The Beanie Baby Bubble of '99
thehustle.co
thehustle.co
A few points on housing:
- real home prices have now surpassed the 2000s peak
- household formation and population growth has been decelerating, while building has been accelerating.
- there are 1.1 homes per household, same as the year 2000. We are not at historically low supply as some claim. Only low in terms of active listings.
- mortgage rates are climbing at a historically fast pace... If inflation doesn't abate we can expect 5-6% mortgages within a few months. Rates were kept low due to the belief in transitory, but confidence in this is quickly eroding. Mortgages roughly correlate with 10y treasury which is at 2%, while inflation at 7.5%. typically these values are close together
- all in affordability will reach record lows within a few months, if inflation and mortgage trends don't abate
- there's clearly a mass FOMO/psychological phenomena going on right now. Buyers aren't acting rationally from a financial perspective
Home prices can avoid a correction if we quickly return to 0 or negative rates, which could happen. If inflation persists, they will correct in a big way within a year or two as rates adjust to inflation
Sources:
https://fred.stlouisfed.org/series/QUSR628BIS
https://fred.stlouisfed.org/series/UNDCONTSA
https://fred.stlouisfed.org/series/SPPOPGROWUSA
https://www.mortgagenewsdaily.com/mortgage-rates/30-year-fix...
EDIT: And the fervent denials that it's a bubble is surely a hallmark of bubbles too :). Please refute with actual data if you disagree
Nope, we have a decade of underproduction that led us to this crisis
1.1 homes per household (or vice versa).
People who count from 2010 are cherrypicking the underbuilding decade while ignoring the overbuilding decade, 2000s.
There is no "shortage" of homes, there's a shortage of homes listed currently.
But it will be true for certain markets. Most homebuilding is concentrated in the SMILE states (southern, areas where people are migrating to)
We're at the end of what sure looks like about a decade-long housing construction boom, in my city, which is not trendy or growing very fast, and prices have done nothing but go up at 2-5x the rate of CPI the entire time. It's possible the under-supply was so bad that all the construction still isn't enough to catch up, but then why did prices not start higher than they did? I find it hard to believe that this city's gained new residents faster than it's gained new housing. Something else is going on.
Growth.
In the last 40 years, the US population has picked up 100 million people. 227M vs 329M [1].
By 2050, the US population is estimated to be 379 million (+50M), and by 2100, it will be 434 million (+ an additional 55M) [2].
That's a lot of housing need to fill.
[1] Google "US population"; I'm not sure if these figures includes those here on non-permanent visas, but if not, it would probably increase the growth even more.
[2] https://en.wikipedia.org/wiki/Projections_of_population_grow...
If inflation abates quickly, then current prices can maintain and become the new normal.
The rate shock will price out pretty much every primary buyer. Investors will stop buying and even sell if they fear it's a peak.
On top of this, huge amount of backlogged supply is about to come into market in a big way in southern cities. The majority of the building is concentrated there. I would be very worried about Phoenix for example
Just look how that worked out for homebuyers in the 80s paying 10%, who were able to refi at 2% later down the line.
I think you're saying that housing prices are too high. Then you're saying that if inflation continues housing prices will drop?
I totally get that most home sales are based on the monthly mortgage bill, so when interest rates are high, house prices are lower. But, if we have 7% inflation why wouldn't rates increase AND prices increase? I don' think the outcome is obvious when high inflation is coupled with high rates - though I'm sure there are several experts ready to jump in with information about how the US 70's and 80's worked :)
Inflation is good for assets once those assets have been valued using an inflation appropriate discount rate. Housing rate now is priced based on a 2% discount rate, not 7%.
After the asset is priced appropriately for the current discount rate, then inflation is good for valuations.
Median wages drive home prices in the long run. It's possible home prices can be sustained if we see median wage rapidly gain over the next few years. Gasoline going up and driving CPI inflation doesn't make housing more affordable. Only increase in incomes/buying power.
Example: the 10y treasury was recently at 1%. If you bought that as an inflation hedge you would have lost a lot of money. Once people realize inflation is here to stay, they won't accept lower rates of returns.
Now it yields 2%, and soon likely 3%. Holding cash is better than holding a treasury during the repricing phase. Same logic applies for other assets.
Real home prices were super low in the 70s relative to today. Also wage inflation was very strong. I believe wages doubled over the decade. That alone implies a 2x gain in prices ignoring changes in discount rates. Not the same at all.
This is essentially what happened in the early 80s when we had mortgage rates in the upper teens. If you look at home price sales history during that era there were some quarters where average selling price went down 10% or more.
Also important to note that rate only matters in the context of price. Rates by themselves don't provide you much info. e.g. 0% on 10 million is still expensive, just as 1000% rate on 1 dollar is pretty cheap
We had an almost 9% annualized wage gain last month using the MoM numbers. Unemployment is too low right now for core inflation pressures to abate, unless we have a recession or similar drop off in employment IMO. I think a lot of these core economic principles were forgotten due to how high unemployment went after GFC and how long it took to reach full employment once again.
It looks to me like we've entered a wage price spiral... but certainly it could play out in a number of ways. Perhaps the Fed will use falling nominal CPI YoY numbers to hide the structural inflation that has developed. That could keep rates artificially suppressed for another year, if they're able to convince markets of it.
Due to base effects, CPI is likely to peak either in Feb or March. But it would be premature to extrapolate a fall from 7 to 6%, for example, as evidence that structural inflation hasn't taken hold.
I expect inflation to persist around 4-5% longer term, absent intervention by the Fed... which still brings us to 6-7% mortgage rates.
People have always over extended themselves here to buy property.
If a 20yr mortgage suddenly became the only option, prices would decline in a big way. Of course, things might go the other way with 40yr mortgages etc
10y treasury yields 2% while inflation is 7.5%. Ergo mortgages will almost certainly run to 5-6% within a few months once the market perceives that inflation is not transitory and start selling off the 10y treasury en masse.
We have seen this move already starting. It's why mortgages have run from 3-4% in just two months. But not even close to pricing in inflation.
Mortgages were 5% in 2018 when inflation was significantly lower. We may even get to 6-7% in a shorter period of time
In the previous 20 years, whenever rates have spiked abroad, the central bank has made interventions to prevent domestic rates from going up. But those interest rate spikes have been transistory, so I have no idea how things would play out this time.
I would be particularly concerned about sustainability of prices for places like Boise or Phoenix. Lots of building there, and prices are far detached from local median wage.
Also lots of land and few regulations preventing further building.
Phoenix was one of the places hit hard in GFC. Prices fell 50-70%
There's a good argument that crypto presents similar to beanie babies, given that there is no intrinsic value to the coins themselves.
People buy crypto because they think they can sell it to somebody else for more later, not because it unlocks some value by holding it. But don't want to sidetrack the discussion.
If you buy something that is comfortably affordable for you now where you're willing to stay for the long term, with a fixed rate loan, I don't see the benefit of waiting until the peak comes. I'd rather be building equity than paying rent waiting for the market to peak. People have been predicting another crash every year for the last decade, and I'm sure it will go down again at some point, but I wouldn't plan my life around anybody's ability to call the top accurately. Just buy what you can afford and get on with your life.
1) Cash out refis. e.g. if you want to renovate, purchase a rental property or better yielding investment with the funds. Say you can take out cash at 2% rate, and buy a SFH rental with a 6% cap rate... you can build net worth faster (at more risk)
2) Being able to move without writing the bank a check. If you're underwater, you will have to pay out of pocket to sell, and then save a new down payment. If you don't ever plan to move, then this doesn't matter.
I consider valuation before purchasing property, rather than just whether I like it. But many don't, and that's fine too.
Commercial RE will definitely be driven by the fundamentals though, so I'm sure we will see cap rate expansion there unless rates begin to fall again. Residential can move out of line with fundamentals, for sure
On the other hand, https://fred.stlouisfed.org/series/COMPU1USA shows that the number of SFHs completed in 2021 finally reached levels of 1994, when population had been 100M less than now. I might be just too dumb to see where there are enough houses.
Total Housing Units: https://fred.stlouisfed.org/series/ETOTALUSQ176N
Divide one by the other to get housing units per household. You can see ratio in 2020 is roughly the same as 2000.
You have to consider multifamily construction too (which can include SFH-like duplexes, or full apartment buildings). Housing is fungible to a certain extent. If rents fall, that will reduce demand for purchasing and vice versa.
Completions is a backwards looking metric. Look at pipeline, not completions to predict forward trajectory. Housing in pipeline now matches the 2000s peak, and looks to surpass the 70s peak within a few months
And yes, the housing is fungible to an extent: the dearth of SFHs cause the price of SFHs to rocket and pushes the rest of the market up as the people who are priced out of SFHs can as well go and buy a condo or a townhouse.
Rental or not doesn't really matter. Fundamentally people just need a place to live, and depending on locale will make the tradeoff between renting and buying. If rental stock doubles overnight, housing prices would decline too, as cost of a mortgage becomes relatively less appealing. In this sense it's fungible.
But it's true there may be some subset of people who would only buy SFH regardless of price
What theory? That people who are priced out of SFH buy condos, townhomes and other type of housing? What do they do, keep renting and enjoy 30% yoy rent bumps instead?
People priced out of one housing type will bleed into others.
https://www.cnn.com/2021/11/08/homes/zillow-ibuyer-homes/ind...
Cryptocurrencies are beanie babies: Once available for a trifle, their value has ballooned based on speculation. But that already happened, you missed out on it, and it has no bearing on their future prospects. And if a bunch of people ever feel the need to cash out at once, they'll find out just how much value they really have when there's nobody buying.
NFTs are Collector's Edition items: Their original purchase prices are artificially inflated (normally by distributor's decision, for NFTs by wash trading). An association with some pop-culture property or pretty artwork attracts eyeballs to it. You could buy it, or you could just get the regular edition (which, for online artwork, is free.) And the price they're available for doesn't necessarily have anything to do with what you'll be able to get for it.
Also, financial instruments work differently from physical assets; if you have conviction that the peak has already happened ("the bubble happened, and there won't be another one"), you can take a bet against the price by shorting.
Of course, this leads to very different kinds of market dynamics which aren't directly comparable to the beanie baby bubble. Too much pressure on the short or (with leverage) long side can lead to liquidation cascades which result in very dramatic price movement. On the short side this would look like a short squeeze as a large fund can buy a bunch of the crypto to liquidate shorts, then sell it after the market moves at a profit.
John Maynard Keynes said, “the markets can remain irrational longer than you can remain solvent.”
I think a better comparison for NFTs is a star registry. You pay a company to name a star after you (or someone else as a gift). That company will provide a star locator chart and publish a book each year with all the star names they registered that year. You don't own the star, but you do own an certificate saying the star is named after you. Unlike an NFT though, you can't transfer the star registration to someone else.
Bitcoins' price increase is driven by scarcity and speculation. NFTs' price increase is driven partly by speculation, but also by the appearance of speculation, a series of wash trades of increasing value that seem to outsiders to be actual people buying the item for increasing prices. The buyer doesn't know that those were all one person trading with themselves, so they expect that, even if they can't sell for a profit, they can still sell for a minor loss. Then, once they buy it, one of two things can happen: 1. They ride off the hype wave from the original seller, and build it up some more themselves, then find a bigger fool to flip the NFT to; or 2. They keep it a while, the hype wave dies down, and if they ever look to sell it they'll find the real level of demand is way below what they were expecting. Either way, the house gets its cut. It's all a gold-brick scam.
Can you describe the situation where nobody is buying? People may abandon Bitcoin but some sort of crytocurrency will be used by criminals. I am unable to imagine a future where Cryptocurrency does not exist. I am curious what you imagine will happen to crypto that it will be useless for criminals.
I suspect the vast majority of players, even in a criminal marketplace, are seeking cryptocurrency with the intent of cashing it our to fiat, or trading with someone who-- after possibly more exchanges-- cashes out to fiat.
Close the offranps, and the supply chains dry up.
A unit of cryptocurrency is a nothing. If you never sell it, it's useless and worthless. Everyone buying crypto is planning to sell all of it. They always need more and more buyers to keep driving the demand up, to in turn keep driving the price up. Eventually, there'll be a time when there are too many sellers and not enough buyers. Maybe a major recession hits and people decide it's a good time to cash out/bad time to make risky investments. Maybe regulation starts scaring people away. Maybe mainstream news coverage turns hostile. Regardless of which, people rush to sell, and as the buyers dry up, they start taking whatever price they can get. The price plummets. Sell orders accelerate. Line goes down. Pop. Then, stories of people losing everything circulate widely, cementing its reputation as worthless and scaring off any speculative buyers forever after. Just like Beanie Babies.
Just like Beanie Babies, there'll probably be some buyers and sellers forever. Just not at a high enough volume to make it worth a criminal's time.
This is a nice natural mechanism for the bubble to burst itself. Housing is not like this at all. Everyone can in fact get cash all out at once at the hyper-inflated prices (no real buyers needed!) by just doing a "cash out refinance" to the bank.
Now I have young kids that immediately yank the tags and carry them to school. I have nieces that have outgrown their's and have passed them down to the family dog as a chew toy. Both give me a moment of 'aaah aaah!' before I can make my rational brain remember they're just a $5 stuffy that once had a bubble.
"According to economists David Tuckett and Richard Taffler, we often view a hot new financial opportunity as a “phantastic object,” or an unconscious representation of something that fulfills our wildest desires.
These objects are “exciting and transformational.” They appear to “break the usual rules of life and turn aspects of ‘normal’ reality on its head.” They promise something far departed from the market’s typical behavior.
During a bubble, we formulate a “collective hallucination” of prosperity, and fall victim to groupthink, a phenomenon where “a significant chunk of society feverishly buys into a shared dream” and ignores reality."
"There was one person who emerged handsomely from the Beanie Baby bubble: Ty Warner.
Aside from getting caught secretly hoarding $107m of his Beanie Baby riches in an offshore Swiss bank account, Warner has kept a low profile over the years — but he’s quietly amassed a fortune the size of Djibouti’s GDP.
Today, the 73-year-old Beanie Baby inventor touts an estimated net worth of $2.7B, good for the 887th richest person in the world. He owns a fleet of luxury cars, a $153m estate, $41m worth of rare art, and the Four Seasons Hotel in New York, where you can rent the “Ty Warner Penthouse” for $50k per night."
That bit at least is rather amusing.
But the prices keep on going up.
Bubble doesn't mean "pops and value goes to zero". It means something more like overvalued asset class that can lose value rapidly. If there is intrinsic value, it won't got to zero. Nobody imagines that of a real estate market outside scenarios that include major wars, etc.
House prices with any sort of scarcity are largely driven by peoples ability to pay (i.e. finance the debt).
I'm not really stating an opinion, just an observation that tonnes of social media companies died until the current 'in' ones adopted advertising and (so far, and for longer already) lasted.
I was 1000% on team facebook/snap/twitter is a bubble.
Bulk purchasing skate bearings, charging 3 times as much for the same plastic because it had different colors…and the STEM school really couldn’t do much, because that kind of thinking was in their charter…plus, you know, distract the hands while keeping their brains engaged.
There’s currently a pump and dump on retro video games but I don’t think the same supply issues exist in Pokémon cards, but I’m not actively monitoring either market.
There's a game behind the cards. And certain cards increase your chances of winning.
Not everything stems from the same reason.
Beanie Babies, on the other hand, only existed for the purpose of get-rich-quick speculative bullshit. Ok, some kids played with them but I remember adults admonishing kids not to damage them and ruin their value. Is anyone actually nostalgic for these? I was 7-10 during the craze and I don't care about them, or know any peers who do. I mean, many of us weren't allowed to play with them.
Another factor is scarcity. Many old cards were played with and damaged, so to have a first edition mint is actually rare. Whereas I'm sure there are (still) 100,000s mint condition Beanies in plastic storage bins in attics across the US.
Finally, some of them were actually special and deservingly command a high price. Black Lotus was a really powerful card in addition to not being printed anymore, so there is another reason why it's sought after. It's so overpowered and game-breaking it won't be reintroduced. Patti the Platypus is not manufactured anymore, but there is nothing special about it anyway. And even if Beanie Babies were to become popular again, who is to say they won't just make another platypus.
A market of flippers (like Beanie Babies) has to terminate at bagholders. While you can also lose your shirt in a collectors' market, it's because they're driven by the tastes and disposable income of those top-level collectors. They tend to shift from area to area based on particular books, articles, or even influential threads on message boards, and those markets move as a whole with wealth inequality and against interest rates, like fine art.
Can you clarify what the pump and dump on retro video games looks like? To me, there seems to be real demand for retro video games. You can see the interest in various subreddits.
Sorry it’s a long watch. The tldr is that people involved in several high end sales, and game rating and auction houses are known business associates creating a conflict of interest and inflating sale prices artificially.
There's got to be something like that at play here with ETH/BTC. It's so much easier to spend it when it's hard to put into perspective just how much physical cash the purchase represents.
https://www.nbcnews.com/tech/security/nft-sales-show-evidenc...
[EDIT] This is distinct from, or a useful subcategory of, some other "manias" or bubbles chiefly because the effect is often deliberately cultivated by a manufacturer or trade group, and the goods are mass-market in price and quality and lacking in (meaningful) natural constraints on supply. Think Franklin Mint junk on the Shopping Channel, or Precious Moments, or early '90s Topps cards. Pop-culture themed dinner plates intended only for display. Or Beanie Babies.
19.94B locked up in NFTs atm
If you want to see some market caps[0] they're still staggeringly high for what they represent, but beware: you can't see the demand curve on a price history chart. There's no way of knowing how much of the market could decide to sell before they ran out of buyers. Market caps are used to estimate value on wall street because it's imagined that the number of people who would want to buy MSFT today for $1 less than the price today are inexhaustible.
That's much closer to the truth on the NASDAQ than on whatever exchange people are using to trade their beanie babies.
There were also rumors going around that the whole thing - production of all Beanie Babies - was going to end in the year 2000 which actually turned out to be very briefly true before it wasn't anymore.
As an adult I was smart enough to miss cryptocurrency 10 years ago because I thought it sounded like Flooz.com or Beenz. Magic internet money you can earn by solving sudokus? Who the hell wants that? I then missed NFTs (won't they just right click?) and now I'm too scared to get in for fear I will end up as the bag holder.
I'm probably going to end up learning the wrong lesson from this and throw fifty bucks into every crazy-sounding scheme I come across from now on in hopes one of them will hit it big. But that's not so different from venture capital. Just on a smaller scale.
https://www.huffpost.com/entry/beanie-baby-fever-in-1999_n_5...
(Article is about picture of two divorcees dividing a Beanie Baby collection on the courtroom floor in front of the judge.)
https://priceonomics.com/when-the-great-alpaca-bubble-burst/
It was a crazy time. Crazy people fighting each other for cheap stuffed animals.
So many people have learned nothing. Granted the time gap means these are entirely new people making those mistakes.
We have such a degraded level of discourse now that if it were used in the Beanie Baby craze there would be people arguing about whether all soft toys are evil.
I suspect far more beanie baby buying individuals.
I would argue considering the plethora of NFT offerings both legitimate and plagiarized that many people learned trying to manufacture the next Beanie Baby is better than investing in them, sort of like selling shovels in a gold rush is more reliable than digging for gold.
I actually knew somebody with an extremely valuable collection in the late 90s whose house was broken into. Only the BBs were stolen, which speaks to their value being well beyond that of regular stuffed toys at the time.
Then 10 years later everyone realized the exuberance was actually totally rational when you're talking about the market shifts the internet brought and the size of the spoils that would eventually befall the winners.
The more I talk to crypto/NFT people, the more I’ve realized that they’re looking at the same historical events but walking away with completely different take-aways.
For example, they wouldn’t look at the Beanie Baby bubble and think of the people who invested a lot of money and had nothing to show for it after the crash. They’d look at the price charts of Beanie Babies and pattern-match that to NFTs with an assumption that they’re early in the game. Just sell before the line goes down and they’re going to be rich!
This is generally known as the greater fool theory.
Cryptocurrencies are a bit different. While there is the same line-goes-up, line-goes-down hunt for greater fools going on, beneath that are people gauging the actual worth. Bitcoin and ETH are vastly overvalued base upon current utility, but if they came to replace money/gold/other they could be worth many times their current value. Investors buying and selling on that basis are not looking for greater fools but are attempting to be more right about the future than average.
That's the basic point of the theory! The tricky part is, at least on mass, humans are much worse at knowing where they are in the curve than they think they are...