Mar272015
Rising interest rates will harm ultra-high-end housing
Wealthy real estate investors will move their money out of ultra-high-end properties when better investment opportunities become available.
Rising mortgage rates hurt properties priced under $1.5 million directly because rising mortgage rates reduce the amount financed buyers can borrow and bid. What most people don’t realize is that rising interest rates (not necessarily mortgage rates) hurts the ultra-high-end real estate market too.
The market for properties priced over $1.5 million depend less and less on mortgage financing and more on the opportunities the wealthy have to park money and preserve asset value. The cash buyer of a $5 million property isn’t affected by mortgage rates at all, but that buyer is greatly impacted by the desirability of competing asset classes where they might earn a better return on that money. Some wealthy individuals will buy trophy homes for their consumptive value, but over the last several years, many wealthy people bought these homes as investments. Ultra-high-end properties don’t cashflow (see today’s featured property).
Over the last 5 years, the wealthy have enjoyed a 100% increase in the value of their equities holdings and a significant bump in the value of their real estate. Further, they enjoy a low 20% capital gains tax rate, so they can easily liquidate one investment class in favor of another. This means the wealthy have the money to buy real estate if they want it — and sell it if they don’t.
Also over the last 5 years, the federal reserve held long-term interest rates near zero. This policy nearly eliminated any cash returns on available investments: savings account pay just over nothing, 10-year Treasuries recently hit 2%, and bond yields are extremely low across the spectrum. 
Relative to these investment alternatives, high-end residential real estate — with it’s historically low cash returns — is a better investment; therefore, wealthy people buy expensive homes and inflate prices. Couple that with the dumb money flowing in from overseas, and ultra-high-end residential real estate is doing relatively well.
But what happens if real estate isn’t the best alternative? What happens with the rest of the economy does improve and investors find competing opportunities with better returns? Wouldn’t the wealthy sell investment homes to pursue these better alternatives? And wouldn’t that outflow of money put pressure on high-end prices?
Over the next several years, we are going to find out.
PIE IN THE SKY PRICES: Buyers are finding there’s wiggle room at the top of the luxury real estate market
NEW YORK DAILY NEWS Thursday, March 12, 2015, BY Katherine Clarke
It’s time to get real about real- estate prices.
Sellers of some of the city’s most expensive properties are dramatically slashing prices, even as developers keep trying to push the boundaries of the luxury market with pie-in-the-sky price tags of up to $175 million.
“Million Dollar Listing New York” star Fredrik Eklund and business partner John Gomes of Douglas Elliman are cutting the price on their ritziest listing — the stunning 7,061-square-foot penthouse at 11 N. Moore St. in Tribeca — by more than 25%. Initially, they were seeking $40 million. Now it can be yours for $29.95 million.
“We made a decision to get real and sell it,” Eklund said of his listing.
He and Gomes aren’t the only ones axing prices.
Embattled hedge-fund billionaire Steven Cohen, who heads the Wall Street firm formerly known as SAC Capital Advisors, recently reduced the listing price of his palatial One Beacon Court penthouse to $82 million from an ambitious $110 million.
And the owner of the penthouse at the storied Pierre Hotel on the Upper East Side has cut the listing price on the unit by almost half, to $63 million.
It’s not that these apartments aren’t top-notch — it’s simply that they’re overpriced. …
Many people have argued that a house is worth whatever someone is willing to pay for it, and at the ultra-high-end, that’s true because those buyers do not depend on financing. However, in the realm of financed purchases, a house is worth whatever the lender is willing to loan on it plus whatever cash the buyer might choose to contribute. Mostly, the price is determined by financing.
“Fredrik and I love, love, love to break records. That’s what we were trying to do here,” Gomes said. “We were treading new waters and trying to determine the limit for pricing for these one-of-a-kind penthouse apartments. We don’t actually know what the limit is.”
Who wouldn’t love to break records when doing so makes millions of dollars?
It’s the real-estate equivalent of throwing everything against the wall and seeing what sticks.
“At the beginning of the sales process, you have nothing to lose when you list your penthouse at a pie-in-the-sky price,” Gomes said. “You have a lot of time. You never know when someone will fly into New York City on a G5 (private jet) and just has to have your penthouse. Sometimes you get lucky, and when you don’t, quite frankly, you get realistic and you adjust the price to meet market expectations.”
And, sometimes, miracles do happen. …
That is the hope of every seller. It only takes one delusional fool to “fall in love” with a property to hit the lottery, but it’s a bit harder when properties are financed because the buyers and sellers have to cope with appraisers who aren’t “in love” with the property.
The string of high-profile price cuts is a bad omen for the luxury market, particularly … with a more recent dropoff in demand from the Chinese business magnates and Russian oligarchs at whom such pads are targeted.
(See: Wealthy Russians dump high-end US real estate)
A massive, 21,504-square-foot penthouse encompassing three full floors of the Sony building at 550 Madison Ave., is slated to come on the market for $150 million, and there’s a $130 million penthouse in a tower going up at 520 Park Ave.
A penthouse in one of the most buzzed-about new buildings in years, a glitzy skyscraper at 220 Central Park South, is rumored to be asking a jaw-dropping $175 million.
None of the properties have even been built yet, and if any of them sell for close to their asking prices, they would smash the $100.5 million record paid on Billionaires’ Row.
These developers are cashing in on the reckless stupidity of a few very, very wealthy people responding to a lack of investment alternatives elsewhere.
“Being a developer is kind of like being a character in ‘Star Trek,’ ” Haber said. “Sometimes you can bend the laws of physics, and sometimes you can’t.”
But those with boots on the ground, and listings currently on the market, say things are getting out of control.
“It’s starting to get to the point where it’s nauseating to people. It’s like, ‘Why don’t you just put a number like $250 million on it if you’re going to be ridiculous?’ The numbers are meaningless,” said Andrew Gerringer of the Marketing Directors, a new-development sales firm. “Unless your country is physically crumbling and you need to get your money out, or you’re getting ready to go to jail, I can’t think why you would put $175 million down for anything.”
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Someone needs to stop those reactionary NASA scientists from publishing all their inflammatory subversive scientific data.
It’s The End Of March And 99.85% Of California Is Abnormally Dry Already
This is no problem. It is totally solvable. It just requires money.
Growth is good; ALWAYS!!! PERIOD!!! And anybody who does not understand that is a nimby or Chicken Little and needs to shut up.
Exactly.
Is there no fresh water available at any price?
Have you ever turned on your tap and had nothing come out?
Do you think you ever will?
Whether growth is good or not, it’s inevitable. What I find interesting is that you are such a strong Libertarian, but you have no problem with taking away a landowners Liberty when it comes to developing their own land as they see fit, even when they pay all the costs, which they do today with the variety of fees and exactions developers must pay.
There is so much ridiculous reasoning in your comments that I will have to short hand it.
“Is there no fresh water available at any price?”
false dilema, non sequitur, red herring, straw man
“Have you ever turned on your tap and had nothing come out?”
Same as above. Actually not quite the same. This one is so stupid that I am having a hard time thinking you were not too embarrassed to write it.
“Was the pollution ever so bad that it gave you cancer?”
“Have you ever gone outside and could not breathe?”
I know that you did not grow up here, and this is a real question for you to answer. Do you know that there were days in So Cal that we, as children, were not allowed to play outside during recess? And children’s sports activities were curtailed on some days? Because of the smog? Ask someone who is over 50 years old what it felt like to breathe on those days. My mom had to use paint remover on me to get the tar off my skin when I came home from the beach. There were oil spills. Capitalism does not include all the costs in the monetary price of some many products. You may think that developers pay what you think are exhorbitant costs, but the truth is that they do not pay all the costs of their development. They pay off politicians so that they do not have to pay all the REAL costs.
“Do you think you ever will?”
same as above
“Whether growth is good or not, it’s inevitable.”
Appeal to force, Appeal to the popular, Appeal to tradition, False Delimma
“Whether cancer is good or not, it’s inevitable.”
“What I find interesting is that you are such a strong Libertarian,”
Guilt by Association, Poisoning the Well, Red Herring,
“but you have no problem with taking away a landowners Liberty when it comes to developing their own land as they see fit,”
same as above. STRAW MAN I don’t give two hoots and a holler what someone does with their land. The liberty to develop one’s property does not come with a right to purchase water that does not exist. Nor does it include the right to make others pay for ingress and egress. I am all for developers paying for their development, but the present day reality is that they do not pay for all the REAL costs; ie; depletion of aquifers, traffic congestion, pollution, etc.
“It is difficult to get a man to understand something, when his salary depends on his not understanding it.” – Upton Sinclair
BTW, you may label me a Libertarian. I do not.
You’re far too easy to provoke…
You’re far too easy to provoke…
Sorry IR.. You’re guilty of the following infractions:
Guilt by Association, Poisoning the Well, and Red Herring
That’s a 10 yard penalty and automatic first down!
If you were not making a point and just responding to provoke me, then it would seem there is no reason for me to comment. And your other comments, like MR’s, have no credibility.
On the other had you may just be reacting to your lack of any ability to come up with a reasoned and logical argument and therefore, like MR, resort to derision and mocking. And likewise have lost all credibility.
The only way to have credibility is to be right about something, but unfortunately your unwavering devotion to gold has made you wrong for 4 years. You may have once had credibility, but you’ve squandered it, and your increasingly erratic behavior seems to show a weird sort of desperation to be right once again.
My response was not specifically to provoke you but to provide my opinion based on the facts as I know them. Your lengthy response, with it’s sprinkling of derisive and accusatory assertions was well beyond what a detached and rational person would do. You responded as if you were provoked even when you weren’t.
My glib response was to poke you, and hopefully prompt a moment of self reflection on your over-the-top reaction. Mellow Ruse got the point, but it appears you did not. So be it.
At this point, we’ve lost the point of the thread as we are now reacting to the reactions rather than discussing the content that originally spawned the comments.
And for the record, you started it in your original comment which was loaded with sarcasm and mockery. I merely ignored your sarcasm and agreed with the actual text of your statement.
NIMBYs in the twenty-first century
SINCE the publication of “Capital in the Twenty-First Century”, Thomas Piketty has won many plaudits for his work on inequality. The book has so far sold more than 1.5m copies. Its arguments have been praised by Nobel-prize winners and politicians alike.
In his book, Mr Piketty argues that over the long run the rate on return of wealth exceeds economic growth: a dynamic summed up in the equation r>g. Over time, this relationship increases inequality as the share of national income going to those who own capital (the rich) rises, while the portion going to labour (everyone else) falls. He also argues that the return on capital in recent history has been remarkably stable, even as economic growth has fallen, and that this trend will continue in the future.
On March 20th Matthew Rognlie (pictured), a 26-year-old graduate student at the Massachusetts Institute of Technology, presented a new paper at the Brookings Papers on Economic Activity. Mr Rognlie finds that the growing share of national income deriving from capital income has not been distributed equally across all sectors. The return on non-housing wealth, in fact, has been remarkably stable since 1970 (see chart). Instead, surging house prices are almost entirely responsible for growing returns on capital.
Mr Piketty used the historical evidence in his book to argue that a global tax of up to 2% a year on individual wealth should be introduced in order to prevent capital concentrating in the hands of the few. But if housing wealth is the biggest source of rising wealth then a more focused approach is called for. Policy-makers should deal with the planning regulations and NIMBYism that inhibit housebuilding and which allow homeowners to capture super-normal returns on their investments.
Well-off homeowners may for the moment be more responsible for rising wealth inequality than top-hatted capitalists or famous hedge-fund managers. But their NIMBYism is a very Piketty-like phenomenon.
Wealth taxes are tricky. If you had a 2% yearly wealth tax that would mean you would need to keep a significant amount of your wealth liquid at any time, just so you wouldn’t have to sell at a loss to pay the wealth tax in a recession. We already have a lot of problems due to short-term thinking. I don’t think this would help.
One of the benefits of an income tax is that it is self regulating in the sense that if your income goes down on year, your taxes go down. In a financial crises I could imagine a wealth tax making matters worse.
I’ve thought about this kind of thing a bit over the years and I think if we defined all income equally (capital gains and dividends and earned income) we would in effect have a wealth tax without a lot of its thorny problems.
I think wealth concentration is not a good thing for a society. I’m not sure what to do about it, though.
I don’t think a yearly wealth tax is necessary if you have a strong inheritance tax, which we do. An inheritance tax eliminates the liquidity problem you mention, and it doesn’t impact the wealthy person while they are alive. The heirs may complain about it, but it’s hard for the rest of us to get too upset when someone who stands to inherit $100,000,000 only gets $50,000,000.
Good point about the inheritance tax. The idea of a perpetual aristocracy goes against everything this country purportedly stands for, which is why so many on the right hate the “death tax” so much. The opposition strikes me as so strange especially as fewer than 1% people pay it and the exemption is 5 million! I’ve never understood how a group that pays so much lip service to personal responsibility and lionizes “self-made men” disingenuously trots out a couple of farmers now and then to rail against the inheritance tax.
It’s not just farmers it’s any type of reasonably successful family owned business. The problem with the inheritance tax is it isn’t like some of these people are just getting a big pile of money they can easily divide in half. They end up having to offload family heirlooms and ownership of companies to cover the taxes. The same thing happened in England and it’s why so many historical family estates were demolished or now owned/operated by non profits.
Oh well, you can prepare for this by having some liquidity and life insurance. By supporting the status quo, you’re saying a household making $300K should pay 35%+ in taxes every year on their income, but a household inheriting many millions (in wealth) should pay $0 taxes. Just ain’t fair.
Plus, the person who made $100,000,000 did so thanks to the social, political, and business environment created by everyone here in the US. If they didn’t want to pay the inheritance tax, they could have gone to make their fortune in some third-world country that doesn’t have the advantages (and responsibilities) that comes with being a US citizen. I suspect they would find the collective good of living in the US is worth the cost they pay in taxes.
Is that totally a bad thing? Do you think our country would be better off with an entrenched aristocracy? Besides, there is currently a $5 million exemption… seems to me that is a lot of family heirlooms.
As for the company ownership, if you have to break up the company when pa dies, well you planned poorly. Apple wasn’t broken up when Steve Jobs died…
Now you are talking about a public company. The company isn’t broken up when pa dies; it ceases to exit and it’s pieces are sold off. Steve jobs did not own apple he had shares which were liquid and could be easily sold without causing an effect to apples assets or employees. Transfers from parents to children should be like transfers from husband to wife. It’s BS the government gets to chip away at things all the way down the line.
I understand the sentiment, but think about it in real terms.
A kid could be born into a high income family benefiting from everything that provides through his entire life. Regardless of his income level when his parents die, he can receive $10M tax-free.
Now picture a kid born into a typical middle class or lower family. If he has a high household income, he’s paying more than a third of that income in taxes every single year. He’ll never receive a real inheritance, and may have to support parents.
Do you see how this is absurdly unfair?
It’s not the governments jobs to make things fair nor is it possible.
What we have now is an inheritance tax on small business which destroys it and an industry for billionares to use to avoid it.
Hmm, perhaps some political historical perspective is necessary here…
Woody, small businesses are not harmed by inheritance taxes. The exclusion amount is so high that any business with an equity position larger than $5,000,000 really isn’t that small anymore. Further, even if the tax burden were a problem, with $5,000,000 in equity in a business, the heirs could easily take on debt to cover the taxes and keep the business together. And even if they can’t, if the family has to sell a few heirlooms or sell the business altogether, you’re overlooking the fact that they just inherited a great deal of money. They will get over it.
I would characterize our estate tax as weak. I support a robust estate tax that would reach much lower levels ($500K?), not include any exemptions (house), and have a progressive rate structure that starts low and doesn’t end as high as the current rate:
1% on $500K-$1M estate
5% on $1M-$5M estate
10% on $5M-$10M estate
15% on $10M-$25M estate
20% on $25M-$50M estate
25% on $$50M+ estate
I agree all income from all sources should be taxed equally. These two changes should result in substantial additional revenue, which could be used to offset lower effective rates on all income.
Currently we have the most perverse system that taxes income derived from your labor much higher than any other income or wealth.
If you want to tax capital gains and dividends equally, then you need to eliminate the corporate tax. As it stands now owners of stock are double taxed, once at the corporate level and once at the individual level.
The estate tax is also a double or triple tax because income and potentially corporate tax was already paid on that money, so getting rid of the estate tax is the only way to make income from all sources taxed equally.
Social Security is also double taxed…once when you pay in, and once when you collect. So lets repeal the income tax on social security to make all forms of income tax equal.
I’m all for your plan Perspective. 😉
There is “double taxation” everywhere. The sales tax is a “tax on top of a tax.” My desired plan would have a corporate and individual effective income tax rate that would be lower, thereby softening the blow of double-taxation.
The estate tax is a fairness tax. The effective rates should be much lower than they currently are, but reach more estates. Sure it’s double taxation.
The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation.
-Vladimir Lenin
Forward comrade
The government should take 100% of income and wealth and provide every citizen a “living wage”. After all, the government knows better how to spend your money. Ownership. Pride. Work ethic. Those are such outdated concepts. Work for the collective, comrade!
Nice! Two Communist accusations! I comment on EconomistView and receive the same treatment in the opposite direction. Extremists are alive and well! (I understand the blogosphere attracts opinionated people.)
You clearly believe in using the tax system as a means of social engineering which is very socialist.
You can label me whatever you like – whatever makes you feel good. My point here repeatedly is that it is absurdly insane to tax the INCOME of higher earners at such a high level year after year, while we allow $10M in WEALTH to pass from a husband and wife to anyone completely tax free.
I support a more robust estate tax at lower rates (see above). In exchange, in my ideal Grand Tax Bargain, this could result in lower effective income tax rates. The Crazy Right doesn’t have to surrender their sacred military industrial complex budget, and the Crazy Left doesn’t have to surrender its sacred social welfare programs.
The only sacrifice is that a small percentage of dead people’s estates is taxed so that higher earners aren’t supporting the entire federal system.
I am in complete agreement with you that earned income should not be taxed differently than capital gains. My capital gains should not be taxed at 0% while the same amount of earned income is 20%. Earned income is actually a trade of time for money which means there is no actual “income” in the first place.
“My point here repeatedly is that it is absurdly insane to tax the INCOME of higher earners at such a high level year after year, while we allow $10M in WEALTH to pass from a husband and wife to anyone completely tax free.”
False dichotomy. It doesn’t have to be absurdly high taxes on high earners, or insanely high estate taxes on the moderately wealthy. By limiting the role and scope of government we could reduce taxation on both fronts.
To me there is a fundamental difference between taking a percentage of income earned (to provide the stable “system” that allows the income to be transferred amicably); and taking a percentage of the after-tax savings of those individuals. The government has done nothing to prevent spenders from saving, or savers from spending. All other things being equal, that is the only difference between the wealthy and the destitute. Should the government change the score after the final buzzer sounds?
Besides, if the government takes the money, there can be no income tax on the wealth earned on that money. Can there?
What about all the jobs that will be lost when general societal wealth decreases substantially? When someone dies, where does the money go? Does it disappear? No. It goes to their children and grandchildren. These children and grandchildren may use the money for a college education or for a down payment on a house, or buy a new car to get to and from a job. The money is spent or saved. Either way, it contributes to economic expansion.
Many people believe that these descendants get money that they don’t deserve. This has nothing to do with taxation. It has to do with redistribution of wealth against the wishes of those who amassed the wealth. The tax debate is classic misdirection.
The line has to be drawn somewhere, or the government (read: other people in the society), will use their needs to justify taking the property of others. And “needs” can mean just about anything.
If you knew anything about trusts and estates you would understand that people have a fundamental right to devise their property in accordance with their own wishes. This is reflected in the Declaration of Independence, the US Constitution, and, as a fundamental right, property rights predates them both.
Just because the Federal government has the right to tax and spend to promote the general welfare, doesn’t mean that it has the unlimited right to everything under the sun and moon. Some people think that since the person is dead it’s ok to steal from them. How is this any different than grave robbing? How does this logic go? They are dead, they can’t do anything to stop us, therefore we can take their money and give it to our constituents. Just about the most despicable, dishonorable notion I’ve heard – even from politicians.
When you dismiss the wishes of “dead people” you dismiss everything they did during their life. When you discount their desire to provide for their friends and family, you remove a powerful incentive for hard work and saving. When you do this, economic stagnation follows. Wills reflect the will of the living. This is what people wanted for their family before they died. If they wanted to give it to the government, they could. But they didn’t.
They earned the money. They paid the taxes on the income. From the savings they had left over, they built wealth to make their kids’ lives easier than their own. What is so wrong with that?
If you are unhappy with your lot in life then change it! Emulate the wealthy by adopting their habits instead of using the government to take their money.
“If you knew anything about trusts and estates you would understand that people have a fundamental right to devise their property in accordance with their own wishes. This is reflected in the Declaration of Independence, the US Constitution, and, as a fundamental right, property rights predates them both.”
I think I “know something” about trusts and estates, having studied this in law school and studying it since law school due to personal interest.
I studied it in law school too. Anyone who calls a family’s life savings “dead people’s estates” may never understand – regardless how much they study.
“The only sacrifice is that a small percentage of dead people’s estates is taxed so that higher earners aren’t supporting the entire federal system.”
But, we do agree that higher earners shouldn’t have to support the entire tax system. We differ on how to balance the budget. The progressive tax system is based on higher earners ability to pay more. The problem is that the tax rates are based on the assumption that higher earners can pay more. Unfortunately, in California, they can’t. There needs to be a cost-of-living adjustment based on median cost to live in different MSAs. A person with a 100k income in rural Kansas has much more ability to pay than the same income in OC.
I also think that everyone should pay some income tax. That way everyone shares the pain. There shouldn’t be anyone getting money back from the government when they haven’t paid any money in.
There is also the whole cash-economy sector where families earn just enough on-the-books to still qualify for all the government hand outs, and earn the rest off-the-books. There is so much gaming of the system going on. If the same amount of effort and creativity were put to honest use, the world would be a far better place.
You think 5M is alot of money for an estate or business? LOL
You realize that if the heirs can’t afford the 50% taxes on an estate it just gets handed over to the gov’t. That’s straight up robbery. Talk about transfer of wealth…or better yet vaporizing it.
The last gov’t or body of power that took generations of wealth away from future generations was the Catholic Church and Vatican. At least they promised you would go to heaven.
The federal and CA state governments took 43% of my 2014 household income. What do you call that?
I arrived at this number by taking our 2014 federal/state income/payroll tax toll (including the employer paid portions) and dividing this by our 2014 AGI (which excludes 401k, FSA, medical benefits contributions).
Maybe you should buy a house?
I don’t agree with subtracting social security from AGI (since [if] you get this back later on). With SS included, we are at 24%. Without it, we are at 13% of AGI for state/fed income taxes. We pay a hefty amount in property taxes and mortgage interest though.
I’m working on buying a house. We’ll very likely place a deposit on a house in Orchard Hills within the next couple of months, with six more months before the home is available to move into.
I think it’s a good time to buy, or at least it isn’t a bad time, which is about as good as it gets in California. With any luck, it will give you a stable home to raise your family. Which is all any of is looking for. Maybe not el O, or Jimmy the coastal flipper, but, you know, normal people.
Lessons From the 1937-38 Recession For the Fed
How fast should the Federal Reserve tighten monetary policy? Should it tighten at all? I recently wrote about these issues but didn’t have the space to explore a fascinating aspect of the debate: the mostly forgotten 1937-38 recession. To many, it’s a cautionary tale against adopting tighter policies too soon.
At the time, it was called the “Roosevelt recession.” It “came as a surprise to most Americans,” writes historian Alan Brinkley in “The End of Reform: New Deal Liberalism in Recession and War.” Until the summer of 1937, the economy was growing briskly, and “many New Dealers were boasting that the Depression was over.” Although civilian unemployment was still high (10 percent in 1936), it was much lower than the peak (23 percent in 1932) and was declining rapidly.
Signs of economic revival abounded. In 1935, the steel industry was operating at 47 percent of capacity; by 1937, that was 80 percent. “Railroads put on extra trains” for July 4, wrote Business Week. “Mountain and seashore hotels packed them in.”
And then the recession hit. It was a doozy. At its low point, the economy’s output had dropped by 18 percent. Industrial production was down by 32 percent, and unemployment reached a peak of 20 percent, according to economist Allan Meltzer’s history of the Fed.
With hindsight, there’s widespread agreement that this stunning reversal was caused by government policies – though there’s disagreement over which ones.
A final explanation involves gold. Since 1934, the United States had been receiving large gold inflows – reflecting fears of political instability or war in Europe – that stimulated economic expansion. The reason was simple. When the gold arrived here, it had to be sold to the government for dollars. Those dollars were then spent or lent, giving the economy a boost. But in late 1936, the Treasury – again, to quash incipient inflation – decided to offset this boost by draining money from the economy. In economic jargon, the gold flows were “sterilized.”
This turned out to be a massive miscalculation. The sterilization created a “pronounced monetary shock,” argues a paper by Dartmouth economist Douglas Irwin. Growth in the money supply, which had been rapid, halted. Stock prices fell, and interest rates rose. After the Treasury reversed its policy on sterilization in 1938, the economy recovered.
Exactly what government policies caused the 1937-38 slump remains unclear. Perhaps all of them. It almost certainly was some mix. With hindsight, the recession seems to have been preventable. This is a lesson that ought to weigh heavily on the Fed as it ponders what to do next. Though tighter policies are inevitable, a fragile economy is vulnerable to too much or too soon.
Maybe it was created in preparation of WW2. PUtting people to work in factories or the military gave them a job. If they the economy was going well, peoe would have been against entering the war even more.
It wasn’t until WWII that the country finally got back to full employment after the Depression and Recession of 1937-1938. I suspect the authors are right in that it was simply a painful mistake of policy.
No it wasn’t a mistake. They created the recession SO they could give people jobs in the military industrial complex..because they knew the US would have to enter the war.
You give WAY too much leeway to the FED and the Gov’t policies. The press and many people here think their policies are just shots in the dark. Everything is done for a reason.
More Millennials Turn to Mom and Dad to Help With Homebuying
A growing number of homebuyers are expected to turn to the big bank of mom and dad to help finance housing purchases, according to a report released Tuesday by loanDepot consumer lender.
About 17 percent of parents with millennial-aged children – which loanDepot defines as individuals between 18 and 38 years old – expect to help their kids at some point in the future finance a home purchase. And a reported 13 percent of parents have done so in the last five years.
But only 19 percent of millennials aren’t expecting to receive any financial help from their parents, according to the report.
“Support from parents is playing a significant role in the housing recovery, and this new research indicates the trend will increase,” Dave Norris, president and chief operations officer at loanDepot, said in a statement accompanying the report. “Through the survey, 75 percent of millennial-age homebuyers who received financial support from their parents said that assistance made it possible for them to buy a home.”
You could add gen X as well.
Really? Anecdotally, I haven’t seen any of that. Most Gen-Xers were able to get easy financing during the financial bubble and they suffered disproportionately as first time buyers during the housing crisis. That’s why the ownership rate is projected to be lower for Gen X than it is for Millenials at the same age.
I think “Me” is simply referring to Gen X-ers getting financial help from family to buy. I’m Gen X (a loser renter, though) but virtually all of my friends who have purchased have done so with parental support. Sometimes very significant and ongoing support.
I just haven’t seen that with my friends. Most of them bought starter condos with their own funds or still can’t buy.
I live in the bay area, and we don’t know anyone in our circle of friends and co workers, etc who didn’t get family help to buy (or inherit) their home in the past 7 years.
Home prices in our neck of the woods avg 1.9M
Shaky housing market about to get even shakier
When will we all stop kidding ourselves?
While there are certain housing markets that today boast record-setting listing and sales prices, such as Beverly Hills, Manhattan and parts of the Bay Area, much of the rest of the country, where most middle-class people live, is experiencing a leveling off of home prices or even declines. The housing market is shaky today and is about to get shakier still.
Indeed, none other than CoreLogic [CLGX] recently reported that the share of homeowners with negative equity increased during the fourth quarter of 2014 with a collective LTV for all mortgages at 59.7%. This was compared to 59.2% in the third quarter. A barometer of home price trends, CoreLogic’s Housing Price Index fell by 0.7% during that same period.
Over the past several years, despite Wall Street and the current administration’s efforts to artificially prop up the housing market with historically low interest rates and foreclosure-alternative programs such as moratoria, HAMP, HAFA and others, we discovered that the so-called housing recovery was simply rhetoric. Talk is cheap – rhetoric is cheaper still.
As if this “news” isn’t bad enough, we are witnessing just how forgetful (or something) some in our industry must be. As if many in the housing and mortgage industries are unconscious of the fact that the housing market has always been cyclical and ignorant of the fact that the market is perhaps once again sitting on the edge of an abyss of another serious downturn, we see higher risk low-down payment programs coming from the GSEs and some private lenders. In addition, media reports are circulating suggesting that sub-prime mortgage-backed securities are potentially making a comeback.
An executive with the Housing Finance Policy Center at the Urban Institute was quoted recently in the media as saying that we do need a non-qualified mortgage market, and right now, that need is not being met. The executive went on to state that in a healthy market, you want all channels open and available… including securitization.
If that were all true, which it isn’t necessarily, we are hardly in a “healthy market.” Even if one concedes that the “new” subprime market will be different than the one that helped bring our financial system and economy to their knees (it will supposedly be based on credit history, not debt-to-income ratios, high LTVs and low FICO scores), this does not portend well for our economic future.
Straw man
15 yards from the end of the last play
‘Foolish’ survey: Will rising rates doom housing?
Matt Frankel: I don’t believe the real estate market is doomed once interest rates start to rise again. Although even a marginally higher interest rate makes a significant difference over the life of a loan, mortgage payments on a monthly basis won’t get that much more expensive when rates begin to rise — at least at first.
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Jordan Wathen: I don’t think rising rates will doom the housing sector either, but I think it will have two broad impacts that will be measurable and noticeable.
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In all, I don’t expect rising rates to be a death knell for real estate. Rising rates will keep inventory off the market as it becomes less attractive to move, just as rising rates will push marginal homebuyers out of the market for a home. If anything, household formation, not rising rates, will have the biggest impact on real estate going forward. And household formation has been climbing ever since the depth of the recession in 2009, a trend that probably won’t stop in its tracks from a small move in interest rates.
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Dan Caplinger: Jordan and Matt make smart arguments for how the housing market could sustain higher rates, but I still think the housing sector will have a lot of problems once rates rise. One thing to remember is that homebuilders have also enjoyed the fruits of low rates, as they’ve been able to finance land purchases cheaply, giving them more latitude to develop new properties. If debt gets more expensive, they’ll have to be more selective about which projects they take on, and that could hurt their share prices.
New York Fed Says Path for GSE Reform ‘Does Not Look Promising’
The New York Fed reports that public actions supporting the GSEs succeeded in supporting the housing market and removing the GSEs as an “immediate source of systemic risk to the financial system. However, the conservatorships have not yet achieved the goal of reforming the system of residential mortgage finance.” The report cited white paper on federal mortgage reform issued jointly by HUD and Treasury in February 2011, just two years into the Obama Administration, which then-Treasury Secretary Timothy Geithner described as a fundamental plan to wind down the GSEs; however, the New York Fed said the white paper was just a “plan to develop a plan” and offered no specifics as to how to achieve the reform despite offering three broad possible alternatives. The New York Fed, in its report, quotes former Treasury Secretary Henry Paulson as saying in his 2010 book that the conservatorships of the two GSEs was as essentially intended to be a “time out,” or a temporary holding period while the government determined how to restructure Fannie Mae and Freddie Mac.
“The key recommendation of the U.S. Treasury and U.S. Department of Housing and Urban Development (2011) white paper – that Fannie Mae and Freddie Mac should be wound down – would in fact not come to pass,” the New York Fed wrote. “This would be a colossal missed opportunity to put U.S. residential mortgage finance on a more stable long-term footing.”
Six and a half years after the government seized control of Fannie Mae and Freddie Mac, the New York Fed report states that there is no longer the same “urgency” to wind down the GSEs as there was in the years immediately following the crisis.
“The path forward for reform of Fannie Mae and Freddie Mac does not look promising,” the New York Fed wrote. “As time passes since September 2008, the perceived urgency for reform seems to recede. Delay prolongs the uncertainty over the government’s future role in residential mortgage finance, which in turn is a deterrent to private capital re-entering the market, and makes the government’s role appear more difficult to replace. Delay also raises the likelihood that deeper reform will be judged as too difficult to accomplish, and raises the risk that the conservatorships are ended by returning Fannie Mae and Freddie Mac to private status with only minor changes to their charters.”
Unfortunately, for those who’re long housing,
1) monetary policy: the intentional devaluation of people’s labor.
2) the post 08 crash price model is based on the continuance of papering over back-dated fraud instead of clearing it.
As a result, being trapped in a rising rates cycle will do much more than harm the high end, the entire sector will implode once again.
When the market turns, short home builders and short real estate etfs. There is always money to be made !
This is one of the more maddening policies of the faux recovery, and most people don’t realize how much of a giveaway to the wealthy this policy is. Plus, the moral hazard this creates is extreme.
Whatever. We are seven years into the recovery and the dam has yet to burst. The anticipation is killing me. Do your Nostradamic permutations indicate some sort of timeframe for the next apocalypse?
30 million dollar home that sold for 12.75 2.5 years ago. Diusional flipper. Mania has hit. What if 12.75 is worth 8.0 in 2.5 years ?
But the ELITE of Hollywood have stayed there.
And it’s on the “Riviera of America”. Wait, that’s not right, the California Riviera is Santa Barbara (because of its south-facing beaches). Delusional flipper indeed.
Gorgeous, gorgeous house though. Can you imagine the views from that place?
The ultra-high-end owners seem to believe all they have to do is buy a prime property, hold if for a few years, then sell it for double what they paid. That can only go on for as long as other wealthy buyers (greater fools) keep playing the game.
Rudolph Valentine, sorry rudy we still remember you. Those Diusional flippers changed you name. When you drink Kool aid, anything is possible !
From the description:
“famous hotelier and developer Frank Miller whom built the Riverside’s famous Mission Inn”
I know the realtor is trying to sound sophisticated using the word “whom” but when you use it wrong you come across ten times as bad as not using it at all!
He was trying to say whom the heck is Rudy Valentine !
Speaking of high-end homes. I’d never heard of this development until yesterday – Hidden Canyon: https://www.villagesofirvine.com/villages-neighborhoods/hidden-canyon/
ooo ooo! I want to put my name down on the interest list for a $2M+ tract house.
nice location, though.
high demand for those homes, believe it or not. I know of people who will be putting in mid 2 million for a house in that tract. This is before upgrades and landscaping is done. I figure end costs will be close or even above 3 million.
I suspect this development will compete with Shady Canyon for exclusiveness. It will set the pinnacle of pricing in Irvine.
Wow 2m+ cookie cutter track homes. Usually in that price range you get something custom.
[…] backed by strong evidence. It wasn’t hard to see this coming (See last March’s post: Rising interest rates will harm ultra-high-end housing, and Wealthy Russians dump high-end US real […]