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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
larrywww

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Reply with quote  #220 

Bruce Norris, Christopher Thornburgh and other economists showed up for their annual market forecast with Coldwell Banker---though they haven't posted it yet on Youtube.

Here is a written copy of the CAR market prediction for 2018----they are predicting a median price increase of 4.2% and a 1.0 increase in sales.  Which would mean the market is less favorable than 2017---which saw a median price increase of 7.2% and a 1.3% increase in resales.  Affordability will decrease from 29% to 26%. 

https://www.car.org/aboutus/mediacenter/newsreleases/2017releases/2018-housing-forecast



Leslie Appleton-Young of CAR gave her annual market forecast recently.




2018 CALIFORNIA HOUSING FORECAST

 

2012

2013

2014

2015

2016

2017p

2018f

SFH Resales (000s)

439.8

414.9

382.7

409.4

416.7

421.9

426.2

% Change

4.1%

-5.9%

-7.8%

7.0%

1.8%

1.3%

1.0%

Median Price ($000s)

$319.3

$407.2

$446.9

$476.3

$502.3

$538.5

$561.0

% Change

11.6%

27.5%

9.8%

6.6%

5.4%

7.2%

4.2%

Housing Affordability Index

51%

36%

30%

31%

31%

29%

26%

30-Yr FRM

3.7%

4.0%

4.2%

3.9%

3.6%

4.0%

4.3%


 
Her predictions from last year were fairly close to being accurate----although she underestimated the price appreciation (unusual for CAR) to be 4.3%---rather than the actual 7.2%.

The first 37 minutes are about the state of the market---and the remainder discusses a CAR survey.  I have trouble figuring out what predictions she is making for next year--she talks alot about economic factors.  It sounds like this is a followup to the economic predictions made during a San Diego meeting.  

larrywww

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Reply with quote  #221 
Bruce gave his forecast for Coldwell Banker Town & Country.

No surprises here---he says he is not afraid of this market.

abc

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Reply with quote  #222 
Thanks Larry for posting that Town and Country video.  Bruce seems like he is not worried at all about prices falling in CA.  Some reasons he cited:

-cash out refi's/equity withdrawal almost non-existent vs. past cycles - people haven't tapped their equity
-almost everyone is in record low fully amortizing 30 yr fixed rate loans
-if there were defaults, lenders learned from last go around that they can just not foreclose for years to keep inventory off the market
-getting mortgage loans is still very difficult - lending very tight
-lots of cash purchases this cycle - you can't lose a house to foreclosure if it has no loan on it
-builders have built far less this time and are being very disciplined
-affordability is still at 29%

Also, Bruce mentioned again 30 yr fixed mortgage rates could fall to 2% in the next recession when the Fed has to crank the Fed funds rate back down.

larrywww

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Reply with quote  #223 
I agree---and Bruce is probably right.   But the market's flat, flatter---the flattest we've seen.  With a forever shrinking inventory.

But I keep hoping we will get some excitement at some point and a chance to re enter the market rather than a total flatfest in a grossly overvalued market with shrinking inventory.
abc

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Reply with quote  #224 
It's very UN-scientific analysis....but I just look at prices in Coastal CA and I ask myself how the hell can people afford this stuff???   Can CA keep cranking out enough super high paying jobs for people to afford this crazy high priced real estate?

I read a lot about CA having a lot of people leaving the state due to lack of housing affordability, but mostly lower to middle income types.  Also wonder about the effects of the new doubling of the standard deduction + the cap on state income tax and property tax deductions making it less attractive to buy these insanely expensive homes in CA.


brycewheeler

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Reply with quote  #225 
ABC asks how the hell people in California along the coast can afford high home prices??  I have for many years wondered the same thing.

THE ANSWER IN LARGE PART IS THOUSANDS OF GOVERNMENT WORKERS!!!

Today I read in the San Diego Union Register paper that just one local San Diego union of municipal government workers has over 1000 persons already who collect pensions of $100,000 per year or more.  That is just one union of government workers for municipal workers.  Do California state workers and Federal workers earn the same or even higher pensions???--Probably and there are more state and federal employess than San Diego city municipal workers.  Think of all the highly paid Military generals, admirals etc. etc.

Must be nice to have a cushy pension like that or even anything approaching those amounts.

No wonder city governments, state governments and federal government all face near bankrputcy in their budgets and forecasts are for even worse future pension problems with expoding pension "budgets".

I am all for rewarding loyal employees for reasonable pension rates, but come on!!!  Do they need $100,000 pensions for life when they already have been highly paid for many years with above average pay and many other benefits.

Just my opinion.

Bryce
abc

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Reply with quote  #226 
Bryce, I think it would be really fascinating if the Federal, State, local Gov'ts completely got rid of ALL defined benefit pensions for every single Gov't employee going forward.  Everyone gets paid a salary just like the private sector, and they are 100% responsible for saving for their own retirements via IRA's, 401k's, savings, real estate....just like the private sector.  

AND...on top of that...no more special health care for Gov't employees...all have to pay their own health care via the (so called) "Affordable" Health Care Act and then Medicare post 65.  

And.... this would of course INCLUDE all the Fed governors, congress, house, etc...!

You better believe there would be some serious changes in things quickly!




brycewheeler

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Reply with quote  #227 
ABC--Excellent idea.  If only our government were democratic enough to grasp that.  The legislators are too greedy to lose their edge over us common folks.

Bryce
GeorgeB

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Reply with quote  #228 

Kooky Real Estate Prices in Leading Global Cities

https://economyandmarkets.com/markets/real-estate/kooky-real-estate-in-global-cities/

abc

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Reply with quote  #229 
Quote:
Originally Posted by brycewheeler
ABC--Excellent idea.  If only our government were democratic enough to grasp that.  The legislators are too greedy to lose their edge over us common folks.

Bryce


It's the old saying of "the fox watching the hen house".  The people that are in control of the laws around Gov't pensions, are the ones who get the biggest pensions themselves!  Why would they ever be motivated to change those laws?   I'm sure the judges on the supreme court have terrific defined benefit pensions, and you can be sure they don't have ObamaCare.
Greg

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Reply with quote  #230 

Quote:
Originally Posted by abc


It's the old saying of "the fox watching the hen house".  The people that are in control of the laws around Gov't pensions, are the ones who get the biggest pensions themselves!  Why would they ever be motivated to change those laws?   I'm sure the judges on the supreme court have terrific defined benefit pensions, and you can be sure they don't have ObamaCare.


Interesting piece. But the author's main point is simply that nobody can afford these ridiculously high priced homes. Well that's obviously wrong since they sell.

He also places some blame on baby boomers that don't want to sell. 

I don't know much about Harry Dent. Does he propose solutions? 

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