Saturday, April 23, 2005

The Marginal Home Buyer by Gary North

"Modern economic theory rests on the insight that what takes place between a buyer and a seller at the margin – one of these in exchange for two of that – is the central economic fact of pricing. The price of some item at the margin is imputed to all other goods of the same class.

Every mania is therefore an imputed-price mania. It cannot be sustained beyond the ability and willingness of the last marginal buyer to pay an equity-raising price to the last marginal seller." More...

Friday, April 22, 2005

Sorry Things are a Little Slow on this Blog

...but my wife just gave birth on to a girl on Thursday and we've been busy the past few days.

Wednesday, April 20, 2005

Taming the McMansion in North Jersey

I have mixed feelings about zoning laws like this. On the one hand, if you actually live in Kinnelon, it is nice to have suburban sprawl contained so that the town remains a pleasant place to live and so that excess housing supply doesn’t eventually reduce the value of the existing house. On the other hand, the enactment of these types of zoning restrictions often, and not necessarily in this particular case, seem to be designed to keep existing homeowner’s property values intact, which is not the function of the government.

“KINNELON - A zoning ordinance designed to curtail the spread of "McMansions" is scheduled to be voted on Thursday night.

Seven months in the making, the ordinance is a set of restrictions borough officials have put together to ensure that newer, larger homes being constructed don't overshadow the older houses in a neighborhood.”

Here is more central planning in Paramus.

The conundrum is back

“Just two months ago, with US Treasury 10-year bond yields hovering around 4 per cent, Federal Reserve chairman Alan Greenspan wondered publicly why they were not higher. Investors took the hint and pushed yields rapidly up to 4.6 per cent. But the recent burst of risk aversion in the financial markets has sent 10-year yields back down again to 4.25 per cent.”

Boston Boom Bust

"While Beacon Hill and neighborhoods such as Dorchester and Roxbury don't typically rub shoulders, the two ends of the Hub housing market may be sharing symptoms of a coming real estate chill, experts say.

Condo sales on Beacon Hill fell nearly 50 percent in March, according to a veteran neighborhood dealmaker.

Meanwhile, mortgage defaults are spiking in Dorchester and Roxbury, while single-family home and condo prices are down, the Herald has reported.

The news comes as the Commerce Department reports a 17 percent March plunge nationally in housing starts, the largest decline since 1991.”

Panic Buying

Applications for new mortgages dropped in the past week even though they really should have gone up. The American consumer is acting irrationally when it comes to buying or refinancing a home. When rates go up, demand for mortgages should drop. Conversely, when rates go down, demand for mortgages should increase. The opposite seems to be happening though.

“Applications for U.S. home mortgages decreased last week, as purchasing and refinancing activity fell despite lower interest rates on loans, an industry group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity decreased 1.6 percent 672.6 in the week ended April 15, slightly offsetting an increase of 6.1 percent the previous week.”

Fed Beige Book Highlights

Real Estate and Construction
Residential real estate markets were very active during March and early April, with Districts noting increased activity levels compared with the previous report. Demand for houses was strong and residential sales were high in three-quarters of the Districts. New York, Richmond, and Atlanta cited low housing inventories, while Boston mentioned increased time on the market for high-priced homes. Several Districts indicated that home prices rose. Reports on new housing construction were more mixed. Atlanta, Minneapolis, Kansas City, and San Francisco said the pace of home construction was strong or picking up, but St. Louis and Dallas noted slower residential construction.

Commercial real estate markets varied. Office vacancy rates declined in New York, Richmond, St. Louis, Minneapolis, and San Francisco. New commercial construction was robust in Cleveland, Atlanta, St. Louis, Dallas and San Francisco, but slow in Richmond. Chicago reported steady vacancy and rental rates.

Tuesday, April 19, 2005

New Unscientific Price Survey for The Jersey Shore.

In the right hand column of this blog I have linked to an over priced house at the Shore. I have also shown the price and the date the link was made so that we can notice if the price changes in the coming weeks or months for anectdotal purposes. If the property is sold, I'll take the link down. I'll try to add more links in the coming days.

Does the Real Estate Market Benefit or Suffer from Retiring Boomers?

That is the question posed at the end of this Business Week article.

"That all makes sense. The only question is, what happens when the Boomers start to retire, sell their primary residences and settle into the second homes they are buying now? Where will that leave the real estate market?"

Personally, I believe that most boomers, once their income scales down as they retire, will only be able to afford one house. The two house owning boomers, that exist now, will eventually end up selling one of their houses creating excess supply for years to come.

Over Priced Real Estate, Next 6 Exits

Jersey Shore Posted by Hello

Stagflation is Back in the News

The word “Stagflation” seems to be popping up a lot in the media over the past few days. The NY Times' Krugman wrote a column about it yesterday that is not worth linking to. (Here is a good critique of the column though,

It was about last year this time that the media was enthralled with the word “stagflation” especially because job growth at the time was anemic. Here is how investopedia defines the term:

“When the economy isn't growing but prices are - not a good situation for a country to be in. This occurred to a great extent in the 1970s, when skyrocketing oil prices further slowed economic growth. The effects of inflation were made considerably worse by stagflation.”

Roach is a Broken Record; But in a Good Way

He has been preaching doom and gloom for the global economy for at least the last 15 months; probably longer. In recent weeks he has been writing that the global imbalances have finally reached some sort of inflection point and that the global economy is only going to get worse from here.

“Little wonder world financial markets are reeling. An unbalanced global economy is not in great shape. The global growth engine -- the United States -- continues to derive its sustenance from asset markets and the unsustainably low real interest rates that support a wealth-driven impetus to aggregate demand. Not surprisingly, the Bernanke thesis conveniently celebrates the result without looking in the mirror and acknowledging the bubble-prone Fed’s culpability in creating this moral hazard.”

The National Association of Realtors is a Good Source of Info.

They will be releasing the First Quarter, 2005 Metropolitan Median Area Prices and State Existing-Home Sales, on May 12, 2005, at 10am ET. This release shows the median prices for different areas of the country including the Monmouth/Ocean metropolitan are. Here are the poorly formated figures for the last five quarters ending December 31, 2004.

($ in thou.)

Period -Q4 2003 - Q1 2004 - Q2 2004 - Q3 2004 - Q4 2004
Price - $ 290.40 - $ 298.00 - $ 314.30 - $ 343.50 - $ 338.40
Q / Q Change - 2.62% - 5.47% - 9.29% - (1.48%)

Monday, April 18, 2005

Hippies Freak Out About Housing Bubble

Even Mother Jones Magazine is writing about the housing bubble.

"Needless to say, at least some mainline economists are starting to get nervous about whether the housing boom isn't a housing bubble. Mike Davis, on the other hand, asks whether it isn't a housing bomb set to explode right under the Bush administration. As he does on just about any subject he touches, Davis takes our real-estate boom and makes a new kind of news out of it, suggesting that the Bush administration is riding this particular economic tsunami to an uncertain -- but possibly unenviable -- end."

Most Over-Hyped Town in Monmouth County

Fair Haven. Red Bank houses at Rumson prices.

Look at this house.

The Asbury Park Press is Obsessed with Recycling

Here is yet another story by the APP about recycling and the environment. They are doing a six day series this week about recycling again because it is probably very cheap to “recycle” the same story about recycling that they originally wrote in 1993.

I would like to see a story in the Asbury Park Press about why so many businesses left Asbury Park in the early 1970s, including the Asbury Park Press. I would also like to see a story about why it costs $8.00 to get on the beach in the summer.

Bill Fleckenstein Wants Paul Volker Back

“We have higher costs, creating more inflation, which the Federal Reserve is theoretically supposed to fight. Though it has timidly tightened, it is behind the curve on inflation. Even if the dropping-money-from-helicopter pilots at the Fed feared inflation, they'd be in a box -- as far as doing a lot about it -- because the economy is weakening. (That's where folks should put their attention, rather than sweating bullets trying to figure out what the Fed is going to say next.)”

Like a few other bears, including Steven Roach, and maybe Bill Gross at Pimco, Bill Fleckenstein seems to want to hold Alan Greenspan responsible for the impending rise in inflation and interest rates and possibly subsequent crash in housing prices.

Although I generally agree that the extra-accommodative policies of the Fed have contributed to the run-up in housing prices, I’m not necessarily sure that Greenspan is a complete dunce just because he hasn’t pushed short-term rates to the 6% range yet. More likely, in my view, Greenspan, rightly or wrongly, is relying on other factors to control inflation. More precisely, he might be relying on the high price of oil to reign in inflation, instead of higher interest rates. I also think that he might be relying on Congress’ renewed talk of protectionism to cause the Chinese to reduce their treasury purchases, thereby allowing yields to rise in the face of lower demand.

Sunday, April 17, 2005

The Japanese Stock Market Took a Dive Today... should make for an interesting open tomorrow morning in New York.

"April 18 (Bloomberg) -- Japanese stocks slumped, with key indexes set for their biggest declines in 11 months. Sony Corp. led a slide by exporters after U.S. manufacturing and consumer sentiment reports signaled the world's largest economy is slowing.

The Topix index had its broadest drop on record after anti- Japan protests spread to about a dozen Chinese cities on a widening rift over territorial and historical disputes. Taiyo Yuden Co., which has a factory in China, fell." More...

US: Housing mania will end in tears - by Bill Fleckenstein

This is a good article from about a month ago.

"Today's tales of rampant real-estate speculation sound just like what we heard at the peak of the tech bubble. And we all know what happened when that bubble burst.

This week, I thought I might bloviate about the bubble in real estate -- the catalyst being a spectacular article in the March 2 edition of the New York Times titled "Speculators See Gold in a Boom in Home Prices."

About two years ago, I began writing on my Web site about the lunacy in the financing of housing, something I called the "housing hot potato." The evolution of this has allowed folks to use their homes as ATMs to live beyond their means. Now, as always happens near the end of bubbles, madness (in real estate) is on display nearly everywhere." More...

Developers Bribes Should be a Cost of Doing Business.

Although I generally believe it is bad public policy and unethical to bribe politicians I can't help but wonder that resorting to bribery on the part of developers is sometimes the only way to make progress. I would guess that on occasion, a developer will have no other choice but to pay up to a crooked government, or else risk losing a significant investment. Although I don't know much about the Marlboro case it does remind me of Joe Barry's bribery of a Hudson County politician.

To make a long story short, Joe Barry and his company Applied Development wanted to put condos on Hoboken's decrepit northern waterfront in the late '90s. (The only imaginable reason why this piece of prime real estate not developed in the past was because some in the Hudson County machine had their hands out looking to be paid.)Apparently, Joe could only turn this prime piece of water-front real estate, that was going to waste, if he opened his wallet, which he did. Needless to say, Joe got caught and so did the politician Hudson County Executive Robert Janiszewski, but the north part of Hoboken is now a much nicer place to live thanks to Joe Barry's money.

This Morning's Washington Post

"Among the symptoms that some say point to a bubble: a widening gap between rental and ownership costs, a spike in the number of investors rather than occupants buying, and a ever-tighter affordability squeeze. Much of the boom in recent years has been sustained by low interest rates, which kept monthly payments down even as purchase prices rose. But the consensus among economists is that interest rates will rise at least a little this year."

Saturday, April 16, 2005

There is that Shiller Guy Again, Trying to Ruin All the Fun

"The man who brought you the dotcom crash is at it again - and this time he thinks the housing market will be the pin that bursts the world economic bubble.

Robert Shiller, the American author whose influential work Irrational Exuberance coincided with the peak of the internet boom in 2000, has added a new chapter to his book, and concludes that there will be an inevitable crash in property prices in the world's 'glamour' cities like Boston, Sydney, Paris - and London."The man who brought you the dotcom crash is at it again - and this time he thinks the housing market will be the pin that bursts the world economic bubble."

The one fault I find with prognosticators like Shiller is that they tend to be one-trick ponies. Abby Joseph Cohen called the bull market for Goldman Sachs in the mid-90s, but she missed calling the subsequent downturn. Elaine Garzelli was thought of as a guru for years beyond her usefullness because she correctly called the '87 crash. Although I agree with Shiller that real estate is over valued, I'm a little nervous because he was already right once in calling the burst of the tech bubble and it seems like an awful lot to ask of the man to be right with his bubble predictions for a second time in a row.

Be on the Lookout for BS Stories

Be on the look out for BS stories. I don't know if the "anecdote" below is true or not, but this is the second time in a week that I have seen this type of story. It is from this website. Given that the story sounds very familiar, I'm tempted to believe it is more "urban legend" than actual truth. Then again, the mainstream media and alternative media seem to be filled with all kinds of unbelievable real estate stories lately.

"A couple of weeks ago, I talked with a guy who lives in New Jersey. He told me that his house has more than doubled in value in the past 5 years. He bought it for less than $300,000. His neighbor across the street put his home up for sale - came over to his house - and asked him to put his house up for sale for a million. He doesn’t want to move and his neighbor knows that, but the neighbor thinks a high asking price on one house will allow him to make more money when someone buys his.'

Impending doom or Wishful Thinking

One of the problems with following the housing and credit market bubbles is that you tend to look for articles or data that support your hypothesis, and maybe unconciously, or conciously ignore contrarian information. I don't view this as a character flaw, but rather as an almost unavoidable bias. If you read enough articles like the one referenced below, you might be inclined to hoard gold and stock up on canned food this weekend.

"The specter of unfolding financial crisis incited some panic buying of Treasuries. Two-year Treasury yields ended the week down 24 basis points to 3.49%. Five-year government yields declined 27 basis points to 3.87%, and 10-year Treasury yields sank 24 basis points to 4.23%. Long-bond yields dropped 17 basis points to 4.59%. The spread between 2 and 30-year government yields narrowed two basis points to 100. Benchmark Fannie Mae MBS yields dropped 22 basis points."

No Bubble in Texas Despite all of the Oil Money

San Antonio area home values rose about 4.3 percent in 2004, while state prices averaged a 3.9 percent increase. Those are modest increases compared with the 11.2 percent average jump on the national scale.

"There's been a limited amount of price appreciation going on in Texas compared to the nation," said Mark Dotzour, chief economist of the Texas A&M University Real Estate Center. "There's been no bubble in the housing markets of any city in Texas."

Anthony Spalliero, the Man Who Built Westen Monmouth County

HOWELL — Monmouth County Prosecutor John Kaye said a corruption and bribery investigation related to the Colts Neck Crossing housing project advanced by developers Anthony Spalliero and Terry Sherman is nearly complete and will lead to arrests. More from the Asbury Park Press

Friday, April 15, 2005

I’m Guessing that Treasuries and Home Builders Moving in Opposite Directions is Not a Good Thing.

Given the rally in the ten and thirty year notes today, it was a little surprising to see the home builders fall down. Hovnanian lost 2.8%, Toll Brothers fell 3.4%, Pulte was off 3.7% and Lennar lost 3.3%, while the 10-year yield fell to 4.25%. Usually, a drop in 10-year yields is a positive for home builders since mortgage rates are priced off that issue, and lower mortgage rates means more demand for homes.

Housing Bulls Have Been Right So Far

It is impossible to argue with the bulls that housing has been a good investment over the past few years, because it’s true. One difference though that I have noticed in the debate between bears and bulls, is the un-willingness of the bulls to examine evidence of a bubble (or lack of a bubble) outside of their own markets. The Jersey Shore Real Estate bulls tend to make the argument that strong demand for housing in Monmouth County is a mostly local phenomenon, and therefore unique and not as susceptible to broader market forces. For example, the relatively new or expanded ferry service from the Bayshore to Manhattan is cited as a reason that people keep moving to Monmouth County and therefore, the reasoning might go, people will always want to move here, no matter what the price.

Although the Jersey Shore does have its attributes that make it a desirable place to live, the bulls do not seem to want to acknowledge that these local attributes are probably at best, secondary considerations for the average home buyer, with the primary consideration being affordability. At the present time, affordability is being determined strongly by events in lower Manhattan, Washington DC, and far away places like China and London. In other words, the bull can argue all day that ferry service to Manhattan makes Middletown a great place to live and will keep demand high, however the bull still doesn’t address why money is so cheap now (the primary reason houses at these levels are affordable), and what more expensive money will do to housing prices eventually, nor do they have a cogent argument as to why they think money will remain cheap indefinitely.

Not About Housing – About the Asbury Park Press

The Asbury Park Press has got to have one of the worst websites of any major daily in the country. It’s design is reminiscent of the look of early web-pages of the mid-90s when amateur HTML programmers wanted to display their “skills”, so they made sites with every annoying script, flash, font and sound. The only thing that has gotten better about is that the extremely annoying Jason’s Furniture pop-up is gone. Because of the pop-up, I feel compelled never to shop at Jason’s. The print edition of the Asbury Park Press is just as bad as the on-line version. Although hard to believe, it is actually slightly less informative than USA Today – but with more advertisements.

From this Morning’s Newswire.

I like the second to last sentence in the paragraph below. Occasionally a feeling of impending doom makes its way through the market. That feeling was evident this week with a flight out of equities and into treasuries, despite many people’s expectations that interest rates are going to move higher soon.

-8:27 (Dow Jones) Credit futures start day sharply higher, with interest rates benefiting from losses in global equities. There's also said to be some short covering ahead of this morning's data which includes the Apr. NY Fed manufacturing survey and Mar industrial production numbers. At the same time though, short-term interest rate desk manager says it also feels like "there is something brewing just below the surface," in the market. He's not sure what it is though, as it "hasn't bubbled over yet."-

Bubble in Virginia

"Economist Dean Baker was so worried about a housing bubble that he sold his Washington, D.C., condominium-- at three times the price he paid for it-- and rented an apartment instead. Now, about two years later, he's still waiting for the bubble to pop.

The danger of a bust is "absolutely getting worse," says Baker, co-director of the Center for Economic and Policy Research in Washington."

Thursday, April 14, 2005

Guest Commentary at Prudent Bear has another good article from a guest contributor. If you are not familiar with, and are curious about how the housing bubble is really being fueled by a broader credit bubble, then try to read some of the commentary their at least once a day.

"US housing prices and consumer spending- marching in lock step- have delinked from household earnings, long term trends and sustainability. In 2003, half of the nation’s $7 trillion in mortgage debt was either originated or refinanced. Credit availability, 40-year low interest rates and rising debt tolerance seized the reins from prudence and off we went..."

It is Frustrating Being a Real Estate Bear Sometimes

The rise in the yield on the 10-year note from about 4.00% to 4.60% in April looked like the first nail on the coffin for the over-heated real estate market. So it’s been frustrating to watch, in the past couple of weeks, 10-year yields drift back into the 4.30% to 4.40% range. Those that are optimistic about seeing higher yields going forward have blamed the latest bond rally on short-covering. Apparently, so many people are short treasury bonds that a lot of covering (buying back) of bonds is occurring, halting the price drop.

Hedge and/or Investment Idea

It is not easy to find a security that will move in the opposite direction of home prices to serve as a hedge or investment against falling prices, however, I keep looking. I have been kind of curious about some REIT names that would do well if housing did poorly. Specifically, there is an argument to be made that apartment REITs should see improved demand if owning houses falls out of favor. Simply, fewer home owners equal more renters. Unfortunately, many REITs are bought as fixed income proxies. The investor who buys a REIT looks for a specific dividend yield, therefore, REITs have a lot of interest rate risk. The conundrum in this, if interest rates go higher, more people will be forced to rent in Apartment REITs, however, the higher interest rates will cause the value of the REIT share price to fall, so that the appropriate yield could be attained. Regardless, this REIT, Home Properties (HME), might be interesting, especially since a lot of its properties are in New Jersey.

Retiring Baby Boomers

Much has been made on the potential effect that millions of retiring baby boomers will have on real estate supply/demand and prices. On the one hand, many have argued that the current boom in housing is being partially fueled by baby boomers, nearing retirement age, buying up second homes in vacation, or warmer areas of the country. If that is the case, then when the boomers do start to retire, will they sell their original home and live permanently in their newer second home? Assuming that most boomers will only want one home, it seems that there should eventually be a greater supply of “full-family” type homes available compared to the second vacation-type homes that older, retired, people might prefer.

Even if some boomers don’t have plans to retire anytime soon, or have a desire to move out of the current area they live in, they still might be looking to downsize to a less maintenance intensive house as shown in this article.

Wednesday, April 13, 2005

If it wasn’t for corrupt politicians, there wouldn’t be any affordable housing on the Jersey Shore.

“Former Marlboro Mayor Matthew V. Scannapieco pleaded guilty Tuesday to accepting $245,000 in bribes from a developer in exchange for his support for housing and commercial developments opposed by many residents.”

Here is a better article on the same subject.

There’s a Reason Margin Requirements are 50%.

If you want to borrow money from your stock broker to buy more stocks, he can only lend you one times as much stock as you already own. For example, if you have 100 shares of IBM and want to buy more, but don’t have the money, your broker can only lend you 100 more shares or less. Among the many reasons individuals are limited by the amount of times they are allowed to “leverage up” their investment in equities, is because the government decided, after the 1929 stock market crash, that some people often make detrimental investment decisions. Assuming that the government, in this particular case, was basically correct in their assessment of some people’s decision making abilities, it would seem that their still exist people, regardless of history, that cannot make rational decisions – poor decisions are universal and enduring. In other words, people have and will continue to make poor investment decisions. Although the government stepped in to limit the stupid decision making consequences associated with buying stocks, but not with real estate, that doesn’t mean stupid decision making consequences associated with buying real estate can’t exist.

Commerce Bancorp. Lower Net Interest Margin

New Jersey based Commerce Bancorp. reported first quarter results this morning. The bank’s earnings met expectations but the stock traded down about 4.0% shortly after the market opened. From a house bubble perspective, one thing sticks out. On a year over year basis, the banks net interest margin declined from 4.39% in last year to 4.04% this year. What this means is that the difference between the average yield of its interest earnings assets and average interest bearing liabilities shrunk. Basically, Commerce’s strategy of borrowing short-term and lending long-term is not working as well as it used to. This is because short-term interest rates have risen, but long term rates have not. The yield-curve has flattened.

The implications for housing are important. If Commerce wants to widen the spread between its interest earning assets (loans and purchased mortgages) and its interest bearing liabilities (mostly deposits) it will have to do one of two things. It will either have to lower the rate it charges on deposits or increase the rate it charges on the loans it makes.

Given that deposits rates (which are at the short end of the curve) are moving higher – Emigrant is offering 3.25% - it seems unlikely that Commerce will be able to lower rates without risking losing depositor money to competitors. Therefore, in order to try to widen the net interest margin, the bank will have to try to raise rates on the loans it makes, including the commercial mortgages it originates and residential mortgages it purchases. As long as the Federal Reserve continues to raise short-term rates, banks, in-general, and over time will be pressured to raise the rates they charge on longer term loans in order to maintain profit margins.

Raymond James Doesn’t Like Home Builders

“Raymond James comments that with what it suspects is a large number of inexperienced and/or over-extended investors in the single-family rental market, a slow down in home price appreciation (real or anticipated) or investors' inability to generate rents sufficient to cover their monthly mortgage/taxes/insurances costs, could cause many investors to put their properties up for sale.” More...

Tuesday, April 12, 2005

Another Robert Shiller Article

"What do most people think might stop the momentum? Interest rate increases come to mind first. These factors can certainly play a role, but often they are not enough. After the boom of the 1970s, even after the 30-year mortgage rates surpassed 16 percent in the spring of 1980, Los Angeles home prices still managed to go up another 10 percent for the succeeding year."

Bill Gross of Pimco April Letter

“The fact is that this real interest rate journey to its current destination has pumped up all asset prices because they are all being discounted by an extremely low real interest rate. The current level has produced double-digit annual rates of appreciation for different asset classes at varying cycles—stocks and bonds first—commodities, collectibles and housing with a lag. The important point and critical element in a future forecast, however, is to recognize that real yields, whether they be short-term or further out the curve, bottomed in 2003 and have been moving higher ever since. Not only has the downward journey ended, but a mini up-cycle appears to be underway which ultimately reduces bond prices, stock P/Es and casts a negative pall on other asset classes.”

Trade deficits are usually perceived as being bad for bonds.

Rising oil prices lifted the U.S. trade gap to a record $61.0 billion in February, the government reported Tuesday, as the difference between the nation's imports and exports came in well above Wall Street expectations.”

Signs of a Healthy Demand

Although property prices along the Jersey beaches have reached seemingly ridiculous heights, the real estate boom seems to have done some good for a few of the perennially poorer towns. In particular, Asbury Park looks like it is about to emerge from its forty year slide into misery and decay. Another town that has improved and actually looks inviting, at least along Ocean Avenue, is Long Branch. These towns look a lot better than they did only five years ago. However, its seems Asbury and Long Branch could fall harder in a housing downturn compared to other shore areas since the towns still lack the ability to attract family’s leaving Manhattan, given the poorly performing school systems.

Other towns that look like they have benefited from the housing boom include those on the Bay Shore, from Keyport to the Highlands. Parts of the Highlands and Atlantic Highlands, seem to be doing well because family’s were priced out of the nicer parts of Middletown, Fair Haven, Shrewsbury, Little Silver and Rumson. Also, some of the older families that have lived between the two rivers (Navesink and Shrewsbury) for years, and that no longer have to worry about schools, have taken profits recently on their multi-million dollar estates and moved into smaller homes in Atlantic Highlands and Highlands that have Atlantic Ocean views.

McMansions Catch a Lot of Grief

The concept of the McMansion seems to have been invented for the Jersey Shore. Since all of the good real estate, within 10 minutes of the beach, had been developed years ago, the next best thing would be to buy a farmer’s field 20 to 40 minutes from the beach and put as many large houses on it as possible. That is why towns like Holmdel, Howell, Manalapan, Marlboro and much of Colts Neck, exist; so that one can live in a mansion at the Shore, when you really can’t afford to live in a mansion at the Shore. If you really could afford to live in a mansion at the shore, then you would actually be living in Rumson, Deal, or Spring Lake.

Monday, April 11, 2005

Stephen Roach, Morgan Stanley’s resident doom and gloomer argues…

…that the US Senate’s harsh rhetoric against China in recent days is mostly ill-informed and potentially destructive to the US economy and, eventually property values. Given the general ineptness of governments, whether Chinese, US or otherwise, it shouldn’t be surprising to anyone when some politicians eventually reach a consensus and enact a policy that inevitably defies basic economic principles and does nothing but destroy asset values. More simply, I would expect some sort of government stupidity to be the what eventually pricks the housing bubble, after doing much to inflate it in the first place.

“As the drumbeat of protectionism grows louder, financial markets could certainly suffer. The dollar undoubtedly would be first to go. Given the extreme nature of America’s massive trade deficit, the currency correction could well be swift and severe. That, in turn, would probably trigger a sharp back-up in long-term US interest rates -- having a cascading impact on over-valued property markets, asset-dependent consumers, earnings expectations, and US equities. Emerging market debt spreads -- already far too tight for my liking -- look especially vulnerable in a scenario of mounting trade frictions; the fundamental underpinnings of these export-led economies would get turned inside out if global trade flows slacken significantly.”

Link to Roach article.

From today’s Wall Street Journal – Online Edition (subscription only)

Today’s WSJ has an article titled Let's Get Real About Real Estate, by Kelly K. Spors. It is a basic description about the state of the housing market, here is one of the more “bearish” comments in the article.

"People have gotten caught up in the euphoria" of a stellar housing market, says Steve Murray, editor of Real Trends, an industry newsletter, who forecasts rates will reach 7% by year end. "Everywhere you go people are talking about how much their homes appreciated," he says. "We are going to have to be a little more rational the next few years." Mr. Murray predicts that if mortgage rates reach 7.5%, the number of units sold will drop 8% to 10%.

…and a bullish comment from the same article.

Even in housing's worst years, prices rarely collapse. They usually level off for a while or fall modestly. "Housing booms end with a whimper, not a bang," says Karl Case, an economics professor at Wellesley College. He suggests looking at history. When the housing market dried up in 1990, prices in Boston fell 15% after a long run-up. And that was an extreme case. Less-volatile markets saw prices level off before rising again.

A Random Observation of the Garden State Parkway.

Driving south on the Garden State Parkway, just after the Driscoll Bridge, I recently noticed there are two large billboards with realty company advertisements. The billboard on the left (heading south) is for Weichert and the billboard on the right is for Diane Turton. These billboards seem to be strategically placed to welcome prospective homebuyers from Manhattan, the outer boroughs and Hoboken, to Monmouth County and the Jersey Shore. Also, along Route 9, there seem to be a number billboards for different realtors and developers, like Hovnanian. I’m wondering if there has always been this many real estate advertisements at the Shore or am I just finally noticing them because of all the bubble talk?

Sunday, April 10, 2005

Businesses Move to the Jersey Shore

This article in the Asbury Park Press, which incidently has one of the worst web-sites out of almost all newspapers in the country, is about higher commercial real estate demand here at the shore. Ideally, the movement of business to the NJ shore demonstrates strong job growth in Monmouth County and favourable population growth trends, which should be good for residential real estate prices over the long term.

Signs you know the market is nearing a top...

...when people start investing in real estate in Mobile, Alabama.

"An incendiary mix of low interest rates, wealthy Baby Boomers and an American desire for ever-larger homes is heating home prices and sparking home building in the Grandview neighborhood that straddles U.S. 31. Within one-third mile of where Tapscott is working, the neighborhood has seven tear-down homes that will be replaced with larger, more costly homes as tear-down fever hits Vestavia Hills as it has in several other areas of metro Birmingham and spots in Montgomery and Mobile."

Saturday, April 09, 2005

Rydex Juno Fund

I have been looking for ways to short housing, or interest rates. Although it is possible to short Home Builders, like Hovnanian, Toll and Pulte, there already seems to be a lot of "short interest" embedded in the price of those companies' shares. In other words, plenty of people are already short these companies and as a result, worthwhile gains might be limited.

Another way to go short housing might be to, instead, go short interest rates. An easy way to do this would be to buy the mutual fund called Rydex Juno Fund.

This fund tries to make money by betting that interest rates will rise (bond prices will fall.) If you are looking to go short interest rates, it's probably easier to invest in this fund than actually shorting forward treasury contracts yourself.

The Case for The Bubble

Almost daily, the international financial press and local newspapers contain articles and opinions that question whether real estate prices worldwide have reached so high a point that a fall in prices is inevitable. Many of the articles allege that a sharp, rather than steady, increase in asset prices over a short time period ultimately leads to a collapse in those prices. These allegations seem to have a considerable amount of merit and one can point to numerous instances in the past where asset prices suffered sharp and severe declines after appreciating at a fast and unsustainable rate. The recent collapse of tech stocks in the beginning of the decade, after unprecedented gains in the late ‘90s is only one example. Other examples of bubbles going bust include that collapse in the stock market in 1987, falling gold and metal prices in the early 80s and the plunge in bond prices in 1994, to name only a few in recent history. In addition to severe stock, bond and commodity price corrections, bubbles have formed and popped for real estate prices as well, though not always on a global or national scale.

One of the most spectacular real estate bubbles and subsequent crashes occurred in Japan in the late ‘80s and early ‘90s. Just prior to the collapse of real estate prices in Japan, one square foot of property reportedly cost over $1 million. Supposedly, at one point during the boom years, the aggregate price of all of the real estate in downtown Tokyo had a value that was greater than the value of all the real estate in the state of California. There are many reasons why property values initially rose and then collapsed in Japan. Essentially what happened though was that the rising equity market in the 80s created huge sums of Yen for the Japanese banks, which then lent out the money to real estate investors. When the stock market fell, the corresponding lack of liquidity caused bank lending for real estate to come to a standstill, and prices fell dramatically. Luckily for real estate owners and investors in this country, the example of the Japanese collapse, and the way it collapsed, is not completely analogous, since many of the causes of the run-up and run-down of property prices were due to unique characteristics to the Japanese banking system. US banks, for example, have generally not relied much on stock market returns to generate cash to lend to property speculators.

Although the current real estate bubble in this country differs from the Japanese bubble, both, at least initially, were fueled by cheap money. In the Japanese example, a rapidly rising stock market resulted in swollen bank assets, and the banks capacity to lend, to sky rocket. In the current US bubble, US banks are similar to the Japanese banks it at least one respect, which is their own access to cheap capital. Almost paradoxically, the US banks access to cheap money might be a result of the stock market collapse of the late 90s.

American banks access to cheap capital is made possible by their ability to borrow at low interest rates. Low interest rates are determined by the market’s anticipation as to what level the rate of inflation will be at various points in the future. Part of the reason why the inflation outlook has been tame for about the past 3 years, is because of the huge amount of spending on capital projects that occurred when companies could fund their capital spending projects with the sale of their stock during the internet stock bubble days. More succinctly (hopefully), the internet bubble created huge amounts of funds; the funds were invested in factories, except more factories were created than actually needed; the excess capacity in the factories resulted in too many products and not enough demand; too many products resulted in the lowering of prices; the lowering of prices meant that inflation would not occur soon; finally, interest rates fell because of no fears of inflation.

As interest rates fell, houses became more affordable. House buyers, who could previously only afford a $500,000 home at an 8% mortgage rate, could at a lower interest rate of 6%, afford a $600,000 home. (The seller of the $500,000 house of course knows this and raises their asking price to the $600,000 level.)

In summary, the low inflation rate of the past three years resulted in lower interest rates, which resulted in home sellers raising the price of their house. Conversely, the opposite should happen when inflation starts to rise, as it is already doing.

Higher Interest Rates Are Here

Since the rate of interest rates is determined by the expected rate of inflation, it is necessary to determine what can cause a higher rate of inflation. The root cause of inflation is when too much money chases too few goods. That is, if people or companies have more money to spend, and the providers of the goods are not capable of manufacturing enough products demanded, then the providers have the ability to raise the prices of the products that they are selling.

As shown in the first section, there were too many factories that were built with internet bubble money. This meant that there was an ample supply of goods and services and the manufacturers had little or no ability to raise prices. These conditions still persist. However, as the broader economy improves, demand for the products also increases. This means that factories, which only two years ago were producing goods at rates that were much lower than what they were capable of, are now producing at levels which are closer to total capacity. As the plants and factories reach full capacity they will have to choices, which are to expand capacity or raise prices. The easier of the two choices is to raise prices, especially since competitors are almost invariably in the same boat.

The fact that companies are moving towards full capacity is becoming more evident. Aside from lesser known statistical indexes and surveys that measure capacity, the evidence that factories and businesses are busier now than they were last year is reflected in the declining unemployment rate. Factories and businesses are hiring new employees to do more work, regardless that the Democrats want you to believe otherwise. The hiring of additional workers also leads to higher inflation rates, as potential employees, who maybe had zero choices of where to work in the past, might have more than one choice, and therefore can demand higher wages.

James Grant Says

"Markets look forward, except when they look backward. At this moment the real estate market is looking backward. What it sees is comforting but irrelevant. In the past five years real estate investment trusts have outperformed the Standard & Poor's 500: up 19.1% annually for the Bloomberg REIT index, negative 3.2% for the S&P.

Mistaking the past for the future, people are pouring money into houses, shopping centers, office buildings, hotels, anything with a front door and a roof. They are paying some of the fanciest prices on record."

James Grant writes a weekly newsletter called the Interest Rate Observer. He has been saying that the housing bubble is going to pop for at least two years, maybe longer. In any case

Friday, April 08, 2005

Bridge Repair Delays

According to several accounts (I can’t find a link right now), the repair of the Oceanic Bridge, which connects Rumson with Middletown, is under consideration. If the bridge is taken out of service, this could be very disruptive for ferry commuters that live in Rumson, Fair Haven and Little Silver that need to get to Atlantic Highlands and Highlands every morning.

Bond Yields Flat

Those of us looking for the real estate bubble to deflate have been waiting for signs from the bond market that interest rates are going to go up. For the past two weeks we have been in a sort of technical trading range on the 10 year with yields in the 4.4% to 4.6% range. Experts are saying that bonds in this range may persist until early May when the Fed meets again.

Robert Shiller is Everywhere

Lately, whenever some media outlet needs to drag out a real estate bear, they seem to call on Yale economist Robert Shiller. The guy seems to be everywhere in recent weeks and to me that is indicative that the real estate bubble is being taken seriously by the mainstream media. Listening to this NPR Audio Broadcast you get the impression in the second half of the show that Shiller thinks that there is also media momentum to covering the bubble, and that the momentum could lead to an actual turning point in “real” real estate markets, which causes people to stop talking about selling and actually sell.

When Congress is in session.

The housing bubble is currently leaking, but it is susceptible to bursting because of an event out of most people’s control. Some event will occur, seemingly unrelated, that will cause housing prices to stop trading up, or even side ways and instead make prices trade down. Everyone armchair economist cites higher interest rates as a catalyst for maybe tanking the real estate market, but the spark that pushes interest rates higher also requires a catalyst.

Thanks to the Chinese buying our government bonds to peg their currency, our interest rates have stayed at historically very low levels. One would think that Congress might want to refrain from giving the Chinese a reason not to by our bonds. Unfortunately, some in Congress would prefer to score political points and try and take a less diplomatic route.

When the Chinese can no longer make worthwhile profits shipping us their manufactured goods, they will also be unable to buy our government bonds, an interest rate will automatically go up.

Wednesday, April 06, 2005


The realization that a housing bubble exists seems to becoming more evident everyday, at least by observing the amount of mainstream and alternative media coverage in recent weeks. As others have pointed out, the current housing bubble is reminiscent of the Nasdaq bubble of 1999-2000 with blogs serving as the new yahoo message boards for sounding off on others prognostications and predictions. Since the good people at Google have made blogging so easy, I have decided to jump on board in order to offer my perspective on the current housing bubble, especially as it pertains to the Jersey shore, or as us locals call it, the beach.