Trulia's New 'Bubble Watch' Nudges California And Texas Housing Into Overvalued Territory [View article]
While we're on this rent vs, own issue, it would be wise to recognize the research and academic work of Christopher J. Mayer at the Columbia Business School. Mayer points out that Joseph Stiglitz (1990) provided a general definition of asset bubbles: “[I]f the reason that the price is high today is only because investors believe that the selling price is high tomorrow -- when ‘fundamental’ factors do not seem to justify such a price -- then a bubble exists. Mayer says that "at least in the short run, the high price of the asset is merited, because it yields a return (capital gain plus dividend) equal to that on alternative assets.” The “dividend” portion of the return from owning a house comes from the rent the owner saves by living in the house rent-free, and the capital gain from house price appreciation over time. We think of a housing bubble as being driven by home buyers who are willing to pay inflated prices for houses today because they expect unrealistically high housing appreciation in the future."
Pay particular attention to Mayer's "capital gain plus dividend" point. ( The “dividend” portion of the return from owning a house comes from the rent the owner saves by living in the house rent-free, and the capital gain from house price appreciation over time.) Very few analysts include that factor to value the difference between renting and buying. Including Mayer's metric makes buying move up on the preference scale for most analysis.
See: "ASSESSING HIGH HOUSE PRICES: BUBBLES, FUNDAMENTALS AND MISPERCEPTIONS" NBER WORKING PAPER SERIES September 2005
Trulia's New 'Bubble Watch' Nudges California And Texas Housing Into Overvalued Territory [View article]
Let me refine my comment. I include the price of land in my use of the concept "replacement cost". After all, just looking at construction costs without linking it to a specific property on a specific piece of land misses the point of what I believe we're trying to discuss here. That said, I also don't agree that there have been wide arc swings in prices of buildable land, certainly not in my area of the California coast. My analysis of the land on the market here in Ventura County for the past 6 years shows little change in price. I can give specific parcel by parcel comparison if you wish.
Also, if you're in a neighborhood where the homes are being bought as "teardowns" you are probably in one of those Coastal areas too. That phenomona isn't new, BTW. Pacific Palisades, as an example, has had developers and owners doing that for more than a decade, if not longer. I also want to say that most teardowns have long outlived their useful life either in terms of design or condition. Because of that, I consider them an exception to the general principal about which I am writing.
Trulia's New 'Bubble Watch' Nudges California And Texas Housing Into Overvalued Territory [View article]
You cannot have a "bubble" unless the prices of the asset are above the basic valuation. As long as homes in the USA are selling at or below replacement costs -- as they are now -- there is no bubble. Next case?
It's hard to comment generally on what amounts to a national subject. On the coasts and particularly California, the low supply problem is compelling because it comes from so many directions.
It appears now that some are arguing about housing formation and whether it's "real" or not. I find such discussions amusing because it assumes that housing might somehow stop the natural quest humans have for a prescribed existence and simply put their lives on hold for a decade or so.
Hosing is a different asset compared to most. It is a non-discretionary expense and must be satisfied. The many reasons for the supply deficiency have been under-studied and under-reported. The lack of good information has allowed pundits to speculate about the validity of their own beliefs rather than the facts around the housing supply deficiency.
Is The Phoenix Housing Market Getting Too Hot? [View article]
Zoomie, I should have given that percentage more thought. I even questioned it a bit as I hit the keyboard. As I look at it again and not doing any technical analysis, I believe that should the 10-year note get to that point again it will reflect a clearer sign of the improving economy behind it and will be used by investors as a sign to begin to reallocate investments. That said, I believe it will take several -- more than 2 or 3 -- years to even approach that point.
I might mention that I have a graph produced by the St. Louis Fed research center which has them predicting low rates of inflation for the next 25 years. The reason? The global economy now acts to blunt the rise of inflation because the world wide competition keeps prices low...
Is The Phoenix Housing Market Getting Too Hot? [View article]
Zoomie, to further add to your point, it will be several years before interest rates rise according to the latest Fed reports. Why would anyone sell property yielding 6-7% after costs cash in on an asset which may not have even reached it's potential? Well, they wouldn't is the answer. A smart investor, and that includes Blackstone, will keep these properties paying these yields as long as the 10 year bond is below 3.5%. It will take a number of years to get to that level.
As long as these homes are selling at below replacement costs, they are a screaming buy!
Is The Phoenix Housing Market Getting Too Hot? [View article]
Zoomie, I agree with your scenario about the large real estate investors such as Blackstone. Frightened buyers who are feeling that the train may have already left the station, often make up a scenario where these investors dump these properties in the false hope that a huge supply will somehow come back on the market. They forget 1) That an organization like Blackstone, one of the most successful hedge funds in the world, are smart business people. And, 2) these investments are drawing a 6-7% annual return after costs to their investors plus a downstream opportunity to pick up 20%+ on their principal when, and if, they decide to sell.
Is The Phoenix Housing Market Getting Too Hot? [View article]
More likely we're in the middle of an Asian investment boom. Asians put their money out for investment all over the world, especially the Chinese. Vancouver Canada has an immense Chinese real estate investment economy and not all those investors leave China to do it.
Is The Phoenix Housing Market Getting Too Hot? [View article]
As long as prices are below replacement costs, this will continue. If it costs more to build than to buy an existing residence, the incentive is towards buying the resale property. Next case?
Supply/Demand Imbalances Continue Building In The Housing Market [View article]
As if in answer to this whole discussion, read the piece in today's USA Today entitled "Home sellers are scarce as spring buyers stir" http://usat.ly/ZAuIOE
Supply/Demand Imbalances Continue Building In The Housing Market [View article]
Doc: I find it interesting that someone has already put a time on a "typical holding period"? Think about it. We have a new phenomona of buying large blocks of foreclosed property and basically creating a real estate mortgage investment conduit (REMIC) and somebody is telling us that a "holding period is 4 years"? Kinda crazy...
The numbers I have seen over the past 18 months is that these "pools" run by hedgefunds like Blackrock et al produce a 6-7% annual return for investors with a projection of a 20% plus additional return when the properties are sold. Why would Blackrock or any other capable investor group predetermine a sell-off period of "4 years" when the real decision will be made when each pool decides their target appreciation of 20% plus is achieved?
In the meantime, in this economy, a 6-7% fixed annual income return is pretty darn good!
Supply/Demand Imbalances Continue Building In The Housing Market [View article]
William, it is compelling to view the current housing market as static but it has, of course, many moving parts. You said you were in the "north state of California" but that's a pretty big area. I can tell you that on the coast on southern California where I live there is virtually nothing on the market. Ventura, where I live, has a population of 108,000, 47,000 single family residences and condos and just 90 properties currently on the market! Moreover, virtually no building is going on either and with the well-known growth restrictions in coastal California, it's unlikely much new construction will move forward for many, many months if not years.
I could go on by citing the facts that even now the nationwide new home building is at but 60% of a normal 1.5 million units per year and that some homes across America are selling a below replacement costs. And what about the fact that many Boomers are choosing to stay in their homes until they are so old they can no longer do so because if they did sell, where would they move?
In short, we're looking at a very serious supply problem and you cannot analyse it from looking at only one of it's many moving parts.
Supply/Demand Imbalances Continue Building In The Housing Market [View article]
Be careful when you look at historic records of recession recovery to predict this Great Recession recovery. Having personally experienced them, this recovery is from a very different economy than in the past 50 years. We in no way have the economic potential we had in those post-recession periods. I think supply deficiencies will exist far longer this time than most analysts but they too are making the mistake of using history to predict this upcoming scenario.
She points out "a lot of the problems that the uninitiated encounter in trying to understand credit risk in the municipal bond market relate to the facile distinction between general obligation and revenue pledges rather than an emphasis on the differences between the actual borrowers in the “municipal” bond market – by which we really mean the “tax-exempt” bond market. Governments issue both general obligation and revenue debt and they create a lot of special districts and independent issuers that complicate analysis. But there is also revenue debt that is issued on behalf of non-governmental entities that is not even remotely similar in nature. The federal tax code allows states to issue a limited number of tax-exempt bonds for private business use every year. These bonds are issued on behalf of private (corporate) borrowers and are repaid from private resources. There are also a host of bonds issued on a tax-exempt basis on behalf of non-profit entities, like hospitals and colleges (although you would probably be surprised by the types of enterprises that count as charitable organizations under the federal tax code these days). This is not government debt. It is often not even a question of whether they serve an inessential or essential purpose vis-à-vis a governmental entity – they are simply getting a government subsidy for economic development or other purposes. Literally the only thing these bonds have in common with government debt is their tax status, and yet they are lumped in with “municipal” bonds for statistical purposes. This is where the vast majority of defaults occur, and it is why aggregate default statistics are mainly only useful for making fun of Meredith Whitney. Most of the “idiosyncratic events” that cause defaults among specific sectors do, in fact, have well-documented narratives (e.g., dirt bonds)."
Be sure to read her material before venturing out trying to explain a very complicated subject such as municipal debt.
Municipal Bonds: Unfortunate Unintended Consequences Or Whitney's Revenge [View instapost]
It's comical to still see these guys cling to the Meredith Whitney myth. A few of them, like this author, are still trying to blow life into her deflated prediction balloon. Once somebody starts talking about Whitney was right but her timing was off, I push the "off" button. I guess this is what you get for to anyone seeking their market research from Seeking Alpha. LOL.
Trulia's New 'Bubble Watch' Nudges California And Texas Housing Into Overvalued Territory [View article]
at the Columbia Business School. Mayer points out that Joseph Stiglitz (1990) provided a general definition of asset bubbles: “[I]f the reason that the price is high today is only because investors believe that the selling price is high tomorrow -- when ‘fundamental’ factors do not seem to justify such a price -- then a bubble exists. Mayer says that "at least in the short run, the high price of the asset is merited, because it yields a return (capital gain plus dividend) equal to that on alternative assets.” The “dividend” portion of the return from owning a house comes from the rent the owner saves by living in the house rent-free, and the capital gain from house price appreciation over time. We think of a housing bubble as being driven by home buyers who are willing to pay inflated prices for houses today because they expect unrealistically high housing appreciation in the future."
Pay particular attention to Mayer's "capital gain plus dividend" point. ( The “dividend” portion of the return from owning a house comes from the rent the owner saves by living in the house rent-free, and the capital gain from house price appreciation over time.) Very few analysts include that factor to value the difference between renting and buying. Including Mayer's metric makes buying move up on the preference scale for most analysis.
See: "ASSESSING HIGH HOUSE PRICES:
BUBBLES, FUNDAMENTALS
AND MISPERCEPTIONS"
NBER WORKING PAPER SERIES September 2005
Trulia's New 'Bubble Watch' Nudges California And Texas Housing Into Overvalued Territory [View article]
Also, if you're in a neighborhood where the homes are being bought as "teardowns" you are probably in one of those Coastal areas too. That phenomona isn't new, BTW. Pacific Palisades, as an example, has had developers and owners doing that for more than a decade, if not longer. I also want to say that most teardowns have long outlived their useful life either in terms of design or condition. Because of that, I consider them an exception to the general principal about which I am writing.
Trulia's New 'Bubble Watch' Nudges California And Texas Housing Into Overvalued Territory [View article]
Is U.S. Housing Slowing Down? [View article]
It appears now that some are arguing about housing formation and whether it's "real" or not. I find such discussions amusing because it assumes that housing might somehow stop the natural quest humans have for a prescribed existence and simply put their lives on hold for a decade or so.
Hosing is a different asset compared to most. It is a non-discretionary expense and must be satisfied. The many reasons for the supply deficiency have been under-studied and under-reported. The lack of good information has allowed pundits to speculate about the validity of their own beliefs rather than the facts around the housing supply deficiency.
Is The Phoenix Housing Market Getting Too Hot? [View article]
I might mention that I have a graph produced by the St. Louis Fed research center which has them predicting low rates of inflation for the next 25 years. The reason? The global economy now acts to blunt the rise of inflation because the world wide competition keeps prices low...
Is The Phoenix Housing Market Getting Too Hot? [View article]
As long as these homes are selling at below replacement costs, they are a screaming buy!
Is The Phoenix Housing Market Getting Too Hot? [View article]
Is The Phoenix Housing Market Getting Too Hot? [View article]
Is The Phoenix Housing Market Getting Too Hot? [View article]
Supply/Demand Imbalances Continue Building In The Housing Market [View article]
http://usat.ly/ZAuIOE
Supply/Demand Imbalances Continue Building In The Housing Market [View article]
I find it interesting that someone has already put a time on a "typical holding period"? Think about it. We have a new phenomona of buying large blocks of foreclosed property and basically creating a real estate mortgage investment conduit (REMIC) and somebody is telling us that a "holding period is 4 years"? Kinda crazy...
The numbers I have seen over the past 18 months is that these "pools" run by hedgefunds like Blackrock et al produce a 6-7% annual return for investors with a projection of a 20% plus additional return when the properties are sold. Why would Blackrock or any other capable investor group predetermine a sell-off period of "4 years" when the real decision will be made when each pool decides their target appreciation of 20% plus is achieved?
In the meantime, in this economy, a 6-7% fixed annual income return is pretty darn good!
Supply/Demand Imbalances Continue Building In The Housing Market [View article]
I could go on by citing the facts that even now the nationwide new home building is at but 60% of a normal 1.5 million units per year and that some homes across America are selling a below replacement costs. And what about the fact that many Boomers are choosing to stay in their homes until they are so old they can no longer do so because if they did sell, where would they move?
In short, we're looking at a very serious supply problem and you cannot analyse it from looking at only one of it's many moving parts.
Supply/Demand Imbalances Continue Building In The Housing Market [View article]
Municipal Bonds: Unfortunate Unintended Consequences Or Whitney's Revenge [View instapost]
She points out "a lot of the problems that the uninitiated encounter in trying to understand credit risk in the municipal bond market relate to the facile distinction between general obligation and revenue pledges rather than an emphasis on the differences between the actual borrowers in the “municipal” bond market – by which we really mean the “tax-exempt” bond market. Governments issue both general obligation and revenue debt and they create a lot of special districts and independent issuers that complicate analysis. But there is also revenue debt that is issued on behalf of non-governmental entities that is not even remotely similar in nature. The federal tax code allows states to issue a limited number of tax-exempt bonds for private business use every year. These bonds are issued on behalf of private (corporate) borrowers and are repaid from private resources. There are also a host of bonds issued on a tax-exempt basis on behalf of non-profit entities, like hospitals and colleges (although you would probably be surprised by the types of enterprises that count as charitable organizations under the federal tax code these days). This is not government debt. It is often not even a question of whether they serve an inessential or essential purpose vis-à-vis a governmental entity – they are simply getting a government subsidy for economic development or other purposes. Literally the only thing these bonds have in common with government debt is their tax status, and yet they are lumped in with “municipal” bonds for statistical purposes. This is where the vast majority of defaults occur, and it is why aggregate default statistics are mainly only useful for making fun of Meredith Whitney. Most of the “idiosyncratic events” that cause defaults among specific sectors do, in fact, have well-documented narratives (e.g., dirt bonds)."
Be sure to read her material before venturing out trying to explain a very complicated subject such as municipal debt.
Municipal Bonds: Unfortunate Unintended Consequences Or Whitney's Revenge [View instapost]