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Monday, February 14, 2011
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28 comments:
Front page today's WaPo:
"D.C. region is returning to its feet"
I think wapo is usually behind the curve.
Agreed. Can you ask the NYT to stop scaring the crap out of the rest of us?
Housing Crash is Hitting Cities Once Thought to be Stable
Articles like that certainly counter-balance any good feeling equity I've managed to accumulate in the last six months...
:-(....
TN,
Seattle????
If I recall correctly, that was one of the very last markets to fall.
We are here talking about the DC area, right? Big population gains, low unemployment and robust hiring...if I owned in Seattle, I may feel differently.
My point, as always, is that they don't distribute the NYT just in NY and Washington State.
We have to assume that most folks (the herd) read the article and intake a viewpoint that is local (or Hey! It's happening THERE so it can happen *here*).
FWIW.
Not the smart people, tex.
I imagine someone will soon publish a book to the effect "Why It Is Never Smart To Invest in Real Estate."
Which will signal the next 7 year boom. Media today is often chasing the story and not uncovering it...
As always,
My $0.02
http://www.csmonitor.com/Business/2011/0210/Home-prices-Where-s-the-market-headed
"The recession brought weakness to nearly all metro areas in the United States, but not in equal degrees. Some are now seeing prices rise. Yun pegs Washington, D.C., as America's strongest housing market, thanks in part to being "stimulus central," with lots of government contracts creating jobs."
All Bubbles are Local
remain leery of those who would project price drops with any degree of precision. There are still too many unknowns. However, any market where prices are out of line with local wages, or that has a large amount of inventory above the conforming limit, or that has a great deal of shadow inventory is still set for a fall. Until the economy turns around and the job situation improves, housing will remain in the dumps.
Pat-
Banks borrowing at low rates and buying treasuries 5+ year treasuries is no where near an arbitrage. This trade is very risky and only makes money if the fed funds rate stays low for longer than people expect. If interest rates rise banks are stuck with treasuries that are worth a lot less than they paid for them and either can sell the securities and take a loss or have to borrow at a higher rate than they are being paid to hold the treasury.
I personally think the trade will be profitable, because I don't expect inflation to take off, but many believe inflation will be a problem. If it is a problem than buying treasuries would be a terrible idea.
I try not to be an Ultra Bear,
The worlds craziest bubble popped destroying banks, hedge funds and
delusions around the world.
That said, How much air remains in the bubble, and how bad things can be, remain somewhat unknown.
Interest rates popped up 85 basis points in short order, that to my mind is good. Any Long term interest rates below 6% is pricing in future deflation.
what is the future? Who knows. If i spot a place I can pencil out and my GF can look at without crying, is a unique challenge but, it's to me a Rent/Buy decision, a place i can handle and be happy with.
http://www.calculatedriskblog.com/2011/02/leonhardt-seattles-foreseeable-housing.html
"Price-to-rent is a great indicator, but some areas have high price-to-rent ratios because of the mix of housing units (rentals units are not perfect substitutes for buying). I prefer tracking price-to-rent over time for a particular city (as opposed to comparing cities), but a high price-to-rent ratio is definitely a warning flag. "
Pat said "any market where prices are out of line with local wages...is still set for a fall"
Really? ANY market? How bout NYC where median home prices are 20X median incomes, and have been this far out of whack for at least 30 years?
So whats more logical (a) NYC prices are set for a fall proving "its not different anywhere", and it "just hasnt happened - yet" or (b) 30 years of contrary evidence is enough to conclude this metric doesnt always work?
A or B Pat...which is it???
HB
i guess technically it's not an arbitrage but an interest rate straddle. you sell 30 year bonds and buy 30 year mortgages, the time risk is the same but you are owning the interest rate spread between them.
i hate high finance, i think it's garbage mostly but, people like it.
anon
it shows that in Manhattan people are willing to accept lousy yields.
I don't know why.
"Contrarian said...When Anon demands an answer for "A" or "B," you know there is always a "C" out there.
2/14/11 4:14 PM"
Correct, there is always option C which is to run away and refuse to answer at all costs. For example, when you wrote:
"Contrarian said...As I said yesterday, I stated in January that the top would occur in the next few months, which occurred in April. 10/1/10 1:49 AM"
In case you haven't been following, the S&P hit 1217 in April 2010. Today, it hit 1332.
So Contrarian, you have 3 choices here. Either (A) April 2010 WAS the peak of the market or (B) April 2010 WAS NOT the peak of the market. Or (C) run away and do not answer the question.
So whats it going to be Contrarian? A, B or C?
I think....am not sure....I saw a purse flying through the air...
:-)
Pat, I dont know why either.
We have a couple of theories, most of which have been discussed here before. VAI said these places never penciled out in his experience. ACE and RECON said similar things. CRT thought the premium (in places like Arlington) is a result of demographic changes, CARA suggested the premium is a natural consequence of increased competition for limited land. I think it is due to "highest best use" analysis which indicates they will never pencil out so long as other better uses exist. Heck, even Bob Shiller once said the premium will exist until other ENTIRE CITIES are built to cause the equilbrium to reappear and let places once again "pencil out".
Admittedly, none of them are dispositive. Nevertheless, the point is, some areas do not satisfy some "rule of thumb" metric, and (given that it has been this way for 30+ years) it is unlikely that they ever will.
Accordingly, to continue to insist that some areas must "pencil out" despite the significant evidence to the contrary is not a convincing argument -- unless you can show why all the other plausible theories discussed above are wrong.
As an aside, if you are insistent in living in a nice place in the immunozone, have you ever considered just renting as a long term solution? In places like NYC its common for people of all economic backgrounds to go their whole lives without ever owning a home. Likewise, RECON has stories about people renting in Arlington for the past 24 years. I say this not to be inflammatory, but to suggest you might want to consider this alternative. Either that, or accept that certain areas are unlikely to "pencil out" and therefore buy because you want to live there, versus buying as an investment.
"Contrarian said...I guess you missed that one day, 1000 point, "flash crash" last year Anon. It was the largest one-day drop in stock market history.
2/14/11 5:37 PM"
No. I didnt miss it. If it makes you feel better, I will admit: there was a flash crash, near 1000 points down -- largest one day drop in market history.
All better now? Good. So again, in case you haven't been following, the S&P hit 1217 in April 2010. Today, it hit 1332.
So Contrarian, you have 3 choices here. Either (A) April 2010 WAS the peak of the market or (B) April 2010 WAS NOT the peak of the market. Or (C) run away and do not answer the question.
So whats it going to be Contrarian? A, B or C?
Pat-
Since you don't like finance I will drop the discussion after this post, but I figured I would clear up the interest rate spread comment. Although the bank does get to keep the difference in interest between the treasury and the 30 year bond they are taking on two major risks, which explain a good part of the difference between the rates. First the bank is taking on credit risk that the person will default on their loans (obviously in 2006-2009 banks lost billions because they were underpricing the risk). The other major risk banks take on is that the 30 year bond can not be paid early, but the mortgage can. On average a 30 year mortgage is paid off in 5-10 years (people move/refinance) so the bank is exposed to what the rate is at this point, because they still have 20-25 years left on their bond and they need to lend at current rates.
Anon-
To clarify your/contrarians comment there was an intraday drop of 1000 points. By the end of the day is was only a little over 300 points. Not a good day, but no where near the biggest drop ever. Also even if the dow did fall 1000 points, you should look at percentages, since that is what matters and in 1987 the markets fell from 2.2K to 1.7K which is just under 25% compared to less than 1K out of 11K points which is less than 10%
HB -- SHHHHH! Please do not point out salient facts :) Im trying to pin Contrarian down to a straight answer, and your contribution (however correct) is merely providing a distraction for Contrarian :)
Contrarian -- sorry about that. So again, for the record. Either (A) April 2010 WAS the peak of the market or (B) April 2010 WAS NOT the peak of the market. Or (C) run away and do not answer the question.
So whats it going to be Contrarian? A, B or C?
HB says:
"This trade is very risky and only makes money if the fed funds rate stays low for longer than people expect. If interest rates rise banks are stuck with treasuries that are worth a lot less than they paid for them and either can sell the securities and take a loss or have to borrow at a higher rate than they are being paid to hold the treasury.
"
Well I concur with your central thesis, which is one of the things that disturbs me. The Fed is acting as a counterparty to an enormous Interest rate arbitrage by the 7 major banks.
It's why they are profitable, they are borrowing from the Fed at 25 basis points and buying treasuries at 450 basis points, letting them take the carry between overnight money and 30 year money.
This would be illegal in any ordinary circumstance. I have a federal line of credit, and it specifically says "You may not arbitrage or use this for non business financial transactions".
That the Banks are allowed to do this speaks to the degree of corruption in the American Economy today.
Anon
Look maybe you are absolutely right, but the corollary question to why people are willing to pay a premium for property in Immunington and Manhattan-Nuts is Why are property owners willing to accept a significantly lower yield on property then on other investments?
Now, i am Renting, I've been paying 1035/month for a 2BR,1Ba Vintage 50's place. It's not glamorous, and I hate the power system, and it really could use some improvements such as a dishwasher and W/D or Central Air, but, it's 3 blocks off the pike and i have 11 bus lines within 3 blocks which will take me to Metro within 15 minutes.
pat,
I'll jump in here. There is usually a trade-off between cash flow and future appreciation. I believe that this is historically correct and would have no reason to believe that is going to change in the future.
People are willing to pay more to own what they want, rather than have a LL. Costs that are fixed (as opposed to rents that will inevidently rise) are attractive to people.
LL's who buy very low-end stuff, count on cash-flow to offset a lesser rate of appreciation, a lesser quality of tenant and many more headaches.
Many LL's, such as yours, have owned for a long, long time and may be perfectly happy with lower rents and a decent (if not optimal) return regardless if new/other investments would produce higher returns. I doubt you know what his other investments are and whether this is part of his diversification. Those rent checks are certain to beat other safe investments such as CD's and Treasuries.
You pay an exordinarily low rent. I have no idea of the condition of your unit. For many with an income that would support a nicer place with w/d, cac, dishwasher etc; your place would be simply unacceptable - no matter the rent.
You may have a bargain, but you are paying a cost for it in quality of life.
Contrarian said...
D) Link
2/15/11 12:13 AM"
Ahh yes - there is always option D, which is to flail about, desperately avoiding to answer at all costs.
Forgetting that your new source of nonsensical doom has been wrong time and time and time and time and time again, perhaps this time he is right. Perhaps the market peaked today and the S&P will be at 250 by this point next year.
Nevertheless, the question (which you continuiously avoid by flailing about) is when did the market peak?
Tell us either (A) April 2010 WAS the peak of the market (B) April 2010 WAS NOT the peak of the market, (C) run away and do not answer the question, or (D) continue to flail about, citing people like Hal Turner, Prechter, Sunspot guru Nenner, Daneric, etc.
So whats it going to be Contrarian? A yes, B no, C run or D flail?
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