Apr252017
Existing home sales are still below normal
Back in 2013, I predicted that existing home sales would remain low for the foreseeable future. That prediction proved to be correct, however, if you are interested on buying a home you can check with homes for sale barton the different options available.
By 2013 it was clear that the banks were avoiding or delaying foreclosure or short sale until prices rose high enough for them to avoid losing money on the sale. They had no choice. When the banks were exposed to $1 trillion in unsecured mortgage debt, they simply couldn’t take the losses.
Clearly, no matter what else happened in the market, lenders kicked the can with loan modifications and suspend homes in cloud inventory for as long as necessary. As I noted back in 2013, since problems in the market can’t be resolved by lowering price, the inevitable problems that arise will cause sales volumes to remain weak. As a result, you can expect years of low sales volumes in residential real estate.
After making that prediction, 2014 turned out to have lower sales volumes than 2013, and 2015 only returned to 2013 levels. In both instances, the market underperformed expectations, and economists were at a loss to explain it.
The fantasy among banks and policy makers was that a resurgent economy would bring back first-time homebuyers in large numbers who would reignite the move-up market and allow lenders to clear out their cloud inventory while sustaining modest rates of appreciation. Most economists actually believed that would happen.
I predicted that the reality would fall short in many significant ways. And when reality was different from the fantasy, clueless economists would act surprised and lament the “unexpected” results. They did.
One of the major hurdles facing a sustained rally in real estate prices was (and still is) the relative absence of first-time homebuyers, the bedrock of the market. First-time homebuyer participation was near historic lows.
Banks did a remarkable job of restricting inventory to push up prices, but if market prices are so high that first-time homebuyers can’t afford them, sales volumes suffer. Some first-time homebuyers held their noses and substituted down to lower quality properties, but many simply didn’t buy and chose to rent instead. The result was fewer transactions and low sales volumes.
Potential first-time homebuyers are under-employed, over-indebted, and unenthusiastic
There are three reasons we didn’t (and still don’t) see many first-time homebuyers. For one, many are under-employed. People with low-paying jobs don’t buy homes (anymore). Further, many potential first-time homebuyers have too much debt. They have large student loan payments, excessive credit card debt, and the lease their cars. They don’t have any money left over to save for a down payment. And even if they had the savings, they don’t have the qualifying back-end debt service ratio required to get a loan.
In the new mortgage regulations, back-end debt-to-income ratios were capped at 43% for all qualified mortgages. If the borrower wants to max-out their loan with a 31% front-end ratio, they can’t spend more than 12% of their gross income on student loans, credit cards and car leases combined. Many young people spend that much on each of those. Any potential homebuyer with a student loan and a car payment — which is most of them — is unable to qualify for a loan. And that’s a good thing because if they got a loan, they couldn’t afford the payments anyway.
And finally, after witnessing the catastrophic collapse of home prices that trapped the preceding generation in their starter homes, many potential young buyers simply don’t want to take the risk. Perhaps rising prices and endless NAr bullshit will force kool aid down the gullet of this generation, but many will learn the hard lessons of the housing bubble and refuse to overpay for a house.
Remember 2007
Everyone laments the lack of MLS inventory, but even if we had an explosion of high-priced inventory, it wouldn’t change much. Inventory that’s priced above what people can afford is the same as inventory that isn’t there. Back in 2007, we had an explosion of inventory, yet sales dropped precipitously.
Many observers mistakenly believe the influx of inventory in 2007 pushed prices down. That isn’t the case. In 2007 the normal listings that came to market found no buyers. Prices fell steeply in 2008 despite declining inventory for most of the year. Transaction volumes dried up in 2007 because the toxic financing was taken off the market and people couldn’t finance the large sums necessary to pay peak prices (see red line below).
Since 2007, mortgage interest rates fell from 6.5% to 3.5% thus allowing buyers to finance mortgage balances similar to those during the housing bubble.
Price or volume but not both
realtors want to see high transaction volumes because that maximizes commission revenue. Banks and over-indebted homeowners want to see high prices so neither party loses money. Unfortunately, it’s nearly impossible to enjoy high prices and high volume, at least in a world without toxic mortgage affordability products.
Elizabeth Warren is obviously running for president in 2020, and she will be a formidable opponent for Donald Trump.
Is Elizabeth Warren running for President in 2020?
Is Elizabeth Warren running for president in 2020? It’s a question that has come up more and more often since the election of Donald Trump in November, and one that has serious implications for banks and other financial institutions.
Warren, after all, was the architect behind the Consumer Financial Protection Bureau, but faced fierce Republican opposition to becoming its director, and ran for the Senate instead. That decision seems especially prescient given the current environment, where CFPB Director Richard Cordray is being assailed from all sides, while Sen. Warren’s star is on the rise.
As a TIME article noted in 2011 at the beginning of Warren’s campaign for a Senate seat, “banks face a more direct threat from a potential Senator Warren… From the Senate, she’d have an easier time rallying public support for pro-consumer laws that banks will undoubtedly hate, and would be able to form alliances, trade favors, and build coalitions with like-minded lawmakers to address financial reform.”
The TIME article posited that Warren would “likely wind up in an influential committee leadership role,” and that “Warren at the head of a CFPB hemmed in by bank-friendly (and bank-funded) lawmakers could do far less damage than a Warren ensconced in the Senate for the next six years or more.”
The fortune tellers at TIME certainly got the committee part right, as Warren currently serves on the Senate Committee on Banking, Housing and Urban Affairs, (not to mention the Armed Services Committee), but it seems that not even they envisioned Warren running for president.
So, is she or isn’t she? When asked on National Public Radio last week, Warren answered with her standard, “I don’t have any plan to do that.” But her actions suggest otherwise.
I would welcome her candidacy because it would push the mainstream Democrats to the left, just as Sanders did with Clinton. Meanwhile, her appeal as a populist would be muted because we’ve already elected Trump, who in many ways rode the wave of anger that Warren originally used to gain power. What would be her justification for seeking higher office in this scenario?
Punishing banks isn’t Americans’ top priority anymore. Being the anti-Trump isn’t a compelling enough narrative for a Presidential campaign (just ask Hillary). Also, being a Harvard professor that abused affirmative action to get an unfair advantage in life won’t fly in the rust belt. Blue collar workers hate that kind of thing.
Her weaknesses are her strengths in the Democratic primaries. She can ride the wave of anti-Trump sentiment to the nomination. It will depend largely on America’s opinion of Trump in 2020 as to whether or not she can win the general election. It’s highly unlikely any of Trump’s core supporters will vote for anyone other than Trump, and it’s equally unlikely that any partisan Democrats will vote for Trump. For Warren to win, she must excite voters in a way Hillary did not. 2020 will probably be a turnout election with very few undecided or independent voters influencing what happens.
Richard Posner: “The Real Corruption Is the Ownership of Congress by the Rich”
“The real corruption is the ownership of Congress by the rich,” said Judge Richard A. Posner of the United States Court of Appeals for the Seventh Circuit in Chicago, one of the most prominent legal scholars of the last five decades, during a keynote interview today at the Stigler Center’s conference on concentration in America.
Posner is one of the most influential antitrust scholars of the last 50 years, and one of America’s most prominent legal minds. During a conversation with University of Chicago Booth School of Business professor Luigi Zingales [one of the editors of this blog], Posner harshly criticized the Supreme Court’s 2010 Citizens United ruling, declared antitrust “dead,” and described the American judicial system as “very crappy” and “not well-designed to get good people.”
On the Supreme Court’s 2010 Citizens United decision, Posner said: “If you become a member of Congress, you’ll get a card from the head of your party that you will spend five hours [each] afternoon talking to donors. That’s not the only time you spend with donors—they’ll take you to dinner, cocktails—but these five hours are important. The message is clear: You are a slave to the donors. They own you. That’s [the] real corruption, the ownership of Congress by the rich.”
Later, remarking on the logic behind Citizens United, Posner said: “The Supreme Court says there’s no such thing as spending too much money to support a political candidate, because your money is actually speech—that’s all nonsense.”
This show is great!
‘Silicon Valley’ Is Still the Outrageous, Tech Industry-Skewering Show That We Deserve
Over the course of three years, HBO’s Silicon Valley has presented its Northern California milieu as a microcosm of corporate America, a place where ambition fuels creativity and ruthless competition is the ever-present norm. Given that it’s also a comedy from the mind of Mike Judge (Beavis and Butthead, Office Space, Idiocracy), it’s been a subculture critique of a decidedly hilarious sort. That hasn’t changed for its fourth season, which once again locates the dark, ridiculous heart of the tech industry through the saga of its clownish wannabe-moguls, who—in every instance—continue to embody the show’s fundamental belief that ego is the thing most responsible for the industry’s (and humanity’s) greatest innovations and failures.
Returning this Sunday, Silicon Valley picks up right where it left off, with Richard Hendricks (Thomas Middleditch) and his merry band of coding compatriots—Dinesh (Kumail Nanjiani), Gilfoyle (Martin Starr), Big Head (Josh Brener), Jared (Zach Woods) and incubator entrepreneur Erlich (T.J. Miller)—up shit’s creek after the spectacular flameout of their Pied Piper compression platform, courtesy of a scandal involving fudged user stats. With his reputation in ruins, Richard is re-introduced in Season Four posing as an Uber driver to get an impromptu meeting with a venture capitalist in an effort to secure funding for the video chat app that Dinesh created, and which is now seeing impressive early numbers. This kidnapping-lite scenario goes predictably poorly, thus forcing him to turn to wacko billionaire Russ Hanneman (Chris Diamantopoulos), who—sensing that Richard’s heart isn’t into “Piperchat”—provides him with some unexpectedly inspiring advice: Work on something about which you’re truly passionate.
I think Mike Judge is a certified genius. Think of all the cultural icons he has created that we still quote to this day. Idiocracy seems more prescient than ever.
I discovered Silicon Valley after season three, and I binge watched all of them. I can’t wait until season 4. He is a genius.
Spring housing: ‘Strongest seller’s market ever’
Even as more homes come on the market for this popular sales season, they’re flying off fast.
Home prices have now surpassed their last peak, and at the entry level, where demand is highest, sellers are in the driver’s seat.
Spring homebuyers are pounding the pavement at a furious pace, but the pickings are getting ever slimmer.
Even as more homes come on the market for this traditionally popular sales season, they’re flying off fast, with bidding wars par for the course. Home prices have now surpassed their last peak, and at the entry level, where demand is highest, sellers are firmly in the driver’s seat.
“I’ve been selling real estate for 25 years and this is the strongest seller’s market I have ever seen in my entire real estate career,” said David Fogg, a real estate agent with Keller Williams in Burbank, California. “A lot of our sellers are optimistically pricing their homes in today’s market, and I have to say in most cases we’re getting the home sold anyway.”
‘Red flags’ are fly’n high; ie.,
*strongest sellers market EVER
*sellers are firmly in the driver’s seat
*buyers pounding the pavement at a furious pace
*they’re flying off fast
*pickings are getting slimmer
*bidding wars par for the course
*prices surpassed previous peak
*selling despite optimistic pricing
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I was thinking the same thing. When sentiment is that bullish, we’re closer to the top than the bottom.
I can’t believe they forgot to mention that:
*rates have increased
*buyers are locking in homes before rates increase further
If this is an amazing seller’s market, why aren’t more investors cashing out? I’m asking seriously because I don’t understand. I’m planning on moving this summer (need a bigger place for my growing family — I sound like a realtor’s wet dream) and there are many more rental houses on offer than sale houses. Why? Houses in my area are selling for 110 – 120% of asking… why aren’t landlords cashing out? Also, in the area I’m looking, renting is cheaper than buying (and in aggregate rent is starting to stabilize or even fall), so isn’t that an incentive for an investor to sell the house rather than rent it out again?
Greed is predominant v reason during ALL speculator-driven manias. Until it isn’t.
ie., what these gamblers ALWAYS tend to forget:
1) the aggregate bubble prices can NEVER be realized by selling
2) to get out, you have to panic before everybody else does.
Hence, the word BAGHOLDER was coined.
I’m a renter myself, and we’ve been looking for the right house to come out, but we just couldn’t buy one. When they do come out, they are way overpriced and sold even before we can put in an offer.
There was a rental property, and we asked the owner if they want to sell, and he/she refused. We wondered about the same thing… why won’t these investors sell??
We got desperate and thought about putting in an offer on a house that would have over extend our mortgage limit, but then we took a deep breath and decided to wait it out.
I wondered several thoughts:
Do they feel bullish about future growth due to continued low inventory?
Are they keeping their houses because of mortgages with super low interest rate?
If they sell, where would they put the proceeds?
If they have a steady rental income, holding on to their investment property might even be safer way to ride out the upcoming downturn?
I suspect people in general (not the specu-vestors) are hanging on to their houses simply because they want to stay in the area, and the money they receive by selling has lost a substantial amount of purchasing power/buys a lot less than the money put in at the buy. Sad really.
It’s weird. One 3-BD house we looked at for a rental was going for $4200 and a house two doors down (same size, similar quality) was for sale for 1.2 Mil and they’re probably going to get it. Especially with noises finally being made to limit the mortgage deduction for high income owners, who would take the risk to buy in this particular neighborhood right now?
There are a few government policies which could change and absolutely destroy real estate prices in the high valued markets.
As an investor, my job is to maximize IRR (Internal Rate of Return). The way for me to do that is by holding out for the best possible price I can get. Since California is a cyclical real estate market, that means selling at, or close to, the peak.
Even if I miss the mark and sell a little bit late, it’s not a huge risk because:
a) the largest gains happen towards the end of the cycle.
b) real estate prices are sticky and don’t crash very quickly.
c) in the worst case scenario, I can continue to hold indefinitely.
Retailers Are Going Bankrupt at a Record Pace
Retailers are filing for bankruptcy at a record rate as they try to cope with the rapid acceleration of online shopping.
In a little over three months, 14 chains have announced they will seek court protection, according to an analysis by S&P Global Market Intelligence, almost surpassing all of 2016. Few retail segments have proven immune as discount shoe-sellers, outdoor goods shops, and consumer electronics retailers have all found themselves headed for reorganization.
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Meanwhile, America’s retailers are closing stores faster than ever as they try to eliminate a glut of space and shift more business to the web. S&P blamed retailer financial struggles on their inability to adapt to rising pressure from e-commerce.
Urban Outfitters Chief Executive Officer Richard Hayne said as much on a conference call with analysts last month. There are just too many stores, especially those that sell clothing, he said.
“This created a bubble, and like housing, that bubble has now burst,” said Hayne. “We are seeing the results: Doors shuttering and rents retreating. This trend will continue for the foreseeable future and may even accelerate.”
Get ready for the municipal budgets to crash.
I wouldn’t be surprised to see municipalities go after internet sales taxes to make up for the shortfall. All that sales tax revenue goes up in smoke when the buyer purchases online. They could demand Amazon report deliveries in their community in order to collect sales taxes on the purchases.
I take my kid to an indoor playground in a local mall. There are 11 stores in that mall that sell athletic shoes. Eleven.
The sneaker head phenomenon is pretty absurd. I think they will end up being the next bean babies honestly. Those sneakers can be mass produced in near limitless quantities.