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larrywww

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Reply with quote  #211 
Given that the tax bill has passed into law, I think it's fair to ask what the impact will be----given that right now we already have a worldwide bubble in stocks, bonds, cryptocurrencies, real estate----practically every asset class I can imagine.   When you inject more than a trillion dollars into the economy----at a time when there were already trillions of dollars sitting on the sidelines---what exactly will  happen?

1. I think it's safe to say that it will put the stock market on steroids----alot of these companies are going to issue dividends and/or do stock buybacks.  What happens when stock investors are gifted with this extra money?  I don't know.

2. I also believe that the Fed is going to start goosing interest rates because of the potential for inflation in the current market.  That alone may be enough to put a damper on the real estate market and would severely impact commercial real estate since it's hard to justify such minimal returns when you have interest rates rising.  Many kinds of commercial real estate have low single digit returns at this point.

3. But maybe in the short run the tax cut will prolong the up market in various asset classes----already way overdue for a recession.

4. I also think that when the crash comes----it will be spectactular.  Maybe it will even involve multiple asset classes.

5. It seems like we are experiencing a really counterintuive real estate market right now----the appreciation has been slowing in many coastal communities despite the low inventory---and the new tax bill may have the impact of depressing the market for properties in the upper end of the market (above 750,000).
  
6. The markets can't just inflate forever, can they?  BTW, the world's most expensive house is under construction in Belair for the bargain price of half a billlion dollars?  Any takers?

7. I am looking forward to the annual real estate forecast presentation by Coldwell banker this March 8th---that will feature Bruce, Christopher Thornburgh and other economists.  Maybe they can figure this market out.  

Anyone care to weigh in?


rickencin

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Reply with quote  #212 

Quote:
Originally Posted by larrywww
Given that the tax bill has passed into law, I think it's fair to ask what the impact will be----given that right now we already have a worldwide bubble in stocks, bonds, cryptocurrencies, real estate----practically every asset class I can imagine.   When you inject more than a trillion dollars into the economy----at a time when there were already trillions of dollars sitting on the sidelines---what exactly will  happen? 


Bubbles are usually driven by easy credit.  Other than low interest rates credit doesn't seem to be particularly easy.  It's hardly surprising that an improved business (tax) climate will help business.  Those idiots who go around saying "Trump hasn't done anything" will have to come up with a new grievance. 

Quote:
Originally Posted by larrywww

1. I think it's safe to say that it will put the stock market on steroids----al ot of these companies are going to issue dividends and/or do stock buybacks.  What happens when stock investors are gifted with this extra money?  I don't know.


The "economy" is just the production of goods and services.  We are at risk of too many goods and services being produced.  A good time to be a consumer.  Don't fret, poverty will always be with us.  These goods and services will not necessarily be produced by people.  Back In the 1980's business managers used to ask "If computers are so efficient, where are my profits?" There is this new thing (to me) called reverse offshoring.  Many offshoring attempts failed.  Maybe there is a glimmer of hope for good jobs in the U.S. 

Quote:
Originally Posted by larrywww

2. I also believe that the Fed is going to start goosing interest rates because of its inflationary impact.  That alone may be enough to put a damper on the real estate market and would severely impact commercial real estate since it's hard to justify such minimal returns when you have interest rates rising.


I agree.

Quote:
Originally Posted by larrywww
 
6. The markets can't just inflate forever, can they?  BTW, the world's most expensive house is under construction in Belair for the bargain price of half a billlion dollars?  Any takers? 


Markets to go up and down, but there are reasons for it (including human opinion). I just don't believe someone built a half billion dollar house on spec.

Happy Holidays!


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Rick
larrywww

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Reply with quote  #213 
Given all the money flooding the economy, I don't see any prospect of an immediate crash.

They interviewed Sam Zell and here is what he said----before the tax cut he would have said we were in the "8th inning", the last stage before the crash of the commercial market.  However, after the tax cut, there maybe a few extra innings.  With money burning a hole in alot of investors' pockets, no crash now.

But, on the other hand, Sam Zell still isn't really a buyer in this market.

But before the tax bill passed Zell was one of the loudest voices in saying that commercial real estate was long overdue for a crash. Among the areas he felt would crash first:

1. Retail.  We are all aware of the adverse impact of Amazon and online retailers on retail space.  A statistic that Zell quoted:  America has 4 or 5 times more retail per capita than practically any other country.  And althogh there is talk about repurposing alot of this useless retail space----this will turn out to be very complicated given the various different parties that would need to agree, including the municipality and state laws you have to deal with.
2. With some retrograde movements, the stock markets has appreciated 10 fold since 1916 and has never been higher---even if some of the appreciation can be attributed to repurchase of stoock, etc.
3. The office market has also showed weakness and alot of small businesses prefer incubator space than sinking alot of money in an office.  We probably don't need the office that is currently being constructed, unless it has a very desireable location.
4. Despite these weaknesses, unemployment is at 4.1%, the lowest in 16 years.    Before that economy, one would have to go back to the 1970s when we had such low unemployment.
5. According to John Burns, rents are at historical highs---given the stagnant wages not clear how they could rise any further.
6. Multifamily is trading in the low single digits in alot of desireable areas.  Hard to see how the returns could dip below the current 2% to 5%.

But it's not like the real estate market---or any of these other submarkets can go up forever.

And the impact of the Fed on this planned stimulus is a negative factor---not only are they going to unwind their 4 trillion dollar portfolio but they are promising 4 interest rate hikes next year.  So what will be stronger---the stimulus or these negative actions by the Fed?  It's really unclear.
larrywww

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Reply with quote  #214 

I finally heard the Bruce Norris audio.  Of course, He didn't address commercial real estate as I did in the above post.

He said:

1. He doesn't feel that the new tax law, even the negative parts of it, will have a severely negative effect on the real estate market.  If loans have interest rates at 4%  or below then is the failure to be able to deduct mortgage interest a game changer?  He thinks not.  But if the rates got north of 8% that would be a much bigger deal.  And the fact that the standard deduction is doubled is going to eliminate this entire issue for lower priced houses.  Whatever negatives he finds this change---which he admits isn't positive----will have on the market will be more than resolved (in terms of the current market) by the low inventory.

2.  Is Bruce concerned we will lose all our rich people?  We are already losing rich people in California because of the higher taxes.  That is already true, we already have negative immigration.  But our population still is rising because foreigners are coming into California and our birth rate replaces those who are leaving.   Again, this is a negative but is somewhat compensated by other factors.

3.  Fannie Mae has 0.5% delinquency since 2011 and alot of their loans are the safest pile of loans in a very long time----at a 3 or 4% interest rate.  In effect, there is nothing to crash---no easy way to gin up foreclosures and REOs.  Even if we have a recession where unemployment rises---is that going to be enough to flood the market with foreclosures?   Builders aren't participating---building at 25% of the normal pace----and their inventory is at 2%.    Even if they sold their inventory, it wouldn't be enough to crash the market.   The % of homeowners is declining----and Bruce believes that investors may be the only upside for growth in the market.   If Fannie and Freddie are privatized----their only growth market would be to increase the # of permitted homes to 25-----otherwise, they face a declining sales environment.

It appears that the end of this market will be dull and relatively benign, not a major crash anytime soon.  But he doesn't have a specific prediction when the market will end.

4. Even if Section 121 were changed (it wasn't) most people stay in their houses 5 years anyway.

5. Bruce read a report by McKinsey report on the jobs that will be eliminated---and that something north of 40% of the current jobs in Inland Empire will be obsolete in 10 years by reason of automation and computerization.  What jobs will NOT be eliminated are those in the medical field----which is why Bruce Norris is renting to nurses and other medical personnel in his Leesburgh.  Most of these tenants are earning from 5 to 6 times their current rent---a very safe place to rent.

6. He mentioned that he bought 38 lots in Leesburgh Florida at 13,000 apiece, where he is currently building for a total somewhere near half a million.  His theory, BTW, is that the last  quarter of 2014 was like 2009 in California----if not the absolute bottom, at least close to that mark.    This doesn't address some of the positives in the law (we have a separate thread that does that).  He still hasn't done his Florida report---but he already seems like a cheerleader for investment in that state.

7. Bruce believes we may still have a recession in 1 or 2 years and that as a result the mortgage rates will hit 3% (or maybe even 2%).  That  was his prediction last year----but he might want  to postpone any recession given that the economy may just have gotten a shot steroids due to the tax cuts.  (We may have "extra innings" according to Sam Zell, who also predicted a crash). 

8. The real example of a "game changer" type tax change is the 1986 Tax act that dramatically changed the landscape, especially for real estate investors.  I think it's fair to say Bruce Norris doesn't think it's anything close to that.

9. Bruce Norris also disclosed his feeling about bitcoin and other cryptocurrencies.  He mentioned his experience with pennystocks in 1999----where he invested $260,000-----that increased to $850,000.  But where he held onto the pennystocks too long---until he sold at $100,000.  Basically, his feeling that something this volatile is more of a speculation than an investment whose future he can reliably predict.  Something like bitcoin is just way too volatile to reliably predict, in his view.

GeorgeB

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Reply with quote  #215 
Thanks for the summary Larry.
larrywww

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Reply with quote  #216 
You're welcome, George.  
mks_97

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Reply with quote  #217 
Great summary!

I just read an article in the SJ regarding folks rushing to pre-pay their property tax bills. Maybe Bruce is underestimating the impact of tax changes on higher end properties in CA?

Also Bruce, all through the presentation, argued that we are not going to see a spectacular crash like the last one. That stems from the fact we haven't seen any irrational exuberance in the market, similar to what happened in 2005-2006. The stock market too hasn't seen the moves we saw in 1999-2000 during the dotcom era. That is not to say we won't have a correction given that home ownership is being disincentivised in some states (e.g. CA, NY etc) 

https://www.wsj.com/articles/homeowners-rush-to-prepay-2018-property-tax-bills-1514335989
GeorgeB

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Reply with quote  #218 

Rising Rates Should Have Minimal Impact on Housing

[BMIFeature-Rising-Rates-Minimal]
Twitter: @RickPalaciosJr

Mortgage rates have risen 1.0% or more ten times in the last 43 years, with little impact on home sales and prices when the economy was also strong. Here is the paper we shared with our clients a few years ago. Historically, rising confidence, solid job growth, and higher wages have more than offset reduced demand for housing resulting from higher mortgage rates. When rates rise during a weak economy, home sales and prices get crushed.
.

[Mortage-Rates-CTA-Download-3]

Click Here to Download White Paper

.
Today’s economic backdrop clearly supports continued home buying demand. Confidence among consumers and businesses continues to hit multiyear highs. Job and wage growth remains solid, with an increasing number of workers rejoining the workforce.

Home builders agree. In our survey of 300+ home builders this month, 85% said sales would decline less than 10% if rates were to rise all the way to 5.0%. 29% (generally luxury and active adult builders whose buyers are quite affluent) don’t believe sales will fall at all.
.

[JBREC-Builder-Survey-2018-Rising-Rates-v2]

Builder stocks typically overreact very strongly to rising and falling rates, so don’t follow builder stock prices to assume what will happen to new home sales and pricing.

For perspective, mortgages rates have increased from 3.78% in September 2017 to 4.32% today, equating to a 6.7% increase in one’s mortgage payment. Rates rose even more last spring, jumping from 3.41% in July 2016 to 4.30% in March 2017 (11.5% spike in mortgage payment). Despite rising rates, housing had its best spring since 2013 last year, with a strengthening economic backdrop more than offsetting reduced demand from higher rates. All signals point to a similar scenario for builders as we kickoff spring 2018, with rising rates unlikely to ruin housing’s recovery.

brycewheeler

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Reply with quote  #219 
Thanks GeorgeB for link to a great summary on effect of mortgage rates.  Page 3 shows interest mortgage rates annually from 1971, which puts in perspective and  shows  current mortgge interest rates at bargain levels compared to the last  nearly 50 years.

i plan to sell another home (a basic one story ranch 3-2-2) in coming weeks and expect no problem in getting a nice price with much demand for Buyers with our low inventory.

Bryce
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