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Money Poured In, Prices Soared, Followed By Building And Oversupply

A weekend topic starting with the Globe and Mail. “In 2002 David Rosenberg moved to Wall Street to become Merrill Lynch’s chief North American economist. The stint turned him into one of the world’s most recognizable economists. His fame grew because of a series of prescient calls about the U.S. housing and credit bubbles, which eventually burst.”

“On signals he’s seeing in the credit markets: ‘We have a credit bubble of historical proportions in the household arena in Canada, where debt ratios are higher today here than they were at the peak in the U.S. in 2007. And in the United States we have the mother of all credit bubbles sitting on corporate balance sheets. You’re already starting to see spreads widening in the junkiest parts of the corporate bond market, which resembles very much the widening of spreads we were seeing in the worst part of the mortgage market back in 2007.'”

“‘So this is all classic late-cycle or end-of cycle-stuff that’s going on. If things were really that rosy, why did the Fed cut rates three times this year?'”

From Yahoo Finance. “You might not think that Barack Obama, Giorgio Armani and Lachlan Murdoch are bargain hunters, yet each of them just bought luxury property for much less than the original asking price. These deals speak to a number of under-recognized financial crosscurrents—everything from central bank policy to taxes to technology and trade wars—roiling the world of real estate.”

“Weakness in high-end real estate doesn’t make sense right now. The stock market is roaring ahead, and with wealthy investors benefitting disproportionately, prices for mansions, trophy homes and apartments should follow suit. Not this time.”

“Note that the three sale prices are down significantly — 47%, 36% and 57% respectively — from what was being asked only a few years ago. These aren’t haircuts, they’re massacres. It’s the kind of price action you’d expect in a stock market rout, not a rally. Remember the S&P is up 28% this year for Pete’s sake!”

“It sounds like fairly typical boom and bust stuff. Except if you scratch below the surface, says Jonathan J. Miller, a New York-based real estate consultant and CEO of Miller Samuel, you’ll see something more curious at work. It’s a distortion created by ultra-low interest rate policies.”

“‘A lot of this circles around speculative markets born out of the financial crisis more than a decade ago, where central banks around the world [lowered rates to] zero or close to it,’ Miller says. ‘Investors were looking for higher returns in a low interest rate world. They wanted to invest in tangible assets rather than financial [assets.] Money poured in.'”

“First prices for real estate soared, followed by building and oversupply.”

The Union Tribune on California. “San Diego County’s median home price hit an all-time high of $594,455. Here’s how the different home types fared in November: Resale single-family homes: Median of $633,750, down from a peak of $649,000 in June. Resale condos: Median of $429,000, down from a peak of $440,000 in August.”

“Newly built: Median of $673,000, down from a peak of $812,500 in October last year.”

The Ventura County Star in California. “December is typically a slow month for home sales, which could result in slightly lower prices for Ventura County homebuyers. The following five homes all saw price cuts between $9,000 and $20,000 in the past few weeks, bringing their total prices between $684,900 and $717,000. Around $700,000 in Ventura County right now buys five bedrooms in Simi Valley and Oxnard, or a bright three-bedroom near Sterling Hills Golf Club.”

The Manteca Bulletin in California. “Editor’s note: This is a column published Nov. 8, 2009 at the depth of the housing crisis and Great Recession that reflected on how the two events were impacting Manteca. It was the Great Depression that ironically gave rise to the popularity of Monopoly. With that in mind, perhaps Hasbro could be inspired by the Great Recession to come up with a new game – Mantecaopoly.”

“The rules are a bit different. Instead of icons representing basic things in life such as sewing thimbles, an old car, a top hat, and a ship the game markers are a Plasma TV, Hummer, $2,000 baseball cap designed by Paris Hilton, and a scaled down version of a 40-foot RV. First, all players start with no money. When you land on a property and want to buy it you simply secure a zero down loan from the mortgage company. When you pass go you will still collect $200 but instead of paying down your mortgage you are expected to dine out more often, travel to Hawaii, and buy lots of high-priced toys.”

“The objective is to amass as much wealth as you can – much like Monopoly – but with the understanding the goal is not about becoming a real estate tycoon but living well above your means. There is a new feature where the price of property changes periodically throughout the game to generate a real estate bubble or, as the rules of Mantecaopoly point out – unsustainable exuberance.”

“If you get into financial trouble, no problem. Just go to the bank and take a second third, fourth, and fifth mortgage out on your property. I you happen to go bankrupt and can’t pay your mortgage, no problem, keep playing the game and stop paying the bank. Then – to encourage you to move out in a reasonable amount of time without trashing the property — the bank will pay you $2,000. In Mantecaopoly you also have the ability to keep collecting rent money when the bank foreclosures on your property after you stopped paying the lender. That way you can literally once over both lender and renter while pocketing money with no consequences under Mantecaopoloy playing rules.”

“The community chest and chance cards are also different. Some of the new ones are: Bank gives you a $200,000 line of credit on the house you paid $16,000 for. Go out and celebrate by buying his and her Suburbans, a pair of Jet Skis to go with a set of snow skis, and matching home theater systems. Home value drops $100,000 below loan balance so feel free to walk away from your obligation even though you don’t kick more money to the bank when your home value increased $100,000 above what you agreed to pay for it and the time it closed escrow when you bought it four years earlier.”

This Post Has 88 Comments
  1. ‘Note that the three sale prices are down significantly — 47%, 36% and 57% respectively — from what was being asked only a few years ago. These aren’t haircuts, they’re massacres. It’s the kind of price action you’d expect in a stock market rout, not a rally. Remember the S&P is up 28% this year for Pete’s sake!’

    What’s the word missing from this article? Bubble. The MSM can’t admit a bubble has popped when they never reported on it as such in the first place. Even yesterday the NYT had the bubble word, but it was a quote. And the other day the same paper said hey, maybe there’s a bubble – in Europe!

  2. ‘San Diego County’s median home price hit an all-time high of $594,455. Here’s how the different home types fared in November: Resale single-family homes: Median of $633,750, down from a peak of $649,000 in June. Resale condos: Median of $429,000, down from a peak of $440,000 in August. Newly built: Median of $673,000, down from a peak of $812,500 in October last year’

    All time high…

    1. All time high adjusted for twelve or more years of inflation? Obviously inflation has been low over that period but it still must be 25 percent or more.

    2. With some careful, selective editing, here is what I come up with:

      “Here’s how the different home types fared in November:

      Resale single-family homes: …down… Resale condos: …down… Newly built: …down…”

      Obvious conclusion: San Diego real estate always goes up!

      1. Fair is foul and fouls is fair: Hover through the fog and filthy air.

        — Hecate, a witch from Shakespeare’s Macbeth

  3. ‘A lot of this circles around speculative markets born out of the financial crisis more than a decade ago, where central banks around the world [lowered rates to] zero or close to it,’ Miller says. ‘Investors were looking for higher returns in a low interest rate world. They wanted to invest in tangible assets rather than financial [assets.] Money poured in.’

    ‘First prices for real estate soared, followed by building and oversupply’

    Yesterday the NYT report mentioned oversupply for bay aryans too. There’s no shortage anywhere and there never has been. It’s just a load of REIC horse-hockey. Meanwhile, I’ve got a whole day of pre-foreclosure scouting to do. There’s more out there than I can drive to.

    It becomes more clear every day that this is a lending bust. Almost every shack I look at is underwater: if the loan was made in 2007 or 2019. Does that sound like tight lending?

    1. “tight lending”

      The American Financing dot net radio ads in Denver keep promoting that “buying” a used house is cheaper than coming up with first and last months rent plus deposit for an apartment.

      Debt is slavery.

      1. Lest they forget first and last month’s rent ARE a monthly payment. None of that downpayment is covering those 70% interest mortgage payments in the first year.

        DebtDonkeys gonna Donk.

    2. “Pre-foreclosures to scout”

      There’s probably no rush. As you said earlier in the week, most get scheduled for auction but are never actually auctioned off. The backlog is going to get overwhelming, but then maybe it already is.

  4. According to Toy Story 3 director Lee Unkrich, who runs a site dedicated to Stanley Kubrick’s “The Shining” and its legacy, “Kubrick filmed a number of different language versions of the iconic ‘All work and no play makes Jack a dull boy’ insert shot as Wendy leafs through 500 pages of Jack’s work.” [And realizes he’s gone mad.]

    Kubrick realised the importance of the scene and how it would lack impact in foreign language versions of the film if explained via subtitles.

    He didn’t just translate the original phrase however, but came up with different stacks of repeated sentences:

    Italian:

    Il mattino ha l’oro in bocca

    (The morning has gold in its mouth)

    German:

    Was du heute kannst besorgen, das verschiebe nicht auf morgen

    (Never put off until tomorrow what can be done today)

    Spanish:

    No por mucho madrugar amanece más temprano

    (No matter how early you get up, you can’t make the sun rise any sooner)

    Russian:

    Rieltory lzhetsy

    (Realtors are liars)

  5. “‘So this is all classic late-cycle or end-of cycle-stuff that’s going on. If things were really that rosy, why did the Fed cut rates three times this year?’”

    If “Everything is Awesome!” as the CNBC permanent-bulls incessantly proclaim, why is the Fed pumping half a trillion in Powell Bux liquidity into the repo markets this month alone? And why does the Fed keep extending the timelines and scope of its repo operations?

    1. Does anyone really expect that money to be paid back?
      If not, then what do you believe that money will be chasing?

  6. “‘So this is all classic late-cycle or end-of cycle-stuff that’s going on. If things were really that rosy, why did the Fed cut rates three times this year?’”

    LMFAO! The world loves a gadfly!!

    1. They never mention the mix when they can twist it to show prices up. New shack sales were up and obviously explains why the overall median is up. Meanwhile new prices continue to drop toward existing.

      1. Spot on.

        It’s also not clear the within-market-tier SN Diego price declines will show up in the Case-Shiller Index, as it is based on repeat sales, and homes whose market value has dropped tend to not sell.

      2. After a few seconds of thought, it’s obvious why the mix is shifting towards new home sales as San Diego price declines gain steam:

        1) Used home owners tend to not sell when prices are cratering, as they continue to hope for a buyer to show up who is willing to pay last year’s price.

        2) New home sellers have to sell to avoid getting stuck with falling knife invetory, and can also sell profitability when prices are cratering, so long as prices stay above construction costs.

        3) So the mix is shifting towards higher priced new homes, even though prices in each market tier are cratering, giving the impression that down is up.

        Try not to catch yourself a falling knife.

    1. There is a shortage…of affordable RE.
      First the primary dealer goons were front running treasuries…now they’ll be front running RE

    2. Of course they love to compare this November to last November, when the market was practically left for dead.

  7. “Note that the three sale prices are down significantly — 47%, 36% and 57% respectively — from what was being asked only a few years ago. These aren’t haircuts, they’re massacres. It’s the kind of price action you’d expect in a stock market rout, not a rally. Remember the S&P is up 28% this year for Pete’s sake!”

    Worth bearing in mind: The Florida land bust of the Roaring Twenties was in full swing by 1926, three years before Wall Street started to crater in 1929.

    And the 2008 stock market meltdown was preceded by the Markit ABX subprime mortgage index collapse beginning in December 2006.

    If history is any guide, we are within a couple years from the next historic Wall Street meltdown.

    1. Poor, innocent real estate victims…

      Secret bank records shine light on 1920s boom and bust
      By HAROLD BUBIL
      REAL ESTATE EDITOR
      Posted Jan 27, 2008 at 1:52 AM

      The real estate market decline and the subprime mortgage meltdown has a familiar ring to those who studied Florida in the 1920s.

      The real estate market decline and the subprime mortgage meltdown have claimed victims big and small, from the mammoth Citigroup and Bradenton’s Coast Bank to families’ equity in their homes.

      It all has a familiar ring to a Tallahassee lawyer and historian named Raymond Vickers.

      Vickers studied the Florida land boom and bust of the 1920s, and came up with a different story from the one told for decades by historians.

      “Fraud and abuse” by banking insiders wrecked the economy then, he says, and he suspects that the same thing happened during the recent rise and fall of real estate, as well as during the savings and loan debacle in the 1980s.

      1. The Glass Steagal Act went a long way in stopping boom and bust as well as faulty lending. That Act seperated lending from investment.

        Why they got rid of this necessary Bill in 1998 that served this Nation well for over 70 years is really a crime by the Politicians.

        For a number of years they had people calling for bringing back Glass/Steagal Act after the 2006 bust in real estate, but they don’t talk about it anymore it seems.

        Now everything is contorted in terms of faulty lending and debt Nation with artificial interest rates with fake prices.

        1. “Why they got rid of this necessary Bill in 1998 that served this Nation well for over 70 years is really a crime by the Politicians.”

          William Jefferson Clinton and Lawrence Summers?

        2. a crime by the Politicians

          As the Florida bust article points out, bank fraud takes a partnership between the bankers and the politicians.

          The records will forever be sealed.

          1. The 1926 real estate bust in Florida was before the 1929 stock market crash, and faulty lending was operative with both.

            After much examining, which included Court Trials in the 30s, they came up with the Glass Steagal Act to prevent a 1929 event.

            They actually figured out what the problem was and that was faulty lending . You cannot make a loan on future value of a investment rather than the ability of a loan applucant to qualify for the loan along with a accurate current value of the investment.

            In 1929 people were buying stocks based on about 10% down and they were leveraging 90% or more based on the notion the stock would go up. No qualifying, just a false creating of money Than there was a run on the banks and than they crashed. They didn’t have bank insurance on deposits in those days

            Had the stock houses demanded full payment for stock purchases the 1929 event or rise could not of happened. It was faulty highly leveraged lending based on a notion of future value of stock with no concern the stock could fall.

          2. “You cannot make a loan on future value of a investment rather than the ability of a loan applucant to qualify for the loan along with a accurate current value of the investment.”

            I beg to differ. This can be done and it has a name:

            Ponzi finance.

          3. future value of a investment

            Just imagine what that building will be worth after 30 years of you, your kids, dogs, weather events and drunk friends beating the crap out of it!

          4. “… while bank regulators, including Florida comptroller Ernest Amos, were kept quiet with unsecured personal loans.”

            A young mistress helps too!

          5. “It’s June in Miami!” proclaimed the billboard that Miami Beach developer Carl Fisher hung in New York’s Times Square in the winter of 1920.

            There it is…the weather. It’s a thing!

  8. Washington Post – Virginia AG Herring: ‘Second Amendment sanctuary’ proclamations have no force, 12/20/2019, archive link because we don’t give clicks to globalist grabber rags:

    http://archive.is/N6Fdn

    It’s almost “Go Time”

    1. Virginia is going to be an interesting case study. After many years, the liberal north of the state has finally outnumbered the rural conservative south of the state. I’m sure there are still some Dixiecrats down by the TN/NC line; otherwise it would have happened sooner. It wouldn’t surprise me to see yet another secession movement, this time to split southern VA from NoVA.

    2. Should I assume most who will oppose Second Amendment sanctuary jurisdictions support Sanctuary jurisdictions for illegal aliens, and also wouldn’t see the irony or contradiction?

      1. Oh I’m sure that’s where the gun owners got the idea, since they used the word “sanctuary.” And, no, I don’t think libs see the irony.

    3. Just as the local laws won’t be enforced at the state level, the Federal laws coming down the pipe will TRUMP the AG’s state laws. Bring on “New York State Rifle & Pistol Association Inc. v. City of New York”

  9. “Sounds like a debt wish.”

    Yep, and the money used in taking up this debt happens to belong to somebody else.

    Let’s take a look at this …

    “Under the current low-yield environment where the regional banks face declining profitability, they will have to take more risks to compensate, he added.”

    If the money being used actually belonged to these regional banks then the smart and prudent thing to do would be to curtail lending since the returns from the lending would be surpassed by the risks.

    But it isn’t the bank’s own money that is being used in this risky lending; the money being used is money that belongs to somebody else.

    If the loans work out okay then the bankers get to collect some hefty fees and they and the true owners of the money are happy.

    If the loans do not work our then the bankers still get to keep the fees they collected while the true owners of the money get to suffer the losses.

    The incentives are skewed.

  10. Another point is that during the Golden Years people didn’t get pissed off at Business being given tax write offs by Government. This is because they were investing in America and American jobs with wage earners getting part of that benefit.

    When Globalism and outsourcing and out manufacturing became the new Big Business tactic of choice, no longer should they of got write offs, but rather penalities should of been charged.

    What Country would give away their jobs and manufacturing base .What Country wouldn’t put a penalty on anything that would take revenue from their Country. That doesn’t mean we shouldn’t have trade, but tariffs use to level out the difference in wages.

    If you think about it, the South didn’t want to give up slave labor. All evil is because of greed .

    1. the South didn’t want to give up slave labor

      I get your point, but there were a lot of slave states in the North too.

      1. “I get your point, but there were a lot of slave states in the North too.”

        It was a prudent capital investment.

  11. “with the understanding the goal is not about becoming a real estate tycoon but living well above your means.”

    This is a profound observation. And a great article, thanks for finding Ben.

  12. 1) Canada and the U.S. are joined at the hip (and at the credit card too, apparently). – Yes, credit markets lead in the cycle. We are late cycle, and correct me if I’m wrong, but I think this is now the longest expansion in U.S. history. “Party like it’s 1999 (2019).”

    A weekend topic starting with the Globe and Mail.

    “On signals he’s seeing in the credit markets: ‘We have a credit bubble of historical proportions in the household arena in Canada, where debt ratios are higher today here than they were at the peak in the U.S. in 2007. And in the United States we have the mother of all credit bubbles sitting on corporate balance sheets.

    “‘So this is all classic late-cycle or end-of cycle-stuff that’s going on. If things were really that rosy, why did the Fed cut rates three times this year?‘”

    2) Mantecaopoly – “You can’t lose if you don’t play.” 🙂 The game could have been used to describe large swaths of the U.S. back then, and esp. most any city in CA. Deja vu.

    “History doesn’t repeat itself, but it does rhyme.” – Mark Twain

    Manteca, CA is in the Central Valley near Modesto. The name means “Butter” or “Fat” in Spanish. It’s near Calaveras County, and so Mark Twain could actually have been there!

    The Manteca Bulletin in California. “Editor’s note: This is a column published Nov. 8, 2009 at the depth of the housing crisis and Great Recession that reflected on how the two events were impacting Manteca.

    “The objective is to amass as much wealth as you can – much like Monopoly – but with the understanding the goal is not about becoming a real estate tycoon but living well above your means.” There is a new feature where the price of property changes periodically throughout the game to generate a real estate bubble or, as the rules of Mantecaopoly point out – unsustainable exuberance.”

    If you get into financial trouble, no problem. Just go to the bank and take a second third, fourth, and fifth mortgage out on your property. I you happen to go bankrupt and can’t pay your mortgage, no problem, keep playing the game and stop paying the bank.

    The community chest and chance cards are also different. Some of the new ones are: Bank gives you a $200,000 line of credit on the house you paid $16,000 for. Go out and celebrate by buying his and her Suburbans, a pair of Jet Skis to go with a set of snow skis, and matching home theater systems. Home value drops $100,000 below loan balance so feel free to walk away from your obligation,,,

    1. Real Vision finance (and other finance youtube channels) is checking with experts every couple of days, asking when the recession is going to start. They are saying: not in the next six months. Doom and gloomers are saying it’s going to be a doozy. I still predict a repeat of 2008; the only question is whether Trump can hold it together until after the election.

      1. “I still predict a repeat of 2008; the only question is whether Trump can hold it together until after the election.”

        The repeated downplaying of expectations for ever again having another recession, plus the central bankers blowing their wad of stimulus amunition before the next recession begins, pretty much guarantees that it will be a doozy.

      2. In 2008, the PTB thought they could allow the country to go into a recession, elect Obama and then engineer a V shaped recovery. Thus, gaining support for open borders and globalism. The aim was to crush the only opposition to globalism which was among some conservative Republicans. Many of the them did lose their seats in 2008. However, they were unable to engineer that recovery and in 2010 the anti-immigration, anti-globalist wing of the Republican party became even stronger. Romney even had to fake support for border enforcement to obtain the 2012 nomination. I think the globalists are going to be reluctant to allow the US to slip into recession since they cannot be sure that both in this country and in the rest of the world, economic problems may reach a point that the globalists backlash reaches a point of actual violence against them. Thus, I think unlike last time anything and everything possible to avoid a recession will be done. Of course, it will only mean a bigger recession later but hard to see it happening in 2020.

        1. Uh…the recession started in December 2007.

          Nice try on injecting alternative facts into the blogosphere.

          1. The amazing revisions in the GDP that occurred after Obama defy reason. Quarters which had showed 2 percent growth were then revised to show declines. I understand how a quarter can be revised down from say 2percent to 1.5 percent but from positive 2 percent to substantially negative? It made no sense. It did make Obama look better since it was easier to grow the economy. Professor take a look at the original numbers as reported and then the numbers which were released a year later under Obama it defies common sense.

        2. Sorry it may be the official start of the recession but it did not meet the definition of two straight quarters of GDP decline. The economy still continued to grow until the PPT went AWOL in the late Summer, Early Fall of 2008.

          1. Regardless, the sucker was already going down like a porn star on a media oligarch before Obama was ever elected.

          2. Look if you look at the final revisions for the quarters at the time you have two possibilities and they are both hard to believe and very unlikely to occur again. The commerce department had an unprecedented error rate in the quarterly reports which left the deep state unaware that the economy was slowing at the time and due to that no actions were taken to prevent the recession. Or the deep state revised the numbers to cover up its role in the collapse. I will post the link to the numbers after I finish my trip to Costco. BTW paid $2.139 in ABQ MAGA.

          3. These are the numbers after the government posted what is calls its “final revision” of GDP numbers. Honestly, how can the government really be that bad at its job? Also I know people in the securities industry and really what you were seeing in the Fall of 2008 is that the Plunge Protection Team basically morphed into the Plunge Promotion Team as seen in why way shares were being traded. Why?
            https://www.thebalance.com/2008-gdp-growth-updates-by-quarter-3305542

    2. They really should get a pair of matching “No Ragrets” tattoos to go along with the Suburbans and jet skis.

    1. Reading the article the average pension is 4 thousand a year and they can’t even meet that obligation.

  13. Here’s a little anti-realtor maths.

    The annualized rates of price decline since the peaks are as follows.

    SFRs (June 2019 peak): ((633750/649000)^(12/5)-1)×100% = -5.5%

    Condos (August 2019 peak):
    ((429/440)^(12/3)-1)×100% = -9.6%

    New homes (October 2018 peak):
    ((673000/812500)^(12/13)-1)×100% = -16.0%

    Oh my…

    1. In case I wasn’t clear, those calculations were for the San Diego price decline data from the San Diego Union-Tribune article.

  14. “‘So this is all classic late-cycle or end-of cycle-stuff that’s going on. If things were really that rosy, why did the Fed cut rates three times this year?’”

    Because Trump ordered them to, to make stock prices go up so top executives and corporate directors could get another round of huge bonuses?

    1. Trump can’t order the Fed to do anything. The private banking cartel known as the Federal Reserve answers only to its oligarch controllers, and exists solely to enable the latter to concentrate all wealth and power in their own hands.

      1. If Trump could order the Fed, there would have been no interest rate increases just before the 2018 elections. The Fed only reversed course when its interest rate rises threatened a world wide recession which was fueling even more opposition to globalism throughout the world.

          1. I am not so sure. When Trump wants a small cut he asks for a large cut. It is just his negotiation style. If had the ability to order interest rate cuts, he would carefully weigh the pros and cons and he would believe that negative rates cause more harm than good.

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