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.”