Tuesday, April 26, 2005

RE Speculation Is Global And Connected

The Telegraph reports on a new scam that already may be in a neighborhood near you. "Some suggest that their members can buy new flats for discounts of up to 30 per cent. Supposedly they can negotiate these cheap deals by taking a number of flats in a new development at an early stage, and so get a 'wholesale' price. The members only stump up 5 per cent as a deposit."

"The number of buy-to-let mortgages in the UK has soared from 28,700 in 1998 to 526,200 last year."

It isn't confined to England. "As a last gasp, a number of the off-plan agents are pushing overseas property in places such as Spain and Florida. Gambling on new schemes in faraway markets is the stuff of madness. The room for error is huge."

We are seeing the idea that RE is local completely discredited, as in this MSNBC story. "There's a good chance you or someone you know owns a second home abroad. You may even unwittingly own a stake in a Guangzhou office block, via your pension fund."

This concept is Alan Greenspans' chief arguement against a housing bubble. What else is he wrong about?

13 Comments:

At 10:16 AM, Anonymous Anonymous said...

It's happening everywhere, yet the Federal Reserve won't admit that it's a national bubble.

They say "There may be concerns in the overheated coastal areas". It's not just on the coasts it's happening in every corner of this country.

The phenomenon that is happening should make them reconsider their claim that "Real Estate is Local". Maybe it was in the past but not anymore.

They need to prop up the dollar to stop our real estate from being so attractive to foreigners, due to the devaluation of the U.S. Dollar. Otherwise the only people that will be able to afford real estate in the U.S. will be the foreigners.

 
At 10:35 AM, Anonymous Anonymous said...

Remember when the Japanese got taken the cleaners buying US real estate assets in the 80's and 90's?

 
At 10:38 AM, Anonymous Anonymous said...

"They need to prop up the dollar to stop our real estate from being so attractive to foreigners, due to the devaluation of the U.S. Dollar. Otherwise the only people that will be able to afford real estate in the U.S. will be the foreigners."

In this regard, much higher interest rates would solve many of these issues. The dollar would get propped up and real estate would be much less prone to speculation at the same time.

Yes, this will likely cause a recession, but as Fleckstein says, we're headed there anyway, let's just get it over with. I don't see that stagflation is any better than a full-blown recession.

Is the Fed too gutless to do the right thing (raise rates dramatically)? This is the 64k question.

 
At 11:29 AM, Anonymous Anonymous said...

Off-topic... Luxury condo bldgs going up in Yorkville, in upper east side Manhattan:

http://newyorkmetro.com/nymetro/realestate/columns/realestate/11751/

For a little perspective: a friend of mine, a RE agent, is trying desperately to rent a number of rent-staballized apts in Yorkville. We're talking $1000 for a 1-bd and $1400 for a 2-bd, cheap for the nabe. But no one wants to live in Yorkville. I mention the apts to friends moving to town from Thailand, friends living in the Bushwick boonies, but no one will bite, not even at this discount. Because Yorkville is dead. Just a few fratboy bars, a few burger-type joints.

Yet they're building "512-square-foot studios starting at $700,000 and four-bedrooms as high as $5.3 million"!

 
At 11:58 AM, Anonymous Anonymous said...

Looks like now the bond market is moving in tandem w/ the stock market..since it was the bond market which made some money for folks, in the last 4 yrs or so- how much is that related to the stock market meltdown and MMs rushing to bonds as preferred investment vehicle esp as other fixed income deposits accrued insignificant interest, i don't know- but this also partly explains why bond yields just don't move up giving rise to very low mortgage rates..

 
At 12:07 PM, Anonymous Anonymous said...

Mr. Noland and Mr. Fleckenstein have it spot on. It's not just a RE bubble, it's a mortgage financing bubble, and the mortgage market is NOT local. Very few people finance with a local bank or CU. The money is all coming straight from the national bond markets, and a lot of that is flowing from overseas. This thing is anything but local and it is a bubble. Greenspan is talking his book, he is not at all concerned about what happens to normal people.

 
At 12:30 PM, Blogger Ben Jones said...

Deb,
Your right, the spread between all private debt and treasuries is widening. Mortgages rates could go up with the 10 year still in high demand.

Also look for the ARM's and IO to go away.

 
At 12:48 PM, Anonymous Anonymous said...

Deb

I agree that the market is partially being driven upward by perception (everyone hears of someone else making money in real estate, so they want to jump in while it's still hot).

The market can also be turned the other way by perception (negative news about the bubble). We are seeing more and more news on the bubble everyday (on tv, radio, internet and even newspaper), however we are also seeing more counter bubble news from the spin doctors representing various real estate related industries.

I also wonder how much news is being suppressed by the press, news and even internet search engines because they don't want to piss off their advertisers (real estate and mortgage companies, etc) and possibly lose their advertising dollars.

 
At 2:01 PM, Anonymous Anonymous said...

It sure feels like RE is at a top. I know many young couples in the Boston area chosing to rent rather than buy. If there is no new buyers, then all that is left to drive the market is speculators and "investors."

As others have stated, once the y-o-y home price appreciation is reported as flat, a wave of speculators and investors will dump their newly acquired negative cash flow investment properties.

That will be the trigger to start an avalanche. Look out below.

What I wonder is how long it will take for rents in bubble areas to equal 30yr mortgage costs (assuming zero down)plus property taxes, plus insurance, plus upkeep?

It happened in the mid 90s in Boston? When will it happen again?

 
At 4:38 PM, Anonymous Anonymous said...

---What I wonder is how long it will take for rents in bubble areas to equal 30yr mortgage costs (assuming zero down)plus property taxes, plus insurance, plus upkeep?---

Don't hold your breath. Here in NorCal, rents are half (sometimes less) than the cost of ownership. So either home prices get cut in half, rents double, or something in between.

My guess is that, in markets saturated with "investors" like Vegas, Florida, parts of SoCal, we won't see rents go up much because there will be so much new rental supply coming on the market.

Here in NorCal, rents are very much a factor of supply and demand. Back in 98-00, rents shot up quite a bit in SF and the vacancy was under 1%. Thank you, dot-com boom. We have rent control but it doesn't apply to new tenants. So landlords (myself included) jacked up rents as high as the market would bear. This was to make up for years of having to live with well-below-market rents due to rent control.

Five years later, rents are 40% lower (back to 1996 levels in most cases) and the vacancy rate in SF is almost 10%.

The condo market will likely be hit the worst. And cities with lots of investor-owned condos will get a double whammy. Lots of new rental condos coming into the market means lower sale prices for condos and lower rents too.

 
At 7:39 PM, Anonymous Anonymous said...

I don't know if we've gone full circle on this or what, but didn't the Plaza in New York get sold to the Japanese back in the 80s much to their later loss. Now the Plaza is converting to condos. You do the math.

 
At 6:44 AM, Anonymous Anonymous said...

should of kept Rockefeller Center.. it would be worth about 2 billion now...

 
At 12:07 PM, Anonymous Anonymous said...

"should of kept Rockefeller Center.. it would be worth about 2 billion now..."

maybe they were over-leveraged and couldn't keep it, similar to half of today's homeowners.

 

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