A weekend topic starting with The Street. “Martin Pring does an excellent job in his 1993 book Investment Psychology Explained outlining the 12 steps of how a mania or bubble inflates. 1. A believable concept offers a revolutionary and unlimited path to growth and riches. 2. A surplus of funds exists alongside a shortage of opportunities. This channels the attention of a sufficient number of people with money to trigger the immediate and attention-getting rise in price.”
“3. The idea cannot be irrefutably disproved by the facts but is sufficiently complex that it is necessary for the average person to ask the opinions of others to justify its validity. 4. Once the mania gets underway, the idea has sufficient power and compelling belief to spread from a minority to the majority as the crowd seeks to imitate its leaders.”
“5. The price fluctuates from traditional levels of overvaluation to entirely new ground. 6. The new price levels are sanctioned by individuals considered by society to be leaders or experts, thereby, giving the bubble an official imprimatur.”
The Washingtonian. “The average rate for a 30-year fixed mortgage recently rose to over 7 percent for the first time in 20 years. That’s a sharp contrast to where we were in the height of the Covid-era market, when rates dropped as low as below 3 percent. That led to a crazy competitive housing market that left sellers in an enviable position—you’ve likely heard the stories about lines around the block at open houses, buyers waving all contingencies, and homes selling for way above listing prices.”
“So—with rates spiking, are DC-area agents seeing a flip to a buyer’s market? Gone are the days of buyers going way over asking prices, says agent Ericka Black. When pricing your home, it’s important to adjust your expectations to today’s market. Look at what comparable houses near you have sold for in the last two months, says Black, not eight months ago. ‘There just has to be some give-and-take,’ she says. ‘It’s not that the sellers will not make money. They’re just not going to make the exorbitant amount that they were thinking.’”
From KSL in Utah. “Researchers Jim Wood and Dejan Eskic, both from the University of Utah’s Kem C. Gardner Institute — had a friendly debate Friday during Ivory Homes’ annual private gathering of hundreds of homebuilders and other industry partners from across the state. The slate of speakers all sought to help bring clarity to a market that they said has largely been fraught with ‘volatility’ and ‘uncertainty’ as mortgage rates, some days hovering around 7%, have squeezed buyers and have brought a rapid end to what had been over two years of a blazing hot market.”
“Eskic said he agrees with Wood about Utah’s strong job market, ‘we’re operating in a different environment because of the rates and prices.’ Eskic said it all comes down to affordability. ‘We go back to the 70s, for example,’ Eskic said. ‘If you divided your housing price by your annual income, it was 2.6. Right now, it’s close to five.’”
From ABC 15. “According to the Homebuilders Association of Central Arizona, new housing permits are down 17% year to date. ‘For 33 consecutive months, between 2019 and early 2022, the Phoenix market led the nation in home price appreciation. But now we’ve reached an inflection point on affordability, because at the end of that 33-month run, mortgage rates basically doubled,’ said Jackson Moll, VP of Municipal Affairs for the Homebuilders Association of Central Arizona. ‘A 7% interest rate looks very different when the median home price is $250,000, compared to when a medium home price is $450,000 or $500,000, which is kind of where we are in Phoenix right now.’”
New Orleans City Business in Louisiana. “David Favret, board president of New Orleans Metropolitan Association of Realtors, said the increase in inventory is compounded by buyers’ struggles with increasing interest rates and a lack of affordability in the insurance market. ‘It’s taking buyers who could afford to be in one place six months ago (and) not only just decreasing their purchase power but eliminating them from the market completely,’ Favret said. ‘And that’s a tough one to solve and out of our control. We can’t market harder. We’re at the mercy of a different industry.’”
Boise Dev in Idaho. “‘So we’re planning a cold winter, but we’re still going to build,’ said Daniel Fullmer, chief investment officer for Galena Equity Partners. Economists have hesitated to characterize the current economic slowdown as a recession because of low unemployment. But homebuilders cutting back will have a ripple effect on local jobs, Fullmer said. ‘If homebuilders cut back, magically there’s less need for appraisers, less need for title people, less need for self-employed real estate agents,’ he said.”
From Mansion Global. “Although the dust is settling in Austin, Texas, after a two-year home-price explosion, indicators suggest reasons for sellers to be optimistic about the luxury market—even as median prices come down. Among cities where home prices are falling the most, Austin came in at No. 1 in a Realtor.com report. The median home list price in September was $558,275, a 10.3% decline from June, according to Realtor.com data. The percentage of sellers who reduced their list prices was up 252% in September.”
“‘Mid-August was the quietest period I’ve seen since the financial crisis,’ said Gary Dolch, owner of Austin Luxury Group. ‘The phones weren’t ringing. People had that scared look in their eyes. Nothing was going on, on either side.’ But he had a clear message for his brokers and clients: Don’t give in to the panic. Based on what he’s observed in over two decades of selling, Mr. Dolch said hitting the panic button and readjusting prices won’t make the problem go away. ‘There’s nothing you can do when demand destruction starts to happen like that. It doesn’t matter what you price it at,’ he said.”
“Despite timidity in the market, Mr. Dolch said there’s a glut of available homes. They’re just not showing up on the MLS. Agents don’t want the optics of having houses rack up a bunch of days on the market while sales are slow. So instead, they’re relying on private listings, which is a big reason why the MLS has been depleted, he said. ‘Austin is notorious for having a shadow market, with sites where brokers can view off-market inventory that isn’t on the MLS. Those sites right now are full. There are hundreds and hundreds of them,’ he said, adding that many of these homes are priced at $1.5 million and above.”
The Dallas Morning News. “With high interest rates taking a bite out of project profits, apartment builders and investors are expecting a slowdown in their business next year. ‘The last few years have been at a high level of velocity — probably unsustainable,’ said John Sebree, national director of commercial property firm Marcus & Millichap. Dallas-Fort Worth leads the country in apartment building, with about 25,000 new rental units scheduled to open their doors here this year. More than 60,000 apartments are under construction in North Texas.”
“Unlike in previous downturns, there is plenty of money to lend and invest. But the costs of those funds are unworkable for many builders. ‘The capital is out there but they are pricing it for risk — the price is high,’ said Ben Brewer in the Dallas office of developer Hines. Property brokers say that the high cost of borrowing has already caused commercial property prices to decline by 15% to 20% or more. ‘Deals that might trade today might trade below replacement costs of projects starting today,’ said Jason Haun of builder Zom Living.”
Bisnow Philadelphia in Pennsylvania. “Even as its leasing success continues and many of its malls remain profitable, PREIT is running out of time to get out from under its massive debt. PREIT reported a net loss of more than $71M for the quarter, an 87% increase from Q3 2021. At issue is the company’s $2B-plus debt load, which has a weighted time to maturity of 1.1 years, with only a few months’ leeway in the form of extension options. ‘We think the financing challenges that all real estate owners are experiencing is related to more than just interest rates,’ said CEO Joe Coradino. ‘We see tighter underwriting standards, valuation uncertainty and negative undertones regarding certain sectors have led to virtually frozen credit markets.’”
The Winters Express. “It’s the biggest question in real estate: “Should I buy a home right now? As a consumer looking at housing headlines, you’ve probably heard, ‘the boom is over,’ ‘homes will lose value,’ ‘the housing market is about to crash’ and ‘interest rates are too high.’ If you zoom out though, the past 50 years of sales data suggest that the right time to buy a house is actually always now. Housing prices in California have climbed steadily since the 1960s, from median prices of $58,000 in 1960, to well over $800,000 in 2022.”
“Across the country, people are saying, ‘I’m just not sure if I can afford it.’ The recent jerk in rates is a product of the current U.S. economy. It begs the question, ‘When rates were so low, was the money too cheap to borrow?’”
“Here in Winters, we saw home’s days on the market increase by 157 percent from this same time last year. There is less frenzy and panic, fewer multiple offers, and fewer offers over asking. There’s been a significant drop in the competition for homes. Although not advice I typically give as an agent, six months ago many buyers were making offers on homes they had never seen while removing all contingencies. Now you have an advantage, more negotiation power. And as a buyer, we haven’t seen this leverage in some time.”
The San Francisco Business Times in California. “Layoffs are widening across a range of Bay Area industries, headlined by massive job culls at Meta Platforms and Twitter. The investment climate for startups has gone from balmy to chilly to subzero. While some of the circumstances are different, some of those with long experience see more than a few similarities with the defining collapse of the Bay Area economy: The 2000 end of the dot-com bubble, when the burgeoning new internet tech economy imploded, leaving a wake of failed startups, empty buildings and misery.”
“We thought we’d give our readers a chance to answer a similar question: The current economic situation in San Francisco is drawing some comparisons to the dot-bomb crisis of 20 years ago. What are your memories of the dot-bomb and do you agree with the comparison?“
“Carolyn Shames, CEO Shames Construction Co. ‘Not yet but I expect it to be much worse. 2002 did not have the terrible inflation and interest rates that we have not that will over lap with the down turn in business so I think this will be much worse when it hits! Also the commercial real estate market is in real trouble with offices empty and going to get emptier.’”
“Marc Canas, Canas Realty Inc. ‘It’s drama … badly run startups don’t survive. Egocentric paper billionaires without business acumen don’t survive. The era of free money is over if you are not profitable no one wants to invest. The fastest way to get profitable is to cut heads.’”
“Steven Khuong, CEO, Curacubby Inc. ‘I co-founded and operated RocketStaffing.com, an online technical recruiting platform during the first dot-bomb crisis 20 years ago and I remember precisely the fallout of many ‘cutting-edge disruptive’ companies such as WebVan. This is akin to the many Web3 and crypto companies today crashing and burning. Some businesses were just ahead of their time, while others relied solely on VC money without careful financial planning for profit. The other similarity was the fast infusion of VC money being pushed into these companies with the assumption they would escape regulatory scrutiny in a current unregulated landscape (think Napster and the fast wave of music streaming peer-to-peer platforms).”
The Daily Maverick. “My memory of the pre-financial crisis era of self-delusional hubris will always be epitomised by a lunch I attended in mid-2007. Working as a junior correspondent for The Independent, I was invited to the plush top floor executive dining rooms of Lehman Brothers by their then head of media relations. Over expensive French wines and smoked salmon, with the vast expanse of London stretching below us, my host spent three hours trying to convince me that the bank was inherently well capitalised and the rumours around subprime mortgages were unfounded.”
“Of course, that epoch ended with Lehman’s ensuing collapse in September 2008. Now, as soaring inflation forces the world’s central bankers to hike interest rates, another era – one of ever-low interest rates – is also coming to an end. The interesting question is: What will come to signify this chapter of economic history?”
“According to the OECD club of developed nations, real wages and productivity have been stagnant for 15 years. The Financial Times has calculated that real wages in the UK grew at an average of 33% per decade from 1970 to 2007, but did not grow at all in the 2010s. However, for homeowners, particularly in the US and UK, low rates created a real estate boom. Lower mortgages cushioned the impact of stagnant wages. Sky-high house prices also took the edge off moribund earnings; people who were lucky enough to be on the housing ladder felt better off, even if only on paper.”
“Then, ultralow costs of capital allowed a whole category of companies that made no money to flourish. For such ‘start-ups,’ companies valued on new metrics such as ‘customer acquisition cost’ or ‘burn rate,’ growing revenue was unimportant – let alone being cash flow positive or profitable. WeWork, Uber, Deliveroo and Klarna were among the most famous of these, but there were countless others. Funded by the tsunami of free money, most start-ups were founded not with the purpose of making money or being sustainable businesses, but simply to successfully close the next fundraising round, as venture capital firms and angel investors sprayed capital around indiscriminately.”
“An entire Ponzi scheme industry of ‘founders’ going from one successful ‘series A’ to another proliferated, leaving a string of failures in their wake. It remains to be seen how many, if any, will still be around in five to 10 years. Traders now openly talk about the approaching ‘ShitCo Reckoning.’ But the most pronounced effect was asset price inflation. With the discount rate going ever lower, valuations – of increasingly uncertain cash flows and riskier assets – could only ever go higher.”
“Equities, particularly tech, provided the best example, but there were more extreme illustrations. As rates have risen, the prices of metaverse real estate, crypto and NFTs have crashed – they are all starting to look like anachronistic relics of another age.”
“One moment will forever embody this for me. In November 2021, pretty much at the apogee of the bubble, I happened to be in Dubai. A friend managed to make a quick $20,000 in 20 minutes by trading a few now-worthless NFTs, and then took us for dinner to one of the most expensive restaurants in the city on the proceeds. Looking around at the scenes of excess, one could not help notice that we were not the only table celebrating with the ill-gotten gains of the largesse of central banks.”
“Of course, such artificially generated demand can only mean one thing: higher prices, inflation and inevitably higher interest rates. It should have been evident what was coming, but perhaps we were all too busy celebrating to realise it.”
The Globe and Mail. “Crypto exchange FTX filed for U.S. bankruptcy proceedings on Friday and Sam Bankman-Fried stepped down as CEO after a rapid liquidity crisis at the cryptocurrency group that has prompted intervention from regulators around the world. The distressed crypto trading platform had been struggling to raise billions in funds to stave off collapse after traders rushed to withdraw US$6-billion from the platform in just 72 hours and rival exchange Binance abandoned a proposed rescue deal.”
“‘The shock was that this guy was the face of the crypto industry and it turned out that the emperor had no clothes,’ said Thomas Hayes, managing member at Great Hill Capital LLC in New York.”
“‘The next question is how wide of a contagion effect this is going to have on other exchanges and where the next potential losses can occur,’ said John Griffin, CEO of Integra FEC, which provides consulting to government agencies and law firms investigating financial frauds. ‘So, to what extent when you have a major entity like this that goes down, all the assets tied to that FTX exchange go down.’”
“‘Once Binance walked away from buying FTX after only 24 hours of due diligence, the writing was on the wall for FTX,’ said Antoni Trenchev, co-founder of crypto lender Nexo. ‘Now we enter the next phase of the fallout, where we witness the second order effects and discover which entities were exposed to FTX and Alameda.’”