even bother cleaning before the showing.

That is good…but pride prevents it.

I emailed the LL to tell them we’re planning on leaving before she starts playing RE agent.

Last time (same thing happened with our rental before this one), about two weeks into it, I lost patience and began to point out flaws during showings. Only one agent called me out on it.

 
Comment by Housing Analyst
2015-05-17 16:49:14

Got a realtor link for this shanty?

 
Comment by Tarara Boomdea
2015-05-17 20:42:04

No.

 
 
 
 
Comment by Puggs
2015-05-17 13:08:00

It truly feels like ‘05 again. People buying all sorts of crap on credit for ever longer amortization periods. Except this time around I’m not EVEN questioning what am I doing wrong : )

Being free from the shackles of debt never felt better.

Comment by Housing Analyst
2015-05-17 16:45:24

“Being free from the shackles of debt never felt better.”

It’s even sweeter this time around considering my pile of cash over quadrupled since 2006.

 
 
 
Comment by Professor Bear
2015-05-16 11:32:52

“In the meantime, the latest pecuniary list shows our current crop of MP’s haven’t been slow to invest in the property market themselves.”

Would it make sense to prohibit lawmakers who have a role in writing the rules governing real estate investment from making real estate investments themselves? Otherwise there is a huge conflict of interest.

P.S. I recently saw a review of a new book about the period after 1776 when America became the United States of America. Turns out one of the reasons George Washington was so strongly in favor of the union was that he believed his speculative real estate investments would increase in value if the union was strong.

Comment by rms
2015-05-17 00:15:44

“Turns out one of the reasons George Washington was so strongly in favor of the union was that he believed his speculative real estate investments would increase in value if the union was strong.”

So George “hooked on brown sugar” Washington is driven by self-interest?

Comment by Professor Bear
2015-05-17 13:43:13

The tradition he started lives on in the city that bears his name!

See if you can detect the flawed logic in this statement (from the comments below):

“Turning a SFH into a rental is only cash-flow positive with about 40% down, according to Zillow purchase and rental data.”

Investors Left in the Cold in Washington, DC Real Estate
by Melissa Terzis • February 25, 2015
By Melissa Terzis, Realtor, City Chic Real Estate, Washington, DC:

We receive a lot of inquiries at our downtown Washington DC Brokerage from investors looking for a real estate windfall. The sarcastic side of me wants to tell them, “Aren’t we all?”

As far as finding an investment in this market? Don’t do it.

Smart investors know: to be successful you have to follow two simple rules: Buy low and sell high. But for every smart real estate investor there are about a dozen who weren’t so lucky. But all clients believe they are going to be the one – the smart investor who flips a property for tons of cash.

It’s all about timing. And the time for investing in residential real estate in DC has passed.

The market here has already pushed prices far above where many of us in the industry expected them to go. It’s still saturated with buyers who think nothing of escalating tens of thousands of dollars over list prices. There are no more good deals. But people don’t believe me.

I blame the media, and I blame the home improvement shows. The news of the real-estate market in DC has long been frothy, citing a plethora of jobs here, a robust economy, and generally painting the city as a home run for real-estate investment. And home improvement shows make renovating look like a piece of cake. Yes, two hot guys are dying to custom-renovate your home into a luxury abode for a cost of a few bucks to you and zero profit to them.

The calls usually come from area codes that are far from DC. This is how I know we have another believer who just finished reading an article in their local business paper about DC and how great it is. Now they want to plunk down some cash and enjoy huge returns in a relatively short timeframe.

The callers always say the same thing. They want “a great deal, in an up and coming neighborhood,” where they can “have a positive monthly cash flow and sell for a profit in a few years.” And they “don’t mind doing some work.”

They are not the first, nor the 10th, nor the 1000th person to think of this brilliant idea. I don’t like depriving people of hope, but a dose of reality comes next. It usually boils down to this:

1. Do you know anything about this market? No? Well, you have tons of competition.

2. You will not be able to compete with buyers here who are escalating sometimes 25% over asking prices.

3. Were you living under a rock in 2002 – 2005 when the steady reduction in interest rates resulted in a huge bubble? Did you block out the ensuing years of misery? It took many people in DC close to 10 years to recoup their investment from the early/mid-2000s.

4. There is no such thing as an “up and coming neighborhood” in DC anymore. Every single neighborhood has jumped on the redevelopment train or has plans in the works for it, save a few neighborhoods that may not see redevelopment for a decade or more.

5. Stop looking at homes as investment vehicles. If you find an agent who guarantees you a profit in a few years, they’re lying.

There are no big secrets here. What I know is what everyone knows.

There is a desperate, scrappy pool of buyers in DC who need houses and who will stop at nothing to get them. Competition is tough. Homes listed in hot neighborhoods get up to 20 bidders in many cases. If you’re the winning bidder of a multiple bid situation guess what?

You paid too much!

9 comments for “Investors Left in the Cold in Washington, DC Real Estate”

Mark B
February 25, 2015 at 4:25 pm

I remember a conversation over lunch at a tech company I was working at in 2007 (all engineers at the table, so reasonably good salaries) and one of us (‘Bob’) was thinking about buying a house in the Portland area but was concerned over price (+$500k). One of the other guys at the table (‘Ed’, a property speculator who’d flipped a couple of houses) said “what are you worried about, you’re in the 90th percentile in income, you can afford it”.

I pointed out that this meant only 10% of the population could afford to buy it from him when and if he decided to sell. Ed just didn’t get it but Bob did and passed on the house.

NOTaREALmerican
February 25, 2015 at 5:41 pm

If it wasn’t for the pathological optimists, the cavemen never would have left their caves and speculated on cave-flipping.

Dude, what can go wrong dude?

Petunia
February 25, 2015 at 6:40 pm

I looked at a house in south FL one half block away from the garbage dump, 330K. Even in a better area it would have been overpriced.

williamwilliam
February 25, 2015 at 8:13 pm

I’m guilty of recent speculation. I’ve been working in another state and rented a room until I was booted when the lease ended. I bought a condo in Northern California Jan’14 which was increasing in value $10k per year…. except for the first year I owned it. Granted, I’ve had my own place when in CA and used airbnb to earn nearly $5k when not there. But property price appreciation may not come that easy. I can still keep it as an non-leveraged investment with 6-8% annual returns after expenses.

Mary
February 26, 2015 at 1:34 am

The American dream has passed, wake up people, it is the time for the Washington dream.

You know the federal government is too big when the zip codes in and around the beltway surpass manhattan, bay area, Hollywood or Beverly hills in terms of wealth. Apparently, creating regulations is far more lucrative business than creating software, machineries, entertainments.

We have reduced to a country of politicians, regulators, bureaucrats, welfare recipients, whiners and, well, agents.

Julian the Apostate
February 26, 2015 at 3:02 am

Or cringe when your load takes you through there. Or worse yet, delivers there.

williamwilliam
February 26, 2015 at 6:51 am

Zillow real estate data of Arlington, VA is not impressive. Real estate values sunk from around 2005 to 2010 and have creeped back up since then. However, Zillow estimates many home values will decline in the next twelve months. Turning a SFH into a rental is only cash-flow positive with about 40% down, according to Zillow purchase and rental data.

Melissa Terzis
February 26, 2015 at 1:07 pm

You can’t tell anyone in the Arlington market this though – they’re seeing houses come on the market and go off within minutes, and things sell without even going on the market at all, at least north of Route 50. It’s truly astonishing to watch because where does it end?

Alan V
February 26, 2015 at 8:09 pm

Speaking of South Florida, the insanity that has once again gripped Miami is something to behold. It’s like everyone is telling themselves 2007-2010 was a bad dream, never happened. Condo towers with absurd amenities and price points are going up EVERYWHERE, ultra luxury shops opening in the Design District (which just 2-3 years ago was a wasteland), it’s like the 00’s bubble on crack. But a slight difference…90% of pre-sales are to foreign nationals, and 70-80% all cash. It’s doesn’t take a wizard to get that at some point this money and these buyers will just evaporate overnight, and do you think all this volume can be absorbed by selling to Miamians needing a mortgage? This will be a blow up for the ages when it hits.

 
Comment by Professor Bear
2015-05-17 13:45:01

“hooked on brown sugar”

I missed that reference when I first read it.

Come to think of it, so was Jefferson.

Comment by rms
2015-05-17 23:17:56

“I missed that reference when I first read it.”

There wasn’t much to do back in those days while waiting for the harvest; might as well plant more seed.

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Comment by Professor Bear
2015-05-17 15:53:51

I seem to have forgotten covering this episode in American history in my high school studies.

Descendants of Slave’s Son Contend That His Father Was George Washington
By NICHOLAS WADE
Published: July 7, 1999

Did George Washington father a son with Venus, a young slave who lived on the estate of his half brother John Augustine Washington?

Three descendants of Venus’s son, who was called West Ford, say that according to a family tradition two centuries old, George Washington was West Ford’s father. They hope to develop DNA evidence from descendants of the Washington family and Washington’s hair samples to bolster their case.

Historians are skeptical, saying there is no documentary evidence to suggest that Washington ever met Venus, whose son was born four or five years before Washington became President, and several reasons to consider any such liaison improbable. In addition, Washington, 26 when he married Martha, then 27, had no children with her. But Martha bore four children in her first marriage, suggesting that Washington may have been sterile.

Yet there is reason to believe that if the child’s father was not Washington, it might have been someone closely related to him. The cousins’ claim has several elements of truth, enough to set up a historical mystery as to the identity of West Ford’s father and to add a new strand to the emerging links between the black and white sides of slave-owning families.

 
 
Comment by Professor Bear
2015-05-16 11:35:39

“The Fed’s defenders quibble that houses are less pricey than in the bubble of 2007, or that stocks are less pricey than in 2000, which misses the difference this time around. In the past 50 years, valuations of U.S. stock prices have been higher than they are now for less than 10% of the time, and similar figures hold for bonds and houses. This kind of synchronized boom has never happened, not even before the last two major meltdowns. My research team’s composite valuation for the three major financial assets in America—stocks, bonds and houses—is currently well above levels reached during the bubbles of 2000 and 2007.”

Denial ain’t a river in Egypt.

 
Comment by Professor Bear
2015-05-16 13:25:27

The campaign contributions were part of a tacit contractual agreement not to prosecute.

The Opinion Pages | Editorial
Breaking Laws in the Mortgage Bubble
By THE EDITORIAL BOARD
MAY 15, 2015

The government won a big victory this week in a case against two banks that were found to have systematically deceived investors about shoddy mortgage securities they peddled during the housing bubble. “The magnitude of falsity, conservatively measured, is enormous,” wrote Judge Denise Cote of Federal District Court in Manhattan in a strongly worded 361-page ruling.

The banks are Nomura Holdings of Japan and the Royal Bank of Scotland. The investors are Fannie Mae and Freddie Mac, the government-run mortgage agencies. The case was brought by the Federal Housing Finance Agency, the overseer of Fannie and Freddie.

The government’s victory in this case raises an interesting question: If the relatively unknown housing finance agency could prevail over foreign banks, why haven’t far more powerful regulators and prosecutors at the Department of Justice and the Securities and Exchange Commission done more to expose and redress wrongdoing by big Wall Street banks in the mortgage bubble?

Comment by Neuromance
2015-05-16 20:12:32

Seen elsewhere on the web

“… [No] survivable fine against a company can match the deterrent effect of prison time for the responsible executives.

Is JPMorgan Chase going to bring down the world economy if it’s punished too severely? Sh•t, we’d better not punish it at all, then. No sense in risking it! But I’m guessing the world will survive if we send its human co-conspirators to do a nickel in a medium-security joint, right?”

– by user “semiotix”

 
Comment by Neuromance
2015-05-16 20:16:05

So if TBTF Financial Corp is just too darned important to risk prosecuting, how about going after the executives in charge then? After all, the corporation itself never actually does anything - it’s just a logical construct. It’s the people who work under its banner who do the actual things.

Surely, going after them won’t bring down the world economy, right?

Comment by Neuromance
2015-05-16 20:17:17

Alas, but then, money funneled to it from the public treasury will stop finding its way back to politicians.

That’s a showstopper.

 
 
 
Comment by Ben Jones
2015-05-17 06:35:42

‘The pitfalls of an inflated market value is highlighted by the cautionary tale of Box, which went public in January. The cloud-storage provider had a valuation of about $2.4 billion when it raised a VC investment of $150 million in July 2014. But by the time it went public, its valuation had sunk to $1.7 billion.’

“You can’t smell the soap when you are inside the bubble too long,” says David Chao, co-founder and general partner at DCM Ventures, told USA TODAY. “Everyone in the industry knows it’s a bubble but just wants to believe otherwise. (It’s) human psychology.”

‘Mark Cuban doesn’t mince words. “I have absolutely not (sic) doubt in my mind that most of these individual Angels and crowd funders are currently under water in their investments, absolutely none,” he wrote in a blog post titled, “Why This Tech Bubble Is Worse Than the Tech Bubble of 2000.” “There is ZERO liquidity for any of those investments. None. Zero. Zip. … The only thing worse than a market with collapsing valuations is a market with no valuations and no liquidity.”

‘The escalated valuations are emblematic of a tech-heavy Nasdaq market, which topped 5,000 points for the first time in 15 years earlier this year, and stratospheric market valuations for publicly traded companies such as Apple, Microsoft, Google and Facebook.’

‘But those companies are established, pumping out profits in the billions of dollars. Burn rates, the amount of cash companies are losing every month to operate, are spinning out of control, Gurley and others contend. Start-ups are spending at a rate far out-stripping revenue in attempts to drive growth.’

‘There is also the possibility of an X-factor: unexpected events in Middle East or China that roil the market. The real bubble is in bonds, says Peter Thiel, a PayPal co-founder and early investor in Facebook. “Central bankers have intervened to drive up prices, and that won’t last forever,” he says. “There are overvalued companies today — just like there are at all times — but the best companies are still seriously undervalued.”

http://www.usatoday.com/story/tech/2015/05/17/bubble-mark-cuban-peter-thiel-bill-gurley-venture-capital/25820305/

 
Comment by Ben Jones
2015-05-17 08:20:58

‘New Zealand First leader Winston Peters says the Auckland housing bubble could burst soon, an event he says would be calamitous for the economy. “A lot of those people in Auckland are about to lose their equity in their homes, as they did in 2007 and 2008 when the market collapsed.”

“Now you’ve got to remember this, we invented the term South Sea Bubble, but it’s coming at such velocity these days, the cycle used to be 30, 40, 50 years now it’s about every seven years and we’re facing the same again.”

http://www.radionz.co.nz/news/political/273862/winston-peters-housing-bubble-could-burst-soon

With Auckland prices reported to be rising $1,000 a day. I wonder if that includes Sundays?

Comment by Professor Bear
2015-05-17 13:46:43

‘New Zealand First leader Winston Peters says the Auckland housing bubble could burst soon, an event he says would be calamitous for the economy. “A lot of those people in Auckland are about to lose their equity in their homes, as they did in 2007 and 2008 when the market collapsed.”

Chicken Little is out of hibernation!

 
 
Comment by rj chicago
2015-05-17 09:51:26

Because history does repeat -
I just finished The Proud Tower by Barbara Tuchman - a tome on the years leading up to WW1 - well worth a read - it was published in the early 60’s…still relevant.
I am now working on a book called 13 Bankers - by a guy named Simon Johnson - former IMF - Finished 1/3 of it this morning over coffee.
P Bear may have read this one - but if not well worth a look and brief history of banking and Washington cabal and attendant oligarchs who push the levers of our ‘e - con - omy’. This so far from what I can tell is a good read as well.

Comment by Professor Bear
2015-05-17 13:47:43

I own it and have started to read it. But got sidetracked reading David Copperfield (a much livelier read!)…

 
 
Comment by Professor Bear
2015-05-17 15:56:17

“Janet Yellen’s comment that stock prices are ‘quite high’ hardly captures the frothiness in U.S. financial markets. The Federal Reserve chair’s admission also stopped short of acknowledging the role of free money in inflating the price of stocks—as well as the price of bonds, houses and every other financial asset. At Morgan Stanley Investment Management, we have analyzed data going back two centuries and found that until the past decade no major central bank had ever before set short-term interest rates at zero, even in periods of deflation.”

No wonder they are so scared of increasing short term rates off the zero bound. There is no historical precedent to form the basis of a prediction on what is going to happen, unless you count the period from 1933-1948 when short-term rates were up against the zero bound as a precedent.

 
Comment by Professor Bear
2015-05-17 19:55:13

The New Daily
Housing bubble a real danger: ASIC
10:25am, May 18, 2015
James Fernyhough
Money Editor

The corporate watchdog has advised against investing in Sydney and Melbourne property.

Property prices in Melbourne and Sydney are closer than ever to bubble territory, and investors would be wise to park their cash elsewhere, the Australian Securities and Investments Commission (ASIC) has warned.

In an interview with The Australian Financial Review, ASIC chairman Greg Medcraft said he was “quite worried” about the property markets in the nation’s two biggest cities.

“History shows that people don’t know when they are in a bubble until it’s over,” he said.

“In housing, the long-term average income to average price ratio is four to five times but at the moment it is at historic highs.”

He said record low interest rates will only exacerbate the problem.

“There is always a danger when rates get so low. That’s when people start borrowing when they can’t afford it. What generally happens is rates start to rise which affects you ability to pay, and rate rises can actually bust a bubble, so you end up with a double whammy.”

A sluggish economy and rising unemployment mean there is an increased danger of borrowers finding themselves unable to make their mortgage payments.

This weekend the auction clearance rate in Sydney was 84 per cent, while in Melbourne it was 80 per cent. That compares with 46 per cent in Brisbane.

Comment by Professor Bear
2015-05-17 20:07:03

Housing price boom is ‘rubbish’: property expert
10:30pm, May 17, 2015
Andrew Brasier

The so-called boom in house prices is a myth for most of the nation and a crash in home values is not likely, according to one expert.

While Sydney and
 Melbourne will continue to record strong growth in housing prices over the next 12 months most 
other markets in Australia will register little or no price movement, says a leading property economist.

Harley Dale, chief economist at the Housing Industry Association, said national house price growth will slow down over the next 12 months even if some pockets in capital cities post another bumper return for the period.

Although the Reserve Bank lowered interest rates to an historic low in May, Mr Dale believes that increased unemployment and stagnant household incomes
 will outweigh cheaper home loans and investor appetite.

Mr Dale said prices across the combined eight capital cities rose by 7.9 per cent in the 
three months to April this year when compared to the same period in 2014, but price growth for regional Australia was much “softer” at 2.9 per cent.

“There are literally thousands of property markets around Australia,” Mr Dale said.

“Many will grow 
in inflation-adjusted terms over the next 12 months and many won’t. In aggregate, Sydney looks to be
 well out in front, Melbourne is kind of in the race, Brisbane is accelerating from effectively last place,
 and the rest have some training to do. National housing price boom – rubbish!”

The economist said while Sydney housing enjoyed “a standout” year in 2014 (rising 14.5 per cent in the
 three months to April this year compared with the same period last year), followed by Melbourne (6.9 per cent),
 “nowhere else stood out”.

 
 
Comment by Professor Bear
2015-05-17 22:04:42

ft dot com/global economy
Global Insight
May 17, 2015 5:52 pm
World’s central bankers braced for big divergence
Ferdinando Giugliano, Economics Correspondent

A U.S. flag flies on top of the Marriner S. Eccles Federal Reserve building at sunrise in Washington, D.C., U.S., on Tuesday, Oct. 28, 2014. The Federal Open Market Committee meets today and tomorrow after six weeks of volatility in global financial markets. Since the FOMC met in mid-September, oil prices have tumbled 14 percent, and the Standard & Poor’s 500 Index of stocks dropped as much as 7.4 percent from a record close. Photographer: Andrew Harrer/Bloomberg

Since the global financial crisis, mankind has learnt to live with a third certainty along with death and taxes — monetary loosening.

Central banks have slashed interest rates to record lows and embarked upon unprecedented programmes of asset purchases in an attempt to raise inflation and restart economic growth.

The common path on which monetary policy makers have strolled, however, is expected to diverge this year. The timing of the partition and the way in which its side effects are managed hold big implications for financial stability and the global recovery.

After years of respectable growth and sizeable falls in unemployment, the US Federal Reserve and the Bank of England have ceased to expand their quantitative easing programmes and are eyeing a first rise in interest rates in nearly 10 years.

The European Central Bank, conversely, is in full loosening mode, having launched a €1.1tn scheme of asset purchases. In Asia, the Bank of Japan is busy with its own bond-buying programme, while the People’s Bank of China has just cut interest rates three times in six months.

The immediate danger facing the world economy lies in when exactly the US’s rate lift-off will take place. Growth has disappointed in the first quarter, with weak retail sales and industrial production figures last week showing that the US slowdown may be more than a seasonal dip.

Economists fear that the damage arising from a premature tightening by the Fed would go well beyond the US: a new recession in the world’s most important economy would hurt exporters across all continents, as well as hitting confidence and investment.

Even with a well-timed rate rise, however, the global economy is far from safe. José Viñals, the director of the International Monetary Fund’s monetary and capital markets department, warned last month that as higher rates in the US lure back investors from abroad, emerging markets face the risk of increased volatility and sudden stops of liquidity.

Some fear a so-called “super taper tantrum” could surpass the market turmoil unleashed by former Fed chairman Ben Bernanke in 2013 when he hinted at the tapering of the Fed’s QE programme. They are calling for greater co-ordination of monetary policy across the world.

But central bank watchers warn that this may not be legal. Monetary authorities, including the Fed and the ECB, have a domestic mandate, and so cannot make decisions on the basis of the spillovers they might cause abroad.

Collaborating to manage exchange rates — another possibility — would also be problematic. As Charles Engel, an economist at the University of Wisconsin-Madison, notes, there is no agreed model upon which to determine the relative value of currencies. Add to that the immense political pressure that policy makers would face upon entering such negotiations.

 
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