Nov PPI 0.5% (5.0% yoy), core PPI 0.2% (1.9% yoy)
Ya don't set monetary policy to the topline number.On the consumer level, its evident manufacturers and retailers are absorbing most of the gains in input prices.
NO INFLATION !
Real Estate is dying? Investment-wise what is the next Asset Class Du Jour?
- Thread starter lrm21
- Start date
Nov PPI 0.5% (5.0% yoy), core PPI 0.2% (1.9% yoy)
Ya don't set monetary policy to the topline number.On the consumer level, its evident manufacturers and retailers are absorbing most of the gains in input prices.
NO INFLATION !
I think this is a logical view, but it's also where the real risk in today's market comes into play.
What has changed in the past few years? The amount of leverage available to buyers, which has allowed for a significant -and temporary- increase in the pool of buyers that can only last as long as the easy credit lasts. Mortgages available at dramatically low rates to pretty much anyone with a pulse. Interest rate only loans with no principal payments for the first ten years. The ability for a couple in their early 20's with $35,000 net income to buy a $250,000 house (or condo rather, at least in my neck of the woods). Add in the natural tendency to extrapolate -what's going on now will keep going on ad infinitum- and we have the cocktail everyone is now drinking.
Leverage has boosted valuation by increasing demand on terms that are not sustainable. This excess leverage creates serious problems b/c valuations are thrown out of wack by buyers taking on more leverage than is prudent and paying valuations that make no logical sense in the long run.
Whether it goes up or down is only irrelevant to homeowners with long term commitments and solid financial means. It's very relevant to the marginal buyers who find themselves struggling to make payments on a house they are now upside down on b/c the easy credit terms have vanished and the demand driven valuations have vanished with it. When you are hurting and upside down, there is little incentive to stick around.
And even if the larger pool of buyers is solid, which is debatable, you have to consider the 'tipping point.' How many people have to catch the flu before it self propagates into a major outbreak. How many homeowners have to get burned or throw in the towel before sentiment and a fear based credit crunch takes hold.
I tend to agree with Old Trader (as usual) although Dark is a quite bright, engaging young mind. IMO Real Estate for many years was a ridiculously under priced asset. Why? Demographics.
Even after a nice run up in the 1980's as rates fell, prices failed to anticipate many new phenomena.
Heavy immigration caused a trickle up in values. The unmarketable old home in a unglamorous area is sold to a Mexican family allowing the old homeowner to move up to the next level causing a domino like cascade.
People are living longer. That condo in Miami Beach that would have been subject to an estate sale a generation ago now has an 88yo woman living in it.
More single working women. RE bear's focus on two wage earning spouses struggling to payoff a huge mortgage. However in most major cities a plethora of singles have created two housing units where once there was one.
Liquidity. Not just lower rates. I'm amazed at how many parents of friends and relatives who appeared to be of "modest" means are leaving quite healthy seven figure estates. Twenty years of stock and property appreciation are certainly leaving a younger generation flush with cash.
None of this suggests that RE cannot "sell off." However I see little compelling evidence to suggest a crisis. Many reasons I hear on this board as bear tout are bull items. Lower dollar? Bullish as hell. The Fed raising rates to protect the dollar? No chance. In fact I'm short the Euro (on the highs) and I'm afraid a sharp rebound in the dollar could be bearish long term for the economy. But when you guys tout a credit collapse scenario based on a dollar slide you're building a bull case for real estate. You think anyone is going to sell hard assets when the dollar is breaking? Think again. Assets are a HEDGE against a weak dollar. Cash is king in deflation not during periods of inflation.
If you think rates are going higher then short Treasuries. I wouldn't extrapolate higher rates necessarily equaling lower RE valuations.
Even after a nice run up in the 1980's as rates fell, prices failed to anticipate many new phenomena.
Heavy immigration caused a trickle up in values. The unmarketable old home in a unglamorous area is sold to a Mexican family allowing the old homeowner to move up to the next level causing a domino like cascade.
People are living longer. That condo in Miami Beach that would have been subject to an estate sale a generation ago now has an 88yo woman living in it.
More single working women. RE bear's focus on two wage earning spouses struggling to payoff a huge mortgage. However in most major cities a plethora of singles have created two housing units where once there was one.
Liquidity. Not just lower rates. I'm amazed at how many parents of friends and relatives who appeared to be of "modest" means are leaving quite healthy seven figure estates. Twenty years of stock and property appreciation are certainly leaving a younger generation flush with cash.
None of this suggests that RE cannot "sell off." However I see little compelling evidence to suggest a crisis. Many reasons I hear on this board as bear tout are bull items. Lower dollar? Bullish as hell. The Fed raising rates to protect the dollar? No chance. In fact I'm short the Euro (on the highs) and I'm afraid a sharp rebound in the dollar could be bearish long term for the economy. But when you guys tout a credit collapse scenario based on a dollar slide you're building a bull case for real estate. You think anyone is going to sell hard assets when the dollar is breaking? Think again. Assets are a HEDGE against a weak dollar. Cash is king in deflation not during periods of inflation.
If you think rates are going higher then short Treasuries. I wouldn't extrapolate higher rates necessarily equaling lower RE valuations.
Hey Pabst, nice to see ya back - again its yes and no
A weaker dollar is bullish as long as we can maintain control, and the fed won't strangle us with rates as long as they maintain control.
The oh shit scenario arises from the real, albeit small, possibility of the fed losing control.
To use an analogy I've gone to before, Greenspan is like a jockey riding a trained elephant. His power is psychological. If the elephant stampedes, there is nothing we can do.
In our case, the elephant is foreign central banks holding US treasuries. Now, I don't think the elephant is going to stampede for no reason, and Greenspan is a pretty damn good jockey, which is why the probability of a catastrophe is relatively low. But it still exists, and the probability is high enough to be of concern.
If a massive redemption scenario unfolds, US interest rates will rise sharply and there will be nothing -absolutely nothing- that Greenspan will be able to do to stop it (short of inducing hyperinflation, which is no solution).
Dark: The most probable scenario is that Asian Central Banks will sell treasuries on dollar strength, not on dollar weakness. Why would Asia want to put pressure on the dollar? Asia is protecting the dollar. If anything Asia will add to positions on further $ weakness. Besides I really don't think the admin is concerned with the dollar. Except for an uptick in commodity prices the weak dollar has been transparent to most consumers and a boon to American equity holders.
I agree! That's why I think the risk of catastrophe is small but still real. Hence the russian roulette references. Chances are we pull it off... but at the same time we are running some genuinely frightening risks.
Essentially we are depending on Asian Central Bankers (not to balk) and US politicians (not to spend so wildly that we give our creditors a stroke). When you consider that our well being is in the hands of foreign central bankers and know nothing politicians, that's some frightening shit. Not to mention the global terror thing and the potential for recession / inflation to creep in through other means.
What happens if we slip into a recession regardless of Asian CBs holding the line / picking up our tab, and Asia experiences a double whammy of declining exports and massive treasury losses? What would keep them from saying sayonara (or whatever goodbye is in Chinese)?
So again, I agree that the probable scenario is for things to work out more or less... but we are playing for very high stakes and the potential for catastrophe is not negligible. We could be painting ourselves into the mother of all corners.
Darkhorse:
First, thanks for a couple of well thought out posts.
Let me say that my ability to read the future in regards to real estate is low. You would have to be blind not to see some of the credit abuses that prevail in today's market. And one has to wonder about the wisdom of those who are out getting adjustable rate loans in a market with 50 years lows in rates, or worse, interest only loans.
Yet there was a time that I lived through as a homeowner when the rates went to 20%. (This is an approximate number). That was back in the early 1980's. In the area I lived in at that time what happened was that it became fairly difficult to sell a house. The market response though was to use creative financing to sell the house. Creative financing was just an alternate form of financing that encompasses a large variety of techniques, but in essence means that you sell your house by "wrapping" around existing financing, thus enabling you to offer lower interest rates than the prevailing market rate. This creative financing created an incentive which allowed people to sell their house. But mostly what I saw was flat prices, no panic, just alot of difficulty in selling.
Keep in mind too that most of my adult life interest rates hovered around 10% plus or minus a little. None of this caused undue problems for real estate.
So when you say that higher interest rates may well create a problem for real estate.....I hear what your saying, I agree with the logic, but I look at the early 80's for example and see a specific example where rates went through the roof, and a collapse in real estate did not result.
Just to put this in perspective, I bought a house at that time where the mortgage was 11.75%. And I believed I got a great deal! Within the next 18 months the rates went to 20%. That was a large adjustment in rates! Even recently it wasn't that long ago when mortgage rates were in the 9-10% area.
My belief is that real estate prices correlate better with employment trends than with interest rates. Now, let me also say that the idea that employment trends are a good correlation doesn't necessarily make me feel any better either. Employment trends in the US don't give alot of reason to jump for joy. But I think the point is that with solid employment rising rates may not be as big an issue as we all believe.
In a long term sense I don't see how anyone can help but believe that our currency is constantly debased by government. And therefore borrowing money to buy assets makes sense. Now of course when you borrow money it has to be repaid, and therefore the borrow should borrow responsibly. And I think it is clear that there is some irresponsible borrowing today, and some very irresponsible lending. At some point this will likely lead to some problems at the margin, but again, the question is whether a problem of this type leads to a massive decline in real estate.
It's interesting to work the numbers out. If mortgage rates were to rise to let's say 9% from let's say 6%, the mortgage payment (PI) on a $100K mortgage goes from $600 per month to $800. If we assume that the value of real estate must therefore decline to a point where the payments would be the same, that $100K must go down to about $80K. In other words, the $80k mortgage at 9% would then be about $600. To go one step further, this means that it takes approximately 11-12 years of payment on a 30 year loan to build $20K in equity. In other words, the buyer at todays prices and mortgage rates would be essential even in 11-12 years assuming he had the ability to pay.
Now whether a homeowner would look at it this way I can't say. Would he simply walk away? In CA for instance he can give the house back...the lender doesn't pursue him for a deficiency judgment if they take the house back...it's what they call a one-action state. On the other hand, there are numbers of states where a deficiency judgement can be pursued upon default.
In fact, an interesting question arises when we look at the automobile industry. Here people buy cars that depreciate with loans. At the end of the loan they own the car free and clear. Could the real estate market survive a model such as the automobile industry?
It's a complicated topic. But it's clearly complicated by the concept that people want to own a home. It's not just an investment. It's the place they live. And therefore, I would not expect to see people react in the fashion that people react when they trade stocks.
OldTrader
I've been reading this thread for a while and its great to hear all these varying opinions.
I currently own several SFRs and apartment complexes and I am looking to acquire more. Note I don't have the experience some here possess (<10years), but where I live (Santa Barbara/Montecito), prices historically just do not drop, they have plateaued at worst. Average local home price is >1mil and entry is 750k. It has been steadily appreciating at 10-12% per year for the last five years and people are still buying in good volume.
OldTrader, I agree with you, when prices are moving up you hold or buy. It is not very complicated - you need to follow one simple rule - do not over - extend yourself and have cash on the sidelines (most lenders will tell you what debt/income ratio you should follow and hence not give the loan if you look weak).
Mike
P.S. My wife and I manage over 85 tenants in various properties. From experience, the ones with bankruptcies, bad credit, etc were, 90% of the time, home builders and contractors.
I currently own several SFRs and apartment complexes and I am looking to acquire more. Note I don't have the experience some here possess (<10years), but where I live (Santa Barbara/Montecito), prices historically just do not drop, they have plateaued at worst. Average local home price is >1mil and entry is 750k. It has been steadily appreciating at 10-12% per year for the last five years and people are still buying in good volume.
OldTrader, I agree with you, when prices are moving up you hold or buy. It is not very complicated - you need to follow one simple rule - do not over - extend yourself and have cash on the sidelines (most lenders will tell you what debt/income ratio you should follow and hence not give the loan if you look weak).
Mike
P.S. My wife and I manage over 85 tenants in various properties. From experience, the ones with bankruptcies, bad credit, etc were, 90% of the time, home builders and contractors.