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Sometimes It’s Helpful To Point Out That The Emperor Has No Clothes

A weekend topic starting with the Star Press in Indiana. “In its general form, Gresham’s Law tells us ‘the bad crowds out the good.’ Whether it’s in currency, politics or in the realm of ideas, this modest proposition warns us be diligent in promoting the good over the bad. This column is mindful of that caution. In 2016 the City of Muncie sought to build some new apartment buildings they termed ‘executive housing.’ The challenge to that effort is that Muncie is losing population and awash in a shocking oversupply of housing. According to the U.S. Census, there are enough vacant homes in the city to comfortably house a third of its residents.”

“Now, many of those extra Muncie homes could be bought for perhaps $25,000, while the same house would sell for more than $500,000 if located in Chicago. Housing is disastrously cheap in Muncie. After adjusting for inflation, homes in Muncie sell for maybe two-thirds the cost of building them.”

“But, subsidizing ‘executive housing'” is rightfully unpopular, especially in a city then facing an imminent school takeover and where potholes are the most common form of road markings. So, to get around these political inconveniences, city officials decided to mislead taxpayers. The easiest way to do this was to find a consulting firm that would manufacture fake population projections so as to justify new housing. So, the city hired a firm, named Zanola, who did just that.”

“In a better world, the City of Muncie would’ve thanked us for revealing this malfeasance and attempted to recover money wasted on these consultants. Instead, the City of Muncie, Zanola, Fallon and Ferris all threatened to sue Ball State, me and my staff for revealing their fictional data and imaginary Census projections.”

“Since this saga began, another 1,500 folks departed Muncie, leaving behind their homes and vacant apartments. The schools continued to bleed students, and potholes grew more capacious. And yes, of course, the apartment project went ahead with taxpayer subsidies.”

“It should be obvious that this project is the absolute antithesis of economic and community development. Any high school AP economics student can explain that increasing the supply of apartments when apartments are already oversupplied will further depress prices. This project will do nothing to stem population loss, while placing even harsher financial strain on the City and Muncie Community Schools. It will of course provide pretty, new ‘executive housing’ in Muncie. The benefits are well beneath the costs, which is why taxpayers were misled from the very beginning.”

From Bloomberg. “I hope to put a big yellow ‘Slow’ sign on home-buying in a pandemic. The housing market may be soaring because of bad information and short-term thinking. You don’t know whether bosses will make work-from-home permanent or who will be targeted for downsizing. You may come to rue buying at a time when inventory is so low and prices so high.”

“Regret is already in the air. LendEDU, a financial information website, surveyed 1,000 mortgage holders in August and found that most people who bought houses after March 2020 already regretted taking out a mortgage. The survey is not scientific, but the results make sense. Record low mortgage rates enticed new buyers, while urban hotspots for the virus drove people out of cities. In July, there was a 56% drop in Manhattan property sales and a 44% increase in the city’s neighboring suburbs. Home prices in nearby New Jersey counties increased over 11% while New York City prices fell 13% compared to last summer.”

“Conventional financial advice suggests if a home costs more than 20 times the annual rent the home could fetch, the house is probably overvalued — a $400,000 home should rent for $1,667 per month or more. In times of low mortgage rates, the breakeven ratio can be a bit higher. But in this K-shaped recovery, rents are falling, occupancy rates are down, and your house might remain overpriced.”

“Because homeownership has always been messaged as a mandatory part of the American Dream and subsidized by the federal government, homeownership is always a bit overrated. A pay cut or job loss might even lead homeowners to sell assets in their retirement accounts — sometimes at their lowest values — to pay the mortgage. This is a terrible financial setback; some of the worst-hit families in the Great Recession were those who lost their jobs and were stuck in their homes.”

The Globe and Mail in Canada. “If you follow the housing debates in Toronto and Vancouver, you’ll have undoubtedly heard the claim that the affordability challenges facing both cities are the result of supply problems. Common complaints include a lack of new housing, burdensome regulation and flawed zoning. This ‘supply narrative’ has been endlessly repeated. There’s only one problem: there’s no good evidence for it.”

“Rather than weak supply, then, the issue has been intense demand pressures, including cheap credit, foreign ownership, speculation and high rental demand emanating from a previously strong labour market.”

“There are several peer-reviewed articles that document the connection between demand-side factors and housing prices in Toronto and Vancouver, particularly the role of foreign ownership and speculation. Yet that peer-reviewed research is dismissed or ignored by advocates of the supply narrative. In fact, the case for the supply narrative is so weak that, after several years of research in this field, I have yet to encounter a single academic peer-reviewed article which documents a substantial causal link between supply-side factors and housing unaffordability in Canada.”

“So why is the debate so evidence-averse? Because the narrative is useful to powerful people. The supply narrative does two things. It helps stymie action on the demand-side, which might actually bring prices and rents down, while giving cover to governments who want to pretend to care about affordability for the middle class. And it is a useful weapon for developers seeking to gain various policy concessions, including rezonings from municipal governments, which deliver windfall land appreciation.”

“The vested interests behind the narrative are relentless, since there are billions in profit to be had. Why let pesky facts get in the way? Such interests, and their noisy Twitter allies, are trying to win the debate through sheer repetition.”

“However, housing affordability will suffer to the extent that policy makers either buy into the misdirection, or use the narrative to deflect public pressure to take substantive action. Sometimes, then, it’s helpful to point out that the emperor has no clothes.”

From Global News in Canada. “Federal officials are ironing out the details of a program to help cities buy properties left vacant due to the coronavirus pandemic so they can quickly create affordable housing. The government has considered the property acquisition program for months as it looks to keep people from falling into homelessness heading into the winter with temporary shelter measures set to expire.”

“The municipal leaders say they could use the money quickly to buy buildings set to be sold soon, rather than have to wait months or years for the construction of new affordable units. ‘We think this is a no-brainer,’ said Edmonton Mayor Don Iveson. Iveson, who heads FCM’s group of big-city mayors, said the purchasing program could help local housing providers nab distressed properties at reduced prices.”

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This Post Has 47 Comments

  1. ‘the purchasing program could help local housing providers nab distressed properties at reduced prices’

    So much for the phony red-hotcakes in Canada. There’s no shortage of housing anywhere. Never has been, never will be.

  3. I’ve said it over and over: Millennials shouldn’t buy unit Boomers are forced to sell for less. The Boomers are using public policy to push them to overpay.

    Who is going to end up being hurt by state and local government fiscal crises? When the can kicking ends, those will end up capitalized into the value of the property too. Those who ran up the tab are looking for some sucker to pick up the check.

    And by the way, according to the Bureau of Economic Analysis, using standardized and reasonable assumptions, the so-called Red States and swing states are as fooked on public employee pensions as the Blue States. It’s generational. The national total hole for state and local governments was $4.5 trillion in 2018. Don’t buy their bills.

    https://larrylittlefield.wordpress.com/2020/09/13/the-bureau-of-economic-analysis-on-state-and-local-government-pension-funding/

    1. “..are as fooked on public employee pensions…”

      Underfunded public employee pensions [and outrageous salaries] are by far the biggest elephant in the room, but get near zero coverage in the MSM.

      In my corner of SoCal, no elected [or wannabe elected] official wants to talk about it. What a bunch of complete self-serving goofballs.

  5. Another absolute moonshot in the DOW futures. Is there some good news I’m missing, or is the FED playing around again?

    1. European stocks and U.S. equity futures climb on vaccine hopes and M&A action

      “Pfizer’s PFE, +1.17% chief executive officer, Albert Bourla, said in an interview on Sunday that the drugmaker should know if its COVID-19 vaccine candidate will work by the end of October — and if approved, it could be distributed in the U.S. by the end of the year.

      …The University of Oxford also announced on Saturday it would resume a trial for the coronavirus candidate it is developing with AstraZeneca AZN, -0.36%.”

      https://www.marketwatch.com/story/vaccine-hopes-and-m-a-action-power-european-stocks-and-u-s-equity-futures-11600070052?mod=home-page

          1. I don’t think I’ve ever been the Tik Tok. WTF is it? How is it different from FB or Twitter or Instagram or even YouTube.

          2. Per wikipedia:
            It is used to create short music, lip-sync, dance, comedy and talent videos of 3 to 15 seconds,[6][7] and short looping videos of 3 to 60 seconds.

  8. From Bloomberg. “I hope to put a big yellow ‘Slow’ sign on home-buying in a pandemic. The housing market may be soaring because of bad information and short-term thinking.”

    “Conventional financial advice suggests if a home costs more than 20 times the annual rent the home could fetch, the house is probably overvalued — a $400,000 home should rent for $1,667 per month or more.”

    – $1,667/mo. * 12 mo. = $20,000/yr. = 5% cap. rate, ignoring all other rental expenses.
    – “You paid too much!” A 5% cap. rate means you overpaid!

    “Because homeownership has always been messaged as a mandatory part of the American Dream and subsidized by the federal government, homeownership is always a bit overrated.”

    – Since housing has been commoditized and financialized, market timing has become much more important than when it was simply shelter. House prices are at another ATH in many metros due to a) historically low rates (2.86% last time I looked) and b) a return of the FOMO. I hope nobody overpaid, but I don’t think that’s the case.

    – “Fools rush in where angels fear to tread.”

    1. A Pandemic Is a Terrible Time to Buy Real Estate
      [Bloomberg]
      Teresa Ghilarducci
      BloombergSeptember 13, 2020

      – Great title!

      “You don’t know whether bosses will make work-from-home permanent or who will be targeted for downsizing. You may come to rue buying at a time when inventory is so low and prices so high.”

      “Buying in a sellers’ market is not a good move. Home sellers are taking their once-in-a-lifetime moment to sell their house substantially over asking prices, asking prices that were connected to rental prices in the neighborhood.”

      – This is good financial advice. So why is this article in the MSM?

      – OK, now it makes sense! The author isn’t a Realtor!

      – Inconceivable!

      “During times of universal deceit, telling the truth becomes a revolutionary act.” – George Orwell

      “Teresa Ghilarducci is the Schwartz Professor of Economics at the New School for Social Research. She’s the co-author of “Rescuing Retirement” and a member of the board of directors of the Economic Policy Institute.”

      1. “A Pandemic Is a Terrible Time to Buy Real Estate”

        “Where there is blood on the streets, buy property” —Baron de Rothschild

    1. I was wondering how you were doing (I haven’t able to follow the blog every day). This is the 1030 exchange working out finally?

        1. We’ve had near zero wind the past few days, which is uncommon, so we’re covered in it, but one positive is it’s also not fanning more flames.

          Westerlies and some rain are on the way in coming days so hopefully that’s a positive in both breaking up the smoke and in fire containment.

        2. Up in Bellingham where my daughter is the smoke has been terrible too, but rain is expected tomorrow and forecast to continue daily through the week. No such luck in the Columbia Basin area.

          1. In spite of living fairly close to highway noise, I’ve been thinking it’s been eerily quiet (something’s missing) at our place.

            We back up to some woods and finally realized there are no birds. Haven’t heard so much as a chirp in 3 days.

    1. This is unpossible! A recent Harvard study says that the reason there are so many blacks and “Latinx” in prison isn’t because they commit so many crimes, it’s because of racism.

      https://www.theroot.com/a-judge-asked-harvard-to-find-out-why-so-many-black-peo-1845017462

      The level of Clown is off the scale. And they get away with it. They got to riot and no one was arrested. Arson is everywhere and elected officials insist it isn’t arson, even when arsonists are caught red handed.

  18. Softbank is selling chipmaker ARM to NVidia for $40B. I guess someone needs cash. Softbank paid $32B for ARm four years ago.

    Funny how a firm that actually makes tech has a market cap that is tiny compared to blowhard “tech” firms that don’t.

    1. It makes some sense IMHO.

      It puts nVidia in the CPU game across from a resurgent AMD who is also in the GPU space. Meanwhile, Intel is trying to go big in the GPU space with their Iris xe and discrete graphics cards and Apple is shifting to their own silicon for CPU and GPU.

  19. “You may come to rue buying at a time when inventory is so low and prices so high.”

    Yes you may.

    “Regret is already in the air.”

    Yes it is.

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