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An Unsustainable Boom When Artificially Cheap Credit Has Misled People

A weekend topic starting with The Stranger in Washington. “If one is stuck with the tools of standard economics, he/she will not be able to make sense of the fact that during the course of Seattle’s construction boom, developers have mostly produced luxury apartments and almost entirely neglected the huge demand for affordable apartments. This fact does not square with the classical ‘law’ of supply and demand.”

“Orthodox economics also lacks the explanatory power to elucidate the current state of Seattle’s rental market. Nothing in its books or models can predict the situation we are now in: The prices for luxury apartments falling because of glut that will only grow because more luxury apartments are still under construction; while the cost of affordable apartments remains high or rising because of demand.”

“Seattle has been in a building boom for seven years and all it has produced are luxury apartments. This is not an anomaly. This is capitalism to the core. As a whole, it is very hard for the market to provide people with things they actually need: cheap transportation, housing, healthy food. These reveal themselves to be things that only non-market systems and institutions can adequately supply.”

The Tri-City Herald. in Washington. “With a vacancy rate below 2 percent, it’s tough to find an apartment in the Tri-Cities. But the same trends that are frustrating renters are drawing investor interest to the Tri-Cities. That means supply could begin to catch up with demand. ‘We can’t build them fast enough,’ said Rob Hughes, director of engineering. ‘They’re being occupied immediately.'”

“The pending sale of 575 Columbia Point is possibly the strongest signal that investors see the Tri-Cities as a strong market. The buyer is being represented by Tim Ufkes. The 575 Columbia Point buyer needs to reinvest proceeds from the sale of a Yakima property to defer capital gains.”

“He called 575 an ideal investment. The project is new, 95 percent leased, has a new and assumable mortgage, boasts strong rents and has enduring amenities, like access to the Columbia River and the nearby city golf course. It is one of four deals he has pending in the Tri-Cities.”

“Ufkes expects to see more Park Place-style development at Broadmoor to accommodate demand from downsizing baby boomers who want condo-type lifestyles. It’s going to lead to a big change in thinking. ‘You may end up with a Whole Foods. I’m not sure why you wouldn’t. You may end up with a Trader Joe’s. I’m not sure why you wouldn’t,’ Ufkes said. ‘It will be quite different that what you have now.'”

From Fox 10 in Arizona. “It’s one of the most noticeable hi-rise buildings in Phoenix. 44 Monroe is a mixture of apartments and condos in the heart of downtown. Many tenants there, however, are upset about paying for downtown living, in a place they can’t make full use of. ‘They have a way from keeping the door from opening any further than 5 or 6 inches so you can’t physically get on the balcony,’ said Amber Felix. ‘You can get it open but can’t get out there.'”

“The pool is just a hole in the ground on the 8th floor. Residents were told a leak needed to be fixed, but they haven’t had access all year. Felix and her significant other sold their house to move Downtown. ‘They haven’t kept up with their end of the bargain, especially when we were told it should be done very soon, very soon,’ said Felix. ‘Had we known then what we know now, we would have never moved in.'”

From the Independent Institute. “We Austrian economists frequently cross swords with our Keynesian foes on all manner of economic analysis and government policy recommendations. Yet the standard Austrian analysis of the business cycle is also sharply at odds with that of the ‘Market Monetarists,’ a new school of thought coming out of the Chicago school tradition and now gaining traction at places like the Mercatus Center.”

“In particular, prominent Market Monetarists have challenged the Austrian narrative of the housing bubble, arguing that the claims of ‘malinvestment’ and the need for reallocation of resources do not fit the data. Yet as we’ll see, it’s the Market Monetarists who are defying common sense with their alternate version of history.”

“In the standard Austrian view, when the banking system (nowadays led by a central bank) injects credit and pushes interest rates artificially low, it sets off an unsustainable boom. However, the distortion is not merely monetary: During the boom, malinvestments occur.”

“Here’s Scott Sumner (one of the leaders of the Market Monetarists): ‘I agreed that there had been some excessive housing construction in the inland portion of the sand states. … But I argued that these cities were fast growing, and this problem was relatively mild. In my view the malinvestment is better termed ‘too early investment’—some houses were built a few years before they were needed.'”

“In his grand treatise Human Action, Ludwig von Mises explained the difference between ‘malinvestment’ and ‘overinvestment’ using—believe it or not—a metaphor of a house project. Here’s Mises, describing the situation during an unsustainable boom when artificially cheap credit has misled people.”

“‘The whole entrepreneurial class is, as it were, in the position of a master-builder whose task it is to erect a building out of a limited supply of building materials. If this man overestimates the quantity of the available supply, he drafts a plan for the execution of which the means at his disposal are not sufficient. He oversizes the groundwork and the foundations and only discovers later in the progress of the construction that he lacks the material needed for the completion of the structure. It is obvious that our master-builder’s fault was not overinvestment, but an inappropriate employment of the means at his disposal.’ [Mises, Human Action, Scholar’s Edition, p. 594.]”

“So contrary to Sumner’s perspective, when the Austrians speak of ‘malinvestments’ during the housing boom years in the mid-2000s, they weren’t predicting that Las Vegas would be a ghost town for the next 30 years. Rather, they simply meant that too many houses were being built ahead of schedule, and further that many of these houses were bigger than they should have been.”

“The Austrian perspective on the housing boom and bust lines up with common sense: Too many houses were built during the mid-2000s, and many of these houses were bigger than they should have been. The Austrians differ from most other analysts by blaming this outcome (largely) on loose Fed monetary policy.”

This Post Has 19 Comments
  1. ‘Seattle has been in a building boom for seven years and all it has produced are luxury apartments. This is not an anomaly. This is capitalism to the core. As a whole, it is very hard for the market to provide people with things they actually need’

    Detroit is building 100% luxury apartments too (pretty much the whole country, BTW). Coincidence?

    The Tri-City article ifs full of examples of how this thing developed:

    ‘he same trends that are frustrating renters are drawing investor interest to the Tri-Cities. That means supply could begin to catch up with demand. ‘We can’t build them fast enough,’ said Rob Hughes, director of engineering. ‘They’re being occupied immediately.’

    Well Rob they were being occupied immediately in Seattle and most major metros, until they weren’t. Not one of these markets slowed down one bit before it was a glut. That tells you it wasn’t market forces at work. So what was it?

    ‘The pending sale of 575 Columbia Point is possibly the strongest signal that investors see the Tri-Cities as a strong market…He called 575 an ideal investment. The project is new, 95 percent leased, has a new and assumable mortgage, boasts strong rents and has enduring amenities, like access to the Columbia River and the nearby city golf course. It is one of four deals he has pending in the Tri-Cities’

    They are flipping these things. And making enormous money, for years.

    ‘ The 575 Columbia Point buyer needs to reinvest proceeds from the sale of a Yakima property to defer capital gains’

    So the buyers just flipped one and ta-da! Right back at it for the tax dodge gravy! Now, is this tax dodge capitalism?

    And then there’s the financing. Ridiculously low interest rates for a decade – check! Oceans of QE rolling around the globe chasing yield – check!

    But the really huge lubrication for the luxury apartment bubble: government backed loans. Is that capitalism?

    “.

    1. “These reveal themselves to be things that only non-market systems and institutions can adequately supply.”

      Nothing works quite like an ocean of government sponsored cheap and easy credit excrement.

    2. I predict that prices of luxury apartments will soon become affordable, thereby pushing affordable apartments down in price to the point where only poor people will live there.

  2. ‘‘They have a way from keeping the door from opening any further than 5 or 6 inches so you can’t physically get on the balcony,’ said Amber Felix. ‘You can get it open but can’t get out there’

    ‘The pool is just a hole in the ground on the 8th floor. Residents were told a leak needed to be fixed, but they haven’t had access all year’

    How many luxury student housing debacles have we seen this year?

    October 4, 2018

    A report from Finance & Commerce on Minnesota. “J.P. Morgan is taking a steep haircut as it sells an Uptown Minneapolis apartment building. The Walkway, a 92-unit mixed-use luxury building at 1320 W. Lake St., was sold Sept. 26 for $33.6 million in cash. The apartment portion sold for $28.82 million and the 23,000 square feet of ground-floor retail for $4.77 million, according to certificates of real estate value made public Monday.”

    “The transaction appears to represent a heavy loss for New York-based J.P. Morgan, which paid $53.75 million for the property in 2015. There’s no obvious reason the price of the property should have declined $20 million in three years, said Gina Dingman, president of Minneapolis-based Everest Real Estate Advisors. The building is fairly new, and Uptown remains a desirable area for developers and renters.”

    “‘It seems like rental rates are still where they were, roughly,’ Dingman said. While the property does face competition from other recent apartment developments nearby, ‘it’s obviously a big hit on [J.P. Morgan’s] part.’”

    http://housingbubble.blog/?p=157

  3. This is what I have been telling anyone who will listen.

    Most won’t.

    Your financial adviser’s ‘sleep easy’ portfolio may be riskier than you think
    By Brett Arends
    Published: Oct 13, 2018 10:56 a.m. ET
    The 60/40 portfolio allocation has burned investors in the past
    iStockphoto

    Conventional wisdom says that a ’balanced‘ portfolio of stocks and bonds will cushion you from shocks. There’s just one problem: History says it may be wrong.

    Yikes.

    Two sharp falls in a row is enough to get any investor a little nervous. Yes, so far the Dow Jones Industrial Average’s DJIA back-to-back plummets are still only a tremor on any longer-term view. Stock prices are higher than they were even one year ago. Nonetheless for many investors it’s an overdue reminder that stock prices can fall — and fall a long way — as well as rise.

    That makes it a good moment, say experts, to take stock of your portfolio. Are you taking on more risk than you want? Worse, are you taking on more than you realize? You may well be. And your financial adviser, if you have one, may not realize it either.

    Conventional wisdom says that a “balanced” portfolio of stocks and bonds will cushion you from shocks and make sure your savings keep growing in all markets. It’s the philosophy behind nearly all financial advice offered in America today, and one that’s taught in most finance courses.

    It’s also the theory behind those “balanced” index funds, “target date” funds and “glide path” funds that try to offer you a one-stop portfolio. It’s also the theory behind the portfolios offered by most “robo advisers.”

    There’s just one problem: History says it may be wrong.

    A “balanced” portfolio of stocks and bonds failed previous generations of U.S. savers, and badly, during at least two extended periods during the past century alone, financial historians note.

    Worse, those occasions had more than a passing resemblance to the situation today: Expensive stocks, expensive bonds, and concerns about rising interest rates and rising inflation.

  4. Nothing in its books or models can predict the situation we are now in: “The prices for luxury apartments falling because of glut that will only grow because more luxury apartments are still under construction; while the cost of affordable apartments remains high or rising because of demand.”

    “Seattle has been in a building boom for seven years and all it has produced are luxury apartments. This is not an anomaly. This is capitalism to the core.”

    Um, no, this is NOT capitalism (i.e. free markets + sound $), but rather misguided Keynesian economics, which is based on progresssivism/socialism. Hey Venezuela, how’s that socialist-inspired economic miracle workin’ out for ya? Yeah, that’s what I thought…

    “There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.” – Ludwig von Mises

    “The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology. The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period and that such an artificially induced boom is doomed. They are looking for the philosophers’ stone to make it last.” — Ludwig von Mises (1940)

    Austrian economics, please!

  5. ‘Senior Living Providers Find Creative Alternatives to Rent Concessions’

    ‘Senior living providers sometimes use rent concessions to boost lease-ups or get a leg up on the shiny new community down the street — but they are by no means the only way to increase census or grow revenue in the long-term, and might not be the most effective approach.’

    ‘While it can be tempting to knock a little bit off the top to snag a new resident — especially in times of financial strife — it’s usually not worth it in the end, according to Gale Morgan, senior vice president of sales for Mather LifeWays. As of July, Evanston, Illinois-based Mather LifeWays managed a life plan community in Evanston, a life plan community in Tucson, Arizona, and an independent living community in the Chicago suburb of Wilmette.’

    “When the economy tanks … all you want to do is concessions, but one of the most difficult lessons I’ve learned is to just say no,” Morgan said during a panel at the recent SMASH 2018 Senior Care Sales & Marketing Summit in Chicago. “As soon as you have the reputation for concessions, you teach your consumer that you will do concessions, and they will ask if price is negotiable.”

    ‘Even worse, cutting rents or move-in fees to quickly bolster occupancy can devalue your properties in the eye of the consumer, said panelist Nicole Bartecki, vice president of sales and marketing at Pathway to Living. Pathway’s portfolio spans 32 owned or managed properties with more than 2,900 units in Illinois, Michigan, Minnesota and Wisconsin.’

    “If you’re waiving your move-in fee, what does it say about that fee?” she said. “We have had consumers … call us and say, I put a deposit down, but this other community keeps calling me. What are you going to offer?”

    1. The entire US economy has turned into a game of smoke and mirrors to deceive, defraud and impoverish citizens. At the very core of it all is the financial industry, backed by the US government. A real shame.

      It was never perfect, but it certainly wasn’t always like this. There used to be a time, as recently as 15 years ago, where a person could easily rent something modest and live below their means. Now shelter, transportation, fuel, food, healthcare and every other need has been infiltrated by greedy bankers aiming to extract every last penny they can.

      1. Barry Ritholz of Bloomberg wrote in June that “we have deflation in the things we want, but inflation in the things we need.” That has stayed with me. You can watch Netflix and for $7.99 a month and have unlimited entertainment and flat screen TVs are ridiculously cheap. But you might not be able to rent a place to mount that flat screen.

  6. “The pending sale of 575 Columbia Point is possibly the strongest signal that investors see the Tri-Cities as a strong market. The buyer is being represented by Tim Ufkes. The 575 Columbia Point buyer needs to reinvest proceeds from the sale of a Yakima property to defer capital gains.”

    I was reading an article about Jared Cushner using this loophole to avoid paying taxes. It’s pretty ubsurd that this can even happen.

    https://www.google.com/amp/s/www.nytimes.com/2018/10/13/business/jared-kushner-taxes.amp.html

    1. this loophole to avoid paying taxes. It’s pretty ubsurd…

      No it’s not a loophole. It’s a pretty fundamental part of the way taxes work. Same as if you sell your house and buy another one.

  7. In my view the malinvestment is better termed ‘too early investment’—some houses were built a few years before they were needed.

    So we’re all China now. Being smart and building cities before we need them.

  8. “If one is stuck with the tools of standard economics, he/she will not be able to make sense of the fact that during the course of Seattle’s construction boom, developers have mostly produced luxury apartments and almost entirely neglected the huge demand for affordable apartments. This fact does not square with the classical ‘law’ of supply and demand.”

    It squares perfectly with the modern ‘law’ of government-sponsored market distortions.

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