The seeds of the next housing crisis have been planted
marketwatch.com
marketwatch.com
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.
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.
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
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
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?
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"!
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.
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.
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.
[1] http://www.multpl.com/case-shiller-home-price-index-inflatio...
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.
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.