The very first point is key. Unless you work at a realty company, when guys at the office are trying to get rich flipping houses we've reached the peak.
My favorite example of this was when the owner of small restaurant brought me thr late statue of his dog that he had cast into silver.
We were taking stocks at my table, and he told me I'd change my tune when silver hit $200/oz (it was like $40 at the time). I remember walking out of there saying "I wish I had silver to sell"!
Planted? In most major cities they've been growing since basically the last housing crisis. Land in First World cities has become the new gold, and it has caused an unsustainable bubble for those of us who actually need somewhere to live.
It's always interesting to me how many people think they have a right to live in a specific location. It's a strange mental model that I haven't fully grasped.
It's always interesting to me how people go to municipal government meetings and continually suggest that, on the one hand, jobs should be plentiful, while on the other hand, housing should be scarce.
If you have X jobs in city B and Y housing units, where X > Y, you have a tight housing market. If X >>> Y, then people can't even just double-up with roommates anymore.
I'm perfectly willing to talk about the moral trade-off involved in asserting that the born-and-bred residents of a city have a right to residence which they can assert over newcomers, to keep transplants out, but first we have to get the economic deadweight loss of insufficient housing supply off the damn table.
The eternal NIMBY conundrum. It'd be saner to bite the bullet and accept that they don't really want the jobs either; they just want the revenue, which means the _productivity_, which could be accomplished with the (relative) wages for _existing_ jobs.
They want to be rich without having rich-people problems (like too many new people moving to your hometown). I have a friend who works in city planning, and disturbingly enough, he told me the gentrification episode of South Park ("The City Part of Town") was completely realistic.
"I have a right to live here" is to me a less bizarre claim than "I have a right to impose a height limit on the neighborhood I live in" or "I have a right to tie up housing stock and keep it empty at the cost of disrupting other people's lives."
Honestly "I have a right to impose a height limit on the neighborhood I live in" is the closest to reasonable IMO. The citizens of a place should be able to shape the place they live in.
Would you be okay if it was allowed to vote that someone you don't like can't live in the neighborhood? By imposing height restrictions, you end up doing just that.
It's more interesting to me how many people think money should, and inevitably will, trump all other interests.
Maybe if you're a 20-something programmer uprooting your entire life to live somewhere else after decades in a location because financial pressures outside your control make your home and everywhere near it impossible to afford that's not such a big deal.
But for fuck's sake, think about this for a second. Most people do have things rooting them to a particular location. Maybe it's a social circle. Maybe it's support network. Maybe it's their career, or their children's schooling, or their health and the local climate.
At the end of the day we as a populace get to decide public policy. Taking people being priced out of their homes as fait accompli because them's the market breaks is heartless enough, but then saying disdainful things about just how painful and difficult it is is worse.
Here is the thing, there is only so much room for people. You are either saying "fuck you" to the young people of the community that want to get a house in the place they have roots, or you say "fuck you" to the people that can't afford to live there. I don't see how it's particularly fair for a person to feel entitled to an area they did not purchase property in over another that just didn't happen to be there as long.
Two hours by car away from work? And that's with me living in a dense part of the country where it's easier to make a long commute like that?
I mean, come on, bother to admit that economic trade-offs exist. If demand for labor is greater than the supply of housing, you're going to have a difficult housing market, and that's before you account for bubble shenanigans like "ghost apartments" used as investments.
Two hours at every time of the day? Unusual shift times could help.
The problem is firms (managers) are not great at adapting to these new problems, instead they pump a lot more money into hiring (spending a lot on headhunters, recruiters, "technical sourcers" and so on), and then put a lot of money into the employee's hands and then they with the same smooth move put it into the landlords' pockets, which then goes to fuel the asset bubble.
We're a hardware and firmware shop. Our work equipment is a physical piece of silicon on my desk.
Yes, we could switch to a remote-work model, but that would make logistics significantly harder (some of the stuff we work with is proprietary and confidential) and destroy our terrific team spirit.
>Could your company not be headquartered in Des Moines, IA? Chattanooga, TN?
Well, some of our largest clients are at MIT and Brandeis Universities, so no, it couldn't. Network effects regarding availability of customers, expertise, and capital are a thing.
Then you've got to raise prices to support paying your employees enough to live in high cost locations. If they're not willing to pay rates to support that, then you can't offer the service (or you need to find employees who are willing to work in less than ideal work conditions like excessive commuting on personal time).
Land doesn't need to move, people do. Geographical confines aren't walls. If you choose to live in a highly desirable location, it is going to be expensive. If it bothers you, deal with the tradeoffs of moving. If you don't like the tradeoffs, understand you are making a choice.
It never ceases to amaze me how many people mistake market trade-offs as deliberately engineered hardships (often by a cabal, in a kind of morality play) despite over 150 years of economics as a formal discipline explaining these emergent phenomena, albeit imperfectly. It's almost akin to possessing a pre-scientific belief in the thundering skies representing a god's wrath
It never ceases to amaze me how many people mistake political will for market trade-offs. Do you think we can't build tall apartment buildings with elevators in the vast majority of the United States, or do you think we pass laws against it because we prefer, for some reason, that even our cities should be basically suburban?
"Just build up" is not a simple, problem-free solution. The physical (gas, water, waste removal, transit capacity, etc.) social infrastructure (schools, police, hospitals, etc.) and more intangible desirables of urban planning (noise levels, green space, continuity of neighborhood design) don't just magically expand to fit the density. Maintaining the quality of life that will keep property values at least relatively stable (and thereby the tax valuations to maintain everything) does not necessarily rise linearly with the number of people you add, and when you have preexisting inefficiencies to work with when the original design wasn't done with the record urban population rates we're seeing now in a modern standard. There are plenty of urban slums around the world where people have space to live, if you can call that living. Now that's an extreme, but if you want to forge ahead and sacrifice some quality of life for everybody by upzoning, don't forget that the preexisting tax base also usually has the greater resources to move.
That's not to say we should never build, or find innovations and consider incentives to make urban living more accessible, but let's not pretend that easy answers without significant costs that others will tolerate idly while legislation eats into their self-interest.
Some people are also unaware that "just build up" isn't possible in some places due to geography. The downtown area of the city I live near can only support buildings between 6 and 10 stories tall. This is because solid bedrock is several hundred feet below ground. The buildings foundations aren't built on solid bedrock (which taller buildings absolutely need).
"Since government agencies back about 80% to 85% of new loans..." That's the problem right there: government is underwriting the risk. Get rid of GSE's like Fannie Mae setting standards and underwriting risk, and you will return to a more normal market fluctuation.
I think this story shows why it's so important to remember how credit-rating agencies and investment banks added so much fuel to the fire of the last crisis. Otherwise you will think the whole problem was silly people taking out mortgages they couldn't afford and say "this is just like 2007".
Anyway, I could buy the idea that once again some portion of homebuyers can't really afford what they're buying, but there won't be the crazy systemic effects that happened last time, unless once again bad mortgages are being sold as good ones, buried in financial derivatives.
Personally I think the situation is worse than a bubble- I think this is just how things are now, if you want to live in a city. The demand really is there to sustain these crazy valuations, and young people and those of us who don't own are just screwed.
I agree. I think it's not really a bubble. It might go down a little, but not -30% like it did in 2008-2009. Which means we are all going to pay lots of $$$ to live in desirable areas.
Some good thoughts on this topic I read recently:
* Quantative Easing (eg printing money) floods the economy with money, it has go somewhere.
* Since the real economy (manufacturing / information) isn't growing, the money flows into assets (eg real estate or stock bubbles)
* When there's zero interest, it exacerbates the problem, because if you've got capital, it's impossible to find anywhere to invest it to get a return. Hence you're incentivised to put it into assets.
* Basically you're not seeing assets (houses/stock) going up in value, you're seeing money go down in value. It's basically out-of-control inflation, it's just that the inflation isn't spread evenly yet.
Disclaimer: These aren't my ideas, i'm merely parroting. But i thought they were clever and worth sharing.
These ideas are more than just clever, they are exactly what is happening due to money printing and zero to near-zero interest rates. You restated the facts well.
As to those who claim QE ended, and other nonsensical ignorant claims, that is irrelevant. The money went to reliquify the broke banks' balance sheets, and so of course did not immediately leave their digital vaults. That takes time, and we are slowly (technically not at all slowely) watching the destruction of the dollar's purchasing power via mass inflation, beginning with the assets closest to the money printing spigot: real estate, stocks, fine art, and other elite assets.
and yet the dollar is not substantially weakened vs other currencies, it is quite strong. This isn't a dollar specific phenomenon at all.
It seems a more appropriate statement would be destruction of all currencies purchasing power. Which leads me to wonder - what is the impact of that exactly?
Should the dollar be allowed to strengthen greatly (relatively to basket of all other currencies), is that what people are proposing? Can we guess at what the dollar based economy might do in that instance?
My point is that other currencies are not static. All the world economies are jockeying to have relatively weak currencies, in order to attempt to spur inflation and ease their debt loads. It's all relative. The US is not in some particularly bad spot, certainly Japan and Europe finance ministers would trade places with ours any day of the week. We have a remarkably strong economy (and everything else, really) in comparison (which is all that matters).
Does it matter if there's fine art inflation? The real estate inflation boom seems more linked to housing policy than QE too...
Declaring mass inflation for the dollar doesn't seem to align with how CPI is evolving though, and it's not like the dollar is losing much ground to foreign currencies. If standard purchases haven't changed much, and purchasing abroad hasn't changed much, could we say that things have changed much?
Though you're saying slowly, maybe I'll ride the bubble til it bursts just like the rest of 'em.
Inflation is the rise in overall price level, not the increase in a few select asset classes. We aren't seeing inflation. The people who have been making that claim for 5+ years have been wrong. Period.
But you can't just look at the rise in one good relative to the medium of exchange (money) and say that money is going down in value; people want a return, and stocks haven't provided it in the last 2.5 years or so, which about matches up with the author's timeline. If the buyers were actually _living_ in these houses as primary residences, it'd make a stronger case for genuine inflation. Commodifying them as value generators by flipping or renting them out may be the beginning of a speculative bubble - not a good thing, but a different phenomenon.
Since the real economy (manufacturing / information) isn't growing, the money flows into assets (eg real estate or stock bubbles) When there's zero interest, it exacerbates the problem, because if you've got capital, it's impossible to find anywhere to invest it to get a return.
Hence you're incentivised to put it into assets. Basically you're not seeing assets (houses/stock) going up in value, you're seeing money go down in value.
My theory is that it has become far too easy (profitable) for middlemen to extract that value from people when they are attempting to invest. Maybe some academics should look into expanding the Principal-Agent problem[1] into the Brokerage-Agent problem. Most brokerages don't care whether the value of an asset goes up or down, only that the trade takes place so that they get their cut. This is what exacerbates the problem, not zero interest. Realtors are especially adept at convincing buyers to bid up properties based on their future value. Securities brokers know that when fear and hype push volume in either direction, it has been a good day; it doesn't really matter if it ends red or green because they get cut whenever trades take place, regardless of whether people are cashing in or cashing out of the market. Quantitative-based profiteering on volatility.
The very top of the market is already plummeting. I am talking about the nosebleed part of the market of 10+ million dollar apartments in new york, london and miami. These are already falling in prices as most hedge funders had a very bad 2015 and decided to liquidate some of their housing investments.
This effect should start working itself down the price ladder soonish. In new york developers are already splitting up mind bogglingly expensive apartments to form higher numbers of merely crazy expensive apartments.
So I would not be investing in housing that I do not need right about now.
At the upper end you see a lot more real estate purchases for investment purposes. At the lower end you see people wanting to buy their first home. That lower end demand is not going to disappear--do you have any data to suggest that this will in fact work its way all the way down to that lower end for people who are not "investing" in housing but instead buying a place to live?
All the people and corporations whom profited dearly from the 2007 scam got off completely scot-free and were made then whole on the backs of the US taxpayers (actually, their grand or great-grandkids, because the money used to pay the bills was borrowed and added to the $20tril debt)
They fully expect to be bailed out again, so again I ask...with big money to be had and almost zero risk to the players, why would anyone think its not happening again?
the article lacks the major fuel of the current housing bubble in US/CA: the Chinese buyers. there is an estimated $500B capital outflow from China in 2015. guess a large part of that is in SF/BC/NYC/London real estate.
In London there are tens of thousands of new build properties which have been built through Chinese investment. Currently unaffordable to most (£1m plus for a 1 bed) and so rather unpopular with Londoners. Many developments are 50%+ sold in China before they are advertised in the UK. however I am beginning to think the Gov may having been playing a clever long game.
Massive outflows from China the last couple of years. Encourage funds into the UK, mostly London, property market. Build huge number of new homes with Chinese money. Once (hopefully) the market crashes, glut of thousands of relatively affordable properties become available.
I am not sure whether this was purposeful, however I have stopped complaining about foreign funded real estate investment here as it will be extremely fruitful if the bubble pops. Unfortunately for those in the states mentioned, it seems the money isn't going into building new properties, but inflating a low and severely restricted stock.
There's a lot of pressure to buy now, which makes me think its probably not a good time to do so. Its really difficult to make any long term decisions when it might be at the top of the market.
Rates being low is a bad thing for buying a house. If interest rates were higher, it'd be harder to qualify for a loan at a particular value, so the house you're interested in would be cheaper. Plus, you make money refinancing at a lower rate, and there's no room for rates to fall when they're this low.
“Mortgage-default rates are currently very low, but that shouldn’t be any source of comfort because they are always low when the economy is doing well and home prices are going up,” said Oliner. “That can turn around quickly if there is a recession.”
The first mortgage default rate doubled from August 2006 to September 2007. It then doubled again by November 2008, peaking at 5.67% just three years after it was at 0.79%... which is roughly the level we're at today.
5. Fed prints money to buy the defaulted mortgages. Profit!
6. Lend new bailout money to private equity buddies to buy the foreclosed houses. Profit!
7. Rent houses to previous homeowners. Profit!
All this is necessary because banking is the foundation of our economy, the most important sector of our economy and the source of all jobs and growth in our economy. There is no sacrifice too great that our country must endure to save the banks in step 3 as the whole economy revolves around the glorious "doing God's work"[1] cycle detailed above.
The anecdotal example of Brooklyn is a bad example IMO. Everyone knows how gentrified Brooklyn has become. As a result, real estate prices for those areas are going way up. For those in SF, the same is happening to Oakland.
Also, having just got a mortgage, I can anecdotally counter that despite Quicken's claims with Rocket, getting a mortgage, at least a "good" mortgage loan is still incredibly difficult. Thanks to 2008, 2016 loans require a shit ton of disclosures. So, if there's a bad loan lying around, you best bet it's going to be hard to disguise it.
As for the < 20% down? That's not a sign of a bad economy per se. I'd factor that more to a generation of poor savers. NPR recently had a whole segment on how little the current generation of millennials saves.
Home prices increasing is due to the fact that it's a seller's market. But, rent prices are increasing as well. IMO you could look at it from a different perspective. Recent homeowners are buying because it's currently cheap to borrow and the long-term result is that they actually save money because rent is increasing at such a dramatic pace.
All said, I do agree w/ the headline, just not with the author's anecdotal proof.
I agree. Talking about there being a housing bubble like the one that popped in 2008 would need a whole hell of a lot more than mentioning how some of the most expensive places in the world are expensive.
The American Enterprise Institute does too much lobbying for me to trust them as straight shooters. Looking at case-schiller [1] it looks a little worrying, but looking at construction starts [2] the market doesn't seem that overheated yet.
While not mentioned in this article, perhaps real estate agents are also insisting that buyers bid over the asking price thereby inflating prices.
Last week I was told by my first buyer agent he would not write my offer despite being 3% ABOVE the asking price for property that listed that day. I then called the listing agent for the same property who insisted she wouldn't write my offer unless I offered 25% above the listing price. We eventually negotiated to 10% above as my first offer. There are only 10 offers on the property so it isn't as if they were flooded with buyers.
Is anyone else finding your own buyer agent or even the listing agent refusing to write an offer if it isn't well over the asking price ?
If there are 10 offers on the first day of listing, you're wasting everyone's time including your own, by not offering above asking, as the offer simply would not be competitive against the other 9.
74 comments
[ 3.1 ms ] story [ 150 ms ] threadWe were taking stocks at my table, and he told me I'd change my tune when silver hit $200/oz (it was like $40 at the time). I remember walking out of there saying "I wish I had silver to sell"!
If you have X jobs in city B and Y housing units, where X > Y, you have a tight housing market. If X >>> Y, then people can't even just double-up with roommates anymore.
I'm perfectly willing to talk about the moral trade-off involved in asserting that the born-and-bred residents of a city have a right to residence which they can assert over newcomers, to keep transplants out, but first we have to get the economic deadweight loss of insufficient housing supply off the damn table.
Build baby, build.
Maybe if you're a 20-something programmer uprooting your entire life to live somewhere else after decades in a location because financial pressures outside your control make your home and everywhere near it impossible to afford that's not such a big deal.
But for fuck's sake, think about this for a second. Most people do have things rooting them to a particular location. Maybe it's a social circle. Maybe it's support network. Maybe it's their career, or their children's schooling, or their health and the local climate.
At the end of the day we as a populace get to decide public policy. Taking people being priced out of their homes as fait accompli because them's the market breaks is heartless enough, but then saying disdainful things about just how painful and difficult it is is worse.
That's how we got to the NIMBY polices we have in many major metro areas and that has contributed in a major way to the financial pressures.
Two hours by car away from work? And that's with me living in a dense part of the country where it's easier to make a long commute like that?
I mean, come on, bother to admit that economic trade-offs exist. If demand for labor is greater than the supply of housing, you're going to have a difficult housing market, and that's before you account for bubble shenanigans like "ghost apartments" used as investments.
Two hours at every time of the day? Unusual shift times could help.
The problem is firms (managers) are not great at adapting to these new problems, instead they pump a lot more money into hiring (spending a lot on headhunters, recruiters, "technical sourcers" and so on), and then put a lot of money into the employee's hands and then they with the same smooth move put it into the landlords' pockets, which then goes to fuel the asset bubble.
Yes, we could switch to a remote-work model, but that would make logistics significantly harder (some of the stuff we work with is proprietary and confidential) and destroy our terrific team spirit.
Well, some of our largest clients are at MIT and Brandeis Universities, so no, it couldn't. Network effects regarding availability of customers, expertise, and capital are a thing.
Market forces at work.
That's not to say we should never build, or find innovations and consider incentives to make urban living more accessible, but let's not pretend that easy answers without significant costs that others will tolerate idly while legislation eats into their self-interest.
Anyway, I could buy the idea that once again some portion of homebuyers can't really afford what they're buying, but there won't be the crazy systemic effects that happened last time, unless once again bad mortgages are being sold as good ones, buried in financial derivatives.
Personally I think the situation is worse than a bubble- I think this is just how things are now, if you want to live in a city. The demand really is there to sustain these crazy valuations, and young people and those of us who don't own are just screwed.
QE benefited people who bought in 2009-2012
Disclaimer: These aren't my ideas, i'm merely parroting. But i thought they were clever and worth sharing.
US QE stopped in October of 2014.
As to those who claim QE ended, and other nonsensical ignorant claims, that is irrelevant. The money went to reliquify the broke banks' balance sheets, and so of course did not immediately leave their digital vaults. That takes time, and we are slowly (technically not at all slowely) watching the destruction of the dollar's purchasing power via mass inflation, beginning with the assets closest to the money printing spigot: real estate, stocks, fine art, and other elite assets.
It seems a more appropriate statement would be destruction of all currencies purchasing power. Which leads me to wonder - what is the impact of that exactly?
Should the dollar be allowed to strengthen greatly (relatively to basket of all other currencies), is that what people are proposing? Can we guess at what the dollar based economy might do in that instance?
Declaring mass inflation for the dollar doesn't seem to align with how CPI is evolving though, and it's not like the dollar is losing much ground to foreign currencies. If standard purchases haven't changed much, and purchasing abroad hasn't changed much, could we say that things have changed much?
Though you're saying slowly, maybe I'll ride the bubble til it bursts just like the rest of 'em.
Depends on how leveraged it is.
Inflation is the rise in overall price level, not the increase in a few select asset classes. We aren't seeing inflation. The people who have been making that claim for 5+ years have been wrong. Period.
Why is this bad? Where else should you put your investment dollars, if not into assets?
A nifty chart that shows this idea in a 3D graph:
http://www.nytimes.com/interactive/2015/03/19/upshot/3d-yiel...
Hence you're incentivised to put it into assets. Basically you're not seeing assets (houses/stock) going up in value, you're seeing money go down in value.
My theory is that it has become far too easy (profitable) for middlemen to extract that value from people when they are attempting to invest. Maybe some academics should look into expanding the Principal-Agent problem[1] into the Brokerage-Agent problem. Most brokerages don't care whether the value of an asset goes up or down, only that the trade takes place so that they get their cut. This is what exacerbates the problem, not zero interest. Realtors are especially adept at convincing buyers to bid up properties based on their future value. Securities brokers know that when fear and hype push volume in either direction, it has been a good day; it doesn't really matter if it ends red or green because they get cut whenever trades take place, regardless of whether people are cashing in or cashing out of the market. Quantitative-based profiteering on volatility.
[1]https://en.wikipedia.org/wiki/Principal-agent_problem
This effect should start working itself down the price ladder soonish. In new york developers are already splitting up mind bogglingly expensive apartments to form higher numbers of merely crazy expensive apartments.
So I would not be investing in housing that I do not need right about now.
All the people and corporations whom profited dearly from the 2007 scam got off completely scot-free and were made then whole on the backs of the US taxpayers (actually, their grand or great-grandkids, because the money used to pay the bills was borrowed and added to the $20tril debt)
They fully expect to be bailed out again, so again I ask...with big money to be had and almost zero risk to the players, why would anyone think its not happening again?
Massive outflows from China the last couple of years. Encourage funds into the UK, mostly London, property market. Build huge number of new homes with Chinese money. Once (hopefully) the market crashes, glut of thousands of relatively affordable properties become available.
I am not sure whether this was purposeful, however I have stopped complaining about foreign funded real estate investment here as it will be extremely fruitful if the bubble pops. Unfortunately for those in the states mentioned, it seems the money isn't going into building new properties, but inflating a low and severely restricted stock.
A chart of 2006-2016 mortgage default rates is instructive: http://au.spindices.com/indices/specialty/sp-experian-first-... (set the time period to ten years)
The first mortgage default rate doubled from August 2006 to September 2007. It then doubled again by November 2008, peaking at 5.67% just three years after it was at 0.79%... which is roughly the level we're at today.
These things can turn around quite quickly.
2. Loans pay for houses to be built. Profit!
3. Credit crunch.
4. Take back homes in foreclosure.
5. Fed prints money to buy the defaulted mortgages. Profit!
6. Lend new bailout money to private equity buddies to buy the foreclosed houses. Profit!
7. Rent houses to previous homeowners. Profit!
All this is necessary because banking is the foundation of our economy, the most important sector of our economy and the source of all jobs and growth in our economy. There is no sacrifice too great that our country must endure to save the banks in step 3 as the whole economy revolves around the glorious "doing God's work"[1] cycle detailed above.
[1] http://dealbook.nytimes.com/2009/11/09/goldman-chief-says-he...
Not the other way around
Also, having just got a mortgage, I can anecdotally counter that despite Quicken's claims with Rocket, getting a mortgage, at least a "good" mortgage loan is still incredibly difficult. Thanks to 2008, 2016 loans require a shit ton of disclosures. So, if there's a bad loan lying around, you best bet it's going to be hard to disguise it.
As for the < 20% down? That's not a sign of a bad economy per se. I'd factor that more to a generation of poor savers. NPR recently had a whole segment on how little the current generation of millennials saves.
Home prices increasing is due to the fact that it's a seller's market. But, rent prices are increasing as well. IMO you could look at it from a different perspective. Recent homeowners are buying because it's currently cheap to borrow and the long-term result is that they actually save money because rent is increasing at such a dramatic pace.
All said, I do agree w/ the headline, just not with the author's anecdotal proof.
[1] http://www.multpl.com/case-shiller-home-price-index-inflatio...
[2] http://www.census.gov/briefrm/esbr/www/esbr020.html
Last week I was told by my first buyer agent he would not write my offer despite being 3% ABOVE the asking price for property that listed that day. I then called the listing agent for the same property who insisted she wouldn't write my offer unless I offered 25% above the listing price. We eventually negotiated to 10% above as my first offer. There are only 10 offers on the property so it isn't as if they were flooded with buyers.
Is anyone else finding your own buyer agent or even the listing agent refusing to write an offer if it isn't well over the asking price ?
Note I am in the SF Bay Area.