Bill Fleckenstein on the Housing Bubble
Best Little Spec House
Rather than talk about the disconnect in stocks, I thought I might bloviate about the complete madness taking place in certain real-estate markets -- a topic precipitated by a spectacular article in today's New York Times entitled "Speculators See Gold in a Boom in Home Prices." (Registration, which is free, is required.)
You needn't get far into the article to realize how wonderful real estate is perceived to be these days. To quote one of its "stars," Carlos Lidsky, who with his wife has been wheeling and dealing, trading real estate: "It is much better than the stock market. This is an extraordinary, phenomenally good result."
The writer has filled the story with psychological insights and anecdotes that could have been lifted from the peak of the stock-market mania. For example: "Like the day traders of the 1990's dot-com boom, people are investing in a market that seems to just go up. Promoters use Web sites to attract investors, promising quick profits. One site, getpreconstructionprofits.com, is run by a pair of investors who offer online training for $197. On their home page, they say people can earn over $100,000 in six months investing in un-built real estate."
Swept Off Their (Square) Feet
An intrepid friend who visited said Web site told me that a friend of his knew the location of one of their listed "properties." From him, my friend learned of a sign posted there, advising people that if they put down a deposit now, it will give them the right to buy whatever happens to be developed on this land. There's no mention of what type accommodation will be developed.
This is the functional equivalent of a blind pool: You put your money up and you have no idea what it's going to be invested in. Take my word for it. You only see that mindset at the height of a craze, after it's gone on quite some time. That doesn't necessarily mean this is the last minute of it, but it's certainly very late in the game of real-estate speculation.
Other bubble-like symptoms are present as well, as the writer discusses what sounds like pre-IPO jockeying: "In Miami, the speculative craze is promoted in part by developers and brokers who help buyers to resell quickly. Brokers in Miami work overtime to get their clients into V.I.P. sales events before developers start pitching buildings to the public." So, there are flippers in real estate who get in on the ground floor, who then sell to the public, very reminiscent of the IPO mania.
Welcome to Avarice Estates
Of course, what's powering this psychology is the fact that real estate has appreciated mightily. (As one speculator is quoted: "It seems that real estate always goes up.") According to the story, since 2000 the national median home price has increased by 33%. I'm sure that virtually everyone reading this Rap has firsthand knowledge of even bigger gains.
Also according to the story -- and contrary to what our esteemed bubble-blowing Fed chairman says about real estate not lending itself to a bubble because it's not fungible and people have to live somewhere -- last year, 8.5% of mortgages nationwide were taken out by people who did not plan to live in these houses, up from 5.8% a couple years ago. Knowing how rough these data are, my guess is, it's probably even higher.
So, at least 8.5% of the market is buying simply because prices are going up -- the very definition of bubble mentality. In addition, the fact that prices are going up and people are chasing them distorts the very market that underlies the speculative boom -- another classic symptom of a mania.
Continuing on, the story talks about the hottest markets, where you see even more houses being bought for a trade. Leading the charge, it says, is Las Vegas (how perfect is that?), with 16.1%, Sacramento at 14.7%, etc. Of course, those markets have had the largest price gains. Blurring the distinction between cause and effect: Is the market going up because the market's going up, or are all the people chasing it forcing prices up? Obviously, it's a little of both.
Home Sweet Bubble
What is different, and far more dangerous about the real-estate mania than the stock-market mania, is that anyone with a pulse can get 100%-plus financing for housing -- a fact made quite clear by the story (and also by the many anecdotes I've shared, as well as what everyone has learned firsthand). Many people can control multiple properties via lax lending standards. It has been cheap and easy financing that have "enabled" the mania, in turn promoting even looser lending standards as the whole process has fed on itself.
However, as is the case with all bubbles, this will pop of exhaustion, if in fact it has not already. Then, folks will find out about the downside of leverage. The fact that our financial system is so larded up with bank assets (in the form of loans collateralized by real estate) means that when this bubble pops, it will impact the economy. And, as soon as lenders start taking hits on real estate, they will tighten up lending standards, exacerbating the problem.
I think it's safe to say that the mania in real estate cannot get too much crazier. Yet, it's not possible to say how much longer it will last. What is 100% knowable: Given all the speculation financed by borrowed money, this will end in tears, and the ramifications will be rather far-reaching. |
