Monday, May 22, 2017

Pop Goes the Bubble

My favorite gym show is The Property Brothers.  If you have not seen said show then you are one of the few.  I of course loathe the Real Estate twin as he is like many in his field with $$ versus stars in his eyes.  It is why when I watch Million Dollar Listing I pretend to be Elvis and shoot the TV.  However, the contractor twin is either the gayest man on the planet as he is both a designer, architect and builder rolled into one or they neglect to mention that somewhere there are those with said skill sets hiding off camera to design and renovate properties in under a month and look amazing.   And all without any type of property inspection, the first rule of property buying is know your property and find any all things wrong with it as that can affect the deal, the outcome and the cost. But hey this is reality tv and who wants reality with their tv.

Property Brothers sort of remind me of a less angry but no less attractive version of Gordon Ramsay's Kitchen Nightmares or the many other shows that enter a business or home to fix, flip or save.  Of course it rarely lasts in the real world as when you hand the keys over it is back to business as usual.

Last week I saw the return of the con "Rich Dad Poor Dad" and his wealth generating business holding fake seminars about house flipping. And as one car wreck happens on HGTV with regards to some house flipping couple another are in the wings waiting to demonstrate their amazing skill set to design, renovate, improve, build all in weeks for immense profit and pleasure.

And of course we have elected the premiere con in chief of said industry to the highest office in the land.  Talk about art of the deal.

In Nashville I am seeing a horrific trend only in this case commercial real estate.  A different animal but with the same concepts, the same inflated sales and turn arounds with largely out of state investors, likely some REIT's with possible foreign investors and funded by mostly banks from out of state.  The current largest is Bank of the Ozarks which is reminiscent of Golden West Financial that was largely responsible for many fraudulent mortgages.   And in turn sold itself off to later Wells Fargo.  No wonder they went  into pushing fake accounts on customers as that was one expensive deal. 

A once small lending institution with a taste for grander things was also behind the collapse of Washington Mutual, a staid stable regional bank that too took a walk on the wild side.  And for the record WaMu collapsed but Bank of the West still rages on and it like Ozarks were bailed out during the '08 crisis.  Here is a list of all the players who received federal bailouts, there are your welfare queens.

I live in Nashville where on a daily basis we are told 100 people a day move here.   It was 85 when I moved here a year ago but hey I am always at the cusp of a trend.  Really they do?  I drive by apartment building after apartment building with free rent and other "deals" to get you in the door.  In my building we are turning over units at a high clip.  I am staying only because the costs to move for the time I am planning to stay will not pay for itself as I actually know how to do math.  That may be one problem that many have when it comes to figuring out the bottom line.

The difference here is the commercial properties are hitting the bubble. I feel it as along with the fake stats our ledger of record, the Tennessean, has a story every day on another property being sold or flipped for millions of dollars. The buyers are from out of state and many talk big with big plans that are bigly huge.  I assume they graduated from Trump University.

My favorite is the old industrial plant, with a water tower no less, just up the street from my apartment that sold for millions and a year ago had plans to build a multi unit dwelling with up to 300 units for rent, all while keeping the historic feel.  The same for the property adjacent that was once the ballpark for the baseball team here.   For the record there is one way in and one way out here and it crosses a train track that runs trains 24/7 that blast horns and block access for hours at a time. Good luck with that.

The dump apartment just under the track which held Section 8 housing was sold and in turn going to be demolished is now being renovated and that work has mysteriously stopped.  Who or why anyone would rent those units are beyond me.   And I have spoken to numerous people who were living in rentals that were not great but worked as they were cheap and then suddenly the house/building flipped and in turn rent went up not 10% but 50%.  Did their income as well go up? But they are told that is what the costs are to improve and maintain the property.  And in turn are the new tenants earning wages to support said rent?  Funny while rents have risen wages are stagnant. But in the bubble you have no idea what is outside of it.

But this is part of what complicates commercial lending for multi housing and development.  You have to "guarantee" a certain rent per square foot and occupancy rates that ensure the lender that you are going to maintain the property and earnings will exceed costs that include payments and taxes.  And well taxes are being raised across the area as this is the only way to generate revenue, so the equation that was used to generate the loan will have to be adjusted.  You know like adjusted rate mortgages that destroyed families when they had inflated balloons attached to their payments that when they lost their jobs could no longer meet.

And this complicates the commercial market as they have to find new investors or tap into the existing ones for more revenue.  I watched the Wizard of Lies on HBO this weekend about Bernie Madoff and his pyramid scheme and thought perfect timing (although ABC also did one a couple of years ago it was just less star studded and comprehensive).  Madoff ran his family firm as an autocratic dynasty for decades, had been investigated once before and in turn a whistle blower informed the SEC that his numbers were clearly frauds. But, it was only when finally the bubble burst outside of this rarefied world above the 17th floor (the floor that housed the criminals that aided Madoff)  did he finally confess to his family his fraud.  It was his sons, both now dead, who turned him in.  They too remind me of two other sons in similar situation today.  I will let you do that math, it's simple.

Timing, history and reality are in perfect flux right now.  The rolling back of regulations and consumer protections, the hyper speak of jobs and of course the reality that debt is back in a big way all lead to  a potential collapse.  If health care is fully repealed this too will affect the job market in many ways, the ones related to health care (for one Physician there are 18 positions connected to that function in patient care) and those who are receiving it, both personally and professionally.    As well as those considering retiring which opens up jobs and opportunities for others to move up or at least into another position that can enable growth.  And again what that fuels is housing and cars all things that too are a large part of our GDP. 

Right now the equation is off and I feel it here in Nashville in a way that I think the rest of the country feels other than those who are in insulated bubbles.  They too will pop.


How Tales of ‘Flippers’ Led to a Housing Bubble

Economic View

By ROBERT J. SHILLER
THE NEW YORK TIMES
MAY 18, 2017


There is still no consensus on why the last housing boom and bust happened. That is troubling, because that violent housing cycle helped to produce the Great Recession and financial crisis of 2007 to 2009. We need to understand it all if we are going to be able to avoid ordeals like that in the future.

But the explanations for what happened in housing are not, I think, to be found in the conventional data favored by economists but rather in sociologically important narratives — like tales of getting rich through “flipping” houses and shares of initial public offerings — that constitute the shifting mentality of the era.

Consider the data for a moment. It shows us that extreme changes took place but doesn’t tell us why.

Real home prices rose 75 percent from February 1997 to December 2005, according to the S&P/Case-Shiller National Home Price Index, corrected for inflation by the Consumer Price Index. And then, from 2005 to 2012, real prices reversed course, falling to just 12 percent above their 1997 level. In the years since 2012, they have climbed 29 percent, about halfway back to their 2005 peak. This is a roller coaster in national home prices — it has been even scarier in some more volatile cities — yet we have no clarity on why it happened.

The problem for economists is that these changes don’t correspond to movements in the usual suspects: interest rates, building costs, population or rents. The Consumer Price Index for Rent of Primary Residence, compiled by the United States Bureau of Labor Statistics and corrected for inflation, went up only 8 percent in 1997 to 2005, so unmet demand for housing services can’t explain the huge increase in real home prices. It doesn’t explain the 29 percent rise in real home prices since 2012 either, because inflation-adjusted rents increased only 10 percent in that period. So what has been driving the wild ride in home prices?

I believe the price swings have something to do with the changing mentality of the times, changes caused by narratives that have gone viral and swept across the population. Looking for answers in such popular stories contrasts starkly with the prominent approach of modeling people as though they react logically to economic forces. But a less orthodox approach can be quite useful.

One thing is clear: The prevalent narratives of 1997 to 2005 did not include the concept of a housing bubble, not at first. A computer search using ProQuest or Google Ngrams shows that the phrase “housing bubble” was hardly used until 2005, the end of the boom. What is a bubble? It typically includes the notion that, spurred by the public’s expectation of ever further price increases, demand eventually reaches levels that cannot be sustained, and so the enthusiasm wanes and the bubble collapses. But that thought was just not on many people’s minds then, the evidence suggests.

Instead, during the 1997 to 2005 boom there were multitudes of narratives about smart investors who were bold enough to take a position in the market. To single out one strand, recall the stories of flippers who would buy a house, fix it up, and resell it within months at a huge profit. These stories appear to have been broadly exciting to people who didn’t flip houses themselves but who appear to have begun to think that stretching a little and buying a house with a large mortgage would make them wise investors.

In his book “The Complete Guide to Flipping Properties,” published in 2004, Steve Berges extolled what he called “the O.P.M. principle,” meaning “other people’s money.” He wrote, “Your objective is to control as much real estate as possible while using as little of your own capital as possible.” In other words, borrow as much as you can. He wrote about the upside of leverage but not about the perils of leverage during the kind of big price drops that were just around the corner.

It can take a long time for narratives like this to grip the popular imagination. Flipping was “a thing” in the condominium conversion boom of the 1970s and ’80s. The idea then was this: Big-time converters with deep pockets would buy apartment buildings and convert the rental apartments to owner-occupied condos, selling units to diverse individuals, some of them flippers. For public relations purposes, converters would offer to sell at reduced prices to renters already living in a building, and typically to some outsiders, too.

This generated buzz. When renters and speculators flipped their purchase contracts at a big profit, sometimes using borrowed money for down payments to flip multiple units without actually even closing on the condos, it was thrilling. It seemed that anyone with energy and initiative could get rich doing this.

Some people eager to make quick profits bought Donald J. Trump’s well-timed 2004 book, “Trump: Think Like a Billionaire: Everything You Need to Know About Success, Real Estate, and Life,” written with Meredith McIver. Some enrolled in the less well-timed Trump University, which emphasized real estate investment in 2005, at the very end of the housing boom; it shut down, amid lawsuits and recrimination, in 2010.

Narratives about flipping weren’t restricted to real estate. Just after the time of the condo boom, stories of rapid buying and selling of initial public offerings took off as well. As with the condo promoters, I.P.O. underwriters would sell some shares below market prices to customers, who might then flip the I.P.O. for a quick profit.

The promoters of condo conversions and I.P.O.s were onto something. By giving discounts to buyers who would make a high return, they captivated the nation with tales of people who had no advanced degrees or hefty résumés but made fortunes anyway.

By now, the notion of getting rich by flipping houses is entrenched. I searched Amazon for books on “flipping houses” and came up with 328 hits, most written in the past few years. Buying and rehabbing existing houses for resale is a legitimate business. But many of these books make extravagant pitches and seem aimed at inspiring amateurs to plunge into risky ventures.

The public fascination with speculating in housing has been held in check by regulators empowered by the 2010 Dodd-Frank Act, but that restraint is tenuous with the election as president of a real estate promoter intent on reducing regulators’ power. These narratives are still potent and could easily spur further spirals in the housing market.

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