Apr192013
Low MLS inventory was a boon to homebuilders
Monday, in the post Can the Fed reflate the housing bubble without negative side effects?, I discussed the various market distortions resulting from the federal reserve’s zero-interest-rate policy. The inflated asset values are byproducts of the fed’s actions, but with respect to housing, the distortion of market prices is what the federal reserve wants to happen. To make the stimulus have good effect, lenders stopped foreclosing on delinquent mortgage squatters and hoped to bait them into temporary loan modifications with the carrot of rising home prices. The slowdown in foreclosures caused the MLS inventory to evaporate. The result of the federal reserve stimulus and the lack of MLS inventory is a supply of homes that fails to meet current demand. Builders are taking advantage of the situation to ramp up construction to deliver the supply the banks are not.
Home-building boom returning to Southern California
Home builders are bidding up land prices, scrambling to find workers and building bigger, more expensive homes than they did just a few years ago.
By Alejandro Lazo, Los Angeles Times — April 13, 2013, 8:08 p.m.
Morning light revealed pitched tents and scattered sleeping bags in front of the sales offices of luxury builder Woodbridge Pacific Group.
Attracted by a dozen new Huntington Beach homes touted as “starting in the low 1,200,000s,” about 15 hopefuls had camped out for days. They were waiting for a chance to get their names on a list to buy into the first phase of a new subdivision.
Anyone who camps out to buy a home is a fool. The people who did this in 2004 and 2005 ended up underwater or in foreclosure, and that was no accident. When buying into a speculative frenzy, buyers are likely to lose money unless they time their exit very carefully. Plus if the demand for the product is that strong, don’t people think the supplier will raise the price? Is any rational supplier going to sell their product under market value to people who camp out on their doorstep? Wouldn’t it be wiser to inflate the prices for these devoted buyers and get more money out of them rather than cut them a deal?
One would-be buyer had flown in a friend from Las Vegas to hold his place in line. Another shopper had hired a pair of men to wait in 12-hour shifts.
It’s stupid enough to waste your own time in one of these lines, but to actually spend money to pay someone else to wait in line is stupid beyond belief.
Christopher Thibodeau, a 43-year-old operations director for a biotech company, rented out an RV so he could telecommute for a week in the builder’s parking lot.
“Do you absolutely have to be here? Maybe, maybe not,” Thibodeau said, sitting inside the spiffy camper with his laptop and iPhone laid out on a desk before him. “I am just going to be safe and camp here.”
Safe from what? Missing out on the deal of a lifetime? That’s kool aid intoxication.
With mortgage interest rates low and prices for existing homes rising, builders are coming back into the market. They’re bidding up land prices, scrambling to find workers and building bigger, more expensive homes than they did just a few years ago.
The tents in Huntington Beach brought to mind last decade’s housing boom,
but the market has changed dramatically since then. Tens of thousands of Southland homeowners who would like to sell their homes still can’t because they’re underwater. That has created a dearth of inventory that’s fueling bidding wars and camp-outs for a limited supply of dwellings.
Kudos to Alejandro for accurately describing what’s happening in the market.
The median home price for new homes sold in Southern California jumped 19% year-over-year to $401,000 in February, according to real estate firm DataQuick. Builders started construction on 2,097 new, single-family homes in Southern California during the fourth quarter of 2012 — a 56% increase from the same quarter the previous year, according to research firm Metrostudy.
That sharp increase is perhaps not surprising, given that 2011 was the worst year on record for new construction. Still, the rapid turnaround may be one of the most meaningful developments for the broader economy; new home construction is a powerful driver of jobs and economic activity.
(See: New home starts surpass lowest pre-bubble low of last 45 years)
The building will create jobs not only in construction but in related industries including lumber, concrete, heating and air conditioning and more. The economic boost should be even stronger when builders complete once-dormant subdivisions and move on to virgin land. Learn more from PURlevel.com about quality construction services.
“They are going to begin with the development of new land, and that is typically about a third of the cost or more of the overall house,” said Gerd-Ulf Krueger, principal economist at HousingEcon.com. “That is going to have a pretty big impact on the housing economy.”
Perhaps builders will start with raw land again soon, but I know they are not doing this now. The supply of finished lots is running out, but there are many entitled and semi-entitled lots available. These will get purchased and turned to finished lots for builders long before developers start working on raw land.
Through the bust, builders scrimped through unprofitable quarters by putting up small, simple models to compete with the many cheap foreclosed homes on the market. Now they’re going big again as prices mend, even in markets that experienced severe price declines, such as the Inland Empire. …
Believe it or not, builders can profitably build and sell houses for $250,000 in subdivisions where they were selling $550,000 properties seven years ago. The extra $300,000 was in residual land value which has since fallen to near zero. Builders are only concerned with the cost of sticks and bricks. Anything left over becomes residual land value. During the bust, land residuals went negative, and all development and entitlement processing stopped. Now with rising prices, many of these parcels have residual value again.
With the real estate market now recovering, the project’s builder, Lennar Homes, has done its own rethinking. The Miami corporation recently unveiled a “Superhome” at Rosena Ranch. It’s basically two homes in one — with a section that functions as a separate apartment, with its own kitchen and bathrooms. The builder hopes to attract families looking to house multiple generations under the same roof.
Dual McMansions? Actually, i like the concept. I have a special needs child that will likely live with us when he is an adult. A Superhome which gave him some measure of privacy and independence would be a great arrangement for us. I know one local family that shares their home with aging parents. I think we will see more demand for multi-generational housing, particularly as the baby boomers age and want to be near their children for support.
If the McMansion was the icon of excess during the housing boom, the Superhome at least seeks to make more efficient use of a huge space. Lennar has packed as many as seven bedrooms and four bathrooms into about 4,000 square feet.
“With interest rates so low, it is still affordable to buy a larger home,” Lennar regional president Greg McGuff said on a tour of the property. “You really have an opportunity for multi-generational living, but you also have the opportunity for more people living in the home to contribute to the mortgage.”
Has he been to Santa Ana lately? It’s not uncommon to find ten or more people living communally in much smaller houses.
Few new homes have been built since the housing crash. Nationwide, just 42,000 completed new homes were available nationwide in February, which is near historical lows, according to the Commerce Department. Inventory in the market for previously owned homes has also dried up as wealthy investors and others have snapped up foreclosures.
In the meantime, buyers have been drawn back to the market by an improving economy, low prices and historically low interest rates. Emile Haddad, chief executive of FivePoint Communities, developer of the massive Great Park Neighborhoods project in Irvine, said both buyers and builders sat out the slump waiting to see what would happen.
There was plenty of waiting for higher prices and some evidence of demand for new product. The Irvine Company wasn’t going to sell unless they could get the land price they wanted. When prices fell and the land values were not justified, the Irvine Company simply stopped selling land, so homebuilding dried up. The group the bought the Great Park grossly overpaid for the property, sot they had no choice but to wait for rising home prices to avoid losing hundreds of millions of dollars.
Many builders, however, are taking their time bringing new products to market, said Brad Hunter, chief economist for Metrostudy. They are more concerned about charging a premium price than about selling homes in volume.”We have seen more and more builders in the position of being able to raise prices again, and to me that is the most important trend,” Hunter said. “There are builders in populated areas in Southern California that are trying to slow down their sales pace by raising their prices.“
That will work. Buyers have ability to raise their bids, but once builders raise prices to levels where jumbo financing is required, the demand falls off a cliff.
Home builders typically sell new subdivisions in phases, setting fixed prices for each phase rather than selling homes to the highest bidder. The strategy is to raise prices in subsequent phases to guarantee price appreciation for early buyers and steady profits for the builder.
But demand is so strong that some builders are tweaking the traditional formula.
When Woodbridge Pacific last month announced it would be selling new homes as part of the first phase of its 80-home Seaglass project in Huntington Beach, it did not create a waiting list of pre-qualified buyers, as builders often do. Instead, it decided to sell the homes first-come, first-served as a way of getting the most motivated and committed buyers, said Todd Cunningham, chief executive of Woodbridge Pacific.
The company also raised prices after the first six homes were sold.
That turned off Thibodeau, the biotech executive, who had waited a week just to get his name on the list. He had planned to snag a five-bedroom model for $1.3 million, but balked when Woodbridge Pacific boosted the price to $1.4 million.
“I just decided it wasn’t worth it,” he said. “I’m not trying to sound like an angry, disgruntled guy. They have limited inventory, and the market is a very hot market.”
So this guy camped out for a week and the builder raised the price on him so he couldn’t get a deal. Who would have guessed that would happen? LMAO!
OC builders are too optimistic
The current market conditions are ideal for homebuilding. There is little competition from MLS inventory, and buyers have capacity to raise their bids. Due to its highly leveraged nature due to the residual value effect, raw land has enormous potential for profit, particularly in the Inland Empire where prices have much more room to rise than they do in Orange County. In my opinion, raw land in Riverside County is one of the best long-term investments available. The Coastal California markets have the least potential to rise significantly. Prices are not undervalued here nearly as much as it is in Riverside County. The barriers to financing at the jumbo loan threshold restricts many of these sales to move-up buyers with plenty of equity and good credit, and there aren’t many of those after the crash and the recession. The builders will do well as long as interest rates remain low and MLS inventory remains sparse. Unfortunately, those conditions will not persist forever.
IR, they were building home in Whittier and Buena Park with two master suites. I also saw some big homes in Ladera Ranch that had “Granda Ma wings”. For example, a bedroom, bathroom, small den, and a kitchenette. And this concept is spreading across the US as families have to combined to make ends meet, boomers spent all their money on crap. I still prefer the two units one one lot concept, house with grandma unit. In Diamond Bar they are over 50 requests to build grandma with existing homes, soon to come to the OC?
I have lived in Woodbridge, Irvine going on 34 years.
One thing I have noticed is a tendency for owners to sub-rent rooms, call them
“Undocumented Grandma wings”.
One big downside to this trend is the tremendous increase in demand on infrastructure — most visibly: roads.
To me, a big red flag of how pervasive this trend has become is the very noticeable increase in on-street parking. When I moved in 34 years ago on-street parking was non-existent.
I think the issue of more cars parked on streets has been a trend in SoCal for decades. I grew up in south LA and I have a friend who grew up in north LA. We both remember playing baseball and football on our neighborhood streets every weekend. However, when you go to these same neighborhoods today, you couldn’t play sports in the streets because they’re now populated with cars on both sides. That was never the case 20+ years ago. There are more cars per household and more people per household today.
I think much of the increase in off-street parking is due to people storing crap in their garages. I currently live in a cluster complex where each of the houses has a two-car garage. When I look out my window, I can see seven garage doors with 14 potential interior parking spaces. Based on the presence of tire tracks leading in and out, I can determine who is using their garage and who is not. Of the 14 available spaces, only seven show any signs of people pulling in and out — ever. Some of the seven spaces show such light traffic that I don’t think they use the garage all the time. I don’t think the 50% utilization I see is out of the ordinary. If you ever drive through the areas in Woodbury with lots of condos, during the day, there is plenty of on-street parking. During the evening when everyone is home from work, there is not a parking space to be found. If there is a convincing argument for HOAs using Draconian methods to enforce garage parking regulations, that is it.
This was a huge problem when I was living in a condo. I would agree that less than 50% of garage parking was being utilized for vehicles. Condos have less storage than SFR’s and people have an ever increasing amount of junk. Many foreclosed homeowners held on to as much of their crap as possible when downsizing to a rented condo, so I think the problem got worse after 2007.
Our HOA tried to implement Draconian methods with parking permits, garage inspections, etc., but the residents threw a fit, and the HOA meetings were packed with angry people. Eventually the management company was fired because somebody’s head had to roll, and it wasn’t going to be the board members.
Report: Kool Aid, Investors, Inventory Shortage Catalysts to Housing Rebound
Demand for distressed properties from investors is contributing to the recovery, not creating an artificial one, according to Pro Teck Valuation Services’ Home Value Forecast (HVF) for April.
According to the report, one of the catalysts driving the housing market rebound has been large investment funds, which are buying distressed single-family homes to be used as rentals.
“These funds have also been renovating homes, which has helped to improve the overall conditions of the surrounding neighborhoods and provided a positive injection of capital,” said Tom O’Grady, CEO of Pro Teck.
Furthermore, the reduction in the supply of homes available for sale is also fueling positive home price reports. A year ago, Pro Teck boldly projected “the market was likely to turn much faster than anyone could imagine.”
“[N]ot only been realized, but also exceeded,” Pro Teck stated.
The real estate valuations company came to the conclusion after noting the number of new homes being built remained at historically low rates for more than five years, which would eventually lead to a shortage once demand returned. In addition, the declines in home values prevented many homeowners from selling, further reducing supply.
After observing a number of real estate cycles, Pro Teck also said that while each one may appear to be different, they all have one thing in common: a catalyst to propel movement.
“Once the cycle starts, a virtuous process of higher sales leads to higher prices which leads to more buyers coming into the market out of fear that they will miss out. At the same time, higher sales typically leads to a shortage of inventory available for sale except in those markets where new homes can easily be built,” Pro Teck explained.
However, the current real estate market also has two unique traits—very low mortgage rates and historically high levels of home affordability, according to the report.
The forecast report included a listing of the 10 best and 10 worst performing metros out of the top 200.
The ranking considers factors such as sales/listing activity and prices, months of remaining inventory (MRI), days on market (DOM), sold-to-list price ratio and foreclosure and REO activity.
Michael Sklarz, principal of Collateral Analytics and contributor to the HVF, noted five of the top markets are in California, while two are in Texas.
Meanwhile, Sklarz said the bottom metros are an “interesting mix, with two continuing to be in the upstate New York area and three in the Southeast.”
“All have double-digit Months of Remaining Inventory, however, many of the indicators are showing positive trends even for the bottom metros area this month,” he added.
Top Metros
Santa Ana-Anaheim-Irvine, California
Indianapolis-Carmel, Indiana
Oakland-Fremont-Hayward, California
Sacramento-Arden-Arcade-Rossville, California
Los Angeles-Long Beach-Glendale, California
Fort Lauderdale-Pompano Beach-Deerfield Beach, Florida
Stockton, California
Warren-Troy-Farmington Hill, Michigan
Dallas-Plano-Irving, Texas
Austin-Red Rock-San Marcos, Texas
Bottom Metros
Cape Coral-Fort Myers, Florida
Rochester, New York
Baton Rouge, Louisiana
Albany-Schnectady-Troy, New York
Greenville-Maudlin-Easley, South Carolina
Tampa-St. Petersburg-Clearwater, Florida
Mobile, Alabama
Little Rock-North Little Rock-Conway, Arkansas
Shreveport-Bossier City, Louisiana
Spokane, Washington
The BIG problem with large investment funds (hedge funds) driving demand is that when monthly and quarterly performance targets aren’t met, or capital calls/margin calls hit the inboxes, or momentum trend shifts, buying/holding can turn into forced selling in an instant.
Top Metros
Santa Ana-Anaheim-Irvine, California
I noticed that too. The combination of kool aid, low interest rates, and withheld inventory is having the biggest impact here.
How can there be that much kool aid if people were repulsed by the thought of real estate just 15 months ago? I think the fear of being priced out forever is a factor again, not only with prices, but with interest rates being so low this time around. The Fed has successfully whipped up a frenzy.
MR says: How can there be that much kool aid?
———————-
LOLO! Nice one.
btw, the last ‘bubble’ go-around, the regular folks drank most of the kool-aid. This go-around, it’s mostly
investorsspeculators. Problem is, at some point, they will spit-it-out much faster than they drank it.Too bad, but it’s already too late for many.
real estate sentiment is feast or famine except with the true professional cashflow investors. I’m not talking about these “hedge” funds.
morons drink the koolaid. even though affordability is attractive, we have a lot more pain, a lot more purge, and exiting the eye of the economic hurricane will prove it.
morons will be crying tears in their beer as the echo bubble bursts. they are morons, what do you expect?
We’ll be selling in Santa Ana and renting in Irvine soon. At least we’ll stay at the “top”. 😉
The first open house in a year in our little condo community went up this past weekend. It was a circus. They listed at 10% below current market sq ft. prices – probably to generate a bidding war. Be interesting to see what it goes for.
Fannie Mae: Housing the Only Beacon as Economy Grows Dark
Housing continues to be a bright spot in the economy, contributing positively to GDP. In fact, Fannie Mae cited the sector as “the most likely source of upside to our forecast” in its April 2013 Economic Outlook.
According to the GSE, residential investment—once a drag on the economy—has contributed positively or neutrally to the nation’s economic growth for the past seven quarters. The GSE expects this trend to continue this year.
Home sales charted their highest levels in recent years at the start of this year.
Overall, economic growth in the first quarter outpaced expectations, rising at a rate of 3.2 percent. Business inventories contributed to this growth, but the “one-time boost” is not expected to contribute again, according to Fannie Mae.
“The April forecast reflects the growing realization that 2013 is off to a good start from a GDP perspective, but we expect the stronger-than-expected first quarter pace to slow somewhat in the second quarter,” said Doug Duncan, chief economist at Fannie Mae.
Additionally, March’s disappointing employment report, amid other economic headwinds, leads Fannie Mae to label first-quarter growth “unsustainable.”
“On the downside, tax hikes, sequestration, and the euro-zone crisis still pose significant risks to our forecast, and the fiscal tightening will likely affect consumer spending and other economic activity in coming months,” Duncan said.
Fannie Mae’s economists expect GDP to land around 2.3 percent for the year, slower than the pace reached in the first quarter, but still higher than last year’s 2 percent and the previous year’s 1.7 percent.
Fannie Mae’s April outlook was issued on the same day as Freddie Mac’s, which predicted employment gains as the construction sector finds its footing.
‘Soft’ Economic Data Drags Mortgage Rates Down Further
Fixed mortgage rates continued to spiral down this week amid weak economic reports.
According to Freddie Mac’s Primary Mortgage Market Survey, the 30-year fixed-rate mortgage (FRM) averaged 3.41 percent (0.7 point) for the week ending April 18, down from last week, when it averaged 3.43 percent. Last year at this time, the 30-year fixed averaged 3.90 percent.
The 15-year FRM this week averaged 2.64 percent (0.7 point), slightly down from last week’s average of 2.65 percent.
On the adjustable-rate mortgage (ARM) side, results were mixed. The 5-year hybrid ARM averaged 2.60 percent (0.5 point) this week, down from 2.62 percent, while the
1-year ARM averaged 2.63 percent (0.4 point), up from 2.62 percent.
“Mortgage rates nudged lower this week as consumer spending showed signs of weakness,” observed Frank Nothaft, VP and chief economist for Freddie Mac. “Retail sales contracted for the second time in three months, falling 0.4 percent in March. In addition the University of Michigan reported their Consumer Sentiment Index dropped 6.3 points in April to settle at 72.3, its lowest level since July. The April reading snapped a streak of three consecutive gains.”
Meanwhile, Bankrate.com’s weekly survey showed yet another three-month low for fixed rates. According to the site, the benchmark 30-year FRM average retreated to 3.61 percent from 3.64 percent previously. The 15-year fixed average, meanwhile, fell to 2.85 percent from 2.89 percent.
The 5/1 ARM average slipped to 2.66 percent, a drop from 2.70 percent.
“The upbeat economic data in the first quarter has given way to more tepid readings of late, raising the possibility of yet another Spring slowdown,” Bankrate said in a release. “Concerns about just such a slowdown will likely keep mortgage rates in check.”
By Bankrate’s measures, this week marks the fifth straight week in which average rates have fallen.
The shit will hit the fan, count on it. To think these monkeys can delay the inevitable by monetizing debt is grand folly.
Where is the media-coverage of the carnage going-on in TIPS-land? ‘holders’ dumping inflation hedges in droves.
What would someone be dumping TIPS in favor of? Gold?
Well, since the gold paper market is ultra speculative (aka a farce), if they’re going to gold, evidently, it’s to the physical stuff.
US Mint Sells Record 63,500 Ounces Of Gold In One Day
According to today’s data from the US Mint, a record 63,500 ounces, or a whopping 2 tons, of gold were reported sold on April 17th alone, bringing the total sales for the month to a whopping 147,000 ounces or more than the previous two months combined with just half of the month gone.
http://www.zerohedge.com/news/2013-04-17/us-mint-sells-record-63500-ounces-gold-one-day
You think we are head to deflation? Like in the 1930’s?
As long as the amount of worldwide capital destruction continues to exceed the total amount of
economic outputmoney printed, deflation remains the prevailing influence. I suspect it will be far worse than the 30’s if euroland fully implodes 😉The problems with central bank financial/economic ‘reflation’ models:
1) based-on academic case studies (LOL)
2) just take a look at the carnage a lil ‘ol Island out in the Mediterranium is able to inflict upon the system.
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2013/04/20130419_infl1_0.jpg
If we start getting deflation, look for the federal reserve to print even more money.
Real prices will deflate and nominal prices will likely inflate or stagnate.
We are in a larger economic contraction being papered over by the printing press.
Here comes the next problem needing a bail-out…student debt!
The American culture has undergone a seismic shift with today’s thirty-year-old less likely to take out a mortgage if they already hold student loan debt.
A new study from the Federal Reserve Bank of New York evaluated the student loan debt situation and found for the first time in a decade, thirty-year-olds with no history of student loans are more likely to have a mortgage than those still paying off education loans.
This is a significant trend considering ten years ago students with some debt were more likely to take out mortgages due to higher levels of employment and income overall.
“However, this relationship changed dramatically during the recession. Homeownership rates fell across the board: thirty-year-olds with no history of student debt saw their homeownership rates decline by 5 percentage points. At the same time, homeownership rates among thirty-year-olds with a history of student debt fell by more than 10 percentage points,” the FRBNY posted in a blog on the situation.
Just what we need, another government handout to banks so borrowers can take on even bigger loans.
A race against time: Student loan debt stalls first-time homebuyers
By Kerri Ann Panchuk April 19, 2013 • 9:49am
The American culture has undergone a seismic shift with today’s thirty-year-old less likely to take out a mortgage if they already hold student loan debt.
A new study from the Federal Reserve Bank of New York evaluated the student loan debt situation and found for the first time in a decade, thirty-year-olds with no history of student loans are more likely to have a mortgage than those still paying off education loans.
This is a significant trend considering ten years ago students with some debt were more likely to take out mortgages due to higher levels of employment and income overall.
“However, this relationship changed dramatically during the recession. Homeownership rates fell across the board: thirty-year-olds with no history of student debt saw their homeownership rates decline by 5 percentage points. At the same time, homeownership rates among thirty-year-olds with a history of student debt fell by more than 10 percentage points,” the FRBNY posted in a blog on the situation.
“By 2012, the homeownership rate for student debtors was almost 2 percentage points lower than that of nonstudent debtors,” the NY Fed researchers said.
This means for the first time in ten years, thirty-year-olds with no history of student loans are more likely to have home-secured debt than their contemporaries who funded their educations with debt.
Student loans have shot up in popularity, with the aggregate student loan balance reaching $966 billion – just under a trillion – in 2012.
The delay in taking on mortgages is statistically linked to more students taking on education debt and at higher levels.
The Fed’s study shows the share of 25-year-olds with student debt increased from 25% in 2003 to 43% in 2012. The average student loan balance among that group also rose by 91% from $10,649 in 2003 to $20,326 in 2012.
Why this spells bad news for the housing market is simple: while students are paying more for school – and were apparently willing to do so in the recession – they still participated in the massive deleveraging process that occurred after the recession.
However, they are deleveraging by avoiding auto debt and home mortgage debt, stalling other portions of the economy.
On net, per capita debt for those with student loans declined by $5,687 during the four-year deleveraging period from 2008 to 2012. This is line with the mass deleveraging among all U.S. consumers that occurred during this period. In fact, those with no school loans saw their per capita consumer debt also decline by $7,095 in four years.
This shows student borrowers delevaraged and cut back even after their average debt levels reached a peak of $35,559 in 2008, but they have been cutting back on debt like the rest of America. The problem for home sellers is they are doing so by avoiding auto and home loans altogether.
Tightening credit standards is another issue, the NY Fed blog said.
“In response to the recent recession and credit crunch, lenders have tightened underwriting standards in all major consumer debt markets. Consumers with substantial student debt may not be able to meet the stricter debt to income (DTI) ratio standards that are now being applied by lenders,” the blog reported.
Late payments or student loan defaults also make potential homebuyers vulnerable, hurting their credit scores early on and making it more unlikely for them to obtain mortgages later on.
Is the Federal Reserve Insane?
By Matthew C. Klein Apr 19, 2013 6:39 AM PT
Americans have been whipsawed by devastating cycles of boom and bust over the past three decades. Now some at the Fed want us to go through it again.
The excesses of the 1980s — leveraged buyouts, the junk bond bubble and wild property speculation — led directly to the original “jobless recovery” of the early 1990s. This occurred despite a prolonged period of very low interest rates. (The 1990 tax increases and post-Cold War defense cuts were probably counterproductive.) In many ways, that episode was a dress rehearsal for the recent crisis, so it makes sense that some of the most interesting writings about the dangers of excessive private borrowing come from that earlier time.
It didn’t take long for the next boom and bust cycle to hit. In the second half of the 1990s, the irrational exuberance of stock investors fueled a binge of business spending. Real nonresidential private investment increased at an annualized rate of more than 12 percent between the beginning of 1996 and the middle of 2000. That changed once firms realized that they had been wasting their money on bad investments and unneeded capacity. Capital expenditures plummeted by nearly 20 percent between the middle of 2000 and the end of 2001. Real business investment didn’t return to its pre-recession level until the beginning of 2005.
The massive swing in capital spending plunged the economy into recession and held back the recovery for years. According to the Census Bureau’s Current Population Survey, real median incomes (for individuals, not households) increased at an annualized rate of just 0.2 percent from 2001 through 2007. More Americans were working in the private sector in December, 2000, than in May, 2005. Since the population of prime-age workers was expanding throughout this period, the actual damage was even worse. Again, this was in spite of the fact that real interest rates were very low for a long time and in spite of the large tax cuts and spending increases of the early 2000s.
In 2002, economist Paul Krugman, who would go on to win a Nobel Prize in 2008, advised that the Fed “create a housing bubble to replace the Nasdaq bubble.” In his view, this would allow “soaring household spending to offset moribund business investment.” (Krugman began warning that the housing bubble was dangerous in 2005.)
We now have extensive evidence that the wanton borrowing that fueled the recent housing bubble made the economy vulnerable to the devastating downturn the U.S. endured. This shouldn’t have been surprising. After studying every business cycle experienced by 14 rich countries since 1870, Oscar Jorda, Moritz Schularick and Alan Taylor found that excessive private credit growth systematically predicts deeper downturns and slower recoveries.
Back in the 2000s, however, most people just wanted to get out of the funk associated with the aftermath of the tech boom. There was also a widespread belief that bubbles aren’t dangerous as long as the central bank is around to “clean up” the mess when they burst. This view was best articulated by Ben Bernanke in 1999. As a result, many monetary policymakers were untroubled by the prospect of creating a new bubble to replace the old one.
Transcripts of the Fed’s internal meetings make it clear that this was their conscious plan. On March 16, 2004, Donald Kohn, a longtime Fed staffer who later became the Fed’s vice chairman, said that the credit bubble was “deliberate and a desirable effect of the stance of policy.” According to Kohn, the Fed’s strategy was: “boost asset prices in order to stimulate demand.” That appeared to work for a short time, but it ended badly. We’re still struggling to emerge from the wreckage despite, yet again, incredibly low real interest rates and very large government budget deficits. Clearly, cleaning up after bubbles is harder than it’s made out to be.
One might think that the Fed has learned something from this experience. A recent speech from Nayarana Kocherlakota, the president of the Minneapolis Federal Reserve Bank, suggests otherwise. He said that the Fed “will only be able to achieve its congressionally mandated objectives by following policies that result in signs of financial market instability.” In other words, he wants to repeat the exact same formula that Donald Kohn endorsed in the 2000s
Back in the day when a lot of Americans worked in industry (you know, making things) it was thought that the Govt. (who is that again?) should make things better for the companies that make things. There was that famous incident when a nominee for some Govt. office, who had worked at General Motors, was asked how he would decide an issue if it came down to what was good for GM or what was good for America. He responded that whatever was good for GM was good for America.
Now the big thing made in America is…debt. Yes, we have found more and more ways to loan (borrow) money…to governments (fed., state, local), business, people (even poor people – usually considered a poor risk, but if you charge enough interest you can make a lot of money doing it). Of course, we have to keep this industry going at all costs, so we have to keep interest rates low.
The new frontiers in debt…who knows…loaning to the dead? Loaning to pets? Loaning to kids? There’s an angle…we should ENCOURAGE allowing kids to borrow small amounts of money so they will learn to manage credit, right?
20%+ interest rates will realign our relationship with saving. It is absolutely necessary.
The insanity of what we encourage becomes clear when you take it to the extremes. We’re not far away from loaning money to dead people, children, dogs, cats.
Dog gets credit card.
http://www.timesrecordnews.com/news/2009/jun/07/family-pet-gets-credit-card-job-offers-in-mail/
The housing market is really doing a great job.
Market increases a demand for a product by:
1. making an elective choice a necessarity in people mind.(buy vs. rent)
2. making a luxury good as a basic necessaity (3000 sf min. size).
3. most have because others have
4. feeling of left behind if you don’t move quickly.
Herd, greed, envy and being special.
For the squatters and banksters, the house borrower made the mistake of not leveraging enough. He was only slightly underwater ($110000), $200,0000 of pocket money, and only got to squat 2 years for free. If he were 2 million dollars underwater and with $1 million of pocket money, the squatting time will likely be greater than 6 years.
I never heard of this.
Crowdfunding’s Latest Invasion: Real Estate
The following guest post is by David Drake, founder and chairman of LDJ Capital, a New York City private-equity firm, and of The Soho Loft, a global financial media company with divisions in Conference & Expo, Publishing, and Consulting. Drake has spent 15+ years working with general partners, and with institutional and multi-family office limited partners, in real-estate-focused funds and fund of funds.
Crowdfunding is rapidly changing the real-estate investment market, offering developers new ways to finance projects, small investors a way in, and the socially conscious an avenue to support their local communities—and their local farms.
Here is a rundown of the real-estate crowdfunding firms I think will have the biggest impact. (Full disclosure: I have advised Primarq (number 7) on its secondary market strategy, where investors can sell their shares without having to liquidate the actual properties.)
Was out at dinner with the local heavy hitter realtor last night. She even remarked that the market is manipulated. I was shocked because she is usually the typical cheerleader BS realtor mantra type.
I told her prices are going to resume their decline in due time. She smirked and said “unlikely”. She then asked me how gold was doing to jab me. I said, “consolidating; it will resume its ascent in due time as they print ever more money to manipulate the housing market”. She laughed it off.
She is a blowhard, barely passed high school algebra, lacks understanding of how economies work. She is my contrarian indicator.
When everyone is convinced that prices can go nowhere but up is when we’re at the next top.
As we approach “2008 2.0”, it is critical to understand that we have turned a banking crisis into a sovereign debt crisis. It is also critical to understand that the new subprime is the OTC derivative markets.
I’d be shocked to see real estate remain our “economic savior” as banks go under and drag taxpayers/depositors with them.
http://www.zerohedge.com/news/2013-04-19/fed-governor-stein-warns-when-tbtf-bank-fails-depositors-will-be-cyprused
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I went to the grand opening at Willowbend in University Park two weeks ago. While there is no camp out line, it was a mob scene all for a chance to buy a 2500 sq ft home starting at just 1. 2 mil. There is an apartment right next door that you can rent to get your kids to go to the same uni high.
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