Market Conditions: How Much Are Foreclosures Affecting the Upper Bracket?
The Chicago Tribune interviewed former Bears tight end Emery Moorehead, who has been a realtor on the North Shore since the mid-1980s.
There is a lot of inventory in the upper bracket and we’ve chattered about reductions on million dollar properties in Chicago numerous times but the North Shore has even more inventory.
According to the realty board, only 30 homes sold for $1 million or more in 2010, one fewer than in 2009. And those 30 homes were the fewest number of million-dollar homes sold since 2004.
Pricing remains key, and Moorehead noted the difficulty in representing sellers who want to hold out for a certain price when comparable, well-maintained foreclosures are selling for substantially less. Last year, the median price of upper-bracket homes sold was $1.3 million. That was an 11 percent improvement from 2009 but still down substantially from the peak median high-end home price of almost $1.48 million in 2007.
In Lake Forest alone, more than 150 single-family, detached homes priced at $1 million or more are actively being marketed for sale, including many that have had price reductions.
“For 21 years it was a seller’s market,” Moorehead said. “Now, young people have opportunities to get into communities they could not get into four years ago. These are times you will not see again.”
How much are upper bracket foreclosures influencing sales?
From tight end to high end for realtor [Chicago Tribune, Mary Ellen Podmolik, February 6, 2011]
Once again – incorrectly and misinterpreted data. Only 30 homes sold over 1 million in 2010? This is very misleading. What area are they talking about? Certainly not all of the Chicago…..
Also, how is Moorehead now an expert at real estate?
In terms of great deals on the North Shore – I certainly don’t see any. Seriously find me a good house in Winnetka or Kenilworth that could be considered a “deal” and I will show you a “sold” sign. Also, find me a decent house in Oak Brook for less than a million or Hinsdale less than 600k and I will show you another “sold” sign.
Finally, if you guys are getting sick of the snow – one positive note could be that is could have a profoundly positive effect on the real estate market this spring. All of the people who are cramped or living with others for economic reasons may just reach their “breaking point” and realize that spending a little extra of their income on housing may be well worth it!!!
“Once again – incorrectly and misinterpreted data. Only 30 homes sold over 1 million in 2010? This is very misleading. What area are they talking about? Certainly not all of the Chicago….”
Of course not all of Chicago since the article refers to the North Shore – Barrington Board of Realtors.
“Also, how is Moorehead now an expert at real estate?”
He has been selling up there since you were a labbie and he is commenting on sales volume as the president of the local board. He’s probably expert enough to get that right.
That Depaul asst prof had an “expert” opinion, too.
Since you have stated many times here that every expert is predicting market gains starting this year and continuing, apparently, forever, maybe it’s time you named a few?
There are many great deals on the north shore. Folks on a $700k house budget can now score a $1 million dollar home, and folks already living in a million dollar home can upgrade to newly built places, (aspirationally) listed at $3 but selling closer to $2 million.
Is the ever growing inventory of distressed property on the north shore giving some affluent buyers pause? Sure. But I don’t think that’s the leading cause of the current slow, perhaps dead, market. Rather, I’d say it’s a confluence of factors.
One such factor might be that there are fewer affluent families looking to buy a home in the burbs right now, because they’re trying (or hoping) to land the almighty SFH in a prime location within the city. Yes, the burbs still exert a big midwestern gravitational pull on people, but that same inclination – at least among several affluent midwesterners I’ve observed in the last year or so – has many among that buyer group looking to live the suburban dream right here in the city.
Were I to fast forward my career, placing myself (I hope) in the shoes of those in that group, as much as I like the eastern sections of Evanston, Wilmette and Winnetka (and HP), we wouldn’t be inclined to leave the city. Having only one child, there’s no motivation to do so. Even a second kid wouldn’t change the calculus. A third kid, however, perhaps would.
So, sellers of $1 – $2.5 million dollar homes on the north shore, here’s to hoping that this particularly snowy winter will have caused some affluent couples – those currently somewhat cramped with two kids in a fancy three bed in LP or the like – to engage in indoor activity that will result in them being an expecting family of five during this summer’s “real estate season.”
G- You may not realize this – but data is only good when put in context and details are provided. 30 sales over 1 million in what towns?!! Seriously, I could say that there were 0 sales of 1 million dollars in Villa Park last year – what does that mean?!! Nothing……
anonny – you are looking at the suburban real estate market through the eyes of someone from the city. Believe me, there are plenty of wealthy suburbanites who would never consider leaving the burbs or wanting to live in the city. Why would they? Their lives center around their family/children. They are not in their 20s or 30s and don’t go out to dinner on weekdays. Once people start having kids they realize that the convenience of the suburbs far outweighs the benefits of living in the city. It really is one of those things you don’t realize until you have at least 2 children.
Seems to me like Lake Forest is overdue for a large dose of pricing reality.
“Seems to me like Lake Forest is overdue for a large dose of pricing reality.”
it is, as is all of the North Shore. Boomers are reaching retirement age and supply in the suburbs were they live is only going to go up. With less and less people able to sell their current home for a profit and move up into a nice Winnetka $1mm “starter home,” the North Shore will continue to be hit in terms of price.
Why do you guys fail to understand that there are still a lot of people out there with a lot of money. The easy credit/lending in the mid 2000s had some impact but you guys make it seems as though many houses in the expensive suburbs were bought with theis funny money. That is simply not the case. The VAST MAJORITY of houses in these nicer suburbs (LF, Barrington, Winnetka, Kenilworth, Hinsdale, Oak Brook) were bought long before the mid 2000s. Sure there may have been a few sales to financially unworthy (not a moral judgement) people, but the vast majority were bought by wealthy, financially stable people. If you want to more correctly assess where impending foreclosures and people in trouble may be, look at communities where the majority of houses 500-1 million were built/bought in the mid 2000s (ie St. charles). Those are the places which may be hardest hit.
where*
I may be wrong..I’ve been wrong before, but I just don’t see a market for million dollar homes in Lake Forest over the next 20 years. Demographics are destiny. My generation is smaller than the baby boom generation (Which is retiring and selling) and further we are having smaller families later in life. Its a demographic turn that just means there aren’t as many people looking for the expensive SFH in the burbs. Add on the fact that modern jobs provide a lot more location flexibility and you realize people have much more of a choice of living in Arizona or Miami or LA. I just don’t see a long-term market for this kind of housing speaking from a 20 something perspective.
clio, you may not realize this, but comparison to prior years is context for RE data.
“My generation is smaller than the baby boom generation (Which is retiring and selling) and further we are having smaller families later in life.”
What? HAve you heard of the echo boom? Think about it: two boomers get together and have 3-4 kids – that is a net INCREASE of 1-2 children. Now think about how many siblings you have and grew up around. All of theses people are going to have kids and need places to live.
” Add on the fact that modern jobs provide a lot more location flexibility and you realize people have much more of a choice of living in Arizona or Miami or LA. ”
Ha ha ha – living in fantasy. The vast majority of people do NOT move from where they live right now. Sure, it is easy to say you are going to move or can move to a warmer climate (especially with the weather we have been having) – but very few people do – it is all talk (remember – builders in the 90s thought there was going to be this mass exodus to arizona, miami when the boomers started retiring – but they were wrong. Even retirees tend to stay where they lived during their adult life).
“What? HAve you heard of the echo boom? Think about it: two boomers get together and have 3-4 kids – that is a net INCREASE of 1-2 children.”
Generation X is WAY smaller than the baby boomers. Gen Y is bigger- but not as big as the Baby Boomers. There will be too many homes and not enough buyers when the Baby Boomers go to sell.
Clio,
“find me a decent house in Oak Brook for less than a million or Hinsdale less than 600k and I will show you another “sold” sign.”
Define decent so I can look.
Some of the variables that people tend to overlook are:
1. Influx from immigration (? higher/lower/same)
2. Aging housing stock
In addition, are there any accurate numbers that depict the actual number of people in gen x, gen y, and the baby boom?
“Define decent so I can look.”
4-5 bedrooms on a decent lot, with no major remodel neccessary (ie, no 70s avocado appliances) in the Hinsdale central school district.
Clio- you are looking for “deals” in all the wrong places. There are tons of million dollar deals all over Chicago- specifically in Lincoln Park and Lakeview.
Seems from our discussion of the last few days- there is much more upside for purchasing one of those properties than being in the suburbs.
This is a self-fulfilling prophecy. As the NS gets cheaper, the undesirables move in, as the undesirables move in, the area becomes less valuable.
The days of most of your neighbors being super clubby and everyone either had a membership to Indian Hill or Westmoreland are over.
RIP
Now, instead of the CEO of Kraft being your next door neighbor, it’s going to be a Ferrari driving weirdo that “doesn’t get it”.
Hopefully, as the city goes to hell, the haves will decamp and retreat to the NS and save the area. Unfortunately, I feel like the poors’ “City vs Burbs” divide and conquer strategy worked. Instead of unifying, some haves will stay in the city, some will stay in the burbs, and we’ll all watch our neighborhoods get taken down by the poors and bags.
We’ll have to set up somewhere, I could see the haves retreating all the way up to Lake Forrest. Some lake burb is going to benefit from this, it’s just a matter of which one.
“In addition, are there any accurate numbers that depict the actual number of people in gen x, gen y, and the baby boom?”
The U.S. census?
But it depends on when you actually “cut off” the generations.
Baby Boomers: 76 million to 79 million
Generation X: 43 million to 46 million
Generation Y: 80 million
Problem is- Generation Y doesn’t have the financial ability to buy from the Baby Boomers (certainly not the huge homes up in Lake Forest.) And, obviously, there aren’t enough Generation X’ers to “move up” and buy from the Baby Boomers.
Add on education debt that the Baby Boomers never had to deal with- and you’re looking at some tough demographic realities.
“The U.S. census?”
Grossly inaccurate. All you have to do is look at the methodology and you will realize how inaccurate the census is.
“As the NS gets cheaper, the undesirables move in, as the undesirables move in, the area becomes less valuable.”
I wonder what Highland Park is going to look like in 15 years.
“I wonder what Highland Park is going to look like in 15 years.”
Duh – obviously it is going to be more dangerous than Englewood. Don’t you read what the Chicago real estate brain trust is writing on this thread?
“Duh – obviously it is going to be more dangerous than Englewood.”
no what a real knee slapper, but seriuosly what is stopping it from getting close to something like that?
“but seriuosly what is stopping it from getting close to something like that?”
Uhhh – maybe the people who make 200k+ who grew up in the area (or didn’t) and want to live there…..
haha clio, now i’ve heard it all… the groundhog day blizzard is going to save chicagoland real estate!
good stuff
“the groundhog day blizzard is going to save chicagoland real estate!”
don’t discount the negative psychological impact all of this cold and snow have on people already teetering on the edge. 2 of my friends already told me that this last storm was the last straw – they are fed up with alley parking and are going to start actively looking for a new place with garage parking.
“Uhhh – maybe the people who make 200k+ who grew up in the area (or didn’t) and want to live there”
uhhh, are you talking about the jewish comunity who left devon avenue for skokie and then left skokie for HP and Northbrook. and they will take their money and families again and move if highland park slips.
also you must not be knowledgeable of Highland park if you think there are more than the 3 areas of 200k+ families.
Immigration will save Lake Forest? So Pedro the gardener will be picking up a house. Now that sounds like a fantasy.
I do not have one friend who has stayed in the town they grew up in our. My generation is use to moving around.
Can someone retrieve stats on homesales on North Shore from 2000 to 2007, so that there’s firm data on house-turnover during the real estate peak years? I’d venture that there was a much turn-over in Winnetka and Lake Forest as elsewhere in metro Chicago area, and that mortgages were as exotic as general housing-market at that time.
I agree w/Sabrina regarding the future sag in housing market as Baby Boomers try to sell their houses and are further penalized by a far smaller buyer-pool due to both relative demographic drop in “family” households and stagnant household income reducing buyers’ purchase budget.
Highland Park has many “affordable” houses, given its greater diversity in both household income and relative social-status than other North Shore suburbs. But all North Shore suburbs have at least one pocket of relatively affordable houses, even Kenilworth. An acquaintance owned one of Kenilworth’s smallest most affordable 3-bedrm houses, to have access to schools for his two children, albeit his wife wasn’t happy with that small unrenovated house.
“don’t discount the negative psychological impact all of this cold and snow have on people already teetering on the edge.”
That would make sense clio, if every winter here didn’t suck!
All of this is theory and makes sense on paper – but reality, kids, is very different. I know because that is where I live. Seriously, find me affordable decent housing in Oak Brook, Hinsdale, Kenilworth, Winnetka, Barrington, Lake Forest, etc. – there is NONE – and there won’t be any. There are still a lot of rich people/high income people that want to live in these areas. It really isn’t that hard to understand. Geez – in the past 45 minutes alone, millions have been earned in the stock market.
“Seriously, find me affordable decent housing in Oak Brook, Hinsdale, Kenilworth, Winnetka, Barrington, Lake Forest, etc. – there is NONE – and there won’t be any”
didnt anon and G cover kenilworth for you already, i even gave you two of the houses i looked at there. your a smart kiddo you can look for yourself.
I’m not quite sure how people get from “Home prices on the NS will decline” to “The demographics of the NS will fundamentally change because of declining home prices.” The first proposition has occurred and very likely will keep occurring; the second seems unlikely.
“going to be a Ferrari driving weirdo that “doesn’t get it”.”
For the last time, Clio drives a Lambargini!
I know people from the north shore who would normally return to the north shore, but instead, choose to remain in the city (at least for now). Combine this change with the ridiculous asking prices up and down the north shore and therein lies a recipe for years of declining prices. The north shore will always remain the north shore, although it might be a bit more accessible west of green bay road for those who are interested. My landlord bought west of green bay road in the 80’s and it was pricey, but he claims it was nowhere near the crazy valuation of the bubble.
Clio,
“find me a decent house in Oak Brook for less than a million”
Based upon your definition of decent (a reasonable one) I would agree that you’re not going to find this in Oak Brook. There’s a lot of older housing stock there and homes with really gaudy decor. But then again the homes out there are huge and for about $1.5 MM you can get a newer home with 6000+ sq ft, and that’s not counting the finished basement. Are these deals? Probably not. There is the occasional foreclosure or short sale but I don’t see an obvious cratering of prices in the last year. But then again they have more than a 2 year supply of homes out there on the market so we’ll see what happens to prices this year.
I posted this before:
Chicago $1M+ closed detached SFH
2005 399
2006 432
2007 435
2008 358
2009 246
2010 277
Chicago $1M+ closed attached SFH
2005 393
2006 375
2007 432
2008 476
2009 234
2010 353
Chicago $1M+ closed attached & detached SFH
1998 107
1999 150
2000 271
2001 278
2002 291
2003 404
2004 676
2005 792
2006 807
2007 867
2008 834
2009 480
2010 630
Cook County $1M+ closed detached SFH
2005 1,167
2006 1,171
2007 1,190
2008 863
2009 594
2010 693
Cook County $1M+ closed attached SFH
2005 396
2006 379
2007 447
2008 481
2009 238
2010 359
Cook County $1M+ closed attached & detached SFH
2005 1,563
2006 1,550
2007 1,637
2008 1,344
2009 832
2010 1,052
Dupage County $1M+ closed attached & detached SFH
2005 335
2006 318
2007 298
2008 220
2009 185
2010 193
Oak Brook $1M+ closed attached & detached SFH
2005 36
2006 34
2007 31
2008 15
2009 20
2010 21
Hinsdale $1M+ closed attached & detached SFH
2005 149
2006 111
2007 111
2008 86
2009 81
2010 89
Lake County $1M+ closed attached & detached SFH
2005 421
2006 430
2007 426
2008 253
2009 150
2010 176
Lake Forest $1M+ closed attached & detached SFH
2005 151
2006 136
2007 157
2008 84
2009 60
2010 82
Highland Park $1M+ closed attached & detached SFH
2005 86
2006 91
2007 74
2008 53
2009 30
2010 38
Volume rises as prices decline.
G – so basically, sales of 1 million dollar plus housing are increasing. Is that what you are trying to say?
He’s not saying anything, the data speaks for itself.
“#clio on February 7th, 2011 at 10:02 am
G – so basically, sales of 1 million dollar plus housing are increasing. Is that what you are trying to say?”
“He’s not saying anything, the data speaks for itself. ”
You can interpret data in many many ways – if you don’t know this by now…. well, there is just no help for you.
I imagine you’re the type of guy who can look at a cell on a slide and instantly know what stage of the Kreb it is in, but, when required to make analysis or interpretation of a set of number or after reading a paragraph, you have a conniption.
Clio,
no comment on my post?
http://cribchatter.com/?p=9965#comment-127764
$1M+ sales volume has declined 40%-60% from bubble peaks. However, “volume rises as prices decline.”
“However, “volume rises as prices decline.””
Yeah, and an improving economy has nothing to do with it, does it? Take a look at the Dow today….
A little off topic, but anyone familiar with Peter Schiff probably knows he was and continues to be very bearish on housing prices. However, I was shocked to discover this morning that even he recently purchased a house. I’m thinking he purchased for the same reasons that PermaBear recently purchased:
Peter Schiff is not what you’d call a typical homeowner. He doesn’t think buying a house is generally a good idea.
At least, not for the reasons many people give when they pull the trigger: That it’s an investment. That it will gain value. That when you’re all grown up, it just seems like the responsible thing to do.
In fact, Mr. Schiff, a middle-aged investment broker and well-known financial commentator in the United States, only got into the market himself recently after renting for years. He bought his 9,000-square-foot colonial home in the affluent town of Weston, Conn., for 40% less than what the previous owner paid. And, combined with cheap credit — he got a “superjumbo” 30-year mortgage at a fixed interest rate of 5% — that was the kind of deal he just couldn’t pass up.
“I own a house but I don’t expect to make any money off it,” says Mr. Schiff, chief executive of Euro Pacific Capital. “I own a house like I own my car or my boat. I need a place to live and I enjoy it. And I expect it to depreciate just like all the other things that I own.”
Read more: http://www.financialpost.com/personal-finance/Home+ownership+isnt/4146950/story.html#ixzz1DIADKdLn
Chris – that is interesting but it shows you that the world is full of hypocrites.
Clio your comment is spurious at best. Why shouldn’t Schiff be able to differentiate between his trades and his consumption? He no doubt has enough bearish positions on RE through his fund that he can still maintain his investment opinions and live somewhere he likes, without being a hypocrite.
A 9,000 foot home is a more of a liability than an asset…
“What? HAve you heard of the echo boom? Think about it: two boomers get together and have 3-4 kids – that is a net INCREASE of 1-2 children.”
Offered as evidence that Clio speaks out of his ass.
“Yeah, and an improving economy has nothing to do with it, does it? Take a look at the Dow today….”
What does the Dow today have to do with an improving economy?
That would be Exhibit #287, joe.
Schiff is using a superjumbo loan at a low rate as an inflation/taxation hedge… as are most smart finance types
“A 9,000 foot home is a more of a liability than an asset…”
C’mon HD, you know this isn’t true. Sq ft does has nothing to do with an asset and liability.
If only 500 of that 9,000 sq ft is paid off, thats a different story.
“What does the Dow today have to do with an improving economy?”
OK – I’ll take the bait. The Dow has everything to do with the real estate market. When people’s accounts (savings, IRA, 401k) were decimated in 2008, morale was low and nobody felt like spending a dime. Now, when people look at their accounts, they gain confidence in the economy and will start spending more.
Seriously, think about it. I have a worker who had 150k in a 401k account. In 2008 this went to 98k and the person was freaking out and trying to “cut back” on coffee, etc. Now, the account is 164k and she is planning a cruise and spending more (and directly attributing her “better” mood because she has more money in her 401k). Now both you and me know that that extra 50-60k won’t do much in retirement (maybe funds 1 year of retirement) but the psychological effect is tremendous!!!
This is exactly what QE2 is supposed to target, a rising stock market, to “create” the illusion of wealth, so people like clio will go out and spend to bolster our consumption-based economy. QE2 is scheduled to end in June 2011, what happens after that? A crash? or QE3?
“Geez – in the past 45 minutes alone, millions have been earned in the stock market.”
The DJIA is one measure of the US’s manufacturing base, supported by the blue collar workforce and the middle class.
To say the DJIA is up is to essentially state that US based manufacturing companies are doing better, thus growing/improving the economy.
““A 9,000 foot home is a more of a liability than an asset…”
C’mon HD, you know this isn’t true. Sq ft does has nothing to do with an asset and liability.
If only 500 of that 9,000 sq ft is paid off, thats a different story.”
A-fed
i think HD was going for, the upkeep on that size is a “liability”.
i know i would have a heart problem when peoples gas sent me the bill for heating a 9000 sqft place.
“Now both you and me know that that extra 50-60k won’t do much in retirement (maybe funds 1 year of retirement) but the psychological effect is tremendous!!!”
The median 401k balance is 44k. Americans had better hope it does much.
http://www.businessweek.com/investing/insights/blog/archives/2009/10/whats_more_real.html
“QE2 is scheduled to end in June 2011, what happens after that? A crash? or QE3?”
QE3, QE4, whatever it takes to keep the economy from crashing.
Those who say this is a bad idea are already well off I feel, and say something along the lines of: “Why should we keep spending money on the economy? I already have plenty and don’t want my taxes to rise!”
What?!! The DJIA represensts multi-national corporations with borderless & globalist ownership, with manufacturing operations that are outside the USA. These firms’ profits only benefit the American class of people that own significant amounts of stock & equities, they don’t do a damn thing for blue-collar America or manufacturing. They do give us cheaper-priced products to buy however, that’s all they do for Main St.
“i know i would have a heart problem when peoples gas sent me the bill for heating a 9000 sqft place.”
HD – if you can afford the 9,000 sq ft mortgage, you can afford the 9,000 sq ft utilities….if you cant, then you shouldn’t be in the 9,000 sq ft house!
(I get what your saying though)
Dan – now they do – with all the companies moving manufacturing basis overseas, but the “intent” of the DJIA is to measure the US manufacturing status through securities.
the “industrials” now contains companies that aren’t even in industrial production:
Bank of America, JPMorgan, Travelers Corp., Microsoft, Verizon, Walmart, McDonalds….
I don’t think the Dow is a good indicator of the state of the economy. It’s pretty narrow. The S&P makes more sense, which is also up quite a bit. These are leading indicators of the economy. If you don’t believe that you should be shorting the market right now.
Having said that, I took money off the table a couple of hours ago. Sort of hedging. Sort of portfolio rebalancing.
“the “industrials” now contains companies that aren’t even in industrial production”
Hey, I don’t disagree! (except Microsoft is an easy example of an industrial manufacturer)
Just stating the intent of the DJIA…
If it wasn’t for QE2, I’d be shorting this market incl. some outrageously priced P/E tech names and also some of the ridiculously overpriced REITs. Vanguard’s REIT ETF (symbol VNQ) is now trading at a P/E of 42 and offers a paltry yield of 3.52%, but hey at least that’s still better than most GZ 2-flats, but barely.
But it’s a lot less work.
“#Dan on February 7th, 2011 at 12:01 pm
If it wasn’t for QE2, I’d be shorting this market incl. some outrageously priced P/E tech names and also some of the ridiculously overpriced REITs. Vanguard’s REIT ETF (symbol VNQ) is now trading at a P/E of 42 and offers a paltry yield of 3.52%, but hey at least that’s still better than most GZ 2-flats, but barely.”
I understand that most people on this board are “city people” and that they are making arguments that are strongly biased in favor of living in Chicago. However, has anyone read the newspaper in the past (2) years? Do you all realize how in debt and broke the City of Chicago really is? Schools will get worse, parks and streets will suffer from lack of maintenance, social services will decline, etc. Every department in the City of Chicago will suffer from Budget cuts. These will not be “one time” budget cuts either. North Shore municipalities have their own problems to face but they are not even close those of Chicago. Daley had a great run – because he spent a ton of money like every other politician did for the past 20 years. Judgement day is coming to Chicago. Remember what it was like before the mid-1980’s? Things “may” not get that bad again but then again………
Sonies on February 7th, 2011 at 10:56 am
Schiff is using a superjumbo loan at a low rate as an inflation/taxation hedge… as are most smart finance types
____________________________________________
The inflation hedge is the number one reason to buy right now. I could have paid cash for my place, but with the clear governmental policy of bailing out debtors through Fed created inflation and Uncle Sugar’s massive subsidies to take on mortgage debt coupled with my rage against moving and living in rental quality places for years, my decision to buy was easy. I’m in HD’s camp – the demographics and economic situation of this State and country are such that RE still has room to go down, but I’m also with Schiff and think the 4.25% 30 year mortgage I got will look like free money within 3 years or so.
For other permabears out there – I would strongly recommend at least looking for something to buy because a 15 or 30 year mortgage at today’s rates is a great inflation hedge. I would recommend something that you like, obviously, but also something that is a close walk to public transportation – I think high gas prices are going to become permanent with India’s and China’s massive growth/Uncle Ben’s magic printing press and anything that is a close walk to public transit is going to be highly sought after if we see $5+ a gallon gas in the next few years – people will start putting much bigger premiums on being able to easily substitute mass transit for driving. I am a permabear, but I am actually MORE bearish about the future macroeconomy with $5 gas, no new jobs being created, massive SS/Medicare liabilities, etc. than I am about housing – that’s why I don’t think it is ideologically inconsistent to be bearish but to buy housing if you really like it and see it as a place to live rather than a store of value. Additionally, life’s too short to cook all of your meals on crappy apartment grade stoves and waste countless weekends looking for a new rental and moving every year or two.
http://www.forbes.com/2010/10/05/quantitative-easing-monetary-markets-equities-japan.html
Japan’s Quantitative Easing May Have Unintended Effects
Agustino Fontevecchia, 10.05.10, 09:59 PM EDT
The globe is in uncharted waters as the Bank of Japan sets sail on a new round of quantitative easing.
Quantitative easing (QE) was the catch phrase of the day on Tuesday as the markets digest both the Bank of Japan’s new and possibly radical asset purchase program and rate reduction pair, and the prospect of further QE by the Fed.
The Bank of Japan announced on Tuesday that it “decided to implement a comprehensive monetary easing policy” which included both a reduction in the interest rate from 0.1% to “around 0 and 0.1%” and, more radically, examining the establishment of a Y5000 billion or $60 billion asset purchase program. The Bank of Japan is being highly unorthodox, as it has allowed for the possibility of purchasing commercial paper, exchange-traded funds and even real estate investment trusts, something no central bank in a major economy has been doing. Still, on Tuesday the Yen appreciated against the dollar.
“We have to wait for the asset program to be implemented to see what it does,” says HSBC analyst Robert Lynch. “This is a good opportunity for Japanese monetary policy to coincide with FX policy; since the market speculated that there could have been FX intervention, the yen initially weakened, but there wasn’t intervention, that’s why the yen crawled back up” Lynch says.
_________________________________________________________
Commentary:
If history is any guide, 20 years after our bust we’ll be looking at interest rates “around 0 and 0.1%”.
Go ahead, explain all the ways that America is different that Japan…we’re not japan, right right. My student loan ARM has been 2.XX% for years now and still trending down ever so slight…but interest rates are going to skyrocket anyday now, right?
“but interest rates are going to skyrocket anyday now, right?”
When the vigilantes decide that the US federal budget is fu … permanently messed up and no one in Congress has even mild interest in actually doing something about it.
Interest rates do not necessarily reflect inflation/deflation.
Interest rates definitely reflect inflation/deflation. If inflation low then THE Bernank kind do QE to infinity and monetize everything thus keeping a lid on rates. Why wouldn’t he print money if we have deflation and large budget deficits? Why should I as a taxpayer choose to pay higher interest rates if I have the choice of low interest rates?
But you do pay high rates on any credit isn’t subsidized by the feds!
The strongest cases for higher rates are bond market vigilantism and credit concerns, not tighter policy. Wouldn’t you like to get 3-4% return on a CD instead of chasing bubbles?
HD – I lived in Japan for a few years and saw the psyche over there – they are toast. The Japanese are also pretty good at learning from the errors of their past and thus their banks are incredibly stingy still today, but our banks have no institutional memory whatsoever. Case in point – there is another M&A boom under way in the US. Huge commitments for LBOs are flying around like candy at a parade again, big corps are sitting on boatloads of cash and Uncle Sugar is standing by with unlimited liquidty for anything the banksters can imagine.
Additionally, Japan has a shrinking population while America has a growing population, which is another key driver of Japan’s malaise. I would say the odds of America following Japan’s two decades of essentially 0% interest rates are less than 20%. I would say the odds of Bernanke and his successors of throwing too much money onto the fire and creating material inflation are 80% – that is their plan and inflation is absolutely necessary to gradually bring the US standard of living down to where it needs to be. Treasuries have moved up a lot lately and I don’t see that bond bubble ending well for the bagholders. You can also see some of the effects of quantitative easing already in gas and food prices, but those are conveniently excluded from core CPI (as was the housing bubble). The massive runup in stocks is also another indicator of what the quantitative easing is doing in the US as markets anticipate inflation.
Americans are FAR more willing to take risks than Japanese and that risk taking behavior is precisely what will again lead to inflation – you put a few trillion dollars into the US economy and tell a few big shots their comp is tied to making loans and that few trillion dollar injection will turn into several trillion dollars quickly as the loan spigot turns on again.
Finally, our bubble was big, but nowhere near the size of Japan’s. The Imperial Palace grounds were once said to be worth more than California. A group that owned a small gas station in Shinjuku sold it for a price in excess of the sale price of the Empire State Building. Nikkei P/E ratios were about as outrageous as NASDAQ P/E ratios at the peak of the dotcom bubble. Japan’s economy in the late ’80’s was a far bigger fraud than our economy was a few years ago and Japan has never developed into a friendly country for foreign direct investment. There are similarities between the US and Japan, but there are many, many key differences that lead me to conclude the US is in for a stagflationary future rather than a deflationary one.
If you want to bet on rising interest rates without buying a house you can buy TBT. I have – until such time as I find my wife’s dream home.
Disclaimer: seek advice from a financial counselor before making an investment like this.
Gary, careful with TBT it’s got tracking issues. RYJAX is a superior alternative to those of us not interested in day trading rates.
Stay VERY far away from TBT. The decay on this leveraged ETF will wipe out any gains. There are far better ways to play increasing rates. Just look at a 1 yr chart on TBT and compare it to rates (hint: compare April 2010 to now). You have been warned. TBT is a TERRIBLE investment.
“Gary, careful with TBT it’s got tracking issues.”
Tracking is not the problem. Decay is.
I’ve played around with TBT but my understanding is that the leveraged ETFs are more of a short term play than anything.
Chuk, what are some of the other better ways to play higher rates?
There is a non-leveraged alternative to TBT but obviously you need to put up more money. But that should eliminate the tracking problem. However, it’s not clear to me why there would be a decay problem. I think it’s all tracking. And BTW, the tracking cuts both ways. It’s just as likely to work to your advantage.
Gary, I’ve looked into SBT and TBT and they seem to be poorly-structured for long-term betting
“However, it’s not clear to me why there would be a decay problem. I think it’s all tracking. And BTW, the tracking cuts both ways. It’s just as likely to work to your advantage.”
They employ leverage to get the “ultra” 2x return. That leverage costs in the form of time decay. Right now, we are pretty much where rates were in April 2010. Yet TBT is at $40 now, and it was at $50 in April 2010. The decay on ALL of these ultra ETF’s is brutal, and they should be avoided at all costs, unless you are daytrading them.
“Chuk, what are some of the other better ways to play higher rates?”
Well, TBF is not leveraged, so you don’t have the decay factor. You could also short UBT which is the opposite of TBT, and let the decay work for you instead of against you. Then there are the other obvious less direct ways to play higher rates (inflation). Gold, oil, and soon (gasp) housing!
Chukdotcom,
I thought that 50/40 discrepancy was tracking error. Where do you think the decay is coming from? There is no way the interest costs 20% per year.
Read what the experts say on housing prices.
http://www.nytimes.com/2011/02/06/business/06view.html?_r=1&src=me&ref=business
“I thought that 50/40 discrepancy was tracking error. Where do you think the decay is coming from? There is no way the interest costs 20% per year.”
It’s not interest. It’s time decay on leveraging tools. Look at their website:
http://www.proshares.com/funds/tbt.html
And note the bolded text:
“This ETF seeks a return of -200% of the return of an index (target) for a single day.”
These types of funds use options and/or futures for leverage. So, on any ONE day, there is not significant decay. But think about it month after month. If they are buying options at the beginning of the month that have time premium, and holding them till the end, that time premium has gone away. Then they need to do it all over again the next month. That is where the price decay comes from.
Chukdotcom,
This fund doesn’t use options or futures. It uses swap agreements. The problem you are talking about is not really time decay, although it gets written up that way on certain amateur Web sites. If you look at the prospectus for the fund you will see the entire problem described in a table labeled Estimated Fund Returns. How these funds perform in the long term is purely a function of the magnitude of the cumulative return and the volatility. The higher the volatility and the higher the magnitude of the cumulative change the more likely you are to have a negative bias. However, you are just as likely to experience a positive bias. If there were a perpetual negative bias then one could make a money machine by shorting this instrument.
Similarly, buying options does not subject one to a persistent negative bias. In theory, owning a large diversified portfolio of call options should perform no differently than owning the underlying stocks. If this were not true you could create a money machine by selling options. A lot of people believe this is possible, or want people to believe this is possible, as evidenced by the preponderance of books describing such strategies. My brother-in-law recently told me about his plans to get rich doing this after reading such a book. I told him to get me the book so that I could point out the logic flaws.