Jan222014
Is San Francisco, the most overvalued US housing market, going to crash?
San Francisco is the most overvalued housing market in the United States; however, the conditions necessary to cause a catastrophic house price decline are absent, and it seems unlikely house prices will crash.
I have a challenge for housing bears: outline a realistic scenario where prices crash from here. I’m an old housing bear; I would be happy to carefully and loudly pontificate on an upcoming market crash, but I simply can’t come up with a realistic scenario whereby it occurs. Sure, there are implausible scenarios, mass investor exodus, suicidal lender policy changes, sudden interest rate spike to 7%+, but nothing that seems very likely — or possible at all.
The premise of the original housing market collapse went something like this: People took on mortgage debt which couldn’t be sustained by current income; those borrowers were going to default, lenders would foreclose, lenders would liquidate their inventory, and the resulting flood of must-sell inventory would push prices lower quickly. For the most part, the bust played out in that fashion until the rules were changed — mark-to-fantasy accounting, loan modifications, shadow inventory, long-term squatting. Once the rules were changed, lenders were able to gain control of the flow of inventory, and house prices bottomed and the bubble reflated strongly. With all these measures in place, and with no pressure to remove them, a housing bust with rapidly declining house prices is very unlikely in the foreseeable future.
The unlikely scenarios
A number of unlikely scenarios could cause either a change in the supply, flooding the market with must-sell inventory, or a change in demand, preventing borrowers from financing today’s prices.
Investors could decide to get out of their illiquid trades and simply dump copious amounts of inventory on the market and accept whatever they get for their properties. Stock market investors do this all the time, so it could happen in housing, but it doesn’t seem likely. First, all the investors with significant inventory are seasoned real estate investors who recognize the perils of liquidating illiquid real estate assets. Most, if not all, of these firms have long-term locks on the investment capital, and they are under no pressure to force an unprofitable liquidation to recover capital. There are many other, less damaging methods of extracting cash if they needed it; they could obtain debt or refinance, sell in bulk to another investor, create their own REIT and sell shares to smaller investors, and any of a dozen other methods widely known to these players. A fire sale scenario simply isn’t plausible.
Lenders could decide to change their policies of can-kicking through loan modifications and instead begin aggressively processing foreclosures. But why would they do something suicidal like that? It would put them out of business. Bank regulators aren’t forcing that to happen, and with the degree of control bankers have over their handlers, it isn’t likely bank regulators will suddenly get tough and force a near collapse on the banking industry; therefore, I believe a sudden change in lender or regulator policies isn’t plausible either.
The federal reserve could lose control of the long end of the yield curve, and mortgage interest rates could spike to 7% or higher. This would cause demand to vanish as only today’s 4.5% mortgage rates enable current borrowers to finance today’s inflated prices. I wrote about this potential problem at length in How will the Federal Reserve’s continued printing money impact housing? While it’s possible mortgage rates could rise suddenly, it doesn’t seem a likely scenario unless the economy picks up and inflation gets out of control. 
It would take a large amount of wage inflation, which seems extremely unlikely, to cause inflation to get out of control. The federal reserve has already proven it can print and print and print and print and not cause inflation.
We could have a terrorist attack, a global recession, or some other outlier event, but if something shocked the system, I would expect the federal reserve to print even more money to stimulate the economy, so those events probably wouldn’t crash housing. Basically, unless something forces supply onto the market from sellers who must take what they can get, house prices simply don’t go down; I just don’t see how it could happen otherwise, and I can’t see a plausible scenario where must-sell inventory hits the market. Do you?
Is San Francisco housing headed for a crash?
Home prices edge down, but still hover well above $500K
In San Francisco, there should be a saying: Buy a home at the right time, sell at the right time.
Do so, and you’re set for life.
Do wrong, and you’re headed for foreclosure and bankruptcy.
Yes, it’s a crowded, highly desired metro with myriad issues keeping home buying on the high-end. Yet, the hottest neighborhood in the nation is in San Fran.
But fluctuations in prices from the peak of the 2000s housing bubble to today show the area always charting a volatile course when it comes to price appreciation and depreciation.
DataQuickreleased a report Wednesday showing the median price paid for a “Bay Area” home in December hit $548,500. That is a slight decline from November, but still up 23.9% from $442,750 a year earlier, the research firm said.
The median price rose year-over-year for the past 21 consecutive months. Yet, local sales figures for December reached their slowest benchmark in six years.
Sales fell off a cliff because prices are too high relative to current incomes at interest rates above 4%. Buyers simply can’t afford current asking prices, and toxic financing options are not likely to proliferate any time soon — but they are available (See: Troubling evidence of new Coastal California housing bubble)
DataQuick says 6,714 new and resale homes sold in the nine-county Bay Area last month. That’s the “lowest for any December since 2007, when 5,065 homes sold,” the company added. Still, December sales edged up a slight 0.8% from 6,659 in November.
But it’s the course charted over the past decade that paints a picture of a market with wide, inconsistent price swings. Those selling at the right time make out big time, while the rest suffer. During the peak of the housing bubble, the median Bay Area price reached $665,000 in June and July 2007. By March 2009, the recession had plunged local values, kicking the median San Fran price down to $290,000, according to DataQuick. That same figure is back to more than a half a million dollars today.
“If current trends hold, including year-over-year price appreciation of 20-plus percent, the typical home would be selling for $50,000 to $60,000 more by spring,” said John Walsh, president of DataQuick. “Perhaps twice that at the upper end of the market. That could loosen up quite a bit of inventory. The question then is, how much of the pent-up demand that accumulated during the down years is still there? An additional issue is the fussy mortgage market, although things are moving in the right direction there, slowly.”
20%+ by spring? Pent-up demand? I want some of what he’s been smoking.
One thing that could slow down escalating prices is the future mortgage market, which remains subjected to regulatory headwinds.
In December, jumbo loans well above the conforming loan limit of $417,000 made up 49.2% of the purchase lending market – down from a revised 49.8% in November. Government-insured FHA home purchase loans accounted for 11.3% of all Bay Area home purchase mortgages in December – up from 10.4% in November and down from 13.8% a year ago.
But the ability to access government loans is diminishing somewhat.
“In recent months the FHA share has been the lowest since early 2008, mainly because of tighter FHA qualifying standards and the difficulties first-time buyers have competing with investors and cash buyers,” DataQuick said.
Mark Calabria, director of financial regulation studies at the Cato Institute, addressed California home affordability issues more than a year ago, blaming some of it on real estate regulations.
“It’s really a supply constraint,” Calabria said. “They should look at trying to deregulate their land markets. In a relatively competitive market, you could build affordable housing without massive subsidies,” he explained at the time.
He is right about the supply constraints creating a false shortage thus driving up prices, but it’s unlikely that will change any time soon. Landowners and lenders benefit from sky-high prices; municipalities benefit from higher tax revenues; only future homebuyers get screwed by higher prices, and they don’t represent a coherent political force to cause change. No, the supply constraints are going away.
I don’t see a crash coming any time soon. As long as supply continues to be restricted and the percentage of all-cash purchases is high, prices simply won’t go down. Sales volumes may continue to decline, but prices will remain suspended where more buyers can’t afford them unless something changes at the banks and they begin approving more short sales or foreclosing on their delinquent borrowers rather than modifying their loans. At some point, we may see a medium-term slow-burn decline like the mid 90s, but a 00s type crash isn’t forthcoming.
[dfads params=’groups=164&limit=1′]
[idx-listing mlsnumber=”TR14008459″]
6162 LEYTE St Cypress, CA 90630
$550,000 …….. Asking Price
$670,000 ………. Purchase Price
10/17/2005 ………. Purchase Date
($120,000) ………. Gross Gain (Loss)
($44,000) ………… Commissions and Costs at 8%
============================================
($164,000) ………. Net Gain (Loss)
============================================
-17.9% ………. Gross Percent Change
-24.5% ………. Net Percent Change
-2.3% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$550,000 …….. Asking Price
$110,000 ………… 20% Down Conventional
4.42% …………. Mortgage Interest Rate
30 ……………… Number of Years
$440,000 …….. Mortgage
$108,379 ………. Income Requirement
$2,209 ………… Monthly Mortgage Payment
$477 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$115 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$2,800 ………. Monthly Cash Outlays
($406) ………. Tax Savings
($588) ………. Principal Amortization
$178 ………….. Opportunity Cost of Down Payment
$158 ………….. Maintenance and Replacement Reserves
============================================
$2,142 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$7,000 ………… Furnishing and Move-In Costs at 1% + $1,500
$7,000 ………… Closing Costs at 1% + $1,500
$4,400 ………… Interest Points at 1%
$110,000 ………… Down Payment
============================================
$128,400 ………. Total Cash Costs
$32,800 ………. Emergency Cash Reserves
============================================
$161,200 ………. Total Savings Needed
[raw_html_snippet id=”property”]
I’ll bite:
Scenario: Taper driven stock market decline.
With hedge fund leverage and margin/GDP at record levels, getting additional debt would be near impossible and the demand for cash would skyrocket. Where does this cash come from? Well, what assets saw massive gains in 2013? Stocks/RealEstate. Taking a 5% haircut off of current market prices from an investment that has gained 20%+ in the last year doesn’t sound so bad.
I wouldn’t expect real estate to be just dumped on the market (would take too long with so few buyers), but selling in bulk to less levered (less desperate) investors seems plausible. In the markets where these properties change hands I guess the price would just reset overnight.
Aaaaannnd then in steps FED/Gov to hand out cash and prop everything back up just before things get too affordable for the normies.
I don’t see how a short-term shock like that would cause a sustained flow of must-sell inventory on the market. Perhaps it could induce a few REO investors to liquidate, which would add some supply, but I imagine those sellers would be patient enough not to flood the market and crash prices. They could seriously slow the rate of appreciation and even cause small declines in the weakest markets, but I don’t think that would create a 2008-style crash.
Good thinking though. It is an imaginative scenario.
It could if it causes credit market disruptions and leads to a bank collapse. There was a reason banks were divided between investment and commercial banking.
I also think stock crash would have a meaningful impact here in the SF Bay Area.
A signifiant portion of transactions here happen well above the conforming limits, either all cash or buyers who have saved up the 20%+. Many people get this money from working from Google, Apple, Facebook, Cisco, etc (the list goes on and on) and having various stock and option plans.
One could actually also make the converse statement that I don’t think prices would have evolved the way the did for the past several years if the stock market had not gone up as much as it did.
That said I also agree with the original point that supply limitation is a huge driver and that probably won’t change very significantly (although I am hoping for a modest improvement).
Tor (Bay Area renter)
agree with above.. not just stock crash though.. it would have to be a tech stock crash. Then again.. what would be the driver behind that.. not like tech stocks are overvalued right now.
SF is headed for another crash (along with OC) simply because…
6) current price levels reflect the residual momentum of QE
5) shelter has become an instrument of speculation that is debt-based and FULLY exposed to global capital flows + volatility + crisis.
4) you need a larger economy tomorrow to pay off the debt accumulated yesterday
3) technology is advancing at ever increasing rates = as time passes, more and more goods/services can be produced with fewer and fewer workers
2) reached the point where carry costs of society have far exceed its output
1) extend and pretend does not equate to resolution
All the factors you list tells me we will simply have more quantitative easing and zero percent interest rates. I believe the federal reserve will chose stimulus over deflation, no matter the amount of stimulus required.
Agreed. It doesn’t mean house prices won’t decline from here (in real or nominal terms), but a house isn’t an “investment” anyway. If you stick to a few general conservative guidelines when financing a house, there are many more things to worry about than its price declining.
Well, the ‘majority’ concurs.
Yes. However, QE infinity is finite in that collapse is the inevitable result. House prices will not fare well when this happens. It is only a matter of time. And those who write this scenario off as an extreme tail event, it still remains the inevitable result of QE infinity.
IR is still holding on to the belief that “this is working”. And it will seem to hold true in the short term.
realtor.com Spin Machine Desperately Pumping 2014’s Market
Despite the numerous challenges that sprang up throughout 2013, the housing market still managed to finish the year in a healthier position than in 2012, according to the latest figures from Realtor.com.
The site’s statistics for December indicate the median national list price ended 2013 at $194,500, up 8.1 percent compared to the end of 2012. Relative to November, however, prices were down 1.6 percent—marking the late arrival of the “usual seasonal winter slow down,” Realtor.com says.
“Bidding wars and all-cash offers left many home buyers empty handed after the summer home buying season,” said Errol Samuelson, president of Realtor.com. “In fact, many buyers remained in the market throughout the fall in an effort to get ahead of the competition—extending the summer season and making housing indicators resilient to usual seasonal patterns.”
The number of listings as of the end of December was an estimated 1.7 million, up 1 percent year-over-year but down 6.2 percent month-over-month. Much of the year saw accelerated price growth and increased competition among buyers as would-be sellers remained on the sidelines due to low equity or other concerns.
Meanwhile, demand from buyers remained strong, even with the winter slump. The median age of inventory in December was 112 days, up 10.9 percent from November but down 5.1 percent from the prior year.
“As we open the new year, the first quarter inventory figures are especially crucial as our first barometer into seller confidence for the 2014 home buying season,” Samuelson said. “The market is still showing significant demand, but in order to have a strong home buying season, sellers need to put their homes on the market.”
There are factors besides seller confidence to consider when it comes to 2014 housing. In the group’s most recent Confidence Index, the National Association of Realtors’ (NAR) chief economist, Lawrence Yun, said regulatory changes coming from Washington—like those instituted earlier in January by the Consumer Financial Protection Bureau—run the risk of hamstringing lending activity if pursued without an eye toward balance.
Another concern, Realtor.com says, is January’s implementation of the Affordable Care Act, which the site’s analysts fear may negatively impact consumer finances.
Your student loan is tanking the mortgage market
The percentage of student loans classified as delinquent shot up by 13% in 2013, as other types of credit — auto, credit cards and mortgages — continued to see notable payment improvements, data from the Federal Reserve Bank of New York claims.
There’s only one conclusion that can be drawn from this – student loans are the new mortgages. Everyone under a certain age seems to have at least one education debt to pay off. And they are more expensive than ever as this debt sector expands to a tally of $1 trillion-plus in outstanding student loans.
With this expansion, comes fewer Americans who are financially stable or qualified enough to buy new or existing homes. But how troubling is the data, really?
It’s a trend the CFPB already highlighted last year. And while the market may want to believe these headwinds are temporal. Analysts in the structured finance space continue to see it as a real problem with potentially explosive outcomes.
What makes the issue appear worse on paper is the fact the government is backing much of this debt in a fashion eerily similar to its support of the housing market back in 2006 and 2007.
“The federal government is the risk-taker on the vast majority of student loans,” said Ron D’Vari, CEO of NewOak Capital. “Similar to the experience witnessed in the growth and risk-taking in the housing market, the rapid expansion of the student loan market, combined with the benefits afforded by government guarantees, is a source of concern. Regulators are on the lookout for abusive practices, with particular focus on student loan servicers and lenders working with for-profit colleges.”
It’s not just the government being on the hook that has D’Vari frightened. He also worries student debt levels have created “an indebted class of consumers” that will impact future buyers of cars and homes.
Purchase Applications Unexpectedly fall 4% from Last Week
Mortgage applications continue to climb, rising 4.7% for the week ending Jan. 17, the latest report from the Mortgage Bankers Association said.
The refinance index also reported a 10% jump from last week, compared to the purchase index, which fell 4% from a week ago.
Overall, the refinance share of mortgage activity edged higher to 64% of total applications.
The 30-year, fixed-rate mortgage with a conforming loan limit decreased to 4.57%: the lowest level since November 2013.
In addition, the 30-year, FRM with a jumbo loan balance dipped to 4.57% from 4.58%, while the 30-year, FHA rate also dropped to 4.24% from 4.29%.
All three 30-year mortgage rates reached their lowest levels since November 2013, with the 15-year FRM decreasing to 3.68% from 3.72% a week earlier.
Meanwhile, the average contract interest rate for a 5/1 ARM fell to 3.23% from 3.28%.
Rates, tight inventory dampen California home sales
California home sales dipped 5.9% from 2012 to 2013 as the market felt the pinch of tighter inventory levels and higher prices, the California Association of Realtors reported this past month.
Higher home prices and tighter inventory levels in December pushed out potential buyers, marking the fifth straight month of declines, C.A.R. said.
Meanwhile, closed escrow sales of existing, single-family detached homes in California accrued to a seasonally adjusted annualized rate of 361,890 units in December.
In December, sales were down 6.7% from a revised 387,860 in November and down 18.6% from 444,770 units a year prior.
Home prices finally reversed a three-month decline and edged higher in December.
Additionally, the statewide median price of an existing, single-family detached home grew 3.7% from November’s median price of $422,210 to $438,040 in December.
December’s price was 19.7% higher than the revised $365,840 recorded in December 2012, marking a year and a half of double-digit annual gains and the first time in 15 months that the annual increase was below 20%.
This is a really, really good question….and it gets to the heart of what is wrong with central planning and the long term stagnation this country faces if we don’t reign in the Fed.
I’m as bearish as you can get, but we’re no longer dealing with a free market where the price of a home is determined by supply-demand dynamics. Just think of all the manipulation that’s going on–QE, mortgage mods, MBS purchases, fake rates, fake inventory, people occupying their homes 3 or 4 years after they should have been foreclosed!!!
It’s all fake. The Fed will move heaven and earth to make sure that prices don’t plunge…BUT–and here’s the catch–preventing the market from clearing, paves the way for long-term stagnation just like keeping the unproductive, money-sucking corporations and banks alive condemned Japan to 20 years of flat growth.
There’s a price to pay for keeping zombies alive, and the price is growth.
“…paves the way for long-term stagnation…”
Not to mention the contributions from a hopelessly convoluted tax code.
Here is a wild idea:
Maybe a parallel economy will grow around virtual money such as bitcoin.
At least in theory, such a scheme could bypass the Fed and the IRS tax code.
“What you can observe depends on the theory that you use.” – Einstein(?)
The tax code came to mind when reading above about all of the interested parties fighting to keep house prices moving higher. There’s no constituency of non-homeowners organized to fight against all of these actions costing them serious money.
It’s similar to the tax code, everyone (in general) would benefit, and the economy too, with a simple income tax code that had no exemptions, deductions, nor exclusions, with much lower rates (bringing in the same amount of revenue); but there just isn’t an organized effort or interest group that fights for this.
Although many folks didn’t warm up to his politics, Steve Forbes pushed the idea of a “flat [income] tax” and abolishing the [then] existing tax code.
Personally, I think the concept of a VAT (similar to sales tax) instead of a flat income tax is the way to go. Such an arrangement would encourage individuals/corporations to make money, save and invest.
Individuals would pay VAT only on what they buy (consume).
To me, paying a VAT would certainly discourage debt as the end consumption (i.e. a house) would be taxed dependent on sales price.
Of course, there are many other pro / cons.
Sad that as a society, we are all stuck with such unnecessary (and expensive / non-productive) complexity.
Steve Forbes also pushed for ending mark to market for bank assests. That makes him an self-serving elitist in my book and I will mistrust every word that comes out of his mouth.
raskolnikov,
I think your analysis is correct. The main reason we are seeing such weak economic growth in what’s supposed to be an expansion after a recession is due to the factors you listed in your comment.
What is socialism?
Socialism is the long hard road from capitalism … back to capitalism.
It’s coming.
Speaking of overvalued…
The incredible gold-interest rate correlation
CHAPEL HILL, N.C. (MarketWatch) — If the 10-year Treasury yield rises to 5%, gold will fall to $471 an ounce.
And if that yield rises to just 4%, from its current 2.8%, gold will still plunge — to $831.
Those sobering forecasts come from an econometric formula based on the last decade’s relationship between gold and interest rates. Assuming this past is prologue, the only way for gold to make it back to its all-time high above $1,900 an ounce is for the 10-Year Treasury yield to fall to 1%.
To be sure, a comprehensive model of gold’s price needs to include more than just interest rates. But, according to Claude Erb, who conducted these statistical analyses, we should not be too quick to reject his simple “behavioral” model relating gold’s price to the 10-Year Treasury yield. Erb is a former commodities portfolio manager for Trust Company of the West and the co-author (with Campbell Harvey, a Duke University finance professor) of a recent National Bureau of Economic Research entitled “The Golden Dilemma.”
Erb says we should not blithely dismiss his simple gold-interest rate model because it has had impressive explanatory power in recent years. Consider a statistic known as the r-squared, which reflects the degree to which fluctuations in one thing predicts or explains changes in another. The r-squared ranges between 0 and 1, with 1 indicating the highest degree of predictive power and 0 meaning that there is no detectable relationship.
In the case of the gold-interest rate correlation over the last decade, Erb told me in an interview, the r-squared is a very high 0.78. ( Click here for a summary of his findings. )
Most correlations on Wall Street don’t come anywhere close to being that high. Indeed, many of the drugs that get FDA approval have lower r-squareds between their use and positive medical outcomes.
Imagine using Erb’s model one year ago to forecast where gold would be trading when the 10-year yield rises to 3%. At the beginning of 2013, of course, that yield stood at 1.76%, and gold bullion stood at nearly $1,700. He told me that the model at that time would have predicted bullion’s price would be $1,196.70 when the 10-year yield hit the 3% point.
That point was reached on Dec. 26 of last year, and the London Gold Fixing price on that day stood at $1,196.50.
That counts as hitting the bulls eye.
Impressive as his simple model has been, however, Erb stresses that he is not recommending that gold traders focus only on interest rates when determining whether they should be in or out of the gold market. Nevertheless, he reminded us, the gold bulls shouldn’t now be claiming that bullion responds to lots of factors besides interest rates. That’s because it was the gold bulls who were quick — so long as interest rates were declining — to claim that the impressive gold-interest rate correlation justified a higher gold price.
As Erb puts it, “if gold traders want to live by the sword, consistency requires them to be ready to die by it as well.”
What factor or factors does Erb suggest that gold traders focus on? The one that he and his co-author Campbell Harvey suggested in their NBER study is the ratio of gold’s price to the level of the consumer price index. Since that ratio historically has averaged 3.4-to-1, a rule of thumb could be that gold is overvalued when the ratio is above that level and undervalued when below.
Currently, the gold-CPI ratio stands at 5.3-to-1, suggesting gold remains quite overvalued. That in turn suggests that gold’s fair value is just under $800 an ounce.
How much money has Erb made using his model?
Here is a graph of interet rates and gold:
“The widespread belief that rising or higher Treasury yields are bearish for gold extends back to the early 1980s. After a popular-mania-driven parabolic explosion higher in late 1979, the last secular gold bull climaxed in January 1980. The day gold topped, 10y Treasury yields were running 11.0%! And they were heading higher still, reaching an unthinkable 15.8% in September 1981. Gold prices just collapsed.
But that doesn’t tell the whole story, correlation doesn’t necessarily imply causation. After soaring 182.6% higher in just 5 months leading into that parabolic climax, gold was due for a brutal bear no matter what long rates did. Provocatively between August 1976 and January 1980 when gold rocketed 731.7% higher, 10y Treasury yields relentlessly climbed 42.2% from 7.7% to 11.0%. Gold still exploded higher.
Despite the popular misconception, long rates are not always highly correlated with gold. And this too makes sense. Gold has never paid a yield, yet it has remained a popular investment for millennia. The investors buying gold are not looking for yields from that portion of their portfolio. They want proven protection from monetary inflation, financial insurance for unforeseen market events, and most of all capital gains.”
http://www.marketoracle.co.uk/Article41269.html
There is also a chart in that article. Personally, I have my doubts that there is any correlation, direct or inverse, with the ten year. I do think that real rates have a causational effect, but supply and demand are more influential than real rates.
Gold has always been a safety play as a hedge against inflation or deflation. Maybe the correlation is between gold price and the rate of change in long-term rates. The 70s gold rush was precipitated by double-digit inflation. Gold is nice to have when your savings only buys 90% of what it did last year.
Gold prices jumped in the 00s because of political instability. Sovereign default risk (Greece, for instance) drove borrowing rates in the PIIGS countries through the roof. Gold prices jumped in response as return OF capital became more important than return ON capital. Gold prices peaked in August 2011, long before the FED considered tapering. If anything, economic stability of Global QE stabilized international financial markets. This stability, artificial or not, is why gold prices started to fall.
Puhleeeeeeze, allow me to clear this up for you MR…
92U²²+0n¹ –> 55Cs²²²+37rb₂ +7ƒ¹ x 0n² + energy – tnx = TOTBKCR
As a result, for optimal guidance, gold vs TOTBKCR provides a much better roadmap.
See for yourself….
The problem is going back prior to 2009, the relationship doesn’t hold. Therefore, you are being fooled by patterns in randomness, as Nassim Taleb would say.
All is well. risk on. growth. strong dollar. dow high. bonds high. RE high. Money fleeing gold. Sustainable?
Two possibilities:
1) Peak electronics. Over the Christmas Holiday I was at Verizon checking on a smartphone for one of ours that broke. The staff was slinging a 7 inch Android Tablet, Verizon branded so I’m not sure who manufactured it, at a price of 2 for $49.00. That’s a steal and yes, they make it up in the $10.00 per tablet data plan charges. That said, even though it was a great price I didn’t need it. I couldn’t give them to anyone since they were loaded up on electronics as well. The smartphone replacement wasn’t going to be an upgrade, more like a swap. The level of tech in phones today has peaked so why buy the latest and greatest. Manufactures like Samsung (SmartWatch) and Google (Google Douche, errr Glass) are pushing their new tech that no one really wants to invest in on a large scale. iPhone 5s and C are so so. Only a radical iPhone 6 might boost sales.If memory serves me, 2013 iTunes sales were reduced YoY for the first time since opening day. More machines…. less software purchases…. tells me a few things.
There just isn’t any big new thing coming that is a “must have” which then drives other product purchases from cables to software. PS4 and XBoxes are out, but are their sales geometrically expanding to the point where companies will hire to support new products for these machines? 4k TV is coming so new sets have to be purchased. That’s what we were told when 3DTV’s came out and look what went.
Without new “must have’ tech, the entertainment/info tech industry will stagnate. Medical tech is another story and could absorb some of the slack in entertainment/info tech.
B) Peak Social Media. The growth arc of FB is slowing. The same for Twitter. MySpace is trying to make a go at it, but at last count Google+ is growing faster. G+ practically is forced on Google/YouTube users and remains little more than a desert of few users. Unless someone can come up with (and monetize) new social media uses, all of the companies that exist to support FB will begin to drop off the radar. Can anyone say Zynga?
Your first point irks me every time I read an article about “the death of the PC” with ipads and other tablets being the reason for flagging PC sales.
Once your PC can read E-mail, browse the web, and run your programs, what is the impetus to upgrade? The company I work for went from upgrading PCs every few years in the 1990s to 10 year old machines being the norm today. New hardware is usually only purchased to replace failing hardware.
We are reaching a point where good enough is good enough, and tech companies are becoming the victims of their own success. Good for the environment, bad for shareholders.
Great observations SGIP.
Facebook to lose 80% of its users by 2017, according to a new study
“Medical tech is another story and could absorb some of the slack in entertainment/info tech.”
As long as there are smart, creative, and hardworking people, I doubt we are going to run short on problems seeking solutions. Maybe it’s time to reallocate some brain power to more useful endeavors than Facebook and Twitter?
Here’s my short list:
1. Cancer sucks, cure it already.
2. My commute sucks, when am I going to be able to zap my ass to work in a transporter? And why do I have to wait 2 days to get something shipped. It should appear at my door before I know I want it.
3. People are idiots. Why can’t we just put something in the water that raises everyone’s IQ by 50 points?
4. We live next to the largest body of water on the planet, and we are in the middle of a drought? OMG, NFW. Are we really this stupid?
5. We spend billions every year to treat the common cold, despite the fact that we have annual flu vaccines. Clearly, the vaccine approach ain’t workin. Maybe we should hire some viruses to solve this issue — they seem to be a lot smarter than we are.
6. Virtual doctor. Why do I have to go to a doctor when I have a cold? Huge waste of time. Blood pressure, temperature, stethoscope should all be part of my iphone. After the virtual exam, my pill should drop out of the bottom of the phone.
Now that we have the computing power we should do something useful with it. When everyone is done with the short list, I have a much longer one.
Companies rise and companies fall. They meet a need, and when that need becomes obsolete, they either fill another need, or they go out of business.
“There are many other, less damaging methods of extracting cash if they needed it; they could obtain debt or refinance, sell in bulk to another investor, create their own REIT and sell shares to smaller investors ”
Aren’t some of the bigger players already rolling huge amounts of properties into REITs?
Yes, they are. Many of them will cash out this way. The REIT will be under no pressure at all to liquidate holdings as it exists as a holding company. Any sale of properties to a REIT ensures they won’t get dumped on the market.
San Francisco is completely social-media centric right now and I think a crash in that business could be challenging for the area’s real estate market. In the 6-unit building I live in fully three people in the other units work for well-known social media companies. The amount of cash and hype around here is unreal. Already we are at a point where buying is far more expensive than renting. I think that alone is a reason prices may start going sideways or dropping slowly. In my neighborhood I saw a one-bedroom condo for sale over 1 million just last weekend. It wasn’t a Real Home of Genius but it was a one-bedroom!
If places like Twitter, FB, and Yelp start hurting and laying off large numbers of workers there could be a big change in the real estate market here. Otherwise, I agree it will most likely be more of the same.
Simply NO.
One thing I mistakenly overlooked for many years is that the the most WEALTHLY of the WORLD WANT TO LIVE HERE. The Fed (the banks) run this market. They are the masters of supply, creators of demand, and the wealthy are about the only players left.
So what if future generations of Americans will never be able to afford to buy a home in coastal CA?? The govt doesn’t care. The banks don’t care. Older generations don’t care. Businesses dont care. But most of all the wealthy don’t care. Don’t underestimate how much wealth is out there! There may be fewer of them, one billionaire can own many, many more homes than the whole middle class combined.
Here is a statistic for you: Did you know that less than.003% of the world has temperate weather like CA?
With housing being the only asset class that lets you earn over 250k Tax free in the US, the wealthy of the world are running over here and will buy out future generations of Americans into poverty and perpetual rental servant-ship!!
Money is color blind and agnostic.
The record level of margin debt in the stock market is the biggest threat.
An Astute Observation!
1) Earthquake
2) Sovereign Bond Crash … QE can not fix that one
3) Major war
Interest Rate Swaps
The boat in this picture is rising just like the housing market is rising:
http://www.imdb.com/media/rm2028437760/tt0177971?ref_=tt_ov_i
Asking what will be the cause of the crash is beside the point by now. How it’s going to happen doesn’t really matter anymore.
[…] Roberts, one of the most popular “bubble bloggers” explains: I have a challenge for housing bears: outline a realistic scenario where prices crash from here. […]