Half a million dollars for a 2 bedroom home in Compton: Hipsters and gentrification lovers unite!

In the last housing mania, people drank multiple rounds of the Kool-Aid and lost all perspective. That is to be expected when we live in the land of Hollywood and living in a world of make believe is pretty much par for the course. In fact, faking it until you make it is now a legitimate way to make a living. Doctored up photos with so many filters you would think you are purifying water to drink out of the L.A. River. SoCal is the land of rental Armageddon and delusional Taco Tuesday baby boomers who run around with their ugly looking dogs in “baby” strollers and think their crap shacks are worth one million dollars. So in the last mania, areas that were legitimately tough somehow carried ridiculous price tags. The pitch was that an area was going to gentrify because “no more land is being made!” or that it was in the county. We are now seeing some outrageous prices in areas that still have legitimate struggles. Today we go back to Compton.

From what you hear from the house horny crowd, this is a great deal! Don’t wait and give your mortgage broker a call! Don’t miss out on this boom. Trump is a real estate guru therefore all real estate is going to go up in their mindset (as if Trump is concerned about Compton or California for that matter).

The mania and Kool-Aid is running freely at this point.

Since we have a shortage of construction labor right now, and since the building industry relies on inexpensive laborers from Mexico to do much of it’s work, will Trump build his wall with illegal aliens?

Bloomberg: Trump Wants to Build a Wall. Finding Workers Won’t Be Easy

President Donald Trump’s proposed border wall faces many obstacles. One of the tallest: building it without undocumented workers.

A labor shortage has left few hands to build houses and factories in the region, where wages have already been rising and projects delayed. Now, the president’s plan for “immediate construction of a border wall” will force the government to find legal builders for a project that could employ thousands if not tens of thousands. About half of construction workers in Texas are undocumented, and nationwide 14 percent lack authorization for employment in the U.S., according to the Workers Defense Project, an Austin group that advocates for undocumented laborers.

“If he is going to build a wall with legal workers in Texas, he is going to have a very hard time,” said Stan Marek, chief executive officer of Marek Brothers, a Houston commercial builder. “There is a real shortage of legal labor.”

The wall, whose cost has been estimated as high as $25 billion, is shaping up to be one of America’s biggest public-works projects since the building of the Hoover Dam during the Great Depression. Trump, who has promised to create jobs by investing more than half a trillion dollars in massive infrastructure projects, will face practical obstacles. While many people think of the border as little more than desert, the almost 2,000-mile terrain includes sand dunes, arroyos and craggy mountains. New roads and temporary concrete plants may have to be built to reach the most desolate areas.

“Contractors in general throughout the country have been saying it’s been difficult to get workers,” said Ken Simonson, chief economist at the Associated General Contractors of America. “Getting workers who would be vetted to work on government projects and then getting them to these locations, which are pretty far away, would be among the many challenges in getting this done.”

2016’S Homeownership Rate Was The Lowest Since 1965

Yesterday, the Census Bureau released its measure of homeownership for 2016 and the annual average for 2016 was 63.4 percent. That’s the lowest rate measured since 1965 when the homeownership rate was 63 percent.

2016 was also the twelfth year in a row in which the homeownership rate was lower than the year prior. In other words, the homeownership rate in the US has been falling since 2004.

I don’t mention this as evidence one way or another about the state of the US economy. The homeownership rate should not be seen as some sort of general index about prosperity in the United States or anywhere else. After all, homeownership rates in Switzerland tend to be considerably lower than those in the United States. Switzerland’s homeownership rate is approximately 45 percent. Meanwhile, the homeownership rate in Italy, where the economy is on the brink of a banking crisis, is quite high, at 72 percent.

Increasing Mortgage Rates May Increase Downward Pressure On Housing Demand

Today, the Financial Times reported that mortgage rates hit a 2017 high. The following chart from the St. Louis FRED’s system is a bit behind the article’s data, but it also shows that mortgage rates are higher:

At what point does this impact the housing market? We don’t know – there is no basic rule of thumb linking basis point increases in mortgage rates with home sales. However, data shows that both new and existing home sales may be peaking:

The above chart shows new and existing home sales. Both sets of data are recalibrated to a base 100 beginning on the last day of the last recession. Existing sales (in red) have been reported at the same level (~110 on the chart) since July 2105. This is by far the larger market. New homes sales (in blue) increased in 2H 2016, but have since printed at approximately the same level.

At some point, interest rates will increase to a level where they will construct demand.

Danger: Financial Deregulation Is A Very Bad Idea

President Trump’s wants to weaken, if not eliminate, the Dodd-Frank Act; and he wants to remove the requirement that financial brokers act as fiduciaries when advising clients making retirement investment decisions.

These are bad ideas. To be fair, the plan will not harm everybody, just almost everybody; and they will help some, at least in the short run. If you want to understand who the losers and winners will be, ask yourself who were the winners and losers during the lead up to the global financial crisis, the crisis itself, and the fallout thereafter.

During the housing bubble, financial services firms benefitted by allowing homeowners with unsound financial situations to buy homes by taking out subprime mortgages they would not be able to service. Many of these home owners benefitted before the crisis, but once the crisis hit lost their homes, and in many cases their jobs too. In the lead up to the crisis, financial services firms collected large fees related to those mortgages, and greatly magnified those fees by trading associated financial derivatives.

I suggest that President Trump’s plan will set a future crisis in motion. A good way to understand the negative dynamic that his plan will generate is to take a look at the Rethinking the Financial Crisis, a collection of readings edited by luminaries Alan Blinder, Andrew Lo, and Robert Solow, which was jointly published by the Sage Foundation and the Century Foundation.

In this volume, my colleague Meir Statman and I discuss the tug-of-war that characterizes the ebb and flow of financial regulation in the U.S., as we swing from strong regulation to weak regulation during periods of economic expansion, and then from weak regulation to strong regulation after periods of crisis. One reason why the country swings from one regulatory extreme to the other is our collective susceptibility to recency bias, the psychological pitfall in which we attach too much importance to recent events relative to past events. Recency bias is an important feature of the financial instability hypothesis, the framework developed by the late economist Hyman Minsky whose brilliant work explains how financial crises develop.

President Trump succumbs to some of the most important pitfalls psychologists have identified when it comes to forming judgments and making decisions. One such pitfall is availability bias, the tendency to form judgments based on information that is readily available and easily retrieved from memory, relative to information that requires more effort to generate.

Information that comes from personal experiences is readily available. The Wall Street Journal quotes President Trump’s rationale for weakening Dodd-Frank. President Trump speaks about “so many people, friends of mine” that “can’t get any money because the banks just won’t let them borrow” with the reason being “the rules and regulations in Dodd-Frank.”

Reality bats last.

3 reasons why Goldman Sachs is shifting its economic outlook

After President Donald Trump won the election, economic markets surged with hope as many economists predicted growth due to Trump’s stimulus plan.

Even consumers were more optimistic after the election, hopeful of a future of economic growth and new jobs.

However that optimism, being called the Trump Effect, could be dying as economists reverse their predictions for 2017.

It seems Trump’s intense focus on issues such as trade tariffs and immigration has Goldman Sachs economists doubting the possibility of financial stimulus, according to an article by Julie Verhage for Bloomberg.

From the article:

“Following the election, the positive shift in sentiment among investors, business, and consumers suggested that the probability of tax cuts and easier regulation was seen to be higher than the probability of meaningful restrictions to trade and immigration,” Goldman Sachs Group Inc. economists led by Alec Phillips wrote in note published late last week. “One month into the year, the balance of risks is somewhat less positive in our view.”

Here are the three reasons Phillips lays out as the reasons for the shift in sentiment:

1. Obamacare struggle is a sign of things to come

Phillips explains that instead of quickly replacing the Affordable Care Act, Republicans are facing many obstacles, perhaps a sign of what’s to come for future financial stimulus plans.

2. Polarization of political parties is getting worse

Cooperation between the two political parties looks further out of reach one month into the new administration, leaving economists to presume issues requiring bipartisan support will face major obstacles.

3. There’s a real possibility of market disruption

Economists insist that Trump’s actions in trade and immigration will do little to support the economy, and could even disrupt it.