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The Global Property Boom: Danger and Delusion
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2006 Apr 17, 2:19am 21,468 views 271 comments
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Peter P
2006 Apr 17, 7:20am
But the CS index should be useful to structure lease-option deals. I understand that it is not based on median prices.
I enjoy golf (when the weather is decent in Oregon) but it's become very competitve. There's just so much market share to go around and just so many "events" each year on a local basis that greens fees have leveled off. Every time I visit the OGA site I'm amazed at how many courses I've never played, and probably never will.
Randy H
2006 Apr 17, 7:22am
Unless I'm the seller, then I want to link to median prices, no? And I can play dumb and feign "worry" about some new fangled thing out of Chicago.
Linda,
I've thought about that, all of us going in there. But it'd be a waste since half of em are all anon anyway, so their safety in anonymity means they usually don't stay the course on conversation. Do you think we'd be super blog nerds bullying up another blog? ha ha! we're the patrick gang, so ya'll listen up- stool pigeon CL nerds! wahhahahah!... sorry...
I thought that futures markets basically depended on gullable speculators.
In theory they are supposed to allow people spread the risk, thereby benefiting everyone. For example, a sugar cane farmer might want to sell futures contracts to guarantee a steady price for his crop, while a candy maker might want to purchase the contracts to guarnantee a steady price for his ingredient.
In practice, though, the cane farmer and the candy maker usually have the exactly same view on which way the market is headed, and therefore neither will buy the other's contract. The only person who will disagree with the professionals is the proverbial dentist from Peoria with a brokerage account, and once he loses money on a few contracts, he generally doesn't buy any more. It's also hard to get the dentist to participate in the market in the first place because he doesn't know anything about sugar.
Housing though -- housing could attract a lot of amateur speculators. Everyone has an opinion on housing, and if only a small number of these people start trading futures the market could attract a whole lot of volume.
Is my take on futures accurate, or am I missing something?
Randy H
2006 Apr 17, 7:27am
We should just rebroadcast our threads here into threads there. That way we'd all keep on as we always have, but all the CL trolls would be futilely responding to all of our "posts". I can hear MarinaPrime whining now.
Randy H,
I have a buddy that worked the "Merc" for years. When this topic came up he felt that b/c no one amoung us really knows exactly how these things will trade to go ahead and take a position and see how it plays out. Since it's new territory start with a small position or "paper trade" until you get comfortable. I'd be more concerned that with all of the fanfare these contracts have rec'd that much of the downside expectations may already be priced in.
Peter P
2006 Apr 17, 7:28am
Housing though — housing could attract a lot of amateur speculators. Everyone has an opinion on housing, and if only a small number of these people start trading futures the market could attract a whole lot of volume.
It may. We will see next week.
Peter P
2006 Apr 17, 7:30am
Since it’s new territory start with a small position or “paper trade†until you get comfortable.
Paper trading is useless. Trading is 99.5% psychology and 0.5% data entry error. ;)
Not investment advice
DinOR,
Yes, we should definitely all care. I'm finally beginning to care about the US economy. After years of apathy and disinterest, I finally want to know more. Just wish I had cared about it sooner. I might have managed to invest enough money for a Ha Ha or so by now...
Regarding CL: those Real Estate blogs do stink to high heaven. I couldn't stomach reading there, so I stopped a long time ago. I do wonder who would win in a fight between 20 bears and 20 bulls?
Randy H
2006 Apr 17, 7:30am
Joe Schmoe,
Is my take on futures accurate, or am I missing something?
You are missing the value of "buying down risk". Farmers are a good example, but even better examples are found in big corporate operations. If I have to manage my cash flow, then it may well be _more_ cost effective to pay a premium for a guaranteed future price of an input (or lock in a guaranteed future sales price of an output), than to risk cash flow shortfall which could be even more expensive. Think of the farmer and how much debt costs him. He'll take an future premium up to his debt cost (theoretically).
Yeah, the one downside is that everyone will probably be shorting next week. The homebuilder stocks are already down by almost 50% year-over-year. And all of the media coverage on the bubble has been bearish lately.
It might even pay to be bullish at the CME if, predictably, all of the individual investors are bearish.
Peter P
2006 Apr 17, 7:34am
It might even pay to be bullish at the CME if, predictably, all of the individual investors are bearish.
IMO, I think the IV of those housing futures options may increase due to speculation. Just a thought.
NOT INVESTMENT ADVICE
Randy H
2006 Apr 17, 7:34am
DinOR,
I’d be more concerned that with all of the fanfare these contracts have rec’d that much of the downside expectations may already be priced in.
Exactly, that is the main problem with commodity markets of all ilk. This is why I am very hesitant to buy gold (or GLD or whatever) right now, or ever. Everything I know they know, and they've had priced in for at least long enough to screw me.
The worst guy in there is "Cable-Guy". That guy loves to poke fun of everyone even though he bought like in 96' or something. Oh well. To each his own. I stopped going there because it was unproductive.
Randy H
2006 Apr 17, 7:36am
The IV will be much higher than 1%, lol. But to stretch from 1% historical vol to anything worth trading is going to take quite a lot of speculation.
Peter P
2006 Apr 17, 7:37am
Everything I know they know, and they’ve had priced in for at least long enough to screw me.
But the market is irrational. Once people move from housing to the next "safe and tangible" asset, gold can go up faster than that East Hosebag shitbox.
Peter P,
I only said paper trade b/c I've worn out "Not Investment Advice".
The same said CME guy told me that on most days when he wasn't sure about a commodity he would just go ahead and take a position more or less based on a coin toss just to get a feel for the market that day. If you want to make an omlette!
Peter P
2006 Apr 17, 7:39am
The IV will be much higher than 1%, lol. But to stretch from 1% historical vol to anything worth trading is going to take quite a lot of speculation.
It is all relative. People will just get into huge positions. A storm is brewing...
Randy H
2006 Apr 17, 7:40am
But the market is irrational.
Not to get into a whole rational market/efficient market debate here...
The problem with narrow derivative markets on commodity assets is that reasonably sized players can move the market, and fast. Since there are lots of rational guys out there running models directly on the irrational behaviors they observe, and trading HF sized bets on this, I believe even irrationality is priced in, making it ... well ... all rational. (Note, this doesn't work so well for broad markets or the stock market, because there is not enough arbitrage power to correct bubbles; maybe Gold falls in this category, but housing futures will not).
Peter P,
Thanks for the link. I signed up for the newsletter, what the heck. I think everyone here has done enough research about their perspective markets to qualify as CBA (Certified Bubble Analyst) but if you're the kind of investor that normally throws 10K at a blue chip stock think like a grand (tops) here. Btw, what are the minimums and what's the leverage?
Peter P
2006 Apr 17, 7:45am
The problem with narrow derivative markets on commodity assets is that reasonably sized players can move the market, and fast.
It is very difficult for any player to move the underlying housing index though, given that it is based on repeating sales.
Peter P
2006 Apr 17, 7:47am
Btw, what are the minimums and what’s the leverage?
I think a contract is $250 x index value. So each contract is worth about 70K. Given the low volatility, I do not know what is the performance bond requirement. We will see next week.
Randy H
2006 Apr 17, 7:48am
They can't move the underlying asset price, of course (in this case it's a computed index based on repeating sales). But they can move the market price of the derivative and drive up (or down) the IV.
Randy H
2006 Apr 17, 7:49am
We can track a "paper position" over on my blog, if you guys want to. I'm not going to throw $70K at nuthin until I see just how quickly I'll lose it ;)
O.K Randy, you're on! That would be fun. No, I'm not throwing 70K around either but given the amount of effort we've all expended trying to understand this bubble it would be worth it to me to see how these things trade.
Peter P
2006 Apr 17, 7:58am
Just to have fun, let's have several "model" portfolios.
One simulates a straight hedge on a particular SF house. We will see how well the index tracks over time. This represents a typical homeowner scenario.
One simulates a hedge on monthly mortgage cost of a particular SF house. This reparesents a typical prospective buyer scenario. We probably need to use a combination of housing futures, TY futures and/or swap futures.
Other suggestions?
Randy H
2006 Apr 17, 8:24am
CME Housing Derivatives: I'll start a thread on my blog to so we can set out the specifics sometime in the next day or two. Watch there. Then we can use our findings after a few weeks to feed some discussions here on Patrick.net.
Randy H
2006 Apr 17, 8:25am
(or actually, DinOR and Peter P, you both can start threads there too)
RE: CL, 2 points to make. First, the segregation of CL vs. patrick.net or other "bearish" blogs is probably a reflection of human tendency towards tribalism. We all (bears and bulls) like to be affirmed in views and beliefs, so we gravitate towards like-minded folks. One could argue organized religion serves this purpose as well (along with other purposes, of course). Second, trolling, bullying, bravado, etc. to me all signify one thing - insecurity. If you have to hyper-defend your position, particularly with name-calling, anger, or vitriol, you are likely insecure about your position. This is particularly evident with trolls that feel the need to come on boards like patrick.net to do their troll-thing. A valid question is, how often do bears go on CL and the like to troll or flame-bait? Not nearly as often, as far as I can see!
Nomad
Yeah, I lurked on CL for about 10 min. today. That was all I could stand. I don't want to engage any of those low class numbskulls. I wonder, however, since psychology is so important these days,if it would benefit the decline to post there occasionally.
I Like Randy's idea of posting a previous thread on CL...we'd get our point across and mess with them at the same time.
It's hard to tell who'd win in a clash of the bears vs. bulls. We'd have our facts and charts and they'd have their chickenshit lowbrow tactics. They'd probably run home crying to mommy. Nitwits.
FaceReality was stirring it up on CL recently.
Sometimes you get so tired of their self-righteous BS that ya just need to speak up. I haven't thusfar.
Bhiptis
Doubting the crash is a normal way to feel just before the crash actually happens. Look at the tables and charts and be patient...see how you feel by end of summer. UNSUSTAINABLE
A major correction. Common sense tells me that prices are out of whack and most folks can't afford to buy. Experience tells me that real estate is cyclical. We are at the top of a prolonged cycle.
Linda,
don't bother replying, just checked Bhiptis's IP address and it's that of a troll.
Randy,
Please erase.
This guy’s IP is 69.25.106.2
AKA KG, Liberals are Dumb, GK, Tester, “Jack†Juku, KooKoo, Boomshakalacka, and Jason.
SFWoman Says:
> San Francisco has too many golf courses. They take a lot of
> resources to maintain and fewer and fewer San Franciscans
> are golfing at them.
San Francisco does not have that many golf courses and with the exception of the SFGC that almost nobody uses (since all the old rich blue blooded WASPs don't play much golf any more and the membership is shrinking since they won't let a Catholics, Jew or other minority join) the golf courses in town get a lot of use.
Golf courses don't take much to maintain, it's just that the SF gardeners work less probably anyone in the world so it "costs" a lot to maintain SF golf courses. A cousin recently retired from the SF parks dept. (with a huge pension) and said that it is common for guys to go weeks on end without showing up for work (but still getting paid).
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Today's (Monday April 17, 2006) Financial Times features an in-depth treatment of the global housing market. The headline reads:
The Global Property Boom
Dangers of the Housing Market Delusion
The opening article is by Martin Wolf. Some interesting excerpts:
Higher prices merely redistribute income among residents [as opposed to creating real wealth], mainly from young to old
Where prices have risen far faster than underlying incomes, only two possibilities exist. Either prices have moved to a higher equilibrium level, in which case future purchasers will have to save more and consume less. That would itself have significant economic implications. Or they have reached an unsustainable level, in which case they will fall in real terms. That would have more significant economic implications. [Note that both possibilities have very significant economic implications]
The future will tell us which and where -- possibly quite soon.
Germany, Japan, US, France, UK, Australia, Spain, Ireland, and New Zealand are all covered and plotted comparatively. A quick summary of the most notable comparisons:
Real House Prices:
Ireland, Spain and UK, by far the highest
Next are France, US, Australia, New Zealand.
As of YE 2005, only Australia, and UK prices are heading down.
Lowest (and still falling as of YE 2005) real prices are Japan and Germany. These two countries are the only to be below 100 on the real-price index, meaning RE has been losing value in these countries in real terms from around 1995 (1995=100 on index) to 2005.
Affordability
Least affordable: Ireland, Spain, UK. Australia and New Zealand were trending up with the top 3 until around 2003.
France is the next least affordable, and on track to overtake the UK soon.
US affordability was almost exactly equal to France until around 2002, when US affordability erosion started slowing, and was flat as of YE 2005.
Again, Germany and Japan are the most affordable, ranking around 75 on a 1995=100 index of price-to-income. Since right around 1995, both Japan and Germany have been locked in almost identical, long-term real-price deflation and increasing affordability trends.
What will USD 1M Buy you Abroad?
London: 328 sq ft, 70% of a 1 bed room flat; 30% of a 4 BR house
Tokyo: 522 sq ft, 100% of a 1 bed room flat; 40% of a 4 BR house
New York: 557 sq ft, 110% of a 1 bed room flat; 50% of a 4 BR house
Paris: 594 sq ft, 120% of a 1 bed room flat; 50% of a 4 BR house
Moscow: 624 sq ft, 120% of a 1 bed room flat; 50% of a 4 BR house
Madrid: 1,074 sq ft, 210% of a 1 bed room flat; 90% of a 4 BR house
Mallorca: 1,663 sq ft, 330% of a 1 bed room flat; 140% of a 4 BR house
Manchester UK: 1,843 sq ft, 370% of a 1 bed room flat; 150% of a 4 BR house
Croatia: 3,254 sq ft, 650% of a 1 bed room flat; 270% of a 4BR house
Bulgaria (on coast of Black Sea): 6,803 sq ft, 1,360% of a 1 bed room flat; 570% of a 4 BR house
Note that some of these countries, noticeably Spain, seem to be affordable from a US perspective (in terms of prices), but it ranks very poorly on real-price and affordability ratings due to low incomes and interest rate to inflation mismatch problems (which is a problem for EMU countries such as Ireland and Spain which suffer from France & Germany's deficits in monetary terms).
The original articles are here and here (online version, requires pay subscription). There are a few others which appeared in print that are also surely online. If you have a FT account, you'll have no trouble finding them.
Post by Randy H
#housing