Tag: real estate

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How To Tell If You Live In The Bubble

CNBC Writes: Hong Kong luxury home buyers queue amid talk of last hurrah

hong kong investwithalex 

People often tell me that it is impossible to spot the bubbles in financial markets. They claim that if Mr. Greenspan or Mr. Bernanke can’t spot the bubble, then neither can they. Well, understand something. Mr. Greenspan and Mr. Bernanke are responsible for creating bubbles that will hurt the US Economy for decades to come, not spotting them.

With that said, bubbles are incredibly easy to spot.  Case and point, the Hong Kong real estate market.

In a shopping mall in one of Hong Kong’s prime retail districts, more than 100 people wait patiently to take a lift to the sales floors – not to buy luxury bags or clothes, but high-end apartments with price tags of up to $4.4 million.

Foster Lee, a 30-year-old banker, was among the lucky ones who won the chance to buy a unit after a ballot in which more than 1,600 people signed up for just 80 luxury units on offer.

Wow, 1,600 applicants and 100 people fighting over $4.4 million apartments. Most likely a very small “luxury” apartment.  Do I even need to say anything else?

Signs on the ground point to a clear pick-up in demand from local and Chinese buyers, thanks in part to steep discounts offered by developers to offset higher stamp duties imposed a year ago to cool prices that have jumped 120 percent since 2008.

“You see that people who earn less than you have caught up with you because they bought then. It’s like a girl you liked got married,” Lee said.

Greed and “if everyone is doing it so should I” psychology has set it. This happens during last stages of a bubble. Everyone knows the prices are unsustainable and most people can’t afford it, yet prices keep going up and people keep buying based on psychological factors alone. Yet, when the fuel of psychology runs out, the drop is always sharp.

Last weekend, long queues at one project prompted developer Hang Lung Properties to postpone pre-sales and change the first-come, first-serve rule to a ballot system, in which more than 400 buyers competed for just 80 units priced from HK$8 million to HK$15 million ($1.93 million). Read The Rest Of The Article Here

Bottom line is, bubbles are easy to spot.  The hardest part comes when one has to open their eyes and see things for what they truly are. 

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Real Estate Meltdown Just Starting

Bloomberg Writes: Pending Sales of Existing Homes Slump by Most in Three Years

 housing crash investwithalex

Fewer Americans than forecast signed contracts to buy previously owned homes in September, the fourth straight month of declines, as rising mortgage rates slowed momentum in the housing market.

The index of pending home sales slumped 5.6 percent, exceeding all estimates in a Bloomberg survey of economists and the biggest drop in more than three years, after a 1.6 percent decrease in August, the National Association of Realtors reported today in Washington. The index fell to the lowest level this year.

Mortgage rates last month reached two-year highs and some homeowners are reluctant to put properties up for sale as they wait for prices to climb, leading to tight inventories. Those forces are pushing some would-be buyers to the sidelines and slowing the pace of recovery in real estate, giving Federal Reserve policy makers reason to delay reducing stimulus when they meet this week.

Read The Rest Of The Article Here

On October 3rd, 2013 I put my foot down and made a gutsy call. I have called for a housing top at the time. You can read the article here. I Am Calling For A Real Estate Top Here

Even though most people have dismissed this forecast I continue to stand by it. As new data points for the real estate market continue to come in, it looks as if I have made the correct and exact call. Yes, certain markets will roll over and start going down a little bit later, but the overall market is starting to look top heavy here. I would expect to continue seeing weakness over the next few quarters until we begin to see clear indications that the real estate market is heading down. At that time a lot of people will freak out and we should see a real inventory spike followed by even lower real estate prices. Of course this cycle will feed on itself for a long time.

Remember, this will be the 3rd leg down for the real estate sector. The first one was the initial decline between 2007 and 2010. Typically, 3rd legs down are longer and steeper. As such one shouldn’t be surprised to see large drops in housing prices over the next few years. As my previous valuation work here showed, overpriced markets like So. Cal should and could go down as much as 50%. 

For now we wait and see as the housing market continues its rolling over process.  

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Warning: Real Estate Red Alert

Reuters Writes: Nobel Prize U.S. winner warns of ‘bubbly’ global home prices

robert-shiller-investwithalex

(Reuters) – One of three American economists who won the 2013 economics Nobel prize on Monday for research into market prices and asset bubbles expressed alarm at the rapid rise in global housing prices.

Robert Shiller, who shared the 8 million Swedish crown ($1.25 million) prize with fellow laureates Eugene Fama and Lars Peter Hansen, said the U.S. Federal Reserve’s economic stimulus and growing market speculation were creating a “bubbly” property boom.

This was the case in the collapse of the U.S. housing market, which helped trigger the 2008-2009 global financial crisis. Markets are at risk of committing the same error now, Shiller told Reuters after learning he had won the Nobel prize.

“This financial crisis that we’ve been going through in the last five years has been one that seems to reveal the failure to understand price movements,” Shiller said.

“When asset prices are getting way out of line it should be cause for alarm. The monetary authorities should lean against extreme asset price movements,” Shiller said.

The bubbling housing market is not mainly the result of central bank policy, but reflects a shift toward “a more speculative attitude,” Shiller said. “We cannot expect monetary policy to cure all of these problems.”

Read The Rest Of The Article

I have a lot of respect for Mr. Shiller and I am happy that he won. My respect is not necessarily based on his economic work(even though it has been accurate), but on his ability to take sides. Most economists don’t do that. Most talk out both sides of their mouth without as much as saying anything worthwhile. That is academia for you.

I agree with everything Mr. Shiller states in the article above. Indeed, we are in the midst of a “Global Real Estate Bubble”. This is a unique situation that we haven’t seen before on such a massive scale. The culprit is easily identifiable here as well. Cheap financing on a global scale perpetuated by the FED. The outcome is clear as well, an eventual collapse in credit, real estate and financial markets on a global scale. Anything other than that would defy the laws of physics. For now, it is only a matter of time.

In my previous post I Am Calling For A Real Estate Top Here, I have made a gutsy call that we are indeed topping out here.  I firmly stand by that analysis as we continue to get more concrete evidence that the real estate market rally from the 2010 bottom has indeed peaked.

As such, I once again caution you against speculating in real estate at this time. 

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The Secret Of Upcoming Real Estate Crash

Bloomberg Writes: A Lonely Housing Bear Predicts a Big Tumble

 housing bubble

Talk to Mark Hanson about the housing market for five minutes and you may find yourself wanting to sell your home and park the cash in a suitcase. 

The Menlo Park, California, real estate analyst, blogger and founder of consultancy Hanson Advisers predicts a decline of 20 percent in housing prices in the next 12 months. Half the gains since the latest housing bottom in 2011 could be erased in the hot areas — Florida, California, Nevada, Arizona and Georgia — by rising interest rates and a thinner herd of speculative private-equity buyers, he says.

Read The Rest Of The Article Here

In my last week’s post I Am Calling For A Real Estate Top Here I have laid out a case of why I  believe the real estate market is topping and should decline from this point on. It seems like other people are starting to see the forest through the trees as well.

Even thought I have briefly mentioned it before, I would like to take this opportunity to talk about an important point as it pertains to the real estate market.  If you study financial markets, as I have, you soon begin to see patterns and similar structures in all markets. One of the easiest things to understand is that markets NEVER go straight up and down and they RARELY complete their moves in one motion.  Typically it takes 3 to 5 distinct moves (up and down) to complete either a bear or a bull move.

As such, what we have experienced in 2007-2010/11 real estate market was only the first leg down.  What we are experiencing now is a rebound, 2010/11 to today. Rebound acts as a perfect tool to suck investors or buyers back in by promising that the worst is over and by offering outsized gains.   Rebounds are often powerful, yet short lived. When they are over, markets tend to shift fast to continue on with their original move.

This is where we find ourselves today. The rebound is topping and the market is getting ready to reverse itself. As soon as it does (and I believe it is already happening) the market will resume its BEAR MARKET in real estate. The third leg down is typically more powerful than the first one. As such, I would expect significant declines over the next few years in the real estate arena.

Fundamental certainly support this development as well. 

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Chinese Real Estate Is To Go Up Another 1 Million Percent

Bloomberg Writes: Chinese Still Prefer Property Over Stocks

china-empty-cities-investwithalexhousing 

Matthew Zhou and his wife spent 1.6 million yuan ($261,000) to buy a two-bedroom apartment in eastern Shanghai in August because they saw no potential to make money in China’s financial markets. “Home prices keep rising, so I’d rather buy a place now than put the money in the stock market,” says Zhou, 30, an information technology engineer at a state-controlled bank in Shanghai. Gains in equities “could never outpace the growth of home prices,” he says.

Okay Mr. Zhou, that’s quite a believe. Perhaps you should study history in order to see that over the long run capital markets appreciate much faster than real estate. In fact, real estate shouldn’t (outside of artificial stimulus) appreciate faster than the rate of inflation.

Real estate has attracted “the lion’s share” of household investment in China, according to a July report by Standard Chartered (STAN:LN). It has made up more than 60 percent of household assets since 2008, compared with 48 percent in the U.K., 32 percent in Japan, and 26 percent in the U.S., the report says.

That is massive. Another indication of a bubble.

Wang Jianlin, China’s richest man and owner of Dalian Wanda Group, the country’s biggest commercial land developer, says the property market is “definitely” in a bubble, though it’s “controllable, not big.”

Ok, Mr. Wang Jianlin,  which one is it. By definition bubbles cannot be controlled.  At least in this case you can’t have your cake and eat it too. If controlled, by whom? You, Chinese government or millions of Chinese citizens speculating on real estate. Will they be rational?

Michael Chang, a 33-year-old investment manager in Shanghai, isn’t concerned about bubbles. He spent 1 million yuan on a 215-square-foot, one-bedroom apartment in Beijing in August last year and 5 million yuan on a 1,400-square-foot unit in a Tishman Speyer Properties development in Shanghai this year. “You see home prices rally even when the curbs are in place, not to say when the bans are lifted,” says Chang, who expects Shanghai prices to rise 50 percent in the next five years. Citing a recent ranking of global housing prices in which Shanghai placed sixth and Beijing did not appear, he says: “Let’s talk about bubbles when Beijing and Shanghai rank among the world’s top five most expensive cities.”

Read The Full Article Here

If the statement above doesn’t scream “Bubble” nothing else will.  Mr. Chang anticipates 50% rise in 5 years in an already overpriced market while there are literally hundreds of empty cities all over China.

Perhaps Mr. Chang is right. Perhaps it will go up 100% over the next 5 years. Who knows. Perhaps you should even invest with Mr. Chang. Markets tend to be irrational at times. However, make no mistake. This market will blow up and when it does millions of Chinese families will lose everything.

How do you say Revolution in Chinese? 

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I Am Calling For A Real Estate Top Here

Daily Ticker Writes: “The Party Is Over” for Housing — and Bank Earnings:

Burning-House-investwithalex

Market watchers are increasingly concerned about recent weakness in the financial sector.

In a related development, technical analyst J.C. Parets of All-Star Charts has expressed concern about a potential topping pattern in JPMorgan while blogger ChessNWine identified a bearish pattern in Goldman Sachs “with potentially devastating ramifications to financials.”

“The party is over” for refinancing activity while a weak job market and flat consumer incomes are preventing a pickup in purchase activity, Whalen says. “Structural reasons, apart from rates [mean] you’re going to see a real tail-off in demand” for mortgages.

Read The Rest Of The Article Here

Those following the Real Estate market should be very concerned with the data coming out. It is showing that the top is very near or has already been set. If you actively participate in the real estate market this is an important issue to watch.  Let’s look at some bullet points.

  • Refinancing is down substantially.
  • Banks are shutting down/moving their mortgage operations and firing tens of thousands of people. They expect a substantially lower volume going forward.
  • Interest rates are much higher from a year ago and are likely to rise further.  
  • Rapid speculation in various markets. Las Vegas and So.Cal.
  • Banks are lowering their earnings due to much lower volumes.
  • Bearish technical patters are starting to develop in real estate and financial stocks.
  • Both the US Economy and the stock market are facing severe declines.
  • Please see other factors in my previous posts CLICK HERE

These are just a few, but it gives us enough information to paint a clear picture. Real estate is toast. The rebound that we have experienced over the last 2-3 years is now over (or nearly over).  While various local markets might top at different times, the overall real estate market is topping right now and should start its decline shortly.

Therefore, I feel confident enough to call for a real estate market top right here and now.  I am going on the record here. Even if I am a few months early I believe it is a good call.

“I never buy at the bottom and I always sell too soon.” – Baron Rothschild

If you are in, now is a good time to get out.  

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Will The US Government Shutdown Freeze The US Real Estate Market To Death?

CNBC Writes: For housing, shutdown is ‘freeze of the pipeline’

 frozen pipes investwithalex

The fight may be in Washington, but the effects of the government shutdown will ripple through every neighborhood in America-without a fully functioning government, an already tight mortgage market may become even more prohibitive. It is exactly what the housing recovery does not need.

“This is going to be very disruptive to the mortgage industry and pretty much result in a freeze of the pipeline,” said Craig Strent, CEO of Bethesda, Md.-based Apex Home Loans. “New loans can be taken, but without IRS and Social Security number verifications, [they] will not be able to proceed to closing.”

“It certainly won’t help housing. Among other things, it is likely to spook would-be homebuyers,” said Cecala.

Read The Rest Of The Article Here

I am not in the camp that believes the US Government shutdown will be a lengthy one.  Although I could be wrong,  either way I don’t believe the shutdown will have any impact on the overall US Real Estate Market.

As I have mentioned many times before, the US Real Estate market is in final stages of secondary bear market rally. Meaning that is in the process of topping and will revert to its downward movement soon enough.  There are only two primary forces driving it forward.  Interest rates and speculation.  Speculation will exhaust itself in due time while interest rates will continue oscillate here with overall upward trajectory (read my previous interest rate analysis).

Could this event be viewed as the top when the people look back a few years from now? Perhaps. If mortgage originators cannot truly proceed with loan underwriting process without IRS/SS verification we can have a freeze. However, I don’t believe that would be the case. In case of a prolonged shutdown they will find a way around it. 

All we can do now is watch the numbers and see if this has any impact. 

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Real Estate Watch, September 24, 2013

Reuters Writes: Citigroup to cut 1,000 mortgage jobs, mostly in Las Vegas

real estate cracks

(Reuters) – Citigroup Inc (NYS:C) said it is eliminating about 1,000 jobs in its U.S. home mortgage business, making it the latest bank to lay off staff as higher interest rates cut into demand for new loans and refinancing.

The bank is cutting about 8 percent of the 13,000 jobs in its mortgage division, with most of the cuts – about 760 – taking place in Las Vegas.

With mortgage rates having risen to their highest in two years, applications to refinance home loans plunged in early September to their lowest in nearly four years.

Roughly 800 of the jobs being eliminated are in sales, underwriting and fulfillment and reflect reduced demand for loans. Another 200 jobs are being cut because the company has less work to do on defaults because of higher house prices and fewer delinquencies, a person familiar with the matter said.

The 100% increase in interest rates over the last 12 month is having its effect.  We are beginning to see cracks in the real estate market develop all over the place. Citigroup eliminating about 1,000 jobs in its mortgage division is a clear sign of that.

So, is the plunge in September loan applications for refinancing an indication that the real estate market has topped and is starting to roll over?

It’s too soon to tell at this stage.  Plus, the real estate market is highly local. As I have mentioned before there is no doubt that the real estate market will go down hard. However, the timing of any such decline is a little bit more complicated. There are too many crosscurrents in the market to identify the exact top for the Nationwide market. 

However, if you are involved in transactional real estate, right now would be a good time to start unwinding all of your position. 

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Timing The Real Estate Market Crash

So, do you want to know when the real estate market will start heading south, way south? Read on.

Las-vegas-real-estate-investwithalex

As of right now,  the real estate market in the US is anything but clear. Here is just a few articles from today’s paper to prove my point.

 

Confusing at best, isn’t it?

The reason real estate data is all over the place is because the real estate market is undergoing a topping process. As I have mentioned earlier,  that is the way the bear market in anything works. It sucks investors back in before slamming the door and resuming it’s decline. Once again, this stage of the decline should at least 2X the magnitude of the previous one between 2007-2011.

The million dollar question is….when will it happen? Thanks to our friends at Doctor Housing Bubble we might have an answer.

They have correctly identified Las Vegas Real Estate Market as the one to watch for the first signs that the overall (nationwide) real estate market is about to roll over and start it’s decline. Here is why…

las-vegas-housing-market-invest-with-alex

Reason #1: Las Vegas market has seen the fastest real estate appreciation in the nation over the last year. Up 34% in just the last year alone. That is a stunning pace of appreciation.

Reason #2: The majority of buyers in the Las Vegas market are investors/speculators.  The number is estimated to be at 50-70%.   With about 60% of buyers paying in cash.

las-vegas-home-buyers-with-cash-investwithalex

What does it all mean? 

Las Vegas market is experiencing a speculator frenzy with 50-70% in cash buying from investors. There are no fundamental reasons for that to happen in Las Vegas. One can argue that real estate there was especially depressed but I don’t find that argument valid based on the median price and median income at the time of 2010-11 bottom.  Plus, there is no housing shortage.

Either way you slice it,  Las Vegas real estate market is driven by pure speculation and hot money. As such, it could be the first market to cool down and reverse itself  -OR-  it could just blow up.  

Therefore,  if you are interested in timing the real estate market with great precision it might be a good idea to start watching Las Vegas real estate like a hawk.   

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Why The USA Housing Market Is About To Collapse

(Quick Note:  Dear reader….. I can drop a substantial amount of economic and statistical data on you to support the points below. However, if past is any indicator any such economic data would put most readers to sleep within 10 second.  Plus, a volume of data/analysis can be published in regards to every single point below. As such, I offer only a quick summary and my conclusion for your reference.   Should you require any additional information about the thesis below, please contact me directly. )

housing bubble

 

Yes, I called it perfectly in 2006-2007 and now I am saying that it is not over. 

Before we can understand where we are now and where we are going in the future we must understand where we came from. The Real Estate run up that we have experienced between 1997-2007 has no historical  precedent.  Real estate data going all the way back to 1790 clearly shows that the US housing market basically appreciated at the rate of inflation.  Yes, there were some bubbles and substantial declines, but overall, appreciation at the rate of inflation is an appropriate way to look at the US real estate sector.

real estate 1 investwithalex

 

A QUICK HISTORY LESSON:

All of that changed in 1997 when Bill Clinton signed The Taxpayer Relief Act into law, basically allowing $250,000 in tax free capital gains in real estate.  While real estate was already appreciating at a good clip at that time, that law added fire to the trend. 

Later,  fearing significant economic slowdown in 2002-2003 the Bush administration added a huge amount of jet fuel to the Real Estate Bubble by cutting interest rates and making mortgage finance available to everyone (even to the dead people).  As people used to say, if you can fog a mirror you can get a mortgage. Of course, all of that led to the largest finance bubble in the history of mankind that “kind of” melted down in 2007-2009. I say “kind of” because most of those excesses are still in the financial system and will have to be worked through in the future.  

 

WHERE ARE WE NOW?

Issue #1: US Home Ownership Rate Is Plunging

On historical basis, home ownership rate in the US is in free fall. Take a look at the chart. I think it speaks for itself.  

homeowership-rate-investwithalex 

Issue #2: Real Estate Affordability Is Plunging

Take a look at the chart as it speaks for itself. The affordability index is in free fall as well. Most likely due to higher interest rates and rising prices. 

Housing Affordability Index

 

Issue #3: Interest Rates Are Going Up             

The trend has shifted up and the 10-year rate is up 100% over the last 12 months. I gave detailed interest rate analysis here. Please take a look here.

 

Issue #4: US Economy & The Stock Market Is About To Turn Down (Big Time)

Please read “The Long Awaited US Stock Market Decline Is Likely Here” as to why.

 

Issue #5: Who Is Buying All Of These Properties For Cash Today?

Chinese buyers, hedge funds, banks themselves, investors, speculators, etc…..  Who cares!!! Remember all those Japanese investors buying everything they could in California and Hawaii in the late 1980’s. I wonder how that turned out for them.

On a more serious note, notice that I didn’t say Average American Family. That is the only category that we should track if we want to accurately predict the future trend in the US Real Estate market. Every other category is irrelevant over the long run.  And guess what? They are not buying.  See the charts above. 

 

Issue #6: Bear Market In Real Estate (sucks people back in)

As I have said here before (US Real Estate At A Turning Point), this is how the bear market works. This is the stage #2 bounce, before the big decline (stage #3).  The bear market tends to suck people back in, offer them perceived safety and a high return before slamming the door, ripping their head off, drinking their blood and taking all of their money.  The US Real Estate market is topping in Stage #2 run up here. That is why you are seeing so many divergences. The market should turn down soon. Beware.  

 

FUTURE OF REAL ESTATE:

Real estate is not made of Gold.  There is a tremendous amount of land available in California, Florida and all over the US.  There is no housing shortage. As such, expect real estate to decline significantly in order to revert back to its natural inflation adjusted mean. It might take a few years, it might be different for various cities, but one way or another the market will get there.

BubbleBurst investwithalex

 

HOW FAR DOWN?

Let’s do very simple math for the San Diego market.  It doesn’t have to be exact for our purposes.

Setup:

  • San Diego Median Family Income: $61,500
  • As Per Various Financial Guidelines Families Shouldn’t Spend More Than 30% Of Their Income On Housing.  That means a $1,500/monthly payment.
  • Median Home Price in San Diego: $500,000 (pushing that level again as per Trulia.com)
  • Interest Rates: 30 Year Mortgage 4.72% (Rates as of 9/4/2013) 

With such fundamental input variables median house value should be $290,000 -OR – A 42% DECLINE     ($1,500x360month@4.72%)

What if interest rates go to 7% over the next 5 years, which can easily happen? 

The fundamental value of the median house drops further to $225,000 -OR- A 55% DECLINE

Also, don’t forget that markets oftentimes overshoot to the bottom, just as they set blow off tops. In such a case I wouldn’t be surprised to see a median price of $150,000- 200K -OR- A 70%-60% DECLINE

You say impossible….. I say study financial markets. Nothing is impossible. 

Now, I understand and agree that there are various market forces at play that make the picture a lot more complicated. Interest rates, timing, mortgage finance, cash buyers, the FED, foreign buyers, speculation, location, supply/demand, etc….    However, fundamentals will always prevail over time. Everything else is just temporary bullshit.

 

ADVICE: 

Your house is not an investment. Don’t be confused. It is the place you live and raise your family. If you are happy with your house, have a fixed interest rate, can afford your monthly payments and don’t care if your house depreciates in value, I would stay put.

If you find yourself in a contrary situation……..I would consider various options. 

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