Bubble question from a reader
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2018 May 3, 8:09am 8,308 views 52 comments
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1
Patrick
2018 May 3, 8:14am
Patrick
2018 May 3, 8:14am
Yes, I'd say that we are again entering bubble territory, because the price of housing is continuously pulling away from the real underlying value of housing as determined by rents.
Rents are more honest than prices, in that people need to really come up with the cash each month for the rent, while prices can temporarily be goosed in various ways. If you can't come up with your mortgage payment, maybe you can refi. And if you want to pay more than the true underlying value of a house, no one is going to stop you, and will actively assist you in getting yourself into as much debt as possible.
As for when it's going to pop, it's very hard to say because there is a feedback loop of rising prices leading to further rising prices as people can borrow more based on the "equity" that the market imagines they have in their current house.
Rents are more honest than prices, in that people need to really come up with the cash each month for the rent, while prices can temporarily be goosed in various ways. If you can't come up with your mortgage payment, maybe you can refi. And if you want to pay more than the true underlying value of a house, no one is going to stop you, and will actively assist you in getting yourself into as much debt as possible.
As for when it's going to pop, it's very hard to say because there is a feedback loop of rising prices leading to further rising prices as people can borrow more based on the "equity" that the market imagines they have in their current house.
2
RWSGFY
2018 May 3, 10:14am
RWSGFY
2018 May 3, 10:14am
It's high time we start asking question about the origin of these Chinese and Russian money. If you as US citizen suddenly come out of woodwork and plop $2M in small notes on the table to buy a house there will be questions asked, right?
3
rootvg
2018 May 3, 10:51am
rootvg
2018 May 3, 10:51am
Patrick, it's pretty obvious. I can't tell you how many stories I've heard of people in their forties and fifties living in relatives' carports and garages. In Alamo!
This entire state or at least this part of the state is nothing but a gigantic real estate pyramid. You know I travel for a living. If I go to Atlanta, I don't see it. In Jackson, I don't see it. Dallas has become bubbly but that place has a history of popping them in a very ugly fashion. If you're paying half a million bucks for a house in Frisco, Texas, you're just stupid. Stupidity has a price.
I've been telling everyone that when Trump gets his second term, that will be when the next recession comes. We have to have one. We're due. Everyone seems to be flush right now so we're putting some money into long delayed repairs at the house and I've bought a few minor toys but the big purchases will wait until there's blood in the streets. That day is coming.
This entire state or at least this part of the state is nothing but a gigantic real estate pyramid. You know I travel for a living. If I go to Atlanta, I don't see it. In Jackson, I don't see it. Dallas has become bubbly but that place has a history of popping them in a very ugly fashion. If you're paying half a million bucks for a house in Frisco, Texas, you're just stupid. Stupidity has a price.
I've been telling everyone that when Trump gets his second term, that will be when the next recession comes. We have to have one. We're due. Everyone seems to be flush right now so we're putting some money into long delayed repairs at the house and I've bought a few minor toys but the big purchases will wait until there's blood in the streets. That day is coming.
4
Shaman
2018 May 3, 11:04am
Shaman
2018 May 3, 11:04am
rootvg says
I disagree. Not that a recession will happen one day, but that it will be so soon. These are generational things, created by an over exuberance of speculation that is itself created by naivety. Or, it can happen when demographics change dramatically.
I think it’ll come in about fifteen years when the Boomers are dying in great numbers. Their care and upkeep and resource consumption provides work for millions and profit for corporations. The loss of that very wealthy and entitled generation will result in a loss of demand which will mean we have an over abundance of supply.
That combined with a truly astronomical national debt and Unsalvageable public debt in cities and states (which will lead to much economic pain as layoffs are announced and pensions are lost) should throw the economy into a tailspin. It might even be worse than the Great Recession, as we will be falling from twice or three times the height.
Also the disruptive technologies of today will have matured into true job-killers, leaving much fewer jobs for low skill labor.
It should be the perfect storm you’re looking for.
But for now and for a while, good times! Enjoy!
when Trump gets his second term, that will be when the next recession comes. We have to have one. We're due
I disagree. Not that a recession will happen one day, but that it will be so soon. These are generational things, created by an over exuberance of speculation that is itself created by naivety. Or, it can happen when demographics change dramatically.
I think it’ll come in about fifteen years when the Boomers are dying in great numbers. Their care and upkeep and resource consumption provides work for millions and profit for corporations. The loss of that very wealthy and entitled generation will result in a loss of demand which will mean we have an over abundance of supply.
That combined with a truly astronomical national debt and Unsalvageable public debt in cities and states (which will lead to much economic pain as layoffs are announced and pensions are lost) should throw the economy into a tailspin. It might even be worse than the Great Recession, as we will be falling from twice or three times the height.
Also the disruptive technologies of today will have matured into true job-killers, leaving much fewer jobs for low skill labor.
It should be the perfect storm you’re looking for.
But for now and for a while, good times! Enjoy!
5
EBGuy
2018 May 3, 12:50pm
This is all you need to know.
The $10.58 billion raised by Bay Area companies accounted for nearly 40 percent of all technology investments made in the United States in the first quarter of 2018.
The $10.58 billion raised by Bay Area companies accounted for nearly 40 percent of all technology investments made in the United States in the first quarter of 2018.
6
bob2356
2018 May 3, 3:15pm
Patrick says
Ah, the mythical foreign buyers snapping up all the houses. Foreign buyers were 5% of purchases by count and 10% by amount last year, within a 1-2 percent of where it's been for decades. Pretty evenly split between resident and non resident.
https://www.nar.realtor/sites/default/files/documents/2017-Profile-of-International-Activity-in-US-Residential-Real-Estate.pdf
Volume of Foreign Buyers Purchasing Residential Property
Foreign buyers purchased $153 billion of U.S. residential property in April 2016—March 2017, an increase from the $102.6 billion of property purchased in the previous 12-month period. This accounts for 10 percent of the dollar volume of existing home sales. Non-resident foreign buyers purchased $78.1 billion of property, while resident foreign buyers purchased $74.9 billion of property. Foreign buyers purchased 284,455 residential properties, an increase from the 214,885 properties purchased during the previous 12-month period. This accounts for five percent of existing home sales. Non-resident foreign buyers accounted for two percent of existing home sales and resident foreign buyers accounted for three percent of existing home sales. Foreign buyers who primarily reside outside the United States (non-resident) accounted for 42 percent of all foreign buyers, and recent immigrants and foreign buyers who reside in the United States on work, student, or other visas (resident) accounted for 58 percent. This composition is about the same as that of the previous 12-month period. Before 2016, the ratio of resident to non-resident foreign buyers was typically closer to 50-50
Most of the money is probably flowing into the metro areas of SF, LA, NY and Miami which probably adds up to about $10 trillion. Then maybe less than a trillion could move these markets. Add up huge, concentrated wealth in China, Russia and hedge fund buyers who are nervous about the stock market and the bond bubble, and that could be creating excess demand that is causing prices to be so high
Ah, the mythical foreign buyers snapping up all the houses. Foreign buyers were 5% of purchases by count and 10% by amount last year, within a 1-2 percent of where it's been for decades. Pretty evenly split between resident and non resident.
https://www.nar.realtor/sites/default/files/documents/2017-Profile-of-International-Activity-in-US-Residential-Real-Estate.pdf
Volume of Foreign Buyers Purchasing Residential Property
Foreign buyers purchased $153 billion of U.S. residential property in April 2016—March 2017, an increase from the $102.6 billion of property purchased in the previous 12-month period. This accounts for 10 percent of the dollar volume of existing home sales. Non-resident foreign buyers purchased $78.1 billion of property, while resident foreign buyers purchased $74.9 billion of property. Foreign buyers purchased 284,455 residential properties, an increase from the 214,885 properties purchased during the previous 12-month period. This accounts for five percent of existing home sales. Non-resident foreign buyers accounted for two percent of existing home sales and resident foreign buyers accounted for three percent of existing home sales. Foreign buyers who primarily reside outside the United States (non-resident) accounted for 42 percent of all foreign buyers, and recent immigrants and foreign buyers who reside in the United States on work, student, or other visas (resident) accounted for 58 percent. This composition is about the same as that of the previous 12-month period. Before 2016, the ratio of resident to non-resident foreign buyers was typically closer to 50-50
7
pkennedy
2018 May 3, 4:20pm
The people living in the bay area, who are home owners today (say bought in 2000 in Palo Alto) aren't going to sell simply because their property is worth a lot more... the reason to sell is to upgrade.
Unless their professional lives have accelerated way beyond the norm, they could never afford to "upgrade" in palo alto. Dual income engineers who bought in 2000 probably haven't moved up the chain far enough to afford rebuying in palo alto, because the wealth gap between them, and current buyers is phenomenal. They were rich in 2000 and were able to gobble up that property in 2000, but now? No way.
The typical reason to sell, is to buy something better, but in the case of Palo Alto, if you were to sell, you would never be able to afford an upgrade. Take out the commissions and taxes and they probably couldn't afford to buy the same house, assuming they had no previous mortgage!
I think thats the big difference between the bay area, and other areas of the country. The sellers have no incentive to sell and upgrade and no way to do so either. If you had to live somewhere in the bay area, and you had a house in palo alto, why would you sell it? Where would you move to? You would lose that great neighbourhood and be forced out to the sticks, even with all the sweet equity you had built up. Sure you might end up with 2M in the bank, and now live in San Jose somewhere, but what are you going to do with 2M and your new 1 hour commute? Sell when you're ready to retire or decide to leave the area, until then, reap the rewards of your early purchase.
The same can go for any city in the bay area, palo alto is just an easy example. These people have no where better to move to, any move they make will be a downgrade. This lowers inventory of those who could possibly afford those homes. If you were to put up 50% of palo alto for sale tomorrow, there is no way there would be enough buyers. This is true of any city, but most cities have the ability for people to sell and move up, even if it means taking on a huge new 30 year mortgage with their salary increases. But you could never get a big enough salary upgrade over 10 years to stay in Palo Alto and do that upgrade, which is what makes the place different than most metropolitan areas.
In Vancouver, if you sold, you could get a new 30 year mortgage and pick up a better place. Take all the equity in your current house, use your nice salaries to get a giant mortgage and buy an upgrade. But palo alto? No way. No way you could afford an upgrade there, the increases in costs there have far exceeded anyones ability to do that.
Unless their professional lives have accelerated way beyond the norm, they could never afford to "upgrade" in palo alto. Dual income engineers who bought in 2000 probably haven't moved up the chain far enough to afford rebuying in palo alto, because the wealth gap between them, and current buyers is phenomenal. They were rich in 2000 and were able to gobble up that property in 2000, but now? No way.
The typical reason to sell, is to buy something better, but in the case of Palo Alto, if you were to sell, you would never be able to afford an upgrade. Take out the commissions and taxes and they probably couldn't afford to buy the same house, assuming they had no previous mortgage!
I think thats the big difference between the bay area, and other areas of the country. The sellers have no incentive to sell and upgrade and no way to do so either. If you had to live somewhere in the bay area, and you had a house in palo alto, why would you sell it? Where would you move to? You would lose that great neighbourhood and be forced out to the sticks, even with all the sweet equity you had built up. Sure you might end up with 2M in the bank, and now live in San Jose somewhere, but what are you going to do with 2M and your new 1 hour commute? Sell when you're ready to retire or decide to leave the area, until then, reap the rewards of your early purchase.
The same can go for any city in the bay area, palo alto is just an easy example. These people have no where better to move to, any move they make will be a downgrade. This lowers inventory of those who could possibly afford those homes. If you were to put up 50% of palo alto for sale tomorrow, there is no way there would be enough buyers. This is true of any city, but most cities have the ability for people to sell and move up, even if it means taking on a huge new 30 year mortgage with their salary increases. But you could never get a big enough salary upgrade over 10 years to stay in Palo Alto and do that upgrade, which is what makes the place different than most metropolitan areas.
In Vancouver, if you sold, you could get a new 30 year mortgage and pick up a better place. Take all the equity in your current house, use your nice salaries to get a giant mortgage and buy an upgrade. But palo alto? No way. No way you could afford an upgrade there, the increases in costs there have far exceeded anyones ability to do that.
8
Shaman
2018 May 3, 4:31pm
Shaman
2018 May 3, 4:31pm
bob2356 says
They aren’t buying in fucking Iowa! They’re buying in coastal California, and along the west coast. It’s not a myth when I’ve personally been outbid several times by Chinese with cash, and my friends have also experienced this. A Taiwanese friend said there were/are tour buses for prospective Chinese buyers to inspect areas and neighborhoods of interest.
So giving us a national average is exactly useless when most of the activity is local to where we live.
the mythical foreign buyers snapping up all the houses. Foreign buyers were 5% of purchases by count and 10% by amount last year,
They aren’t buying in fucking Iowa! They’re buying in coastal California, and along the west coast. It’s not a myth when I’ve personally been outbid several times by Chinese with cash, and my friends have also experienced this. A Taiwanese friend said there were/are tour buses for prospective Chinese buyers to inspect areas and neighborhoods of interest.
So giving us a national average is exactly useless when most of the activity is local to where we live.
9
pkennedy
2018 May 3, 4:43pm
Quigley says
A national average shows they haven't changed in numbers, and they weren't buying in Iowa before, so we can deduce that the averages for buying in places like California haven't changed much over the years either.
So giving us a national average is exactly useless when most of the activity is local to where we live.
A national average shows they haven't changed in numbers, and they weren't buying in Iowa before, so we can deduce that the averages for buying in places like California haven't changed much over the years either.
10
SunnyvaleCA
2018 May 3, 5:36pm
pkennedy says
Don't forget loss of Prop 13 benefits. That theoretical couple probably bought the Palo Alto house for $1MM and are now paying property taxes on an assessed value of only $1.4MM — about $14k to $15k per year. Their house probably has market value at least $2.5MM, so an "upgrade" house would be at least $3.5MM. Their new property tax bill would be $35K to $37k per year.
As far as avoiding capital gains tax, is the "1031 exchange" strategy only for commercial properties? I thought individuals could do something to avoid capitol gains tax when upgrading, but the benefit was ended many years ago and replaced with the $250k / $500k deduction (which isn't a huge deduction for such expensive houses).
Have people found an effective way to mitigate the robbery of the real estate cartel? 6% is ridiculous. I know some people who live in a newish townhouse development that have bought and sold online with Redfin, but with that situation all the unites are quite new and quite standardized — you've seen one you've pretty much seen them all. With a 50 year old (or older) house, each one is somewhat unique and the Realtors can take advantage of this to make it hard to not pay for their "services."
Dual income engineers who bought in 2000 ... The typical reason to sell, is to buy something better, but in the case of Palo Alto, if you were to sell, you would never be able to afford an upgrade. Take out the commissions and taxes and they probably couldn't afford to buy the same house
Don't forget loss of Prop 13 benefits. That theoretical couple probably bought the Palo Alto house for $1MM and are now paying property taxes on an assessed value of only $1.4MM — about $14k to $15k per year. Their house probably has market value at least $2.5MM, so an "upgrade" house would be at least $3.5MM. Their new property tax bill would be $35K to $37k per year.
As far as avoiding capital gains tax, is the "1031 exchange" strategy only for commercial properties? I thought individuals could do something to avoid capitol gains tax when upgrading, but the benefit was ended many years ago and replaced with the $250k / $500k deduction (which isn't a huge deduction for such expensive houses).
Have people found an effective way to mitigate the robbery of the real estate cartel? 6% is ridiculous. I know some people who live in a newish townhouse development that have bought and sold online with Redfin, but with that situation all the unites are quite new and quite standardized — you've seen one you've pretty much seen them all. With a 50 year old (or older) house, each one is somewhat unique and the Realtors can take advantage of this to make it hard to not pay for their "services."
11
Strategist
2018 May 3, 5:39pm
Strategist
2018 May 3, 5:39pm
pkennedy says
So it's not the foreigners who are responsible for the recent home price jumps.
From other threads:
It's not the increase in incomes, because incomes haven't increased much. OK.
Easy loans. Nope. Loans are not as easy to get as they were in the past 40 years before the crash.
------
My dear friends. I'll give you 3 hints. Shortage Shortage Shortage. As long as there is a shortage of homes, prices cannot drop. They could plateau, but they cannot drop.
Stop thinking emotionally, stop cherry picking data, and use rational thought. You housing bears are screwing up your finances.
A national average shows they haven't changed in numbers, and they weren't buying in Iowa before, so we can deduce that the averages for buying in places like California haven't changed much over the years either.
So it's not the foreigners who are responsible for the recent home price jumps.
From other threads:
It's not the increase in incomes, because incomes haven't increased much. OK.
Easy loans. Nope. Loans are not as easy to get as they were in the past 40 years before the crash.
------
My dear friends. I'll give you 3 hints. Shortage Shortage Shortage. As long as there is a shortage of homes, prices cannot drop. They could plateau, but they cannot drop.
Stop thinking emotionally, stop cherry picking data, and use rational thought. You housing bears are screwing up your finances.
12
JZ
2018 May 3, 6:34pm
JZ
2018 May 3, 6:34pm
People flock to places that have jobs, dreams, and other attractions. RE investing basically figure out where that is, take a position in that place, jack up the rent and squeeze the renters until they give up the jobs, the dreams, the attractions. That’s when the “bubble” pops, no longer sustained by the jobs, the dreams, the attractions. Then the dump begins. Bay area are such places. Does silicon valley still have jobs, dreams, attractions? Are people giving it up?
13
JZ
2018 May 3, 6:36pm
JZ
2018 May 3, 6:36pm
Pablo alto folks have the luxury of getting stuck and can NOT move up. When the thing hits, there will be forced sellers because they can NOT sustain the mortgages any more. It does matter what you want, you do what you HAVE to.
14
Shaman
2018 May 3, 7:10pm
Shaman
2018 May 3, 7:10pm
SunnyvaleCA says
I keep seeing this tv commercial for “Purple Bricks” which I gather is a flat fee real estate agency.
Have people found an effective way to mitigate the robbery of the real estate cartel? 6% is ridiculous.
I keep seeing this tv commercial for “Purple Bricks” which I gather is a flat fee real estate agency.
15
anotheraccount
2018 May 3, 7:50pm
anotheraccount
2018 May 3, 7:50pm
Quigley says
Sorry Bob, I have to agree with Quigley on this one. And it's only a big city coastal California - they are not buying in Sacramento.
They aren’t buying in fucking Iowa! They’re buying in coastal California, and along the west coast. It’s not a myth when I’ve personally been outbid several times by Chinese with cash, and my friends have also experienced this. A Taiwanese friend said there were/are tour buses for prospective Chinese buyers to inspect areas and neighborhoods of interest.
So giving us a national average is exactly useless when most of the activity is local to where we live.
Sorry Bob, I have to agree with Quigley on this one. And it's only a big city coastal California - they are not buying in Sacramento.
16
mell
2018 May 3, 7:56pm
Strategist says
Well then what were the 2008 taxpayer robbery bailouts all about? It's not like they were suddenly building more land. While I agree that long term housing should always be a relatively decent investment if you can pay your mortgage and are a decent landlord, current prices are critically inflated due to the fact that the housing market is better supported by the crony capitalist/socialist system than the stock market (and there is of course some inter-dependency), and that is not easy to accomplish. So any bear betting on total housing annihilation must also bet on the inability of the Fed to re-inflate the bubble another time and the inability of the cocksucker government (back then Obummer and Dubya) to pass yet another taxpayer raping bailout legislature. Thus I believe, while housing should drop or at least stagnate very soon, it will never completely crash until the Fed and the gov are out of bullets.
My dear friends. I'll give you 3 hints. Shortage Shortage Shortage. As long as there is a shortage of homes, prices cannot drop. They could plateau, but they cannot drop.
Stop thinking emotionally, stop cherry picking data, and use rational thought. You housing bears are screwing up your finances.
Well then what were the 2008 taxpayer robbery bailouts all about? It's not like they were suddenly building more land. While I agree that long term housing should always be a relatively decent investment if you can pay your mortgage and are a decent landlord, current prices are critically inflated due to the fact that the housing market is better supported by the crony capitalist/socialist system than the stock market (and there is of course some inter-dependency), and that is not easy to accomplish. So any bear betting on total housing annihilation must also bet on the inability of the Fed to re-inflate the bubble another time and the inability of the cocksucker government (back then Obummer and Dubya) to pass yet another taxpayer raping bailout legislature. Thus I believe, while housing should drop or at least stagnate very soon, it will never completely crash until the Fed and the gov are out of bullets.
17
BayArea
2018 May 3, 8:52pm
BayArea
2018 May 3, 8:52pm
rootvg says
Blood in the streets is the most efficient time where money changes hands from the poor/middle class to the rich. It’s built in by design and tends to come every decade or so like clockwork.
I've bought a few minor toys but the big purchases will wait until there's blood in the streets. That day is coming.
Blood in the streets is the most efficient time where money changes hands from the poor/middle class to the rich. It’s built in by design and tends to come every decade or so like clockwork.
18
SFace
2018 May 3, 10:51pm
SFace
2018 May 3, 10:51pm
mell says
Between 2002-2008 homes were popping up like weeds. Thereafter. Home builders ground to a halt in 2009. 2012 and since then homebuilding has lagged.
Until you see new build in the 2m there will he shortages
Strategist saysMy dear friends. I'll give you 3 hints. Shortage Shortage Shortage. As long as there is a shortage of homes, prices cannot drop. They could plateau, but they cannot drop.
Stop thinking emotionally, stop cherry picking data, and use rational thought. You housing bears are screwing up your finances.
Well then what were the 2008 taxpayer robbery bailouts all about? It's not like they were suddenly building more land. While I agree that long term housing should always be a relatively decent investment if you can pay your mortgage and are a decent landlord, current prices are critically inflated due to the fact that the housing market is better supported by the crony capitalist/socialist system than the stock market (and there is of course some inter-dependency), and that is not easy to accomplish. So any bear betting on total housing annihilation must also bet on the inability of ...
Between 2002-2008 homes were popping up like weeds. Thereafter. Home builders ground to a halt in 2009. 2012 and since then homebuilding has lagged.
Until you see new build in the 2m there will he shortages
19
mell
2018 May 3, 11:06pm
SFace says
Probably. But a lot of that shortage was artificially created, for example by dropping the discount window to zero and the resulting pass-on of 3% or less p.a. interest rates guaranteed for a whole decade to big RE giants made them not sell their underwater homes - which they may have been forced to without the Fed stepping in - but in fact double down (while rolling over their existing debt), buying up homes in droves from distressed non-commercial owners and converting them into rental property. Clearly homes (esp. SFH) are much scarcer than rentals since 2008. While rents are high you can almost always find a reasonably priced rental anywhere given good credit. But regardless they will keep making tons of money on those rentals (with fixed low interest loans) and unload them at the next top again, using all the new cash to buy up even more homes in the next great recession ;)
Between 2002-2008 homes were popping up like weeds. Thereafter. Home builders ground to a halt in 2009. 2012 and since then homebuilding has lagged.
Until you see new build in the 2m there will he shortages
Probably. But a lot of that shortage was artificially created, for example by dropping the discount window to zero and the resulting pass-on of 3% or less p.a. interest rates guaranteed for a whole decade to big RE giants made them not sell their underwater homes - which they may have been forced to without the Fed stepping in - but in fact double down (while rolling over their existing debt), buying up homes in droves from distressed non-commercial owners and converting them into rental property. Clearly homes (esp. SFH) are much scarcer than rentals since 2008. While rents are high you can almost always find a reasonably priced rental anywhere given good credit. But regardless they will keep making tons of money on those rentals (with fixed low interest loans) and unload them at the next top again, using all the new cash to buy up even more homes in the next great recession ;)
20
bob2356
2018 May 4, 3:36am
anotheraccount says
OMG I forgot that the universe revolves around a couple cities in CA. I can't imagine why prices would be high in landlocked cities with extreme concentrations of wealth and jobs combined with insane nimby rules restricting building other than foreigners buying all the houses. After all housing there was so cheap 20 years ago. The good old days when you could get a SF victorian for the price of a used toyota. What was I thinking?
Quigley saysThey aren’t buying in fucking Iowa! They’re buying in coastal California, and along the west coast. It’s not a myth when I’ve personally been outbid several times by Chinese with cash, and my friends have also experienced this. A Taiwanese friend said there were/are tour buses for prospective Chinese buyers to inspect areas and neighborhoods of interest.
So giving us a national average is exactly useless when most of the activity is local to where we live.
Sorry Bob, I have to agree with Quigley on this one. And it's only a big city coastal California - they are not buying in Sacramento.
OMG I forgot that the universe revolves around a couple cities in CA. I can't imagine why prices would be high in landlocked cities with extreme concentrations of wealth and jobs combined with insane nimby rules restricting building other than foreigners buying all the houses. After all housing there was so cheap 20 years ago. The good old days when you could get a SF victorian for the price of a used toyota. What was I thinking?
21
bob2356
2018 May 4, 3:50am
mell says
Big RE giants weren't sitting on underwater houses. Huge numbers of late to the game following the herd without a clue individuals (remember people lining up for days to put deposits on condo construction in places like Miami) were the underwater cohort. The big operators bought them up at fire sale prices after the crash.
Probably. But a lot of that shortage was artificially created, for example by dropping the discount window to zero and the resulting pass-on of 3% or less p.a. interest rates guaranteed for a whole decade to big RE giants made them not sell their underwater homes - which they may have been forced to without the Fed stepping in - but in fact double down (while rolling over their existing debt), buying up homes in droves from distressed non-commercial owners and converting them into rental property.
Big RE giants weren't sitting on underwater houses. Huge numbers of late to the game following the herd without a clue individuals (remember people lining up for days to put deposits on condo construction in places like Miami) were the underwater cohort. The big operators bought them up at fire sale prices after the crash.
22
pkennedy
2018 May 4, 5:37am
bob2356 says
When you buy a house with basically any level of downpayment, you're underwater for multiple years. The commissions, mortgage fees, and moving fees will ensure that. Even if you weren't under water, it doesn't mean you're not going to lose a large sum of money by selling immediately either.
Underwater homes aren't the problem. It's whether you can pay for them or not, and it's all about the monthly payments, not how much you paid. If I pay $1000/month @ x%interest or $1000/month @ y%interest it doesn't matter. It doesn't matter if I have a 15 year mortgage or a 30 year, if I'm paying $1000, and that's what I can afford. If it's $1100, ok, things are getting tight. If it's $1500 I'm going under, probably in 1-2 years.
However we haven't been seeing mortgages that were "free for the first year!" or "limited payments for the first 18 months!". So people are having to foot the full bill from day one, regardless of where the market is going, in 18 months they will be gone, good or bad times.
During the economic crisis in the bay area, during the worst of the worst when the country was dealing with horrendous unemployment, the bay area was 2.2% for those making over 100K. So the money was still there. It's all about if they can afford the house or not, not when a crisis hits. Those big houses don't need to sell. And if you bought back in 2000, you're almost 20 years into your mortgage. If you refi'd, you're probably still at a point you can handle unless you refi's at the last possible moment for the worst terms possible, but that isn't going to be the majority of those people.
The crisis will be in the lower end markets, where those people have way over bought and where most people don't want to live anyway.
Big RE giants weren't sitting on underwater houses. Huge numbers of late to the game following the herd without a clue individuals (remember people lining up for days to put deposits on condo construction in places like Miami) were the underwater cohort. The big operators bought them up at fire sale prices after the crash.
When you buy a house with basically any level of downpayment, you're underwater for multiple years. The commissions, mortgage fees, and moving fees will ensure that. Even if you weren't under water, it doesn't mean you're not going to lose a large sum of money by selling immediately either.
Underwater homes aren't the problem. It's whether you can pay for them or not, and it's all about the monthly payments, not how much you paid. If I pay $1000/month @ x%interest or $1000/month @ y%interest it doesn't matter. It doesn't matter if I have a 15 year mortgage or a 30 year, if I'm paying $1000, and that's what I can afford. If it's $1100, ok, things are getting tight. If it's $1500 I'm going under, probably in 1-2 years.
However we haven't been seeing mortgages that were "free for the first year!" or "limited payments for the first 18 months!". So people are having to foot the full bill from day one, regardless of where the market is going, in 18 months they will be gone, good or bad times.
During the economic crisis in the bay area, during the worst of the worst when the country was dealing with horrendous unemployment, the bay area was 2.2% for those making over 100K. So the money was still there. It's all about if they can afford the house or not, not when a crisis hits. Those big houses don't need to sell. And if you bought back in 2000, you're almost 20 years into your mortgage. If you refi'd, you're probably still at a point you can handle unless you refi's at the last possible moment for the worst terms possible, but that isn't going to be the majority of those people.
The crisis will be in the lower end markets, where those people have way over bought and where most people don't want to live anyway.
23
LeonDurham
2018 May 4, 7:40am
mell says
Nonsense. This argument has been thoroughly debunked multiple times.
But a lot of that shortage was artificially created, for example by dropping the discount window to zero and the resulting pass-on of 3% or less p.a. interest rates guaranteed for a whole decade to big RE giants made them not sell their underwater homes - which they may have been forced to without the Fed stepping in - but in fact double down (while rolling over their existing debt), buying up homes in droves from distressed non-commercial owners and converting them into rental property
Nonsense. This argument has been thoroughly debunked multiple times.
24
bob2356
2018 May 4, 7:49am
pkennedy says
That was what I said. Big RE investors had postive cash flow so the house price and discount rate were irrelevant. Even small RE investers like me did. The roi stayed exaclty the same. People who over committed and took out insane loans that depended on refinancing out the appreciation to stay afloat were the problem.
When you buy a house with basically any level of downpayment, you're underwater for multiple years. The commissions, mortgage fees, and moving fees will ensure that. Even if you weren't under water, it doesn't mean you're not going to lose a large sum of money by selling immediately either.
Underwater homes aren't the problem. It's whether you can pay for them or not, and it's all about the monthly payments, not how much you paid. If I pay $1000/month @ x%interest or $1000/month @ y%interest it doesn't matter. It doesn't matter if I have a 15 year mortgage or a 30 year, if I'm paying $1000, and that's what I can afford. If it's $1100, ok, things are getting tight. If it's $1500 I'm going under, probably in 1-2 years.
That was what I said. Big RE investors had postive cash flow so the house price and discount rate were irrelevant. Even small RE investers like me did. The roi stayed exaclty the same. People who over committed and took out insane loans that depended on refinancing out the appreciation to stay afloat were the problem.
25
mell
2018 May 4, 7:56am
Everybody was underwater. Many big RE firms and banks were on the verge of BK to make way for new ones. The discount rate - basically free money for those speculators - then messed up the natural cycle and artificially inflated prices, worse socializing their losses with backstop guarantees. Until the Fed and govt stop meddling or run out of bullets there will be no true price discovery.
26
LeonDurham
2018 May 4, 9:04am
mell says
Wow--so many inaccuracies there. Any borrowing form the Fed discount rate is documented and viewed as a sign of extreme weakness so banks almost never do it.
Nobody speculated with discount money--that's ridiculous.
What losses were socialized?? Bailouts (save for the auto industry) cost basically nothing.
And the fact that housing prices rebounded so quickly indicated that there was price discovery. Without the bailouts, prices would have done exactly the same thing, except you would have had a lot more hedge funds renting out houses and fewer owner occupied. Not sure how that's better.
Everybody was underwater. Many big RE firms and banks were on the verge of BK to make way for new ones. The discount rate - basically free money for those speculators - then messed up the natural cycle and artificially inflated prices, worse socializing their losses with backstop guarantees. Until the Fed and govt stop meddling or run out of bullets there will be no true price discovery.
Wow--so many inaccuracies there. Any borrowing form the Fed discount rate is documented and viewed as a sign of extreme weakness so banks almost never do it.
Nobody speculated with discount money--that's ridiculous.
What losses were socialized?? Bailouts (save for the auto industry) cost basically nothing.
And the fact that housing prices rebounded so quickly indicated that there was price discovery. Without the bailouts, prices would have done exactly the same thing, except you would have had a lot more hedge funds renting out houses and fewer owner occupied. Not sure how that's better.
27
Al_Sharpton_for_President
2018 May 4, 9:19am
Al_Sharpton_for_President
2018 May 4, 9:19am
What drives swings in a bubble are short termers. RE speculators, home equity extractors etc. I do believe lending standards remain tight compared to anyone with a pulse. A lot of folks are predicting a hiss if a slowdown but not pop. Won’t help the sideliners. But folks have been predicting a crash for some time - insert popcorn munching porn stars gif. -
28
mell
2018 May 4, 9:23am
LeonDurham says
Lol had a good laugh reading it. Bailouts were extremely expensive for the taxpayer while socializing losses for the wealthy. They cost billions. Why doesn't the Fed print money every day and let it rain down on the people?! Lol cost basically nothing right
Nobody speculated with discount money--that's ridiculous.
Lol had a good laugh reading it. Bailouts were extremely expensive for the taxpayer while socializing losses for the wealthy. They cost billions. Why doesn't the Fed print money every day and let it rain down on the people?! Lol cost basically nothing right
29
LeonDurham
2018 May 4, 9:27am
mell says
OK--can you detail the expenses then?
I'm assuming inflation was running rampant, right? With all that Fed money printing? You must be able to show when the inflation kicked in as a direct result of the all the money printing, right?
Lol had a good laugh reading it. Bailouts were extremely expensive for the taxpayer while socializing losses for the wealthy. They cost billions. Why doesn't the Fed print money every day and let it rain down on the people?! Lol cost basically nothing right
OK--can you detail the expenses then?
I'm assuming inflation was running rampant, right? With all that Fed money printing? You must be able to show when the inflation kicked in as a direct result of the all the money printing, right?
30
LeonDurham
2018 May 4, 9:39am
And just, fyi, deflation doesn't simply mean lower prices. It also means reduced employment, lower wages, higher governmental costs (food stamps, welfare, etc.)
Inflation can be bad, but deflation is worse.
Inflation can be bad, but deflation is worse.
31
mell
2018 May 4, 9:59am
LeonDurham says
Have you checked house prices, health insurance, tuition, rents lately? Inflation out of control for years. The EPI is what matters.
mell says
Lol had a good laugh reading it. Bailouts were extremely expensive for the taxpayer while socializing losses for the wealthy. They cost billions. Why doesn't the Fed print money every day and let it rain down on the people?! Lol cost basically nothing right
OK--can you detail the expenses then?
I'm assuming inflation was running rampant, right? With all that Fed money printing? You must be able to show when the inflation kicked in as a direct result of the all the money printing, right?
Have you checked house prices, health insurance, tuition, rents lately? Inflation out of control for years. The EPI is what matters.
32
bob2356
2018 May 4, 10:00am
LeonDurham says
No, there are people more interested in spouting dogma than presenting facts. https://money.usnews.com/investing/articles/2017-01-19/financial-crisis-bailouts-have-earned-taxpayers-billions
In total, $623 billion in taxpayer money was dispersed via bailouts and roughly $698 billion has come back via dividend revenue, interest, fees and asset sales. It doesn't take a math genius to see the bailouts ultimately earned taxpayers more than $75 billion in profit, and that number is still growing.
I still think the banks should have been nationalized and the assets sold off. They are still too big and run by the same people for the most part. There will be a repeat.
The bailouts worked out this time, mostly by luck. Next time probably will not be so lucky.
OK--can you detail the expenses then?
No, there are people more interested in spouting dogma than presenting facts. https://money.usnews.com/investing/articles/2017-01-19/financial-crisis-bailouts-have-earned-taxpayers-billions
In total, $623 billion in taxpayer money was dispersed via bailouts and roughly $698 billion has come back via dividend revenue, interest, fees and asset sales. It doesn't take a math genius to see the bailouts ultimately earned taxpayers more than $75 billion in profit, and that number is still growing.
I still think the banks should have been nationalized and the assets sold off. They are still too big and run by the same people for the most part. There will be a repeat.
The bailouts worked out this time, mostly by luck. Next time probably will not be so lucky.
33
LeonDurham
2018 May 4, 10:03am
mell says
I don't know--Patrick just posted a thread showing rents dropping. What matters is overall inflation--not in a few cherry picked sectors that have unique circumstances.
If it was the Fed causing it, it would affect the entire economy.
Have you checked house prices, health insurance, tuition, rents lately? Inflation out of control for years. The EPI is what matters.
I don't know--Patrick just posted a thread showing rents dropping. What matters is overall inflation--not in a few cherry picked sectors that have unique circumstances.
If it was the Fed causing it, it would affect the entire economy.
34
LeonDurham
2018 May 4, 10:03am
bob2356 says
+1. Absolutely.
I still think the banks should have been nationalized and the assets sold off.
+1. Absolutely.
35
Strategist
2018 May 4, 10:05am
Strategist
2018 May 4, 10:05am
SFace says
We need 1.5 million units of new construction every year. So little was built in the last 10 years, so large is the shortage, it would take years to catch up, even by constructing 2 million units per year. We need 3 million units per year built right away to stabilize the housing market.
The current shortage is around 4 million units, and continues to grow. We are presently constructing only 1.3 million units per year.
Between 2002-2008 homes were popping up like weeds. Thereafter. Home builders ground to a halt in 2009. 2012 and since then homebuilding has lagged.
Until you see new build in the 2m there will he shortages
We need 1.5 million units of new construction every year. So little was built in the last 10 years, so large is the shortage, it would take years to catch up, even by constructing 2 million units per year. We need 3 million units per year built right away to stabilize the housing market.
The current shortage is around 4 million units, and continues to grow. We are presently constructing only 1.3 million units per year.
36
mell
2018 May 4, 10:25am
LeonDurham says
3 reasons why it is not affecting the entire economy equally (it also has been affecting the stock market so you can see it beyond housing):
1) When you get (interest) free money, you will invest/speculate in goods/services with the highest leverage => housing!
2) When you get guarantees of being backstopped by the taxpayer, you will favor those goods/services => housing, education!
3) When the economy is fueled with "free" cash, local goods/services (i.e. which cannot easily be globalized/imported) will inflate => housing, education, healthcare!
The reason rents are not as crazy as SFH prices is precisely because SFH have been bought en masse by the big RE firms with free Fed money and converted to apartments, hence more units to rent, less to buy => renter nation!
mell says
Have you checked house prices, health insurance, tuition, rents lately? Inflation out of control for years. The EPI is what matters.
I don't know--Patrick just posted a thread showing rents dropping. What matters is overall inflation--not in a few cherry picked sectors that have unique circumstances.
If it was the Fed causing it, it would affect the entire economy.
3 reasons why it is not affecting the entire economy equally (it also has been affecting the stock market so you can see it beyond housing):
1) When you get (interest) free money, you will invest/speculate in goods/services with the highest leverage => housing!
2) When you get guarantees of being backstopped by the taxpayer, you will favor those goods/services => housing, education!
3) When the economy is fueled with "free" cash, local goods/services (i.e. which cannot easily be globalized/imported) will inflate => housing, education, healthcare!
The reason rents are not as crazy as SFH prices is precisely because SFH have been bought en masse by the big RE firms with free Fed money and converted to apartments, hence more units to rent, less to buy => renter nation!
37
LeonDurham
2018 May 4, 11:48am
mell says
No--most people who get free money spend it. But even if you are going to invest it, why would a low interest rate cause people to choose riskier investments?
mell says
Well, first off, nothing was guaranteed backstopped. That's a lie. Did IndyMac get made whole? Bears Stearns? Even the folks who got loans weren't made whole. They just were loaned enough money so they didn't fail. They lost billions.
mell says
The economy wasn't fueled with free cash. Local goods/services DIDN'T inflate! That's my point. Education isn't local. If what you say is correct--everything would have seen inflation and that didn't happen.
3 reasons why it is not affecting the entire economy equally (it also has been affecting the stock market so you can see it beyond housing):
1) When you get (interest) free money, you will invest/speculate in goods/services with the highest leverage => housing!
No--most people who get free money spend it. But even if you are going to invest it, why would a low interest rate cause people to choose riskier investments?
mell says
2) When you get guarantees of being backstopped by the taxpayer, you will favor those goods/services => housing, education!
Well, first off, nothing was guaranteed backstopped. That's a lie. Did IndyMac get made whole? Bears Stearns? Even the folks who got loans weren't made whole. They just were loaned enough money so they didn't fail. They lost billions.
mell says
3) When the economy is fueled with "free" cash, local goods/services (i.e. which cannot easily be globalized/imported) will inflate => housing, education, healthcare!
The economy wasn't fueled with free cash. Local goods/services DIDN'T inflate! That's my point. Education isn't local. If what you say is correct--everything would have seen inflation and that didn't happen.
38
JZ
2018 May 4, 12:55pm
JZ
2018 May 4, 12:55pm
I think it is true that there is a lot of money in the capital market. By capital, I mean loans, bonds, stocks that are used to form companies and employ labor.
Those capital market does help huild companies like Telsla, Uber, Snap, etc that can bleed capital for very long time and are still running.
For consumer goods and services to inflate, NOT only you have to think about these jobs created generates demand, BUT ALSO the price cutting and over supply/production fueled by these capitals.
Imagine all credit goes into production and they keep selling goods at loss, how can you have consumer inflation?
What is for certain is that the jobs created by Uber, Telsla, Snap will need houses to live and schools to go to. So let’s just squeeze rent out of them.
This is how ZIRP/QE was carried under the name of stimulating the economy but in reality, it just helps rent seekers to fuck the W2 workers.
Those capital market does help huild companies like Telsla, Uber, Snap, etc that can bleed capital for very long time and are still running.
For consumer goods and services to inflate, NOT only you have to think about these jobs created generates demand, BUT ALSO the price cutting and over supply/production fueled by these capitals.
Imagine all credit goes into production and they keep selling goods at loss, how can you have consumer inflation?
What is for certain is that the jobs created by Uber, Telsla, Snap will need houses to live and schools to go to. So let’s just squeeze rent out of them.
This is how ZIRP/QE was carried under the name of stimulating the economy but in reality, it just helps rent seekers to fuck the W2 workers.
39
LeonDurham
2018 May 4, 1:02pm
JZ says
It was carried to offset the deflationary effects of the housing bust.
This is how ZIRP/QE was carried under the name of stimulating the economy but in reality, it just helps rent seekers to fuck the W2 workers.
It was carried to offset the deflationary effects of the housing bust.
40
JZ
2018 May 4, 1:31pm
JZ
2018 May 4, 1:31pm
It was carried out to make sure everybody is loaded with debt so that wealth is transferred from honest work and wealth creation to rent seekers such as bankers and land lords.
I have no problem for bankers and rent seekers to take on risk, and do what they do. When they levered up and blowed up, let’s do NOT bail out, let them die and drag down everybody with them. It is NOT only honest that way, it also clean the rot and restore displine for the “COMMON” good. In stead the “offset of deflation” encourages more corruption and wealth transfer. I was in post office and wait in line for passports. I was chatting to a young lady and asked her what she does. She told me she does NOT want to work, “how about investing?” that’s what she said.
I have no problem for bankers and rent seekers to take on risk, and do what they do. When they levered up and blowed up, let’s do NOT bail out, let them die and drag down everybody with them. It is NOT only honest that way, it also clean the rot and restore displine for the “COMMON” good. In stead the “offset of deflation” encourages more corruption and wealth transfer. I was in post office and wait in line for passports. I was chatting to a young lady and asked her what she does. She told me she does NOT want to work, “how about investing?” that’s what she said.
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