Feb162017
Low house prices provide an economic boost
Low house prices make for lower debt service payments that benefit the economy as money is liberated to circulate and buy goods and services.
Low house prices benefit everyone because low house prices make for low loan balances and less debt-service. When borrowers carry excessive home debt, the excess comes directly out of disposable income. Since consumer spending is such an important component of the economy, the excess interest payments drain the economy (and enrich lenders).
It’s really that simple.
Legislators, existing homeowners, and bankers all want rapidly rising home prices. Legislators want to see home equity rise because it provides free money to homeowners reducing government dependency. Bankers like rapidly rising home prices because it reduces their exposure if a loan goes bad. Existing homeowners… well, they get rich, so obviously, they like rapidly rising home prices. With all that pressure, it isn’t surprising that none of those parties recognize when they have too much of a good thing.
There is no free lunch. For home prices to rise more rapidly than wages, then future homebuyers endure higher payments and less of the benefits — unless the pool of greater fools is enabled with toxic financing options. When homebuyers must overextend themselves to buy a home, they often become dependent upon mortgage equity withdrawal to make ends meet. When large numbers of people come to rely on this money, a Ponzi scheme takes off.
During the housing mania of the 00s, the California economy depended on Ponzi borrowers raiding the housing ATM machine to stimulate growth.
Lenders ostensibly didn’t have a problem with this practice, despite the fact it was a Ponzi scheme. Apparently, no lender believes they will be the one holding the bag at the end — and with endless can-kicking they may be right.
Sustainability is key
Rapidly rising house prices are not sustainable, and the HELOC dependency it creates provides an unsustainable economic stimulus sure to result in a painful crash. Financial market implosions purge irresponsible and unsustainable habits from the populace. HELOC dependency serves no one, not even the sheeple who got to enjoy it for a time. The unceremonious fall from entitlement is inevitable, and although the fall is emotionally devastating, getting off the HELOC heroin is better for borrowers in the long term.
Falling prices bring affordability to the prudent who understand valuation and their cost of ownership. Many people have put off their purchases because they understand the power of rental parity. Those people will be rewarded with lower debts, and the ability to move without feeding a black hole on their family balance sheet. The lower debt service payments will benefit the economy as money that used to go to a lender is now circulating to buy goods and services.
Why Falling Home Prices Could Be a Good Thing
Conor Dougherty FEB. 10, 2017
Suppose there were a way to pump up the economy, reduce inequality and put an end to destructive housing bubbles like the one that contributed to the Great Recession. The idea would be simple, but not easy, requiring a wholesale reframing of the United States economy and housing market.
The solution: Americans, together and all at once, would have to stop thinking about their homes as an investment.
(See: House poor: when the house fails as an investment)
The virtues of homeownership are so ingrained in the American psyche that we often forget that housing is also a source of economic stress. Rising milk prices are regarded as a household tragedy for some, and spiking gas prices stoke national outrage. But whenever home prices go up, it’s “a recovery,” even though that recovery also means millions of people can no longer afford to buy. …
High rent and home prices prevent Americans from moving to cities where jobs and wages are booming. That hampers economic growth, makes income inequality worse and keeps people from pursuing their dreams.
(See: Potential homebuyers can’t save for down payments with high rents)
So instead of looking at homes as investments, what if we regarded them like a TV or a car or any other consumer good? People might expect home prices to go down instead of up. Homebuilders would probably spend more time talking about technology and design than financing options. Politicians might start talking about their plans to lower home prices further, as they often do with fuel prices.
Can you imagine that actually happening?
In this thought experiment, housing prices would probably adjust. They would be somewhat cheaper in most places, where population is growing slowly. But they would be profoundly cheaper in places like super-expensive San Francisco. …
The only real solution is to build enough houses to accommodate population and job growth. House prices wouldn’t necessarily stop going up, but the rate of price increase would be less than the rate of wage growth. Over time, even expensive areas like San Francisco could be brought back to much more manageable levels of affordability.
Over time, the accelerated pace of building could lead to a long-run deflation in home values. But for the most part that would be limited to a few coastal cities. And while the older homeowners there would most likely be resentful of all the new apartments, condos and townhomes that caused their home equity to shrivel, younger people would have an easier time getting started.
The nimbys wouldn’t be impressed by the changes.
Of course, our view of homeownership is so entrenched in our economy, our political system and our tax code that it would be impossible to change in a short time, and probably even in a long time. But there could be political and societal benefits. …
The point of this thought experiment isn’t to embrace it full-on, but to open our eyes to the negatives of the national obsession of owning a home, expecting its value to rise, and using the levers of local government to keep neighborhoods as they are.
I’ve dreamed about this for years.
High house prices that keep rising higher certainly don’t benefit buyers who must pay higher and higher prices to own their homes. They bear all the costs but obtain none of the benefits — at least until future buyers push prices even higher. Recent homebuyers are impoverished in order to enrich those who came before them.
Housing Shortage Fuels Price Gains
The number of homes for sale fell to the lowest level in nearly two decades in the fourth quarter, lifting prices and raising concerns that young buyers are being shut out of the market.
The median price of an existing single-family home increased in 89% of metropolitan areas in the fourth quarter compared with a year earlier, the National Association of Realtors said Thursday. In the third quarter, prices rose in 87% of those markets from the same quarter a year earlier.
Sale prices in more than half of the 178 markets included in the report have now reached or surpassed their previous peaks.
“The inability for supply to catch up with this demand drove prices higher and continued to put a tight affordability squeeze on those trying to reach the market,” said Lawrence Yun, chief economist at the National Association of Realtors.
A major factor driving price gains is a worsening inventory shortage. At the end of the fourth quarter, there were 1.65 million homes available for sale, 6.3% less than the same quarter a year earlier and the lowest level since NAR began tracking the supply of all housing types in 1999.
What a Drag
Pretty much any adult with a rudimentary degree of financial knowledge is aware of the impact that interest rates have on housing. Lower rates make monthly payments cheaper and higher rates make monthly payments more expensive on a relative basis. Since nearly all homes are financed, rates impact buyer demand and prices rise and fall accordingly.
What’s far less understood is the impact that housing costs have on interest rates. Let me explain: the cost of shelter is basically a necessary evil. Houses are not a particularly dynamic economic investment yet still represent the largest “asset” that most people own. Every dollar spent on housing is a dollar that is not recycled back into the economy via consumption or investment in growing businesses that create jobs. This means that excess dollars spent on housing are a drag on the economy, leading to lower growth and, in turn lower interest rates.
The conventional wisdom is that rising housing costs should lead to higher inflation. However, this has proven to not always be the case, especially in recent years. As housing (either renting or owning) becomes more expensive without incomes rising a commensurate amount, it causes capital to be diverted away from more productive parts of the economy. This effectively limits economic growth, slowing inflation and keeping interest rates lower than they would otherwise be. An interesting counterfactual to this is the run up to the housing crash in 2008. In the mid 2000s, the HELOC floodgates opened, and people were allowed to extract equity from their homes at record amounts. A large portion of that money found it’s way back into the economy via increased consumption which stimulated economic growth for a period of time and led to higher interest rates. Of course this was unsustainable and the economy came crashing down in a heap when the market turned, leaving a giant mess of negative equity.
So let’s carry on with this hypothetical. Say we opened the floodgate of development. What kind of effects could we expect? The economy would grow, and by a lot. According to a recent paper by the economists Chang-Tai Hsieh, from the University of Chicago’s Booth School of Business, and Enrico Moretti, from the University of California, Berkeley, local land-use regulations reduce the United States’ economic output by as much as $1.5 trillion a year, or about 10 percent lower than it could be.
That is a theoretical figure that includes easy-to-see things like increased sales of building materials and more jobs for construction workers. Most of the increase, however, would come from more abstract gains like increased wages for people who are willing to move from an economically distressed city to a faster-growing economy elsewhere, but are currently unable to because housing is too expensive.
That giant sucking sound that you hear $1.5 trillion a year that is swallowed up by housing costs, keeping it from making it to more productive parts of the economy.
I’ve always been confused about the concept that a dollar spent on housing isn’t a dollar recycled back into the economy. Well, what does your landlord do when he gets more rent than he used to? Maybe he buys a Tesla and a trip to Hawaii… wouldn’t those actions boost the economy?
If you overpay for a house, well, sucks for you, but wouldn’t the retired couple you bought the house from use the windfall money to travel, eat out more often, buy a boat and an RV, get a Honda Civic for their granddaughter’s college graduation present, and maybe loan $25000 to their free-spirit daughter to start a rice pudding food truck? Isn’t that spreading money around?
It isn’t like money spent servicing housing costs goes into some financial black hole.
Look at it as a matter of where that dollar gets circulated.
Any dollar spent on housing does get recirculated in the world economy, so on that scale, it makes no difference. However, a dollar spent on housing is probably $0.80 in mortgage interest, and that may be going to an overseas investor, never to be seen again in the US economy. Also, since mortgage finance isn’t usually handled by local banks anymore, even if the investor is in the US, it doesn’t mean the dollar is recirculated in Southern California. If a borrower isn’t so indebted, then the money that used to flow out of the local economy is instead spent locally.
Imagine if the dollar that was spent on interest and sent to an out of area investor were instead spent on a dinner out at a local restaurant. That money pays local food suppliers, local wait staff, and so on. The money circulates around the local economy and boosts the sales of goods and services locally.
So while no money spent on housing is truly taken out of the broader economy, it is generally taken out of the local economy. California homedebtors fund pension funds all over the US and abroad.
I’d love to have an idea of how many retirement plans, investment managers, pension funds ….have invested in apartment complex throughout Orange County. It’s probably more than anyone realizes. The last downturn proved the US government will do anything to keep prices stable, safer than the stock market.
The deep-pocketed investors who buy the bonds used as financing on these come from all over. Probably very little of the debt used to finance these properties is held locally.
NYC rents dip as concessions become the new normal
A little relief is coming this way for renters, particularly those in NYC’s luxury market. The average rent throughout Manhattan and Brooklyn dipped in January, with concessions like free rent and comped building amenity fees reaching new highs. The use of concessions has been on the rise, particularly in Manhattan, where Douglas Elliman found that it hit an all-time high for the fourth consecutive month—now, more than 30 percent of leases include a concession. In short, it’s a good time to sniff out reduced rent.
In Manhattan, the median rent—including the cost of concessions—has been on the decline for six consecutive months, year over year, landing it at $3,259 for the month of January. (Without concessions, the median rent in Manhattan comes in at $3,369.)
The rental market in the borough has been tracing the same pattern for months: the demand for less pricey and often smaller apartments remains strong while the market for more expensive and larger apartments is less aggressive. Because of this, the average rent for studios and one-bedrooms is rising as rents for two- and three-bedrooms fall. The average rent for a Manhattan two-bedroom is down three percent from this time last year, now clocking in at $4,382. For three-bedrooms, those numbers are far more staggering: the average rent for an apartment with three or more bedrooms has fallen nearly 12 percent from this time last year to $7,706.
Elliman data guy Jonathan Miller explains the trend: “Those renters are also considering moves to the suburbs which are still experiencing record sales volume. Studio renters aren’t going to the `burbs to buy a house—typically.” It’s no wonder the two-bedroom market in Manhattan is where concessions are being used the most.
Expect to see fewer Wall Street Journal articles going forward.
The Wall Street Journal to close Google loophole entirely
The Wall Street Journal continues to tighten up its paywall as it strives to hit 3 million subscribers to the Journal and other Dow Jones products.
Starting Monday, it’s turning off Google’s first-click free feature that let people skirt the Journal’s paywall by cutting and pasting the headline of a story into Google. The Journal tested turning off the feature with 40 percent of its audience last year. But the eye-popping moment was when the Journal turned it for off four sections for two weeks, resulting in a dramatic 86 percent jump in subscriptions. The Journal said the full turnoff is a test, but didn’t say how long it would last.
“A consistent amount of people were avoiding the paywall,” said Suzi Watford, Dow Jones’ chief marketing officer.
The Journal recently touted a 110,000 increase in subscribers in the last three months of 2016 to 1.1 million compared to the previous quarter, which a spokesperson called its biggest quarter-on-quarter increase in history. And while it believes the Trump bump played a significant role in that increase — 13 of the top 20 stories of the past six months were political — it also reflects efforts that have been underway since last summer, when the Journal started to tighten up its paywall, tweak its subscriber messaging and allow people to share links on social media.
“We had a paywall that’s 20 years old and hadn’t really been changed,” Watford said. “We asked, how can we optimize it for subscription sales but continue to work for advertisers?”
This will please working class Republicans. They perceive these immigrants as taking jobs meant for them, so if these workers stop going to work, perhaps they will get fired and be replaced by an American worker.
Immigrant Workers, Families to Protest By Staying Home
Organizers in cities across the U.S. are telling immigrants to miss class, miss work and not shop on Thursday as a way to show the country how important they are to America’s economy and way of life.
“A Day Without Immigrants” actions are planned in cities including Philadelphia, Washington, Boston and Austin, Texas.
The protest comes in response to President Donald Trump and his 1-month-old administration. The Republican president has pledged to increase deportation of immigrants living in the country illegally, build a wall along the Mexican border, and ban people from certain majority-Muslim countries from coming into the U.S. He also has blamed high unemployment on immigration.
Employers and institutions in some cities were already expressing solidarity Wednesday with immigrant workers. Washington restaurateur John Andrade said he would close his businesses Thursday, and David Suro, owner of Tequilas Restaurant in Philadelphia and a Mexican immigrant, said he also planned to participate.
The Davis Museum at Wellesley College in Massachusetts said it would remove or shroud all artwork created or given by immigrants to the museum through Feb. 21.
In New Mexico, the state with the largest percentage of Hispanic residents in the nation, school officials worried that hundreds of students may stay home on Thursday.
“We respectfully ask all parents to acknowledge that students need to be in class every day to benefit from the education they are guaranteed and to avoid falling behind in school and life,” principals with the Albuquerque Public Schools wrote in a letter to parents.
Students who take part in the protest will receive an unexcused absence, Albuquerque school officials said.
Organizers in Philadelphia said they expect hundreds of workers and families to participate.
“Our goal is to highlight the need for Philadelphia to expand policies that stop criminalizing communities of color,” said Erika Almiron, executive director of Juntos, a nonprofit group that works with the Latino immigrant community. “What would happen if massive raids did happen? What would the city look like?”
Almiron said that while community groups have not seen an uptick in immigration raids in the city, residents are concerned about the possibility.
With the high number of recent protests going on, everybody’s messages get diluted and it diminishes the impact that any one protest can have. Nobody even cares about this one. Sad!
Not just diluted, but radicalized. It will be interesting to see how turned off the true middle America gets with all of this.
Yeah, exactly. Every time I see masked protesters clubbing somebody over the head or burning private property, I don’t get angry. They are working hard on Trump’s re-election in 2020 without realizing it.
I should clarify it does make make me angry, but it’s not something I dwell on like some, because I see the huge mistake these masked protesters are making. What is amazing to me is how many of my friends/family that I always thought of as basically rational people that have exposed themselves as being completely radical with their FB postings. When I respond to their endorsements of violence and anarchy with simple facts, the response is almost always crickets. Their objections to Trump are visceral and emotional, but not based on rational thought about what is actually going on.
I felt the same way about Tea Party protesters, crazy, radical, racists. Violence is not condoned and there were probably lots of sane tea party groups who didn’t support the racist nature of the Obama protests. There is always a bad apple and blanket generalizations never help.
There is no “they” in these protests. It’s individually many angry people with their own unique agenda (women, gay, Muslim, immigrants, refugee sympathizers, illegals, teachers, scientist…. people all over the world who are reluctant to visit the US.
To minimize it to a singular “they” you are missing the mark.
I think equating the Tea Party with a racist movement discredits your post, but it’s a common smear tactic on the left. One that helped get Trump elected.
My comments were directed at pretty specific groups: the masked anarchists committing violence and my personal friends & family on FB. I really have no problem with any of the protesters other than those that commit violence. Was the Tea Party committing acts of violence? Nope. They were too busy winning elections. Therefore, even though I wasn’t one of them, I had no problem with their protest activities.
Unlike the Tea Party, which had a unified message of lower taxes and less government, the current protesters are trying to protest too many things at once. This has the collective effect of cancelling each other’s voices out, and the value of the protests gets diminished.
I’m a registered republican. Neither left or right. I was not equating Tea Party to racists. That was my point about equating all protesters to being violent. Even if there are violent people diluting messages. These protest should not stop.
As a women, he disgusts and saddens me.
So many on the left still don’t comprehend that the very things that make them so upset actually appeal to Trump’s reporters. At some level, they believe that everyone should respond the same way to the same events as they do. When they protest what Trump does, rather than converting Trump’s supporters to their point of view, Trump’s supporters take it as a sign that Trump is doing a great job, the opposite of what Trump’s opponents want to happen.
Will Trump Succeed in Restoring America, or Will His Enemies Drag Him – and Our Country – Down?
After barely two weeks in office Donald Trump has stunned the world with his «shock and awe» campaign to keep promises made when he was a candidate. The mere fact of a politician doing what he said he would do seems to have unsettled the nerves of his opponents. What is called «Trump Derangement Syndrome» is already reaching critical proportions.
Withdrawing from the Trans-Pacific Partnership, ordering a start on his Mexican border wall, ordering an investigation into voter fraud (if conducted properly, almost certain to uncover widespread unlawful voting by non-citizens both legally and illegally present in the U.S., since no proof of citizenship is required to register), insisting he wants to get along with «killer» Vladimir Putin, and cutting short a call with Australia’s prime minister over Barack Obama’s idiotic promise to take in Muslim refugees that our mates Down Under don’t want themselves – all of these have infuriated the usual suspects.
http://www.ocbc.org/wp-content/uploads/2015-Housing-Scorecard-FINAL-PAGES-3.20.15-small.pdf
This is inline with many of the articles you post. It is fascinating that the challenges that face OC are so clear cut and there is no meaningful movement to address them.
Thanks for sharing.
I hope more studies like this will increase awareness of the real causes of the problem. It’s the only way any grass roots political movement will spring up to address it.
A 2017 ‘rentier’ reality…
*LA/OC RRE cap rates continue to tank.
*Input costs continue to rise >the ability to raise rents. In other words… the squeeze is on!! (I have a multitude of good contacts in the space)
Denial or deflection is expected, especially coming from the local ‘moguls’ (with multiple props in the bucket) who post here under annonymous id’s, and calculate net returns ignoring actual inflation LOL 😎
Class is back in session..
Today’s lesson: IRR includes gains from appreciation (aka inflation).
Bonus fact: RRE doesn’t have cap rates. Only CRE does. (Ask your contacts.)
Class dismissed!
Hahaha… you did not disappoint bypassing denial.
Way to deflect 😆
PS: I especially enjoyed the fake news style bonus fact you laid down, and going off topic bringing IRR into the mix. Pure comedic genius 😉
Please provide your data source for “LA/OC RRE cap rates continue to tank”, as I’ve never seen a residential listing that was priced based on cap rate. Generally, they use a thing called ‘comparable sales’ to determine pricing in the residential world.
1) any investor worth his salt would do a cap rate analysis before buying any investment property, CRE or RRE.
2) source: good rentier contacts in the space. That said, I do understand that good contacts may not be a good enough source for many, so I took the liberty… googled the matter. Look what popped up…
California has the lowest SFR cap rates in the nation
In California, single family residence (SFR) investors are wrestling with the lowest capitalization (cap) rates in the nation, according to a recent HomeUnion study.
http://journal.firsttuesday.us/california-has-the-lowest-sfr-cap-rates-in-the-nation/52061/
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HomeUnion Ranks Single-Family Rental Markets
February 24, 2016 | By David Phillips
IRVINE, CA—Memphis has the most favorable cap rate, while San Francisco and San Jose, and Orange County are among the least favorable.
http://www.globest.com/sites/davidphillips/2016/02/24/homeunion-ranks-single-family-rental-markets/?channel=markets§ion=orange-county&slreturn=20170116175112
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So, you see… RRE does have cap rates.
+1 el O
Anyone familiar with this guy? Sounds crazy to me but is he full of BS or what?
http://economyandmarkets.com/exclusives/american-home-values-cut-half/?z=601216
It’s designed to catch attention. There is zero chance of a 30% to 50% drop in value in 2017. We just witnessed the worst possible crash in history from 2007-2012, and it took a full five years to fall as much as he’s predicting. And with the new can-kicking loss mitigation procedures in place, prices will likely never fall that far ever again.
Harry Dent also predicted the Dow would hit 36,000 in 2007 or 2008. Instead the Dow went from 14,000 down to 7,000 during those years. He is fun to listen to but I would categorize him as entertainment rather than somebody I would listen to for actual market timing advice.
This is ridiculous.
Rent in a market is set by income.
We are at rental parity.
Lower rents as a percentage of income would also be an economic boost. The high cost of housing, both rental and resale, are a drain on the California economy.
“we are at rental parity” is a myth; ie.,
During the QE/ZIRP era, the price mechanism behind ALL assets: fed machinations and .gov agencies = NO real price discovery/NO actual/real market.
If low house prices provide an economic boost, then why do the most expensive cities have the most vibrant economies? Conversely, why do the cheapest areas of the country have economies that consist mainly of welfare recipients and liquor store sales? I’m thinking about the desert areas of California or rural plains states.
The truth is that high home prices stimulate the economy because it leads to new home construction, expensive remodels, high end furniture sales, and sales of all kinds of other items to fill the house with.
You are putting the cart before the horse. The most vibrant economies have the most expensive cities because the vibrant economy raises wages which allows local homebuyers to finance large sums. The economy is not vibrant because the city’s real estate is expensive.
I thought you might say that. Basically, high home values are a function of the economy and don’t really matter in terms of boosting or hindering the economy. As an example, OC in 2009-2011 had much reduced home values but the economy sucked. Prior to that, OC had sky high real estate prices and the economy was vibrant. Your theory in today’s post only works in a vacuum where jobs and growth have no effect on real estate.
The core issue is what happens to interest payments. Because our house prices are so high, the amount of mortgage debt in California is staggering. If these loans were held on the balance sheets of local banks and reinvested in our communities, this wouldn’t be a big deal, but most of those huge mortgage payments go out of state to compensate investors. The cash outflows from California each month on mortgage interest is a remarkable amount. If house prices were lower, less money would leave California this way.