By Bill Fleckenstein
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.
You needn't get far into the article to realize how magical real estate is perceived to be these days. (Remember, they're not making more of it.) To quote one of its subjects, Carlos Lidsky, who with his wife has been wheeling and dealing by 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.'" Banks and insurers
check your credit.
So should you.
Swept off their (square) feet
An intrepid friend told me that a friend of his knew the location of one of the site's listed "properties." From him, my friend learned of a sign posted there. It advised people that if they put down a deposit now, it would give them the right to buy whatever happens to be developed on this land. There's no mention of what type of property 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 and then sell to the public. It is 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, the national median home price has increased by 33% since 2000. I'm sure that virtually everyone reading this has firsthand knowledge of even bigger gains. (For more on this, see my June 28, 2004, column "The housing bubble doesn't add up.")
Also according to the story, 8.5% of mortgages taken out last year nationally were taken out by people who did not plan to live in these houses. That's up from 5.8% in 2000. Knowing how rough these data are, my guess is it's probably even higher. And it's 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.
So, at least 8.5% of the market is buying simply because prices are going up -- the very definition of a 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. (For a general background on bubbles, read a speech I gave on the topic.)
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.
Leverage: The secret sauce of real-estate gains
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 one that many folks have learned firsthand). Many people can control multiple properties via lax lending standards. It has been cheap and easy financing that has 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 it hasn't already). According to data passed along to me by a friend in London, the number of new single-family homes for sale in the United States is now greater than at any time since recordkeeping began in 1963. In addition, the ratio of homes-for-sale to houses-sold has crept back to levels not seen since mid-2000.
And, when the housing bubble does pop, 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 the implosion will impact the economy. Then, 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 this 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 far-reaching.
In case you're wondering what it might look like, there is a group of islands where there isn't enough real estate for everyone -- and where real-estate prices have declined for 10 years now. It's also home to the world's second-largest economy. It's called Japan. |
