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11-21 Hanson…San Fran Bay Area…Bubbles & Busts; How Large Will This Bust Be?
Great report and chart porn on “this” Bay Area Real Estate bubble (here, here, here, here, here) from Paragon covering my backyard and backing-up what my data & research has been signaling for well over a year; that’s simply how long it takes for what I see to make it to the Case-Shiller indices and mainstream radar.
IMPORTANT NOTE: The author is slanted bullish by omission (and his occupation), as he left out several features I have identified below unique to Bubble 2.0 vs the previous bubbles and resets. That said, Paragon has the most honest commentary of any real estate company I have seen. I would use them if I was house buying or selling in the City. Wonder if they know a way to short a basket high-end houses there?
In my opinion, Bubble 2.0 is more dangerous than Bubble 1.0, in part, because…
- Bubble 1.0 had a much more stable, wider base of participants: tens of millions of individual “end-user, shelter-buyers or landlords” involved; much harder to deflate; price sensitive; variety of sell motivators required for a sustained down-cycle.
- Bubble 2.0 was driven by a relative handful of more “unorthodox” participants: insti’s, foreigners, high-tech workers, imported “skilled-workers”, private speculators, and price insensitive buyers in search of yield, laundering money, parking cash, and flipping (lack of end-user participation is obvious by persistently weak purchase apps, end-user resale purchases, and historically low builder sales relative to past cycles).
- Bubble 2.0’s high percentage of “all-cash” buyers removed the housing market’s “mortgage loan house price governor” allowing it to blow in the exact same manner exotic loans allowed Bubble 1.0 to blow.
- Bubble 2.0 saw much more inflation over shorter period (15% greater “appreciation” in 20% less time), which could set the stage for more deflation over a shorter period.
- Bubble 2.0 house prices in major metros are further detached from end-user, shelter-buyer employment and income fundamentals meaning further to fall before a wide demand base can be formed to stabilize the market.
- When Bubble 1.0 popped the Treasury and Fed had virtually unlimited balance sheet, bond yield, money printing, and loan manipulating (“modifying”) ammunition to “soften the landing”.
- Bubble 2.0 comes with the Treasury and Fed perilously light on ready-ammo to fight a larger pop. (Obama doubled debt to $20tt and Fed rammed its balance sheet to $4.5tt in order to halt the crash and produce fake 2% “growth”. There isn’t another $10tt to $20tt in Treasury and $4.5tt in Fed balance sheet room left for a do-over).
- The Bubble 1.0 pop had high-tech just beginning its long, debt-fueled, up-cycle providing a tailwind. Here, at the Bubble 2.0 peak, the tech/debt cycle is extremely mature — perhaps in an enormous bubble itself — and likely to be a drag on housing this time around. Especially, with Bay Area and other tech-centric, core housing markets across the nation so expensive based on most all known metrics.
- Trump’s cap gains plan would provide and escape hatch for unorthodox parties to liquidate a historical amount of Real Estate and to move capital into growth or higher yielding assets.
- In 2008, Angelo Mozillo famously said “in my 50 years in this business I have never seen a soft landing”.
I could mention several other things like the Case Shiller being lagged by at least two quarters, indices skewed to the high-side by the surge in remodels/rehabs, and that the points above apply to most other tech-centric, core, bubble-markets from coast to coast, but will save that for another note.
In closing, I live by the assumption that house prices will always gravitate to what the end-user, shelter buyer can afford using a tradition mortgage loan and minimal down payment. During certain times for various reasons prices can detach from end-user earnings and employment fundamentals. But, they always reattach over time. I believe the next several years is one of those times.
TRUMP: It’s important to note that overall I am far more bullish than bearish on Trump’s overall tax plan, as it pertains to the macro economy and real estate. But, he might not get it through. And if he does, if might not do a thing for the middle-to-higher end bubbles in core markets coast to coast. Further, his tax plan might mean that prices drop 25% instead of 40%otherwise, for example. In short, a lot of structural damage has been done to the housing market over the past several years, that may be impossible to reverse without another reset.
A few tasty charts from this report…
This Recovery vs. Previous Recoveries
1996 to Present
(After Recession) Boom, Bubble, Crash, Doldrums, “Historical” Gov’t debt, Fed intervention, and Stimulus, and “faux-Recovery