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The Housing Bubble's Silver Lining
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
As rents climb, developers large and small take out their calculators and dreams of wealth blossom: but no, this is not bubble.
The disastrous blowback from inflating housing bubbles is painfully obvious: as housing becomes unaffordable, households impoverish themselves to "get in now before it's too late;" malinvestment (i.e. McMansions in the middle of nowhere) flourishes as housing becomes a speculative financial vehicle rather than shelter; retirement funds are sold designed-to-default mortgage-backed securities, and when the bubble finally pops, those lured into buying at the top are left underwater, owing more on their mortgage than their house is worth.
But there is one silver lining to housing bubbles: some of the money squandered in the speculative frenzy ends up rehabilitating old buildings or erecting new housing in useful locales.
Let's not overstate this silver lining: a rational, productive set of financial policies would have directed capital into useful construction without the dubious aid of a speculative bubble. Every dollar wasted on a marginal-return housing investment (for example, a shoddy house with Chinese drywall that renders it cheaper to tear the house down than attempt to fix everything that's wrong) is a dollar that could have gone into rehabbing a well-constructed building from a previous era or building shelter that will last 100 years with little maintenance.
But the euphoria and greed of the bubble mindset do serve one valuable purpose: rundown properties that would not attract any investment in more rational times are viewed as undiscovered gold mines in bubbles.
As rents climb, developers large and small take out their calculators and dreams of wealth blossom. This gold-rush mentality quickly spreads to forgotten areas such as small-town Main Streets and abandoned urban zones--for example the Mid-Market area in downtown San Francisco, a seedy stretch of Market Street that is being redeveloped at a furious pace. Decrepit storefronts are being torn down and thousands of new high-rise apartments and condos are being built in their stead.
The tens of thousands of well-paid techies who have flooded into the city in recent years have driven rents off the scale, and so developers of cubbyhole studios are rubbing their hands in anticipation of collecting $3,000 a month for each cubbyhole from Tech Bros earning $10,000 a month.
All bubbles eventually pop--not just in housing, but in tech employment, and every other bubble in which the participants are absolutely confident that the bubble is not a bubble and the good times will roll essentially forever.
Thus we can anticipate thousands of Tech Bros will lose their jobs when the current frenzy runs its course, just as we can anticipate developers with empty cubbyhole flats will be forced to lower the rents. Many will go broke and the buildings will be auctioned off for a fraction of their construction cost, and the new owners will be able to make a go of it at rents that are a fraction of the asking price in the Tech Bro glory days.
But the city and the future residents got new buildings that will provide shelter for decades, and that's a good thing. As the massive speculative bubbles propping up the U.S. economy all pop, the value of those new and rehabbed buildings will plummet, along with rent and the price of condos. Andf that will be a good thing, too.
When will this unfold? Nobody knows. Bubbles are not entirely predictable phenomena; we can identify them easily enough--when every participant is sure it can't be a bubble, that guarantees it is a bubble--but we cannot predict when the fever will break. We can only predict that all speculative bubbles will pop, and that the deflation will be commensurate to the trendline of the bubble's ascent.
If we're left with some renovated buildings and new shelter in practical locales, we can count our blessings.
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Silver lining, sounds more like lead poisoning to me. Appreciate the optimism, but look what the last housing crash did to pensions, loans, wages. Only the banksters via17 trillion dollar bailouts benefitted.
Yep and look for the same to come with every bubble the Feds blow. Make no mistakes, the Fed is whats behind every one.
The only ones who win in the long term with financial bubbles are the big boys at top. Everyone else gets the bag and poverty to boot.
Call me when rent is less than $300 per sq per month rent
"Daddy, I don't want to be a poor Brain Surgeon when I grow up fighting Obamacare paperwork and insurance companies 24/7. Can I please be a Banker......pleeeeeeeeeeeeeeeeeeeeeeeeezeeee?"
Let's be fair....
EVERYBODY who had enough invested capital in ANY risk assets has benefited from the fed's bubble inflation.
I'm not the 1%, but I sure as fuck made a gripload of money on a condo I bought in Brooklyn in 2010 (flipped it 2 years later for ~60% profit net of fees).
And for this, I would like to thank Obama & Bernanke....
Farmer; yes. You bought at the absolute bottom after the Obama rebate ended.
Only $17t? (Laugh track deafening)
So you won't have a job but you'll have new faucets?
Granite!
Cheap buildings made with Chinese swagg. Clear all of the commerical stuff out, turn it into farmland, and ditch the waste of the parking lots.
Evidently, there's a certain amount of that going on in Detroit (large gardens maintained in neighborhoods on formerly empty, teardown lots). Current "highest and best use" of urban land doesn't necessarily mean more condos.
How about a new bridge this century so we can go from one housing plan to the next.
109,631,000 Americans lived in households that received benefits from one or more federally funded "means-tested programs" — also known as welfare — as of the fourth quarter of 2012, according to data released Tuesday by the Census Bureau.
The Census Bureau has not yet reported how many were on welfare in 2013 or the first two quarters of 2014.
Economic Characteristics of Households in the United States
But the 109,631,000 living in households taking federal welfare benefits as of the end of 2012, according to the Census Bureau, equaled 35.4 percent of all 309,467,000 people living in the United States at that time.
One simple, never-gonna-happen law would fix this: If you are on welfare, you can't vote. The more people there are to vote in favor of keeping and extending the assistance programs that they themselves financially benefit from, the less likely it is that this problem will correct itself. The federal government is buying votes for those politicians who support these programs.
One simple, never-gonna-happen law would fix this: If you are on welfare, you can't vote.
This is one brutal method of getting rid of dependency. One much similar method would be to reduce welfare benefits to way below what someone would earn at a minimum wage job working 40 hours a week. This would save money and drop the incentive to leech off tax-payers.
Here's another idea: remove the "exemptions" from income tax form 1040. If you want to have more children, you pay for them.
An alternative would be to bar anyone from voting who paid no income or capital gains taxes during the prior year (or did not file). That would expand the pool of non-voters to include all income levels (including the wealthy who can successfully exploit loopholes excusing them from taxes). It isn't just bottom-rung welfare recipients who should have no say about policies affecting state-funded expenditures.
'If you are on welfare, you can't vote.'
This should extend to Senior Citizens and Corporations too…. And all Public Employees.
A former coworker who lived in Switzerland for a while told me the Swiss do this. You're on the dole, you don't vote.
While I agree with the sentiment, I question how many who are on the dole really do vote, and further, if given the choice which would they prefer. It would stand to reason that if those receiving benefits were unable to vote themselves more, we would stop this trend, but given the trend was well established long before this percentage of participation was reached, maybe not. It has always been the bleeding heart do-gooders who have pushed for these policies. And given the corporate welfare in play, they have so many ways to hide the weasel that the chances of shutting them down would far exceed any voting rights.
The real problem is American values and personal responsibility. The world as we know it today was in no way considered acceptable 50 years ago. Debt and welfare were big personal negatives, but then so were a lot of other personal behaviors that we seem to fully embrace today.
So this is our brave new world and until we decide to be something else, it is what it is.
Eliminate welfare and use the money saved to subsidize the minimum wage. Employers could pick up employees for next to nothing. Jobs would return from Asia and we would all receive the benefits of having more people working.
Mission creep.... the U.S military is considering sending a "small number" of additional troops to Iraq.
when the renovated slums are being financed with nil or negative rent yields, the lining ain't all that silver no more.
I am confused, are you saying that China buying up Detroit is a good idea or should the US Bankster money be buying up Detroit?
Bullish bullet proof Doors!
Oh so places like Detroit should expect to see some really pretty buildings?
After the system implodes and a billion or more people cease to exist, housing markets won't look much like they do today.
Sun Valley, Idaho will be mine.
The only silver lining is being able to sell to some greedy bastard at or near the top. If you're lucky enough to do so. Everything else is malinvestment and shattered psyches.
MOAR SNICKERS! MOAR COKE!
The silver lining sounds like it's impossible to know whether you're in bubble or not prior to the expansion of credit. Which means that any time someone tells you they can identify bubbles before they happen is full of shit. You can't otherwise know what will be malinvestment prior to . You only ever know after the fact. And that's why it keeps happening and the credit markets don't need to be managed by a centralized authority.
Unless the bubble is intentionally created.
The housing bubble was created intentionally. No small part of it were the phony outcome-based appraisals.
http://www.mortgagenewsdaily.com/4252005_Appraisal_Fraud.asp
If the Bubblelee was not forced to account for the risk that the Bubblelor does not, everything would be fine with Bubbles.
Bubbles occur when the Bubblelor offloads his or her risk onto the FDIC or some outside agency separate from the Bubblelor.
Let the Free Market work with Bubbles, the Bubblelee will thank you and the Bubblelor will improve their business practices so that Bubbles will be restricted to one Bubbleliscious company at a time.
Was just chatting with a friend who's making loads of money working the SF real estate market -- basically she guides people through the permit process at the City. Deals are being done in cash, lots of it from Dotcom 2.0. These guys just sell some stock and buy for cash--they don't really think of it as dollars but as shares. One guy just bought $4M house and is looking to buy the two neighboring houses as well. In the end, he probably won't get the money back, but in that case he probably wouldn't get the money back from the stock either. Worldwide dollars coming home to roost -- through the stock market into the real estate market. Meanwhile . . . gold? silver? The Fed has apparently succeeded in killing the store of value, inflation refuge concept (at least for this crop of new money players).
I'm in commercial lending in Bay area real estate (yes, I am in banking but at least I hate it). Made a list of all construction projects going on in SF (mainly downtown); about 5.2 million sf of office going up right now. That's probably not a record, but it's significant. All of the pre-leasing in these buildings are to tech companies (Salesforce is largest by far, Dropbox, Splunk, Trulia, LinkedIn). Pre-leasing accounts for less than 50% of these projects, so plenty of speculative risk in play.
Similar story going on in residential world - about 5,000 units of apartments and condos under construction right now (again, just focusing on the downtown, SOMA areas - not the entire city). Prices and rents are all at levels only possible for 6-figure salary earners. New 2-bedroom apartments are renting for $5,000 (roughly); 1-bedrooms for $3,500. New condos are priced at $1,100 psf (roughly). Relatively small population that can afford that. Existing renters are stuck where they are - can't afford to move out of their rent-controlled units (which is most of housing stock in SF). The only place worse would be Manhatten.
The story this cycle is the young tech workers that all want to live in the city; and, therefore, all the tech companies rushing to rent office space in the city.
I've been wondering for more than a year when the Bay area tech companies will start to reflect the economic reality of the rest of the US and world; who continues to buy their goods and services? I can't see this local hiring frenzy for engineers going on much longer. When it stops, won't take long for prices to tumble.
The problem with blowing up a housing bubble (lest we forget "housing is not in a bubble"--Greenspan and Bernanke in 2007) in and of itself isn't a big deal...but when married to a massive infrastructure buildout (roads, bridges, airports, etc...etc...) you have a far bigger problem than a "correction in home prices." How Detroit going belly up can be seen as a surprise is definitely a surprise to me. That...and many other Cities I might add...are all "built" on a recovery in housing. We don't even had a recovery in employment...let alone incomes. Guaranteeing "government employment" doesn't helpless se either (tax on work means you get less of it.) with production in energy booming there is "energy security" (for traders on Wall Street) but we still have M-2 flatlining...basically "not a Great Depression"...but that's about it.
I have said the same. Huge numbers of beautiful historic houses and buildings were restored by fools with easy money. And tax credits. I am very happy that these houses were saved. The owners not so much. I can't wait to get a firesale price on a big old beautiful Plantation Mansion from some liberal idiot who restored and lost it. The Master will be in.
I live downtown where the rents are high and there are less parking spots then units. Developers are buying 100 year old apt buildings and kicking out the tenants who paid 400 a month due to long term rent controls. A makeover, they removed the facade revealing concrete floors and double brick walls, will turn a 400 a month apt into a 150k? condo. 150k? for 500 sq ft with no parking.
There is a 100 year old storage building nearby. I think it was a horse stable at one time. It reeks of mold and there are holes in the brick walls. It was bought and will be turned into apts of 500 sq ft that rent for 1100 dollars per month with no parking. Each unit refurbished cost the developer a total of 125k including building purchase price.
I suppose new costs too much as well as a new prefab condo of 435 sq ft is 209k plus 1k per floor with no parking. A parking spot is 42.5K or 38.5k outdoors. This is in a dump of a city across the street from the Jets. Taxes and condo fees will be about 350 a month. At 3% I suppose the monthly payment is manageable.
I don't understand how a luxury house is an investment in the first place. It seems to me that if a luxury house is an investment, then a luxury car, a luxury boat, a luxury big-screen television, and so forth are all investments. But they are not. Investments are things that help you produce more, or help you produce a better product, or at least help you reduce costs, not increase them. After WW2, the government had a VA housing program which built a lot of 1,200 square foot VA houses with 1 car carports for WW2 veterans. If you "need" a house, it seems to me that we could consider that the size of house you "need" is 1,200 square feet with a 1 car carport. A 3,000 square foot house with a 2 car garage, 20 different roofs, 50 windows, filled with fancy plumbing and appliances that are always breaking, is not an investment but a money drain. Everything in it drains money. Maybe it's a speculation, but it isn't an investment. But I think a lot of people bought McMansions because (1) they knew our Middle East wars were going to cause inflation, and in WW1 and WW2 housing prices (though not necessarily mansion prices) had kept up with inflation, and (2) they thought it would be easier to "buy a house in a good school district" than to attend PTA meetings and School Board meetings and MAKE whatever school district they were in be a good school district. So, for these two reasons at least, in the 90s and 00s, many people "took the easy way out" and bought money-draining McMansions. Then, in 2008, many of these people lost heavily, because they found themselves suddenly unable to afford that money drain. By the way, today, many people today are putting their kids in "charter schools" instead of attending PTA meetings and School Board meetings to MAKE the public schools better. I think this also "taking the easy way out" mistake, and I fear that these people too will have the rug pulled out from them one way or another. I don't know how yet, but it just seems to happen every time.
You attend a meeting, and it makes your school better. How is it possible?
Your kid's classmates have no interest in learning anything, just TV games and basketball. You attend a meeting. Will it change their attitudes?
Vincenze, I can't disagree with you. You HAVE TO protect your own children first.
But all this is secondary to the point that a 3,000 square foot McMansion is a speculation, not an investment.
you win the internet today.
I think this is the reason behind the Chinese building bubble. Remember their leaders are communists, and do not really care about capitalism. But Chinese people are good at getting a good deal, even if they have to wait years for it.
When the Chinese bubble burst entire (currently ghost) cities of newly built buildings will become available at affordable prices. Their leaders will blame capitalism for the price falls and the losses some people had. And they will get popular with the general population because a lot of affordable housing has become available under their leadership.
This will be a wealth redistribution. Something communists like, if wealth is distributed from capitalists to the government or ordinary citizens. An economic collapse does not destroy the infrastructure already built, so it is still available after the collapse.
I am not a communist, and I do not like central planning. But bubbles are in my opinion not as dangerous for society as the long-term deterioration caused by the artificially low interest rates centrally planned by most western central banks.
Decades ago, when Bay Area house prices went from $10 k to $25 k, it was a bubble. Then when they went from $25 k to $60 k it was another bubble.
Then from $60 k to $125 k, bubble again. And from $125 k to $275 k, still a bubble. And back in 05, when they went from $275 k to over $400 k,,,,still a bubble.
So, in 08, when 30 % came off the price! it was a disaster. Now that the price is back to $500 and rising, it's a bubble again.
Guess it will still be a bubble when, after the next 50% dollar devaluation! prices double again!
10 years out, when household income is 120 k, and a house a million bucks, they will still be bellowing "bubble."
Why don't people just call it what it is, Keynesian dollar devaluation?
Or as a contrarian might put it:
In front of every silver lining is a black cloud.
http://www.globaldeflationnews.com/south-florida-housing-recovery-anemic...