Dec302015
Psychological stages of a financial bubble
Psychological Stages of a Bubble
Once a bubble starts to form, it will go through several identifiable stages: enthusiasm, greed, denial, fear, capitulation, and despair. Each of these stages is characterized by different speculator emotional states and different resulting behaviors. There are outside forces that also act on the market in predictable ways in each one of these stages. Most often, these outside factors serve to reinforce the market’s herd behavior and exacerbate changes in price.
Precipitating Factor
There is often a precipitating factor causing the initial price rally that pushes prices above their supported fundamental values. A bubble rally is usually kicked off by some exogenous event, but it may occur simply because prices have been rising and investors take notice, or it can be merely the result of a lack of investor fear and the widespread belief prices cannot go down.
In a typical market, there is a significant selloff when prices exceed fundamental valuations. This selloff is a natural reaction to inflated prices as a decline to fundamental valuations is normal and expected. Many seasoned market observers will “sell short” here to profit from the initially inflated values caused during the take-off stage.
However, in a financial mania, this sell off is short-lived, and it traps many who are bearish on asset pricing on the wrong side of the trade. This “short squeeze” may prompt a feverish activity of buying as short sellers cover their positions before their losses get too great. A short squeeze may act as a precipitating factor.
In a securities market, a precipitating factor may be a very large order hitting the trading floor, and in a real estate market it may be a dramatic lowering of interest rates as it was in the Great Housing Bubble. Regardless of its cause, the initial price rise has the potential to spark sufficient interest to prompt further buying and set a series of events in motion which repeat with a remarkable consistency. Market bubbles can be found in all financial markets and on multiple timeframes.
Enthusiasm Stage
At the beginning of the enthusiasm stage, prices are already inflated, so there is cautious buying from traders looking for trends and momentum. If prices fail to drop to fundamental valuations and instead push higher, media attention is often drawn to the speculative market.
The general public starts to take notice of the money being made by people who have bought the featured asset and they begin to participate in larger numbers. Of course, this stimulates more buying and prices continue to climb. The market sentiment turns very bullish. Buyers are everywhere and sellers are scarce. At this point, prices are completely detached from fundamental valuations, but people are not buying because of the underlying value, they are buying because prices are going up.
In residential real estate markets, the enthusiasm stage is often greeted by lenders with open arms. With prices rising, there is little risk of loss from default. If a borrower gets in trouble, they can simply sell into rising prices, and neither party takes a loss. With neither party fearing loss, and since lenders make most of their money on the transaction itself through origination fees, there is an inevitable lowering of standards to meet market demand. This in turn creates more market demand leading to further lowering of standards. The credit cycle reinforces the bullish psychology in the market and helps push prices even higher.
Greed Stage
In the greed stage, the bullish sentiment reaches a feverish pitch and prices rise very rapidly. Every owner in the market is making money and most believe it will go on forever. As prices continue to climb, buyers become very enthusiastic about owning the asset, and they tell all their friends about their great investment. The word-of-mouth awareness and increased media coverage bring even more buyers to the market. 
Egomania sets in as everyone thinks she is a financial genius. Any intellectual analysis at this stage is merely a cover for emotional buying and greed. During the Great Housing Bubble, there were many instances of properties receiving a dozen or more offers the day they were listed, with many in excess of the asking price. Encouraged by realtors, some buyers wrote emotional letters to sellers to convince them why they should be bestowed with the honor of home ownership.
Most people who are bullish already own the asset, but for prices to continue to rise there must be more buying. For buying to occur, someone who was either bearish or ignorant of the rally must be convinced to buy. In other words, a greater fool must be found. Once everyone is made aware of the market rally and is convinced to buy, you simply run out of new buyers. Once there is a shortage of potential buyers, prices can only go down.
Denial Stage
When the limit of affordability is reached and the pool of available buyers is exhausted, prices start to decline. At first market participants are still overwhelmed by greed, and they choose to ignore the signs that the party might be over. In 2007 most real estate markets were in the denial stage as prices had not dropped enough to cause real fear. 
Denial is apparent in polls in mid-2007 where 85 percent believed their home would rise in value during the next five years, and 63 percent believe a house is a good investment. That is denial.
It is also apparent in the number of homes purchased during the greed stage that are held for sale at breakeven prices-even if this is above market. When the inventory is large, and houses stay on the market for a long time, prices are too high. Sellers who refuse to lower their prices to take a small loss are in denial about the state of the market. They believe bids will increase and some buyer will come along and pay their price-after all, that is the way it was just a couple of years prior.
Buyers who bought in the enthusiasm stage are still ahead, so they feel no urgency to sell. They have made good money already and they will hold on with hopes of making a little more. Since they believe the asset will appreciate again (and they have no exit strategy), this group of buyers does not sell. In contrast, the few traders who still hold positions liquidate and go back into cash. Successful traders recognize the emotion of denial as a signal to exit their positions to lock in profits or prevent further damage.
In the denial stage of a residential real estate market, many speculators are unable to obtain the sale price they desire. The accumulation of unrealistically priced houses starts to build a large inventory of homes “hanging” over the market. Overhead supply is a condition in a financial market when many units are held for sale at prices above current market prices. 
Generally there will be a minor rally after the first price decline as those who missed the big rally but still believe prices will only go up enter the market and cause a short-term increase in prices. This is a bear rally. It is aptly named as those bullish on the market buy right before the bear market reverses and quickly declines.
For prices to resume a sustained rally, the overhead supply must be absorbed by the market. Once prices stopped going up and actually began to fall, demand is lessened by diminished buyer enthusiasm and the contraction of credit caused by mounting lender losses. With increasing supply and diminished demand prices cannot rally to absorb the overhead supply.
The overall bullish bias to market psychology has not changed much at this point, because owners are in denial about the new reality of the bear market; however, the insufficient quantity of buyers and the beginnings of a credit crunch signal the rally is over and the bubble has popped.
Fear Stage
In the grieving process there is a shift from denial to fear when the reality being denied becomes too obvious to be ignored or pushed out of awareness. There is no acceptance of reality, just the idea that reality might be fact. 
The fact that an investment might turn out to be a very poor financial decision with long-term repercussions to the speculator’s financial life is generally very difficult to accept. The imaginings of a horrifying future creates fear, and this fear causes people to make decisions regarding their investments.
The most important change in the market in the fear stage is caused by the belief that the rally is over. Price rallies are a self-sustaining price-to-price feedback loop: prices go up because rising prices induces people to buy which in turn drives prices even higher. Once it is widely believed that the rally is over, it is over. Market participants who once only cared about rising prices suddenly become concerned about valuations. Since prices are far above fundamental values and prices are not rising, there is little incentive to buy. The rally is dead.
Another major psychological change occurs in this stage after people accept the rally is dead: people reassess and change their relationship to debt. During the rally, debt becomes a means to take a position in the housing commodity market. Nobody cares how much they are borrowing because they never intend to pay off the loan through payments from their wage income. Most believe they will pay off whatever they borrow in the future when they sell the house for more than they paid.
Once prices stop going up, people realize they are simply renting from the bank, and the only way to get ahead and build equity is to pay off a mortgage. The desire to borrow 8 to 10 times income diminishes rapidly as people realize they could never pay off such a large sum. What started in the denial stage as an involuntary contraction of credit, in the fear stage becomes a voluntary contraction of credit as people simply do not want to borrow such large amounts of money.
In August of 2007, a more serious credit crunch gripped financial markets, and during the times that followed there was increased liquidation of bank held inventory. Banks tried to get their wishing prices through the prime selling season, but by the end of the year, there was pressure to get these non-performing assets off their books. The sales of bank foreclosures and the ongoing tightening of credit drove prices down an additional 5% to 10%. This caused some major problems for owners of residential real estate. Fear began to grip the market.
By the time a financial market enters the fear stage, greed stage buyers are seriously underwater. Comparable properties may be selling for 10% less than their breakeven price, and there is little hope that prices will rally. Some sell at this point and take a loss, but most do not.
People who bought in the enthusiasm stage come up to their breakeven price and face the same decision the greed stage buyers faced earlier: sell now or hold out for a rally. Even though there is good reason to fear, most do not sell here. They regret it later, but they hold on. Speculators generally only sell an asset when the pain of loss becomes acute. The pain threshold is different for each individual, but there is no real pain until the investment is worth less than the purchase price, so few sell for a profit or at breakeven. 
Inventories grow in the fear stage because many would like to sell, but sales volumes are light because few are willing to sell at prices buyers are willing to pay.
Prices do not rally here because there are even fewer buyers in the market and a reduced appetite for debt due to the change in market psychology. There are more and more sellers either choosing to sell or being forced to sell, and since there are more sellers than buyers, prices continue to drop.
During the fear stage, a majority of buyers during the rally go underwater on their mortgages and endure the associated pain and stress. In the past, since the bubbles of the 80s and 90s were largely built on conventional mortgages, people just held on. During the Great Housing Bubble, people used exotic loan financing terms, and they simply could not afford to make their payments. They borrowed from other sources until their credit lines were exhausted and they imploded in foreclosure and bankruptcy. During this stage many renters who would otherwise have purchased a home put off their purchase and save more money because they correctly see the decline in prices has momentum and prices should continue to drop further.
Capitulation Stage
The transition from the fear stage to the capitulation stage is caused by the infectious belief that the rally is over. There is a tipping point where a critical mass of market participants either decide to sell or are forced to sell. In residential real estate, people are compelled to sell by anxiety, and the mechanism for force is foreclosure.
Once a critical mass of selling is reached, the selling causes prices to decline further which in turn causes more selling. This convinces even more people the rally is over yielding even more selling: a downward spiral. The same price-to-price feedback mechanism that served to drive prices up during the rally works to drive prices down during the crash. Collectively, everyone in the market accepts prices are going to drop further, and they need to get out: Now!
Of course when everyone knows prices are going to drop, and everyone is trying to sell, there are very few buyers. Each market participant has a different threshold for pain. Some give up early; some give up later; some stubbornly try to hold on, but in the end, by choice or by force, everyone who cannot afford their home sells out and capitulates to the forces of the market. Each seller accepts the market rally was a bubble, and the frenzy of selling activity clears out the overhead supply. The capitulation stage is the counterpart of the greed stage. Sellers are everywhere and buyers are scarce. This puts prices into free-fall until a critical mass of buyers is ready to buy again.
Since buyers in the aftermath of a bubble tend to be the risk averse who did not participate in it, they will make cautiously low offers on properties. Buyer caution is reinforced by lender caution. In stark contrast to the days of bubble lending, large down payments are suddenly required, appraisals are carefully reviewed, eligibility is tighter, and most exotic loan programs are gone.
This cautious buying together with desperate sellers causes the market to drop below normal valuation standards. The market enters the despair stage. Here the market participants think nobody wants the asset, and nobody ever will again. Of course, nothing could be farther from the truth as those who recognize the fundamental value of the asset are buying it in preparation for the next cycle.
Despair Stage
From a perspective of market psychology, it is difficult to tell when the capitulation stage ends and the despair stage begins. Both stages have an extremely negative bearish sentiment. It is called the despair stage because most who own the asset are in despair and wish they did not own it, and the general public is still selling. Most who still own their homes are able to afford the monthly payments, but realize they will face a large loss if they sell their house anytime soon. They feel like prisoners in their own homes because they are unable to relocate for a better job or any other reason.
One distinguishing feature of the despair stage is the increased buying activity of investors-true investors, not the speculators who were wiped out during the price decline. Investors are not in despair during this stage. This is the time they were anticipating to make their purchases.
There is an extreme emotional toll paid by those who participated in the mania. Losing a home to foreclosure is devastating. The emotional ties to a home go beyond seeing it as an investment. A home is supposed to be a safe haven where people raise a family. It is a unique reflection of the family, adorned with mementos and family photographs. Being forced to leave the family home is difficult for reasons that have nothing to do with money. Unfortunately, this is often followed by personal bankruptcy, and the difficulties in bankruptcy have everything to do with money.
In some ways, those who endure foreclosure may be the lucky ones as they get to leave their debtor’s prison and go find an affordable rental. The income that used to go toward housing is now freed up to go toward living a life. Those homeowners who hang on, who are desperately underwater, and who are putting 50% or more of their income toward a house worth less than they owe on it, their circumstances are arguably even more dire. There is no light at the end of their tunnel; they must live with their pain every day.
The despair stage is not desperate for everyone. What makes the despair stage different from the capitulation stage is that buyers who focus on fundamentals like rental savings or positive cashflow return to the market and begin buying. Affordability has returned to the housing market, and those who did not participate in the mania finally get their chance to become homeowners-at reasonable prices. These buyers are not concerned with appreciation; they simply want an asset which provides a savings or a cash return on their investment. They are not frightened by falling prices because their financial returns are independent of the asset’s market valuation. It is the return of these people to the market that creates a bottom.
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Pending home sales struggle to overcome housing headwinds
Demonstrates that TRID is not responsible for slowdown in sales
Pending home sales once again struggled to overcome housing headwinds and slightly declined for the third time in four months, the latest report from the National Association of Realtors said.
The Pending Home Sales Index, a forward-looking indicator based on contract signings, slightly declined 0.9% to 106.9 in November from an upwardly revised 107.9 in October. However, this is still 2.7% above November 2014 (104.1).
While the index continued to increase year-over-year for 15 consecutive months, last month’s annual gain was the smallest since October 2014 (2.6%).
November’s dip in contract activity continues the modestly slowing trend seen ever since pending sales peaked to an over nine year high back in May, Lawrence Yun, NAR chief economist, said.
“Home prices rising too sharply in several markets, mixed signs of an economy losing momentum and waning supply levels have acted as headwinds in recent months despite low mortgage rates and solid job gains,” he said. “While feedback from Realtors continues to suggest healthy levels of buyer interest, available listings that are move-in ready and in affordable price ranges remain hard to come by for many would-be buyers.”
And the problems are expected to persist into the New Year. According to Yun, with existing housing inventory already below year ago levels and new home construction still deficient, it’s likely supply constraints and faster price appreciation will reappear once the spring buying season begins.
“Especially with mortgage rates likely on the rise, affordability issues could creep up enough to temper sales growth – especially to first-time buyers in higher priced markets,” adds Yun.
Your evidence is self-defeating. Pendings are higher than a year ago yet closings are way down. That is because a pending sale is based on obtaining a signed purchase contract, something not affected by TRID, while closing times from signed contract to funding are at their highest in a year and a half, which is the direct result of TRID delays.
WSJ: New Mortgage Rules May Spark Delays, Frustration
http://www.wsj.com/articles/new-mortgage-rules-may-spark-delays-frustration-1443519000
The National Association of Realtors is advising real-estate agents to extend contracts by around 15 days in anticipation of delays in some home closings.
The rules require that consumers see the final terms at least three business days before closing, a change meant to ensure they have time to understand what they’re agreeing to. Some changes to the closing terms—such as if a home buyer wanted to change from a fixed-rate mortgage to one with an adjustable rate—cause the three-day period to reset.
Since home transactions often are made together, as home buyers sell their old homes, a delay in one home closing can cause a ripple effect.
Bert Bevis, a real-estate agent in Tallahassee, Fla., said borrowers, accustomed to being able to make last-minute changes to a transaction, might get frustrated at closing delays. “If they dillydally, they’re going to get their closing delayed. That’s the missing link. Nobody’s educating the consumer yet,” Mr. Bevis said.
Any decrease in closings caused by TRID would be temporary. The slowdown in sales in not only reflected in closings, but in pendings as well. The idea that TRID hurt closings may have been true in October, but the excuses keep coming long after the effect has played out. Why is nobody in the MSM talking about the decrease in pendings as well. Everyone is quick to blame TRID without looking at the corresponding decline in pendings. This is an industry-wide effort to get TRID rolled back, something that isn’t going to happen.
Pendings are down monthly due to normal seasonal slowing, but are still up over last year as they have been for many months. They are going in the opposite direction that closings are once seasonality is accounted for, completely negating your point.
TRID went into affect with loan applications taken October 3rd and after, which means virtually none of them could have closed before November, so the effects couldn’t have played out as quickly as you say they should have. I posted Ellie Mae data on closing times that validates average closing times pre- and post- TRID. There was an unprecedented 3 day jump in closing times that just so happens to line up with TRID implementation, and also the highest closing time in 17 months.
Nobody is looking for or needs excuses and nobody in the industry believes TRID will be rolled back. That’s out of left field on your part. If sales recover after a few months then it shows TRID had a one time implementation effect on the number of sales. If not, then there is something more going on.
I think the most telling thing is that you know Shevy will agree with me and therefore, you won’t be posting his thoughts on the blog.
Looks like Mellow is still in the “denial” phase.
Mellow, if you could do us a favor, let us know when a sense of dread and worry start creeping into your subconscious thoughts.
Wow, if Larry has already jumped to the fear/denial stage, we must already be a year into it, either that or he reads this blog and doesn’t want to be made fun of any more.
“”Home prices rising too sharply in several markets, mixed signs of an economy losing momentum and waning supply levels have acted as headwinds in recent months despite low mortgage rates and solid job gains,” he said. “While feedback from Realtors continues to suggest healthy levels of buyer interest, available listings that are move-in ready and in affordable price ranges remain hard to come by for many would-be buyers.””
He has rare moments of lucidity. Like a politician who tells the truth, I consider these lucid moments gaffes.
Maybe real estate agents are getting pissed off they are loosing sales with unmovable or uncloseable properties in conjunction with the lack of cash and foreign buyers.
Could be a shift in strategy to try and tout “price stabilization” in the hopes fence sitters no longer have a reason or incentive to wait to sell their properties. There likely is a transaction backlog that realators would love to tap into, especially at the peak of prices. Now with prices run up and the horse dead, they want to drive up volume.
Here are the 20 hottest housing markets to close out the year
20. Midland, Texas
19. Fort Wayne, Indiana
18. Tampa-St. Petersburg-Clearwater, Florida
17. Boulder, Colorado
16. Detroit-Warren-Dearborn, Michigan
15. Modesto, California
14. Palm Bay-Melbourne-Titusville, Florida
13. Nashville-Davidson-Murfreesboro-Franklin, Tennessee
12. Oxnard-Thousand Oaks-Ventura, California
11. Los Angeles-Long Beach-Anaheim, California
10. Stockton-Lodi, California
9. Yuba City, California
8. Santa Rosa, California
7. Denver-Aurora-Lakewood, Colorado
6. San Diego-Carlsbad, California
5. Sacramento-Roseville-Arden-Arcade, California
4. Dallas-Fort Worth-Arlington, Texas
3. Vallejo-Fairfield, California
2. San Jose-Sunnyvale-Santa Clara, California
1. San Francisco-Oakland-Hayward, California
Over 50% in CA.
How long can that last?
Nice charts that seem to conflict with the rapid appreciation:
https://confoundedinterest.wordpress.com/2015/12/29/what-the-fed-or-foxcnbc-wont-tell-you-about-west-coast-home-prices/
Such is the power of super low mortgage rates and restricted inventory.
supply shortage is biggie. imo so cal is in quasi greedy stage
2016 might be greedy…
Buying still more affordable than renting for most of country
But not in coastal california
Rapidly rising rents are ensuring that it makes more sense to buy in much of the country, a new report from RealtyTrac showed.
According to RealtyTrac’s 2016 Rental Affordability Analysis report, it is currently more affordable to buy rather than rent in 58% of the 504 counties analyzed as part of the report, despite home price appreciation outpacing rent growth in 55% of markets.
Not only is the rent rising equal to, or in some cases more than home prices, rents are outpacing weekly wage growth in 57% of markets, RealtyTrac’s report showed.
According to RealtyTrac’s report, rents on three-bedroom properties are expected to increase an average of 3.5% in 2016 over 2015 across all 504 counties analyzed, per the HUD data.
Meanwhile, average weekly wages in the second quarter of 2015, which was the most recent wage data available, were up an average of 2.6%from a year ago and median home prices were up an average of 5% in the third quarter of 2015 compared to a year ago across all 504 counties, RealtyTrac’s report stated.
“Renters in 2016 will be caught between a bit of a rock and a hard place, with rents becoming less affordable as they rise faster than wages, but home prices rising even faster than rents,” said Daren Blomquist, vice president at RealtyTrac.
“In markets where home prices are still relatively affordable, 2016 may be a good time for some renters to take the plunge into homeownership before rising prices and possibly rising interest rates make it increasingly tougher to afford to buy a home,” Blomquist added.
Here are Freddie Mac’s five housing predictions for 2016
With just a few days left in 2015, Freddie Mac is looking towards 2016 and trying to predict just what’s going to happen in housing over the next 12 months.
Freddie Mac is already on the record stating that it doesn’t think mortgage interest rate will increase immensely in 2016, despite the Federal Open Market Committee recent announcement that it is raising the federal funds rate for the first time since June 2006.
In the wake of that announcement, Freddie Mac’s chief economist, Sean Becketti, said that interest rates should remain at “historically low levels” throughout 2016, in spite of whatever moves the Federal Reserve is expected to make.
Here are five more housing predictions for 2016, courtesy of Freddie Mac:
* Expect the 30-year fixed-rate mortgage to average below 4.5% for 2016 on an annualized basis
* Gradually higher mortgage interest rates will present an affordability challenge, but expect a strengthening labor market and pent-up demand to carry 2015’s home sales momentum into 2016
* Expect house price growth to moderate a bit to 4.4% in 2016 driven in part by the reduction in homebuyer affordability and reduced demand as a result of Fed tightening
* Housing activity will grow in 2016 despite monetary tightening. Expect total housing starts to increase 16% year-over-year and total home sales to increase 3%
* While home purchases will increase next year, higher interest rates will reduce the refinance volume pushing overall mortgage originations lower in 2016 than in 2015
My top 5… errrr…. top 1 prediction:
2016 looks very similar to 2015 but without the price appreciation.
– Rates almost unchanged, sales low, prices move sideways
The global slowdown is slowly sucking the life out of our economy.
That’s probably a good prediction. Even if the economy does improve globally, that will push up interest rates, removing the only thing keeping up prices.
Ten charged in fraud said to target Irvine real estate office
A 42-year-old woman pleaded not guilty on Monday to multiple felony charges alleging a real estate company’s Irvine office was defrauded of $1.4 million.
Michele Lynne Stewart, who was arrested on Christmas day, is charged with more than two dozen felony counts of forgery and theft, according to court records. Nine other defendants have been charged in the case and are all listed as fugitives, according to court records.
The other defendants are Brian Vancleave, Robert Morken, Jennifer Vancleave, Joe Chang, Joon Kim, Rebecca Kim, Tomy Lam, Bryce Jacot and Jimmy Lam.
Stewart is accused of taking 28 fraudulent checks for a total of $240,880 from a manager of First Team Real Estate’s Irvine office from September 2011 through April 2012, according to court records.
Co-defendant Brian Vancleave ran the office’s risk management division, which handled claims, settlements and legal services, according to court records. Vancleave is accused of issuing 228 fraudulent checks for more than $1.4 million to friends and relatives, according to court records.
Stewart is due back in court on Jan. 5.
San Francisco housing market reaches highest levels of unaffordability: The tech led housing bubble where the typical condo now sells for $1.1 million.
There is no doubt that San Francisco is in a deep housing mania. When you take a look at the junk you can buy with $1 million you realize something is amiss. Bubbles are hard to assess when you are in them. You have continuing momentum pushing prices higher and the constant rhetoric that “this time is different” although history tends to serve as a better guide. But San Francisco is in another dimension. The median home price is now $1.25 million and the typical condo is selling for $1.1 million. You have tech professionals earning good money struggling to afford basic rundown rentals. All of this is being spurred by hot money in the tech sector and foreign money flooding the market. In a place like San Francisco even a professional couple with a solid down payment will have a tough time competing with all cash offers over asking price. As we noted, last month we saw a large portion of the market being taken over by all cash offers yet again as regular buyers are priced out. San Francisco is now more unaffordable than at the peak of the last bubble.
How much will housing inventory increase in 2016?
10) Housing Inventory: Housing inventory bottomed in early 2013. However, after slight increases in 2013 and 2014, inventory was down slightly year-over-year in 2015 (through November). Will inventory increase or decrease in 2016?
Tracking housing inventory is very helpful in understanding the housing market. The plunge in inventory in 2011 helped me call the bottom for house prices in early 2012 (The Housing Bottom is Here). And the increase in inventory in late 2005 (see first graph below) helped me call the top for house prices in 2006.
This graph shows nationwide inventory for existing homes through November 2015.
http://www.calculatedriskblog.com/2015/12/question-10-for-2016-how-much-will.html
There are several reasons for the low inventory. Because of low inventory, potential sellers are concerned they will not be able to find a home to buy – so they do not list their home. Another reason for low inventory is that some homeowners are still “underwater” on their mortgages and can’t sell. However negative equity is becoming less of a problem. Also some potential sellers haven’t built up enough equity to sell and have a down payment for a new purchase.
Over time, as the market moves back to normal, it seems homeowners will sell for the usual reasons (changing jobs, kids, etc).
Right now my guess is active inventory will increase in 2016 (inventory will decline seasonally in December and January, but I expect to see inventory up again year-over-year in 2016). I don’t expect a double digit surge in inventory, but maybe a mid-single digit increase year-over-year. If correct, this will keep house price increases down in 2015 (probably lower than the 5% or so gains in 2014 and 2015).
Housing is the main reason Toyota is moving from California to Texas
Sure, the low taxes, relaxed regulatory environment and Central Time Zone are nice. But none of those factors tops the list of reasons Toyota decided to plant its North American headquarters in Plano, bringing in more than 3,000 jobs, mostly from California.
The main driver of Toyota’s move from Torrance, California, was housing costs, according to Albert Niemi Jr., dean of the Cox School of Business at Southern Methodist University, who has inside knowledge about the move. Niemi shared the anecdote at an SMU Cox Economic Outlook Panel on Friday morning.
“It wasn’t so much that we don’t tax income,” he said. “It was really about affordable housing. That’s what started the conversation. They had focus groups with their employees. Their people said, ‘We’re willing to move. We just want to live the American Dream.’”
Toyota did the math and found that housing costs in Los Angeles County, where Torrance is located, are three times per square foot the cost of a house in Dallas-Fort Worth.
“They’re paying the same salary,” Niemi said. “So in real terms, they’re going to triple the affordability of housing they can buy if they move to Texas.”
Would you follow your employer from SoCal to Dallas? I’d guess if most of your household income is derived from the employer moving, you’d have to seriously consider it. It’s at least worth a try. Give it maybe two to three years. See if it’s doable.
When I worked at KB Home in 2005, everyone talked about moving to the Atlanta office because in Atlanta you could buy a McMansion for under $200,000 even back during the bubble. You could take the same salary and reduce your housing costs by 70%. That frees up a lot of disposable income.
I recently traveled to Plano for business and it’s a nice area, very clean, and loaded with ex-Californians. The article failed to mention that each employee is effectively getting a 10% pay raise due to no state income tax in Texas. So take that pay increase and buy twice the house for half the cost that you could in California and it’s very tempting for people.
The big drawback in my mind is that we have so much more to do in California. They don’t have the ocean or the mountains, just flat prairie land. Also, very little entertainment unless you drive into downtown Dallas, and even then it doesn’t compare to what we have around here. We have world class music, comedians, theater productions, you name it.
The one thing they do have is good food, and so all of these ex-Californians with nothing to do take their newfound disposable income and eat out like crazy. There is one town near Plano that has something like 200 restaurants in few square mile area, and the places are packed with long waits, even on weeknights. Unreal.
“We have world class music, comedians, theater productions, you name it.”
These things are not static and will follow the population.
Yes. The culture will go to where people with money are. If ex-Californians demand these services, they will appear.
I’ve found the vast majority of people who insert “The Constitution” in political arguments rarely understand even the basics, much less have detailed knowledge on the topic. Here are some fun facts:
10 common misconceptions about the Constitution
http://www.abajournal.com/news/article/10_things_you_may_not_know_about_the_constitution/?utm_source=maestro&utm_medium=email&utm_campaign=weekly_email
This one surprised me: 9.) Several states did not immediately approve the Bill of Rights. Connecticut, Georgia, and Massachusetts never got around to ratifying it until the sesquicentennial of the Constitution in 1939.
Which was completely irrelevant since you only need a 2/3rd majority to modify the constitution. Since 10 States approved it the bill of rights became law in 1791. Those states probably just ratified it to make it retroactively unanimous but it was not required.
True, but interesting that they never bothered. Protest vote?
Massachusetts wanted additional changes which they didn’t get. Connecticut and Georgia though it was perfect as is.
You know your history.
I just hope Torrance still have Japanese food n markets…
Fed Rate Hikes Will Dampen Sales Of U.S. Homes To International Buyers
The Federal Reserve’s steady round of rate hikes over the next two years will hold back foreign home buyers from Western Europe and Canada. The reason is the Federal Reserve policy change to raise interest rates will make the U.S. dollar stronger. That in turn will make it more costly to buy in America for foreigners. One major exception to this trend is likely to be Chinese buyers.
The U.S. economy grew by 2 percent in the most recent quarterly GDP data, which is a continuation of subpar expansion compared to historical norms. Yet, America’s performance looks quite good if compared to other advanced countries. Japan, Canada, and most European countries are barely growing if at all. Moreover the job market conditions in the U.S. continues to show improvement: 2.6 million net new payroll jobs in the past year, 12 million net new jobs over the past 5 years, and the unemployment rate falling to 5.0 percent. Even wages are showing signs of impending acceleration as companies try to lure workers. Because of these factors, the Fed raised its interest rate in December and is expected to do so throughout 2016 and 2017. The terminal fed funds rate could settle at 3.0 to 3.5 percent. Mortgage rates and other longer-dated interest rates need not rise in equal proportion, but the direction will be upward.
Higher interest rates draw foreign savings into the U.S., which then strengthens the dollar. Already the U.S. dollar, because of a better economic performance and in anticipation of future rate hikes, is stronger by more than 20% on a trade-weighted currency conversion from few years ago with much of the increase occurring in the past year. For example, the U.S. Dollar and the Aussie Dollar were in near parity – one for one – three years ago, but now $1 gets 1.40 Aussie Dollar. These types of changes make the cost of a U.S. property is much more expensive to foreigners.
Sorry I do not believe that Toyota is moving because of housing. I am sure they got a big tax break and other concessions to move to Texas. Concern over their employees housing sounds nice but it is a smoke screen.
It becomes a very real problem for hiring and retaining good talent. Super high housing costs forces them to pay more in salaries, which also fuels the high house price problem. It may be too strong a statement to say that the cost of housing was the sole reason, but it was likely a large contributing factor.
I saw the movie “The Big Short” last night, and it got thinking these thoughts:
1) The TBTF Banks have consolidated and are now bigger today than they were during the economic crisis.
2) Home prices in much of the country are near all time highs prior to the economic crisis despite wages being less than the same period. We still have never resolved this issue and it is the reason why first time home buyer sales remain low.
3) There are likely more Credit Default Swaps in existence today than there were prior to the economic crisis. However, we don’t know this for sure because this market is still traded in the dark without any oversight from the SEC or FINRA.
4) The Federal Reserve has still not been reformed and they continue to inflate bubbles and deny they exist.
I thought the movie was excellent … I would give it a solid B+ grade. It broke down a very complex issue and made it easier for the common person to understand.
BTW, on a final note … oh my, tic, tic, tic:
Michael Burry, Real-Life Market Genius From The Big Short, Thinks Another Financial Crisis Is Looming
http://nymag.com/daily/intelligencer/2015/12/big-short-genius-says-another-crisis-is-coming.html#
Did the movie make you angry? I think you could tell from my post yesterday that the reminder of all the facts you listed above really pissed me off.
Your point #2 is false.
Incomes are not lower than they were at the height of the bubble unless you measure on an inflation adjusted basis, but using that standard, home prices are not near all time highs. You have to measure both in either nominal terms or real terms, but you can’t do a mix of nominal and real.
“…you can’t do a mix of nominal and real.”
Sure you can, if your sole intent is to deceive, not inform.