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Daily Speculations The Web Site of Victor Niederhoffer & Laurel Kenner Dedicated to the scientific method, free markets, deflating ballyhoo, creating value, and laughter; a forum for us to use our meager abilities to make the world of specinvestments a better place. |
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James Lackey
01/09/05
Residential Property: The "Biggest Bubble of All"?
Fed Chairman Alan Greenspan, despite his reputation as the Great Helmsman of the economy, is responsible for "the biggest bubble of all: residential property," writes Stephen Roach, Morgan Stanley’s chief economist, in a coming issue of “Foreign Policy.” Greenspan has “driven the world to the economic brink,” Roach says, and when he steps down as chairman next year he will leave behind a record current accounts deficit and a generation of Americans with mountains of debt made easy by too-low interest rates, and little wealth beyond the value of their homes.
Victor Niederhoffer comments:
Do we have to look for one or another publicity stunt, like an addict looking for an ever-increasing high, from people like Steve Roach who have been proved wrong over and over again about the lack of productivity and growth in the economy and the stock market and the overvaluation of equities and the weakness of the dollar before we dismiss arguments like those repeatedly proffered as the ignorant rumblings of a failed friend of Abelson?
The Assistant Webmaster notes: Like a stock analyst, Dr Roach uses a rating system. At any given time, the outlook is "Strong Sell" (his most bullish rating), "Crisis", "Disaster", "Catastrophe" or "Armageddon" (most bearish). Whoa, watch out for those downgrades!
James Lackey comments:
The comments, and bankers’ feelings, may be understandable. In the Northeast, Southeast and West, home prices increased some 100% in the past five years. Bankers look at that as a “transfer of wealth.” As entrepreneurs, we look at it as creation of wealth.
The increase in home prices is wonderful for homeowners. The lenders, the banks did not profit. Just as in 1996-2000 on their loans and non-ownership lending.
In a very general sense a "banker" will borrow at 3% and loan at 6% with sufficient "collateral."
But when the markets serve as the bankers, the non-bankers benefit. That happened with the NAZZs in 1996-2000, and when Fannie and secondary mortgage markets backed and financed lenders, then offered zero-down homes to those of credit scores and incomes of what they and the markets deemed suitable.
Now all the traditional "bankers” are up in arms just as in 1999 and “irrational exuberance” 1997. Shiller is back with home price boobeeeel, and the Fed is ready to fire off a shot across the bow to specs, judging by the minutes of the Dec. 14 Federal Open Market Committee meeting that were released Jan. 4.
Say what you will about the markets, or banking, or systems, or the Fed. I saw two fabulous things created in the past four years I have been on the Spec List:
One, technology, new products, bandwidth and creativity have not boomed – they have exploded. Housing prices from Pittsburgh to Nashville to Iowa City have remained stable. They are still paid $100 an acre not to farm their land in Nebraska. Yet housing prices have not risen any higher than what some of you econoguys lump waaaay too many prices, add and drop some at convenience, into that much too descriptive word "inflation."
Secondly, housing prices on homes demanded by wealthy, productive people from all over the globe have increased in value. From West Palm Beach, Florida, to California to New York City, house prices have risen 100%; Why not Chicago? Just ask any one that has lived there. Pick two of three for a transfer please, Chicago, New York or LA. Demand.
In the meantime, Argentina, Australia and many bozo-driven countries have put so many restrictions on ownership of real estate or, in Australia’s case, barred foreign investment altogether. There are only a few places in this world where a freedom- loving entrepreneur can reside. Then it is a matter of choosing where to reside, and paying a grand a month for a decent home to raise a kid.
That may explain the so-called dislocation of housing prices in the USA, normally blamed on free money from an irresponsible Fed. Well, outside Kansas City, no one is refinancing their home appreciation to buy Hummveeeeeeees. (Yes, I did leave the tax incentives on "trading" the most liquid of housing markets NYC, LA and FLA out of the equation.)
In any event, two great things have happened: much capital for new tech, and rising home prices for arguably the most productive citizens in the entire world....a huge creation of wealth for ownership.
And new outlets are already popping up: Calais, France, for the English affordable housing and a daily barge to work back to Great Britain…Dell moving to Carolina as Texas was flooded by Californians.
This country is so huge, and has so many great universities, immigration assets, a constitution that can be changed.
Please do not let propaganda from a few bankers, or some corporate, Madison Avenue-driven newspaper pull the oldest magic trick in the book: make you look the wrong way…to the pessimistic side.
Gitanshu Buch predicted much of the home price increase after the fall of 2002 to me. He also said, “You Americans really need to see the "real world". Like India, Singapore, the East.
I will add: “You American economists need to visit America. The direct from Kennedy to LAX is going to cost you fortunes in opportunity costs."
George Zachar comments:
Lack's property price observation is dead-on.
Over the decades I have noticed that primo housing in NY-SF-LA-Aspen all trade in unison and quite often within a few $/sq ft.
As for uneven home appreciation/population growth, Zachar's Law of Migration ® states that Americans will tolerate high taxes OR an unpleasant environment, but not both.
CA is a nightmarish hell of taxation and bureaucracy, but it is a very nice place.
NYC is the most stimulating, interesting, productive place in the nation, so its population grows despite the costs and hassles. But upstate New York is one of the very few places to actually LOSE population over the last couple of decades.
Home prices in Ithaca, N.Y., where I went to college, are roughly unchanged over the last quarter-century.
High taxes + 9 months of winter makes people leave.
Finally, don't downplay the role of inflation.
I contend that American real estate has replaced gold as the "fixed" store of wealth for many people. Greenspan himself vowed to never let cash appreciate (deflation).
When men give themselves arbitrary power over the value of "legal tender," and then announce it will never gain in value, ordinary citizens have very few ways to protect their capital.
Add in "landmarking," "wetlands," zoning," green belts," "view planes" and all the other property use restrictions imposed by government, and appreciation of property in desirable places to live makes perfect sense.
The US is the only "western" nation enjoying population growth. And our capital account surplus means the rest of the world is willing to park its capital here despite low yields and all the Roachian monsters-in-the-closet.
We have problems, yes, but they're nothing compared to everyone else's.