Definitely the same for the West coast. All major metros are feeling it.
The ACD Method
- Thread starter sbrowne126
- Start date
Definitely the same for the West coast. All major metros are feeling it.
There is a saying in the markets, sooner or later, all things return to fair value. Many of the newer market participants don't believe this because their memories are short and they have only experienced one type of market and they become conditioned to it. I find economics fascinating. And I find very people truly understand economics no matter how many blogs they say they read. Prices matter. Value matters. Money matters. Markets are trading where they are for a reason. Eventually value has to be established. History has shown time and time again that eventually this value becomes realized.
It's not a conspiracy to say that are debt markets are not correctly valued. Bill Gross is saying this. Hugh Hendry is saying this. George Soros is saying this. Even Ben Bernanke. There were circumstances that took us away from fair value that could not have really been avoided. But we cannot stay here into perpetuity. Value has to be realized. People don't blindly do things for no reason. There is a reason. But reasons are always temporary. When that reason goes away, value gets discovered once again. This is not a doomsday forecast. In fact, quite the opposite. The world will be a better place for it and markets will actually trade back to fundamentals which everyone here claims they always want.
I look at a house no different then I like at a stock. Houses can be valued on their cash flows they generate and therefore the standard DCF models work fine. When housing becomes too far stretched, they come back down to earth. And no, it does not matter if you live in NY or London or on a lake or with a view or whatever bullshit your realtor fed you to get you to sign the loan documents. Those things are very easy to value and price in. In fact, of all the complex things in finance, housing is probably the easiest to model. Certainly easier then trying to value GOOGL or the path an exotic option can take on a double knockout.
What got me to even write about this in the first place was looking at all these charts that are saying things that contradict the next chart. If incomes are truly not rising and in some cases dropping (ask a programmer what they make today vs 5 years ago), then how can housing prices be at record highs and increasing? If home ownership is really at 50 year lows in real terms, how can sales be going up? And if it's true that hedge funds, banks, pensions, trusts are buying up baskets of homes then is it really true the old saying "people won't sell because they have to live somewhere". That is what my dad always told me growing up. But actually people don't own these homes. Financial players do, and yes, they will the minute they start going down. They always have and they always will.
We have lived so long in this zero interest world that we have become conditioned to it. What happens if that changes. There is no question it will change, the only question will be to the magnitude of the change and what random effects it may cause. Remember, black swans by definition are not predictable. So whatever will happen, we probably won't be ready for it.
It's not a conspiracy to say that are debt markets are not correctly valued. Bill Gross is saying this. Hugh Hendry is saying this. George Soros is saying this. Even Ben Bernanke. There were circumstances that took us away from fair value that could not have really been avoided. But we cannot stay here into perpetuity. Value has to be realized. People don't blindly do things for no reason. There is a reason. But reasons are always temporary. When that reason goes away, value gets discovered once again. This is not a doomsday forecast. In fact, quite the opposite. The world will be a better place for it and markets will actually trade back to fundamentals which everyone here claims they always want.
I look at a house no different then I like at a stock. Houses can be valued on their cash flows they generate and therefore the standard DCF models work fine. When housing becomes too far stretched, they come back down to earth. And no, it does not matter if you live in NY or London or on a lake or with a view or whatever bullshit your realtor fed you to get you to sign the loan documents. Those things are very easy to value and price in. In fact, of all the complex things in finance, housing is probably the easiest to model. Certainly easier then trying to value GOOGL or the path an exotic option can take on a double knockout.
What got me to even write about this in the first place was looking at all these charts that are saying things that contradict the next chart. If incomes are truly not rising and in some cases dropping (ask a programmer what they make today vs 5 years ago), then how can housing prices be at record highs and increasing? If home ownership is really at 50 year lows in real terms, how can sales be going up? And if it's true that hedge funds, banks, pensions, trusts are buying up baskets of homes then is it really true the old saying "people won't sell because they have to live somewhere". That is what my dad always told me growing up. But actually people don't own these homes. Financial players do, and yes, they will the minute they start going down. They always have and they always will.
We have lived so long in this zero interest world that we have become conditioned to it. What happens if that changes. There is no question it will change, the only question will be to the magnitude of the change and what random effects it may cause. Remember, black swans by definition are not predictable. So whatever will happen, we probably won't be ready for it.
On your subject, I tend to read a lot, see a lot, and just make a mental note of it.
Since 2012 or 2013, I've been reading about hedge funds, pension funds and insurance companies buying rental properties in the search for yield. I thought nothing of it, it's normal.
Every time Bernanke announced more QE, Asian markets went up. Yup, that money that was supposed to help the real economy in the States found its way to Asia in search of higher yields. Strangely, I've never seen a single post on ET saying WTF, why is our money boosting Asian markets.
Then when the US QE party was over, and I saw crap Thai trade data, out of the blue the local market goes up. So I ask my broker here what the hell is going on and he tells me the ECB is likely going to do QE so people are getting in early. Well that money found its way here too and the market went up again.
So for sure easy money has found its way into property. Just a few days ago one of the wire services I have on my Twitter feed put out a piece on the lines of 'when your landlord is a hedge fund'; I didn't bother reading it, old news.
At the first hint of tapering, the Thai market went down. When cheap money isn't going to be cheap any more, best to get out early and leave others holding the baby. When the cost of money goes up, at some point rental properties will not make as much sense and the players will unwind their positions. Since your average Joe doesn't say let's buy a house the same way he says let's go out for dinner, the price decline will have to be steep to bring in buyers, either individuals or financial players who may take a longer term view but still won't pay stupid money to own.
As for wages not keeping pace, that's been a sad reality for decades. Back in the '60s my dad was a senior Civil Servant. About 13-15 months of his pay would be able to buy what in America is called a townhouse, cash. That beast became extinct long ago. When I was confirmed in my position as an Assistant Manager back in the '70s, a year's pay would buy an imported 1800cc car. I haven't owned a car for more than 20 years now, hate the bloody things, but last time I was with someone here looking, the current equivalent salary wouldn't even buy you half of an eco car, one of those 1200cc jobs.
Wages simply have not kept pace with the cost of goods and services. We could all write long stories about the whys and wherefores, how wonderful globalisation has been in reducing the cost of goods and how cheap TVs and so on are, that is if you have a job that allows you to buy those things that food stamps don't buy.
It's a reality that the less you earn, the higher the percentage of disposable income you spend on necessities, so back in the day if you were middle class and careful with your money and invested, you would have a comfortable retirement. Lately I've been seeing endless articles about why people can't afford to retire nowadays.
When the surplus shrinks or becomes non-existent, you don't get to build wealth. I thought this chart I saw recently was pretty fascinating, both for the sheer volume of information conveyed succinctly, as well as how it told a story of the reality of life today. Solid well sourced data, not tabloid sensationalism.
http://www.visualcapitalist.com/wealth-inequality-problem-one-chart/
Since 2012 or 2013, I've been reading about hedge funds, pension funds and insurance companies buying rental properties in the search for yield. I thought nothing of it, it's normal.
Every time Bernanke announced more QE, Asian markets went up. Yup, that money that was supposed to help the real economy in the States found its way to Asia in search of higher yields. Strangely, I've never seen a single post on ET saying WTF, why is our money boosting Asian markets.
Then when the US QE party was over, and I saw crap Thai trade data, out of the blue the local market goes up. So I ask my broker here what the hell is going on and he tells me the ECB is likely going to do QE so people are getting in early. Well that money found its way here too and the market went up again.
So for sure easy money has found its way into property. Just a few days ago one of the wire services I have on my Twitter feed put out a piece on the lines of 'when your landlord is a hedge fund'; I didn't bother reading it, old news.
At the first hint of tapering, the Thai market went down. When cheap money isn't going to be cheap any more, best to get out early and leave others holding the baby. When the cost of money goes up, at some point rental properties will not make as much sense and the players will unwind their positions. Since your average Joe doesn't say let's buy a house the same way he says let's go out for dinner, the price decline will have to be steep to bring in buyers, either individuals or financial players who may take a longer term view but still won't pay stupid money to own.
As for wages not keeping pace, that's been a sad reality for decades. Back in the '60s my dad was a senior Civil Servant. About 13-15 months of his pay would be able to buy what in America is called a townhouse, cash. That beast became extinct long ago. When I was confirmed in my position as an Assistant Manager back in the '70s, a year's pay would buy an imported 1800cc car. I haven't owned a car for more than 20 years now, hate the bloody things, but last time I was with someone here looking, the current equivalent salary wouldn't even buy you half of an eco car, one of those 1200cc jobs.
Wages simply have not kept pace with the cost of goods and services. We could all write long stories about the whys and wherefores, how wonderful globalisation has been in reducing the cost of goods and how cheap TVs and so on are, that is if you have a job that allows you to buy those things that food stamps don't buy.
It's a reality that the less you earn, the higher the percentage of disposable income you spend on necessities, so back in the day if you were middle class and careful with your money and invested, you would have a comfortable retirement. Lately I've been seeing endless articles about why people can't afford to retire nowadays.
When the surplus shrinks or becomes non-existent, you don't get to build wealth. I thought this chart I saw recently was pretty fascinating, both for the sheer volume of information conveyed succinctly, as well as how it told a story of the reality of life today. Solid well sourced data, not tabloid sensationalism.
http://www.visualcapitalist.com/wealth-inequality-problem-one-chart/
Let me add one more thing about when housing prices drop. In 2008, when housing prices dropped, what allowed that to recover so quickly was the "drop" in mortgage rates. In other words, people could get back into their homes not only at lower prices but with a much lower monthly payment as the interest rates were dramatically lower. Now the problem is going to be, as housing prices go down, your mortgage payment will go up!!!!! In other words, it will actually become more expensive for new buyers to buy your discounted house because the total monthly payment will be higher at higher interest rates. That means the "real fair value" is not so much the value of where the home needs to trade at, but where the monthly mortgage payment needs to trade at. Because the buyer HAS to qualify for that payment via their income.
Maverick, an interesting thesis to be sure. It would help to see current versions of the more out of date charts you posted though I don't doubt what the trend has been--just curious where things stand now. The home ownership chart looks remarkably similar to a US workforce participation chart.
Truth: "We have lived so long in this zero interest world that we have become conditioned to it." If you had told me in 2008 we would have zero interest rates for 8 years (and counting) with a rising stock market, etc, I would probably have thought you were crazy. Now, I have no clue when this ends or normalizes.
My conviction is that central banks want inflation to debase the enormous outstanding debt piles and they are willing to patiently pursue inflation for as long as it takes--potentially for many years to come though I doubt it will take that long. The good outcome would be inflation that gradually rises and allows a slow normalization of policy. The bad outcomes are various but inflation that accelerates very aggressively or a loss of faith in a major currency are a couple of possible scenarios. None of this really helps the general economy and it is downright damaging to savers and capital allocation over the longer run. I don't really view these possibilities as black swans though their actual form and timing may be surprising.
Ultimately, value will govern pricing in the long run. Inflation will beget rising rates. Rising rates should reprice assets to underlying values. I expect real estate would be particularly vulnerable to this repricing.
Truth: "We have lived so long in this zero interest world that we have become conditioned to it." If you had told me in 2008 we would have zero interest rates for 8 years (and counting) with a rising stock market, etc, I would probably have thought you were crazy. Now, I have no clue when this ends or normalizes.
My conviction is that central banks want inflation to debase the enormous outstanding debt piles and they are willing to patiently pursue inflation for as long as it takes--potentially for many years to come though I doubt it will take that long. The good outcome would be inflation that gradually rises and allows a slow normalization of policy. The bad outcomes are various but inflation that accelerates very aggressively or a loss of faith in a major currency are a couple of possible scenarios. None of this really helps the general economy and it is downright damaging to savers and capital allocation over the longer run. I don't really view these possibilities as black swans though their actual form and timing may be surprising.
Ultimately, value will govern pricing in the long run. Inflation will beget rising rates. Rising rates should reprice assets to underlying values. I expect real estate would be particularly vulnerable to this repricing.
Just to be clear, I think this is still a few years away. And timing it will be next to impossible.
Mav, I have good news and bad news.
The good news is you were probably right.
The bad news is you were probably right.
Scientific American, no less, has reported that your dog may not actually love you.
If you have a dog, that might be a blow. I have no pets, and have never owned a house. Freedom gives you a sense of lightness that being loved can't.
Enjoy the rest of your weekend.
http://www.ibtimes.com/real-secret-life-pets-6-things-your-dog-really-thinks-about-you-2389922
The good news is you were probably right.
The bad news is you were probably right.
Scientific American, no less, has reported that your dog may not actually love you.
If you have a dog, that might be a blow. I have no pets, and have never owned a house. Freedom gives you a sense of lightness that being loved can't.
Enjoy the rest of your weekend.
http://www.ibtimes.com/real-secret-life-pets-6-things-your-dog-really-thinks-about-you-2389922
I live out in the San Diego area and residential real estate prices are incredibly expensive. Was very hard for me to rationalize why people were willing to spend so much on these unimpressive properties, until I did a little arithmetic on a 30-year mortgage repayment schedule:
Amount borrowed: $650,000
Interest rate paid: 3.44% (today's prime)
Monthly payment: $2,897
Amount borrowed: $458,000
Interest rate paid: 6.50% (rate in year 2005)
Monthly payment: $2,897
If the Fed were to somehow lose control of interest rates, housing once in again is primed to be ticking time bomb, even though subprime is not an issue this time around. Imagine the following scenario:
1) Guy buys shed sized house in San Diego for $650,000 today via historically low mortgage rates.
2) Fed loses control and interest rates rise much faster than anticipated, and mortgage rate climbs to 2005 levels of 6.5%.
3) Guy has no problem making monthly payments, but suddenly needs to sell home to change locations.
4) Due to "normalized" interest rates, prospective buyers can only afford to pay $458,000 for home he purchased for $650,000 (scenario assumes no economic recession dampening their ability to make high monthly payments). He angrily sells for $458,000 - defaults on remaining debt, along with millions of his fellow countrymen. Mortgage issuers take massive writedowns on loan portfolio - financial system once again is brought to the brink. Except this time around the Fed has lost all credibility with the world, and therefore cannot rescue the system. Collapse.
I'm really starting to believe the Fed is running out of bullets here; not to mention some of the states within our country. For example, did you know that the NJ treasury justifies its teachers pension funding by penciling in a 12% per annum projected return from the S&P500 over the next 10 years? If the S&P 500 returns anything less than 8% per year, the fund will be insolvent within 6 years.
The best thing going for the US right now is that the rest of the world is such a mess; our country would be in serious trouble if Russia or China or one of these other countries could ever establish itself as a higher-yielding, safe haven for foreign investment.
Amount borrowed: $650,000
Interest rate paid: 3.44% (today's prime)
Monthly payment: $2,897
Amount borrowed: $458,000
Interest rate paid: 6.50% (rate in year 2005)
Monthly payment: $2,897
If the Fed were to somehow lose control of interest rates, housing once in again is primed to be ticking time bomb, even though subprime is not an issue this time around. Imagine the following scenario:
1) Guy buys shed sized house in San Diego for $650,000 today via historically low mortgage rates.
2) Fed loses control and interest rates rise much faster than anticipated, and mortgage rate climbs to 2005 levels of 6.5%.
3) Guy has no problem making monthly payments, but suddenly needs to sell home to change locations.
4) Due to "normalized" interest rates, prospective buyers can only afford to pay $458,000 for home he purchased for $650,000 (scenario assumes no economic recession dampening their ability to make high monthly payments). He angrily sells for $458,000 - defaults on remaining debt, along with millions of his fellow countrymen. Mortgage issuers take massive writedowns on loan portfolio - financial system once again is brought to the brink. Except this time around the Fed has lost all credibility with the world, and therefore cannot rescue the system. Collapse.
I'm really starting to believe the Fed is running out of bullets here; not to mention some of the states within our country. For example, did you know that the NJ treasury justifies its teachers pension funding by penciling in a 12% per annum projected return from the S&P500 over the next 10 years? If the S&P 500 returns anything less than 8% per year, the fund will be insolvent within 6 years.
The best thing going for the US right now is that the rest of the world is such a mess; our country would be in serious trouble if Russia or China or one of these other countries could ever establish itself as a higher-yielding, safe haven for foreign investment.
Canada might be in a bigger bubble then we are.