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Real Estate 2015: "Unlikely To Be What The Market Is Looking For"
Submitted by Ramsey Su via Acting-Man blog,
A Picture of Stagnation
No reason to sell. No reason to buy. That about sums it up. Unfortunately, that is about as optimistic a scenario as I can come up with, supported by equally optimistic growth expectations. In reality, the market has no support. We can only hope that it will not crash at the first sign of trouble.
In a flat market, real estate transaction costs are prohibitively expensive. Commissions, closing fees, loan fees, mortgage insurance, transfer taxes and recording fees can easily add up to 8% or more, depending on where you live. Add a few trips to Home Depot or Ikea and the out of pocket expense of a move can be over 10%.
In the coming year, or years, many home owners are going to find that they do not have the equity to pay for a move. At a low or no appreciation rate, it will take years to build up enough equity just to break even. Some who financed their purchases in recent years with low down payment programs will have to incur out of pocket expenses in order to sell. Others may find that their existing homes have not appreciated enough to offset the expenses, providing little down payment and incentive for the trade-up.
What percentage of the millennials is stuck in jobs, versus careers? How many are waiting on tables while figuring out what to do with their masters degrees in anthropology? These are not home buyers. Not only do they lack the financial means, they need to be mobile so they can pursue career opportunities wherever they may find them. There are no cradle to grave companies left in the world. Mobility is far more important today than ever. Pride of ownership may become a major obstacle, blocking career moves.
On the other side of the spectrum – the boomers – are equally restricted. Many are reaching retirement age and finding themselves financially unprepared to enjoy their golden years. Never mind that second home they dreamed about ten years ago. If they are fortunate enough to have a home, with equity, they can ill afford to blow away a chunk of that equity just to move from miserable Pittsburgh to equally miserable but sunny Miami.
Stuck in the middle are the working class poor of today, as they watch their aging parents and their boomerang kids fight over the room on top of the garage, with free board. They are not moving anywhere.
$ 1.74 trillion in mortgage backed securities piled up on the Fed’s balance sheet – click to enlarge.
Meddlers with Nothing Left and the New Normal
Real estate financing is a simple math problem. The real estate market is heavily subsidized by the Fed’s QEs, which are supposedly ending. Mortgage rates are at all time lows, around 4%. If rates go up by just 1%, mortgage payments will increase by over 12%, offsetting any appreciation in real estate prices and/or increase in household incomes. Any upside in real estate is capped by the removal of Fed accommodation.
On the down side, there are no more QEs that can benefit the real estate market. Just imagine the circumstances that would force the Feds into more action. Economic conditions would have to be deteriorating. So would you want to buy into that market, assuming you have the means?
The 30 fixed rate mortgage has been on a steady decline all year, from above 4.5% to below 4% today. In spite of these favorable rates and very easy comparables against a dismal 2013, real estate prices barely appreciated in 2014. What if the prices depreciate? The interventionists have nothing left. If mortgage rates were to go down further from the low levels of today, I would hate to imagine how bad the global economy would have to be.
Average 30 year fixed mortgage rates since 1971. Scraping along near the lowest levels ever.
In the meantime, supply and demand in the housing market are mismatched. Builders continue to build where they can. For proof, look no further than Las Vegas, Phoenix or non-coastal California. They are replenishing the REO inventory of tomorrow. Redeveloping city centers will be more attractive to the changing life styles of the millennials, and to provide support services for the aging boomers. Unfortunately, these projects prove to be too difficult and may be politically infeasible.
In summary, the real estate market is changing along with ever changing demographics, as well as the changing economy. There are always good reasons to own a home, a place to raise a family. However, home ownership via extremely leveraged financing carries enormous and unprecedented risk. I think many potential buyers recognize the risk and are correctly staying out of the market. The new normal in real estate terms is unlikely to be what the market is hoping for.
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Thank god I sold my house at the right timeand now just rent
fuck that scheme of ownewrship, you dont own shit here in the USSA
As long as home "owners" pay a property tax, they don't own anything but a few on-paper "rights" that can be changed or removed unilaterally at any time.
(Keep voting, slaves.)
Those who downvoted have no concept that taxation is violence or refuse to believe they are living in a tax farm.
lesson one:
https://www.youtube.com/watch?v=Xbp6umQT58A
it's called deal paralysis. seller's don't sell because afraid it's going to keep going higher despite crazy breackneck prices, and buyer's buying with their eyes closed because they think it might be the top.
This sort of behaviour marks a top.
Oh, don't get me started on the evils of taxation, the 'voting' system, and corrupt government.
I was wondering why the New World was so stupid in the first place, as to allow governments to tax their land, when they should have been able to see how well that worked for them in the Old Country:
When Were Taxes Implemented?
Most of the taxes we pay today have been around for less than half of our country\'s history. One of the oldest is the estate tax,which was enacted in 1797, but was then repealed and reinstituted over the years, often in response to the need to finance wars. The modern estate tax was implemented in 1916 and the gift tax came about in 1924. The federal income tax was enacted in 1913, and corporate income taxes were enacted slightly earlier, in 1909.
- from Investopedia, http://www.investopedia.com/articles/tax/10/history-taxes.asp
This seems to have morphed from the "estate tax":
Definition of 'Estate Tax'A tax levied on an heir's inherited portion of an estate if the value of the estate exceeds an exclusion limit set by law.
- from Investopedia, http://www.investopedia.com/terms/e/estatetax.asp
I can see where envy of "the rich" may have led to the first property taxes. After all, in a time of war, how about making sure Mr. Pig Mansion Dweller pays his "fair share", and maybe even a little more? He's rich, he can afford it. After that, it's a small enough matter to redefine the "rich" to include ANY property owners. Then, seeing as the government provides "services" (good god), this all gets justified in the mind of the non-asset holding, pay-as-you-go peasant as normal, as "paying our fair share for services we all receive" which is a normal dynamic to that mind. Such services can, of course, be abused, swindled away, turned into fascist spying, or simply discontinued when inconvenient to the government, who in this tax-supported way may easily become majority or even sole providers of said "services".
It's retarded, beginning to end, but I guess we can't expect a lot when our governments are empowered by achieving the greatest number of "voters" at intervals of several years, preferably over an area whose borders are drawn by themselves.
Personally, I think elections serve only 3 purposes anymore:
1) Give slaves a sense of empowerment and hope.
2) Give government an ongoing poll on policies and personalities.
3) Allow government to measure public response to policy or crisis. (Hence, "snap elections".)
The real pathos of all this, is it actually DIS-empowers landholders, whose "taxes" must pay for policies that non-landholders may endorse by "voting".
And the REAL idiocy of it all, is that the government only has to print what it needs. It doesn't even need taxes! But the taxpayer, who CANNOT (legally) print money, DOES in fact need that cash. So taxes are completely unnecessary from a fiat-money government POV, but damn do those voters cling to them. It's like they can't stand the pain of even the suggestion that they've been conned all their lives, into sacrificing a large portion of their hard-earned labour to a government that can just PRINT IT at any time, and doesn't need it anyway. (Deficit financing, anyone?) Strong backs and weak minds, indeed.
Remember all that talk about a flat tax? That's what the FED does. It's a variable flat tax that will never go away.
Estate taxes were never strong enough to keep our gov. from being seized by the Rockefeller's, and others, a hundred years ago.
Yeah, that's from those who defend taxes as a "necessary evil". (Funny how that "necessary evil" thought-stopper can be used to defend anything.)
Property taxes are evil, but they are not necessary.
The estate/property tax was strong enough to do just as it was intended. I would argue that estate/property taxes are a big reason why the Rockefellers, etc. captured the government, since such taxes apply to ALL landowners, not just the wealthy ones.
So J6P, subject to the same property tax system as Rockefeller but unable to buy exemptions and less able to absorb the cost, loses autonomy over his own land, while Rockefeller now has only to buy a few government shills before he can run the place and direct what happens on what used to be J6P's land. (Property taxes are all about growing government power and reach, and nothing else - and this gives Rockefeller etc. a government that is worth the buying.)
+10,000
Indeed Sir!
Even if you live in the middle of a spread so large you can't see any roads or neighbors in any direction and you are up to date on your taxes, they can be raised to a level you can't pay or your property can be "condemned" and you can be removed from "your land". Peacefully or forcibly.
Paying Squatters
"home ownership via extremely leveraged financing carries enormous and unprecedented risk. I think many potential buyers recognize the risk and are correctly staying out of the market."
If only the second sentence were true. As covered extensively on ZH, the lending standards are going to be relaxed further to "stimulate" the economy with debt. The only guarantee is that they will inflate bubbles and burst them. Rinse, repeat, ad infinitum.
Personally, I am waiting for the second crash to by the final homestead. When prices bottom I am going all in on land with water and pastures.
Sell your house, Buy MOAR STAWKS !!!
More like borrow from your home's illusionary equity, and buy moar stawks.
OOps, I didn't think I needed to end a Krugmanesque comment like that with /sarc, /BadData or /MeltUp at ZH
The author neglects to account for money laundering into one of the last available non-regulated vehicles (escrow accounts) used by the entire world of criminals.
That's an important point; thanks for raising it. The elephant in a room full of "hot money".
It is a good point but what % of SFH purchases in USA are closed with 'hot money'? I'd guess less than 5%.
Yo, Tylers! I'd love to see an article on this. % of sales closed with hot money, laundered money, or proceeds of crime (any or all), AND degree to which such sales may SKEW prices? (I'd guess, small number of sales, and BIG price skew.) The Hedge has been great with articles showing corporate investor effect on the market, but I think there's more to this picture than just big investor money (which is rapidly pulling out now, as Wolf Richter among others has been right on top of).
Unfortunately, I can still only guess at this point, same as you...
EDIT: Seeing as I'm on the Investopedia site anyway:
Definition of 'Hot Money'1. Money that flows regularly between financial markets as investors attempt to ensure they get the highest short-term interest rates possible. Hot money will flow from low interest rate yielding countries into higher interest rates countries by investors looking to make the highest return. These financial transfers could affect the exchange rate if the sum is high enough and can therefore impact the balance of payments.
2. Stolen money that is marked so as as to be traceable.
Investopedia explains 'Hot Money'1. Banks usually attract "hot money" by offering relatively short-term certificates of deposit that have above-average interest rates. As soon as the institution reduces interest rates or another institution offers higher rates, investors with "hot money" withdraw their funds and move them to another institution with higher rates.
2. Hot money might have been involved in a robbery and tracked through dye marks on each bill or through recorded serial numbers.
http://www.investopedia.com/terms/h/hotmoney.asp
The ESCROW SLUSH FUND
Indeed, abuses run rampant.
Yeah, nothing like being labeled a criminal because one wants to eliminate the immoral confiscation of even more of one's property by the largest gang of criminals on the planet. LOL
Would love to see the market value of those "assets". If only the masses could grasp the amount of malinvestment that has been swept onto the Fed balance sheet, they would see just how bankrupt the TBTF really are.
But that would take actual thought on the part of the masses. And that ain't happening, cuz if the masses thought about the fact that they are now on the hook for the TBTF banksters, the pitchfork mobs would be a-rollin'.
Only real question is whether you have the means and fortitude to defend your home when it goes to crap. Will guarantee you, there is no "mob destruction" rider on your insurance so you will be out your "investment" if you can't defend it.
Do you really think insurance companies will be around to pay any claims when TSHTF?
That's the reason I refuse to buy earthquake insurance: any earthquake big enough to destroy more than 20% of a home's value (the standard earthquake deductible) will destroy so many structures, the insurers (and re-insurers) will all be bankrupt; you'll never collect on your claim.
Great and timely comment - I just received my annual renewal notice for earthquake insurance and decided for first time in a long time not to renew. I agree with you - if a big one hits, it will take down many companies. I also think that for those homes destroyed by fire in a major earthquake, the policy coverage won't be enough to re-build the homes. Think about the cost of materials and labor (especially labor) in such a scenario.
Chief Justice Roberts set a precedent that mandatory insurance is a "tax" and it's "Constitutional".
Don't be surprised if you live in an area that will force you to buy earthquake insurance or else pay a fine in upcoming years.
this past september i was forced into home ownership becasue my landlord kicked us out after his diner went under and his son was about to go homeless. sometimes actions are forced on for you. so much for not borrowing allot in 2014
His was the only available rental property in dinerville? Sounds like you were 'forced' into home ownership the way some are 'forced' to go to college and borrow $120K to do so.
the rents in NYC or north shore of long island made no sense, tight rental market here, pricing allot higher then 4 years ago. Actually the Frinedly resturants on LI are all going bankrunpt, I know its a depression, but others are starting to slowly see it. I actually went north of the city, over 1/2 million dollars for a handy man special on LI is insane, a person with a million dolalrs is a sucker to buy it.
Well, that explains it. You're on LI. Here I was thinking you were living in the real world. At least yer Islanders are playing well again.
I'm surprised it's only 1/2 mil there. Handyman specials in Fairfax County where I want to buy are easily that much or more.
thats like kings point, sands point here i assume, 1 million easy for handy man special, no i did not even attempt that
"$ 1.74 trillion in mortgage backed securities piled up on the Fed’s balance sheet"
?!!! Not cool, dude.
Speaking of the FED, is their or is their not a FOMC meeting today?
Is not listed on the FEDS website, one for Jan 27-28 is.
http://www.federalreserve.gov/newsevents/press/monetary/20140605b.htm
I was able to find this.
January 7 FOMC Minutes
Meeting of December 16-17, 2014
http://www.federalreserve.gov/whatsnext.htm
Their balance sheet somehow continues to translate into the taxpayers' liabilities.. and this MBS-crap is not helping.
FSBO: Lovely 3 bedroom home in Bridgeport CT surrounded by decaying state that is working hard to remove rights. Many opportunities for free shit from state that works its hardest to take from the few still paying taxes via the HIGHEST property taxes in the nation. Rush right in! Interest rates are still low(and will be FOREVER)! Comes with democratic government hell bent on keeping the EBT fux happy! Only 175K gets you this lovely gem built pre-WWII!
When can I do a walk through? What's the rental market like?
Try the S.F. Bay Area. You can't get a dog house for $175k
Several people I know bought the heck out of distressed properties at the bottom of the downturn in 09. Put em in their rental fleets... the rents in the Bay Area are very,very strong. The performance is VG+
Correct Beetlejuice, but the ~entire~ Bay Area phenomenon is predicated, underscored and $underwritten by the social media 'revolution' and the companies that reside from San Jose south, to Marin County north. Will it sustain? Who knows - maybe so, but if or when it doesn't, the Bay Area will have its very own (and quite special) version of $Cratering. In a rather perverse sort of way, I can't wait...
"Will it sustain?"
Sure, just like Detroit, or more recently, drkoop.com
Hardly, the Bay Area has gained from a host of bubbles over the past decades (tech, biotech, dot-com, VC,...). At this point, there is basically enough cash wealth in the Bay Area to weather any downturn, and simply retool and reinvest at the bottom of a business cycle.
I've been close to this market all my life. Sure there's been downturns and tough spots. If Armageddon comes what's the dif?... but from my understanding the S.F. Bay Area is slated to prosper in high tech. That is the position it has been assigned by our Globalist Masters who favor this area.
For a really great insight into this whole rigged situation take a look at -
https://archive.org/details/New_Order_of_Barbarians_remaster_tapes_1to3
Anode Phase Bucking
Under empire equal outcomes, males and females can pretty much do the same things, creating a voltage common reference. In the real world, men cannot do what women do or vice versa. Depending upon power requirements, you want the sexes to buck 180X degrees out.
Adding children / generations increases multiphase dimensionality, which the empire seeks to simulate with dc scale, which is a farce if you take the empire seriously, as anything other than an extension of gravity, which is a waste of timeenergy, creating event horizons, redundant resistors.
The majority is always more than happy to print money in a positive feedback loop with natural resource exploitation, and hire revolving scapegoats, until it can’t, when it hunts you down, with best business practice proliferation, in public, private and non-profit corporatisms, the process of elimination. It only knows what you tell it.
The only net difference among affirmative action brands is how efficiently they discharge natural resources to feed the bankers, the ultimate affirmative action babies, with interest on flipping real estate inflation. The problemsolution of these master-slave relationships is that they cannot produce productive children, which is why their schools get dumber every year, with proprietary vendors depending upon H1B1 at the top and the most desperate illegal aliens at the bottom, for compliance.
That piece of paper is the entrance to a trap, for which there is no exit. You are the exit, or there is no exit. Somebody has to provide circulation back to the community for economic mobility to exist, and it’s not the bankers or their grant gravy train. Talk’s cheap. The secret to tunneling, climbing, is that not all current follows the path of least resistance.
Funny, my wife is not afraid of vicious dogs, or getting wet in the rain. The planet knows you better than the empire does. You cannot beat natural selection, but go ahead and try.
Malinvestment is not in the vocabulary of the Fed or any Keynesian economist. How the fuck are we ever gonna purge any malinvestment in the economy if we keep feeding the monster by debasing the buying power of the middle class. Fucking, idiots.
What do you mean no reason to sell? Distress.
What do you mean no reason to buy? All those empty tract shoeboxes are being filled up by massive immigration of cheap labor whores on your dime, unemployed economists.
You really should look at who is teaching your children, and what they are telling them. Really.
Decent article with some insight to this debaucle..
http://www.bankrate.com/finance/federal-reserve/financial-crisis-timelin...
Particularly appreciating these comments at the bottom.. they complete the article..
"jefferysikes • 10 months agoWhat the author missed was the relationship of the QE and interest rate derivatives, especially interest rate swaps which are making the financial institutions very wealthy (about 5-7 trillion/yr). The total of interest rate swaps is about 200 trillion dollars. The purpose of QE was bank liquidity not home interest rates.
Grip2013 jefferysikes • 10 months ago
That's probably because the author, like the lay person, does not understand the derivative, credit swap business that underpins the global banking systems."
Never been a better time to buy, you are all just poor haters.
hehe
In this country, we aspire to "poor". Poverty (net worth near or at zero) is a big step up from insolvency or destitution (net worth below zero).
DESTITUTE haters - now, THAT would have stung! And if you'd said "insolvent haters" then I would prolly have to report you somewhere, for the good of the children.
No reason to sell.
I'm not so sure about that. The under-capitalized specuvestors and REIT's are skating on super thin ice. Without Greater Fools or Renters the lenders will come calling and liquidation will be inevitable. I'm of the opinion the FED is more concerned with popping Housing Bubble 2.0 than the stock market hyper bubble. The popping of the former extends the latter.
If TPTB can get the cost of RE down just like they did energy, they might be able to extend the bull run just because increased consumer spending on retail and services will bring those PE ratios back to some semblance of sanity.
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If TPTB can get the cost of RE down just like they did energy, they might be able to extend the bull run just because increased consumer spending on retail and services will bring those PE ratios back to some semblance of sanity.--
If they were to let Mr. Market do his job the costs will come down without their supposed help-- Yes?
And even if they 'forced' the prices down present meager wages from the service industry wouldn't come close to that sunny forecast of a vibrant economy. Nope, when they offshored the production, most of the economy went with it. The importation of H1B visa and illegal labor pretty much finished it. If people don't have the means then they won't buy,,, regardless of price.
Most have the cart before the horse. First a viable productive underlying economy is necessary before a decent retail and/or RE market can be successful. Otherwise your howling at the moon which is exactly what we are doing now.
A managed depression.
So far it has been. Too many balls in the air to count.
"What percentage of the millennials is stuck in jobs, versus careers?"
I'm an x-er and I don't have a career and don't know anyone personally with one. I have worked for bosses with careers. I don't even have relatives with a career. I have a cousin who was an apprentice plumber till he got hurt, now he had a chance at a career, someday he would have had his own truck, later maybe multiple guys working for him. None of my coworkers have careers, we're just working until downsizing and outsourcing takes away our jobs.
I have a job, fairly decent STEM job, and I'm quite good at it which is why I've survived the downsizing, but no upward mobility and its virtually impossible to get another, and its not going to change any time soon, other than someday downsizing and ageism will get me. Then its Walmart, I guess.
Great time to buy or sell a house! (not!)
Better jump on that Wal-Mart greeter job now. I hear they aren't as likely to take you once you hit the age of 30.
As a realtor I advise working on reducing your debt load and stay away from real estate. If you have extra funds I like farmable land with natural water sources more than stawks or bonds. As this site well knows I am preaching to the choir but I am fully into tangible. Hard Currency, Precious Metals and farm land (farmland bought in cash, no debt)
“home ownership via extremely leveraged financing carries enormous and unprecedented risk.”
Quite an understatement; especially in a market that has seen Treasury 10 year constant rates at %2.5-%3 for 6 (going on 7) years.
At these rates, home prices should be rising like fireworks; but they aren’t.
So, what happens when rates rise to market rates – as they inevitably must?
The last time this happened (2007-8), an unprecedented real estate crash was triggered – and this happened AFTER a nearly unprecedented boom in real estate prices.
Oh yes, prices have risen in the last few years – but not nearly as broadly as the prior boom.
This time, when rates rise, I would expect an unprecedented slaughter of RE prices as well as prices of most, maybe all, other assets (stocks, bonds) et cetera.
The entire financial system is “unsustainable”; even those who prepare Financial Reports of the US Government will tell you the same (see Bad News…)
My advice? Wait for rates to rise and the correction to chop off %50 to %70 from previous highs; then go shopping.
Been looking to move into a larger place, but the prices in most metro areas are outrageous. I refuse to do so until prices come down 30-40% or my salary goes up by the same amount. I have some hope for the former.
For the former, patience; maybe 1 or 2 years.