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Matrix Analytix Capital Reallocation Theory: Capital Flight Out Of Equities To Produce Housing Bottom In 2011
Matrix Analytix Equity To Real Estate Capital Reallocation Theory:
* Significant reassessment of traditional investment vehicles ongoing due to unprecedented concerns over deflation here in the US, with extreme focus on structural integrity of equity market yielding major concerns over asset classes' ability to act as a long-term investment vehicle
* Concerns over deflation and structural integrity of equities causing major capital outflows in asset class with nearly $50B in domestic equity outflows year to date, and most recently the exit of major hedge fund players whove performed extremely well for decades (ie Stanley Druckenmiller's Duquesne Fund Management)
* Equity outflows causing major decline in overall market liquidity making it more difficult for hedge funds to initiate and unwind large positions...equity outflows also causing a decline in pool of risk-taking capital which will result in additional hedge funds closing up shop over the next 6-12 months
* Equity outflows have created decrease in market liquidity which is now leaving the door open for much more significant manipulation by larger players....larger players now using manipulation in equities to yield significant profits in short-dated options (note weekly option instruments now expanded to several equities with very high volume in weekly index options)...low volume 2% manipulated move in S&P producing 100-200% gains overnight...note major banks under tremendous pressure to produce earnings as yield curve flattens, trading volumes decline, and FinReg disrupts traditional bank activity (in other words, sharks are very hungry and looking for any possible instrument to produce returns...they are well aware that we are in an environment where only strong will survive).
* Increase in manipulation in equities yielding dramatic disruption in traditional correlations against bond yields and currencies which is posing major problems for black boxes....black boxes which have performed well in past environments of high volatility now being reconstructed to adapt to new environment in equities which continues to tend toward chaos...again, hedge funds finding it increasingly difficult to put on meaningful medium-term trades with many likely unable to survive this long period of chaos
* As choatic period in stocks continues, capital continues to flee equity market ultimately reallocating into Treasuries where yields continue to sit at multi-year lows (nearly $200B in net inflows into bond funds year to date vs $50B in net outflows in domestic equity funds)....relentless bid in Treasuries continues to signal major concerns over deflation and skepticism over current equity pricing
* With significant amount of investment capital now sitting in Treasuries with record-low yields and/or money markets with near-zero yield, at some point this capital will become dissatisfied with lack of meaningful returns and look to reassess the two markets which can produce higher yields, namely the equity and real estate markets
* As market participants look to reassess these traditional markets on a risk/reward basis we expect market participants will begin to note several attractive data points within the scope of the housing market which will produce a strong bias toward capital deployment into the housing market vs. equities:
1) With possibility of deflation likely modeled into most risk analysis models expect market participants likely take note of the fact that while equities have yet to deflate, the housing market has not only deflated but currently sits at extremely depressed price levels on a historical basis thereby yielding a much more favorable risk/reward profile vs that of equities.
2) As Average Americans reassess how to redeploy investment capital, expect skepticism over the structural foundation of the equity market to continue lingering within the psyche of Average investors which will ultimately lead to a focus on the intangible nature of the assets yielded in a stock investment (outside of a stock certificate) vs. the tangible nature of assets yielded in a real estate investment (an actual home, apartment, piece of property, etc.)...this tangible nature of an investment in real estate will further lead to the assessment that unlike stocks, real estate (especially homes) can not go to zero value and hence their downside risk is limited.
3) Mortgage Rates currently sit at historic lows acting as an extremely strong incentive for real estate investment (should you have the ability to get a loan, which we'll address shortly)
4) Since Americans are significantly reducing their exposure to equities, the governments "interest" in seeing higher equity prices to perpetuate a wealth affect will decline (as equity appreciation now begins to affect less and less Americans), leaving the housing market as the most significant market which can have an affect Americans' wealth...we expect to see significant government tailwinds for the real estate market (specifically aimed at price appreciation) over the next several years.
5) The expiration of the Bush Tax Cuts at the end of 2010 which will raise capital gains taxes across the board will act as a significant disincentive to owning equities beginning in 2011 as the appeal of buying and selling equities especially for short-term gains declines (transactions now yield less and less profit due to increase in taxes)....we expect that the imposition of these new tax hikes will therefore increase the appeal of long-term investments such as real estate, especially as the downside risk of owning real estate is now diminished.
* We acknowledge that we are making the significant assumption that should market participants come to the conclusion that an investment in real estate far outweighs an investment in equities, that they will indeed be able to qualify for a loan which would enable them to adopt this investment. And of course there is major risk to this thesis in the form of unemployment, as higher unemployment levels make buyers less and less qualified for large principal, high down payment loans and hence unable to carry out this transaction. However we believe that the marked increase in personal savings over the past 3 years, where savings rates as a percentage of disposable income have increased from just over 1% in 2007 to over 6% in Q2 of 2010 (according to the Bureau of Economic Analysis), will lead to higher consumption rates in 2011 (as Americans have traditionally been unable to save for prolonged periods of time) which will lead to higher demand for goods and services, thereby producing higher demand for labor and a bottom in the job market with a downtick in unemployment in 2011...this decrease in unemployment and most notably the increase in job security will lead to an easing of lending standards especially at the low end of the mortgage market (sub-$500K loans), and therefore an increase in the ability to finance real estate transactions. Note we also expect continued government incentives for real estate purchases over the next several years, as home prices remain a significant factor of wealth, consumption, and therefore economic activity which the government has a keen interest in seeing uptick due to much desired increase in tax revenue.
* Now of course, should demand for goods and services increase and unemployment begin to decline in 2011, equities are likely to appreciate as well, however we believe that current widespread skepticism over the structural foundation of equities will remain pronounced for several years leading to continued declines in investment into the equity market and more notable increases in the traditional market of real estate especially as market participants look to take advantage of record low mortgage rates, depressed housing prices, and much more favorable risk/reward levels.
CONCLUSION: While housing prices are expected to continue declining near-term due to uptick in foreclosures, we expect the significant amount of investment capital which has been pulled from equities and currently sits in Treasuries and/or money markets will become redeployed into the housing market in 2011 which will therefore begin clearing supply of houses available and put a bottom under housing prices especially at the low-end of the market. We moreover expect the recent increase in savings rates will lead to increased consumption of goods and services in 2011 which will therefore lead to an increase in demand for labor, a decrease in the unemployment rate, and ultimately an easing of lending standards (due to increased job security and increased confidence from lenders that borrowers will be able to repay loans) which will act as a significant catalyst to real estate purchases in an environment already ripe with record low mortgage rates. As such we expect to begin accumulating long-term January 2012 call options across the board in homebuilders heading into year end 2010 as we expect to see a bottom in these stocks in the next 6 months with significant price appreciation in 2011. Highly expect Housing Stocks will be the Trade Of The Year for 2011.
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the author of this article must live in San Diego - land of the real estate Pollyannas
does anyone besides me find the real estate related articles posted on ZH today interesting?
I guess it is understandable that there would be heightened interest in RE on a day when the -27% number came out but it sure seems like there was a string of RE propaganda pieces today
note to US govt: get smarter propaganda writers - the present batch are REALLY stupid!
I think something is lost here. It took 30 years to build the housing00 bubble. Thank You Greeny. With lot's of
credit. To think it won't take longer than 2 years is missing a very important point. The American worker has
been subject to the greatest transfer of wealth ever over the past 30 years. That's right. For thirty years workers
were told unions serve no purpose. Look at how much you have. Just buy more. Well, the music has stopped.
Now, the transfer of wealth must go the other way, or this will be the mother of all DEPRESSIONS. I think it
will be anyway. It is already to late. A 100 million dollar bonuses for Lord Blankfein , in just one year and it was
just his bonus will do what the "flashcrash" did to retail equity investers. Never Again. The Ponzi Scam market is
now exposed. Godman Shafts destroyed it. They stole taxpayer and equity investors money and their confidence.
Since every poster is strongly against the article, there's probably some weird way in which it's right. LOL
But the main objection I see is that the government cannot permit the Treasuries market to weaken, since the Treasury auctions have to go well or it's instant sovereign default. Everything possible will be done to keep money flowing into Treasuries, as opposed to any alternative. A substantial move to real estate would be fiercely opposed. With what success, or what results, nobody now knows (except it probably won't be pretty.) We'll see.
So who is going to buy all the RE? Surely the unemployed will be able to go zero down and at next to nil interest. <sarcasm on>
Jeez, without jobs- there's not even a need for for such a preposterous theory.
Gold, guns, grub
This reads like someone drunk on the fumes of endless government intervention, coupled with a deep abiding faith in that same intervention to make things all good again. In short, this is nonsense.
Boomers are aging. They are pulling money from the stock market to retain what they have left towards retirement or a part time working old age. They are NOT going to redeploy that capital into a market that has been blasted to kingdom come before their very eyes. In fact, there is little reason for them to move that money anywhere other than into bonds, as they are already doing. The housing market as we knew it is dead, for at least a generation if not longer.
The softest landing we can hope for is a deflationary collapse, and that it stops there without more Bernanke-Stigliz-Geithner-Rubin-Krugman led nonsensical "interventionist" cheerleading. In that case, we'll be a broken nation but we'll still be a nation. But if the asses who favor QE, QE2, and other interventionist strategies get their way, the United States of America and its currency will both be deader than the Roman empire, with a high likelihood of several tens of millions of US citizens dead with it.
That's where these investment jackwipes dare not look - right into the very maw of the hell that they are helping to create. Yet that same hell will not spare them because they have an expensive suit and were fund managers with XYZ, Inc. Karma's a bitch and it's getting close to payback time.
Point 1 says house prices are historically low. Point 1 is wrong. Didnt read the rest.
I wasted my time skimming the rest of the article but agree that the article quickly revealed itself as garbage
Too many contingencies to make predictions like these.
My dears, you have someway to go, the UK crash of the 90s took 7 years to bottom and 12 years to get back (in real terms) to where it started from. Thats was a market far more supply/planning and credit constrained than your own. Theres no point even bothering about a bottom for a couple of years yet.
As for us in the UK, we are still awaiting the next (inevitable) leg down.
http://www.housepricecrash.co.uk/graphs-average-house-price.php
Author says "capital continues to flee equity market". Now an individual can flee the equity market (like me) if replaced by another individual (like Leo), how does capital flee the equity market? Capital can't move out of equitys without being replaced by capital. Can it? Like a sum zero game. Author also says "equity out flows causing major decline in overall market liquidity". Well, to have outflows there needs to be inflow, no?
There are so many things wrong with this. First off, we already went here. What anemic housing stabilization there was was the result of speculative froth bubbling over and causing some activity in places like San Diego. This author assumes what already happened is in the future. Until the credit collapse is completed, housing will not 'recover'. There are many headwinds this author simply ignores, such as:
- Nobody can move because everyone is hanging on for dear life to their job
- Nobody can move because everyone is upside down
- There is 25% plus young people unemployment. Where is new household creation going to come from?
- Wages are being decimated
- People will move into hard commidities, not real estate
- Owing money doesn't mean anything anymore. Why would lenders lend more money?
- Likely that the bottom will be pulled out from under GSEs, or at least there will be lots of uncertainty there.
etc, etc.
ex VRWC
Musical? Add your voice to the chorus at http://economicprotestproject.blogspot.com/
I think this person hit their head on the pavement after falling off a watermelon truck. There will continue to be a downward bias of housing prices (some worse than others) in markets throughout the country until the fed and the Obama goons start pushing a lot more of the bankrupt product through the door.
what garbage! someone got paid to write that? there is no hope.
Let me see if I get this...money has fled equities and into the relative safety of MMAs and US Treasuries. Next year this low-yielding money will flow back into real estate providing a prop for real estate prices.
I think the inverse relationship of bond prices and yields might have a thing or 2 to say about that. As money exits the Treasury mkt, other things equal, those bond and note prices will fall, leading to rising interest rates not only for Treasuries but for mortgages too.
It's true, the Fed might try to stonewall that course of events, but even if they're successful, I sincerely doubt whether even we Americans are that stupid as be lulled back into a mkt that just finished burning us a few months before. ...At least I hope we're not that stupid.
Well, kudos for having the guts to go so contrarian, but in this case, the consensus is right, housing is a dog. I suppose there might be a little bull market or two in some small segments somewhere. But overall, especially in the US, housing is a big, smelly dog. The tax credit expiry and the capitulation we're seeing now are just the beginning. Wait till Bill Gross's nightmare comes true and the government, not by choice but because it's broke, stops backstopping mortgages.
Pending state and muncipal defaults and public pension nightmares make residential rental property (especially CA) an unpleasant tax target. Plus, many areas have rent control and tenant rights regulations that heavily favor the tenant, add in new government regulations; lead paint remediation for example, make me reluctant to buy property until we've seriously resolved the financial debt bombs. It only makes sense to hold title when the reward outweighs the risk.
An impressive list.
We have and will have a cronic problem of underemployment of people under 25. That stays on the table for at least the next five years. So where are the buyers? On the other hand you have the sellers. This is the first year of the boomer retirement/downsizing. We have 15 years to go. It will crest in 2018.
No buyers, lots of sellers. I don't see the upside.
Under 25? Try more like under 35. Barely any of my 2002 graduating class in Electrical Engineering are fully employed today. This isn't exactly a new trend either. Job postings at the University that I attended basically dried up after 2001 at their career centre.
I suppose that if homes were bought by hedge funds with an infinite and inexpensive supply of other people's money then there might be a recovery or boom in 2011.
Since that is not the case and people think about feeding and clothing themselves first before taking on debt and buying a house, it seems logical that jobs need to recover before housing will show increases. Credit is not extended to unemployed people and homes are bought with debt.
Given the supposed death of the McMansion, the 9 year inventory of existing houses and tight credit standards, I cannot see where any real demand will come from to spur new construction.
Will babyboomer downsizing spur new construction or simply withdrawals of money, from investments, to pay for living expenses?
"While housing prices are expected to continue declining near-term due to uptick in foreclosures, we expect the significant amount of investment capital which has been pulled from equities and currently sits in Treasuries and/or money markets will become redeployed into the housing market in 2011 which will therefore begin clearing supply of houses available and put a bottom under housing prices especially at the low-end of the market. We moreover expect the recent increase in savings rates will lead to increased consumption of goods and services in 2011 which will therefore lead to an increase in demand for labor, a decrease in the unemployment rate, and ultimately an easing of lending standards (due to increased job security and increased confidence from lenders that borrowers will be able to repay loans) which will act as a significant catalyst to real estate purchases in an environment already ripe with record low mortgage rates."
Ummmm...no. There is logistically no possible way, in this ongoing era of wage stagflation and the massive destruction of investment value, that any of this rather rosy prediction is going to match the reality of what skittish investors will do. I don't think that the investor-class in real estate can possibly be motivated to buy up more real estate after such a miserable implosion of the market, especially considering that the buying/renting occupants of the public are so heavily battered by the costs associated with running a home. The petals of a rose can only serve so much purpose in trying to cover up the underlying stink of dog shit.
I agree HTF...would you buy real estate if you thought there was a chance it would continue to decline in value? Tell all the buyers with cash who want to buy next year that I can get them great deals right now...do some of these investment people really think about what they say?
Trouble is, it's not even a chance that it will decline in value more than it has. RE is and always has been only worth what it is that someone's willing to pay. As we're currently locked in a state of default/repossession, I don't see where anyone would be motivated to buy...there's enough backed up inventory at this point to further dilute prices in horrific fashion. The only people who would want to buy are people in need of a home, and very few of them can afford it. Actually, I'd wager that the largest percentage of those in need of a home are the ones who have just recently lost one. Good stuff...the spiral of decay continues, unabated and self-reinforcing.
I think that one of the major flaws in this article is that it views RE prices to be "depressed" based on values established during an insane bubble in RE.
RE, in most places, still has a long way to fall before it can be considered cheap in realistic terms and not just cheap compared to the bubble prices.
For now, it's a good time to be renting and stashing cash. Avoid debt.
That's exactly the case in the completely insane world of modern RE values. Somehow, even now, people are left dumbfounded by the fact that their houses are no longer the ATM's that they were led to believe. If there's any stand to be made, in terms of ruining every single bubble that could ever emerge, it's simply to reject the idea of languishing debt, of any sort. Of course, that idea, if it were ever to catch on, would be the death-rattle of our current system of fractional-reserve banking, but...isn't it just about that time? The patient is already dead, and yet the Fed is still trying to practice some weird combination of resuscitation and hospice care. Totally worthless.
I clicked on the title thinking this article was some kind of a joke. I was not disappointed.
this kind of propaganda on ZH?
I also disagree. Housing has another 20% to fall (particularly on an income to price basis) and the capital gain juice has been sqeezed out of the housing market. Individuals will not redeploy out of bonds until bonds crash and if bonds crash, they will not have the capital or the creditworthiness to invest in a house. Finally, if the assumption is that the lower end of the market will be coming back first, I'd love to know where these lower end Americans will be working to make their mortgage payments.
Who said the biggest buyers will be Americans?
Ergo the demand for dollars to continue in 2010 in preparation for acquiring the USA on the cheap. Welcome to the New America. We may get rid of the Progressives for decades to come. But your landlord will be speaking Chinese.
Hey. We reap what we sow. And so did they.
And this
http://www.amfirstbooks.com/IntroPages/ToolBarTopics/Articles/Featured_Authors/chittum-thomas_w/Chittum_Works/Thomas_W._Chittum_20031209_Millions_Of_Houses_Worth_Trillions.html
Here's an article I wrote in 2004 about a coming housing bust ... and I don't have a PhD from an Ivy league "good school."
"I'm also suspicious that tens of millions of Americans are going to lose their houses to foreigners within the next few years. Yes, I said tens of millions."
http://www.prisonplanet.com/analysis_chittum.html
I think he's saying the next growth business area in the US is slum landlord.
I would have said the same thing but not as well. :-)
I'll never buy another house unless it's at $75 per sq ft
Uh...no.
Yeah, I'll start holding my breath..........now!
I'd rather try and survive on the spare oxygen from Pladizow than get into RE anytime soon. (And I am talking avatar.)
This article seems to assume that we live in a bubble and does not include the impending default of the USD. If we lived in a perfet world (closed monetary economy), then I could buy the thesis of this thinking.
When the USD defaults, and it will, why would money flow into real estate????
History shows that precious metals are the likely area we will see rise. We live in a global environment and gold/silver are some of the few commodities that an objective fiat of value can be gauged and measured.
I don't buy the premis of this article.