News

Landmark Links October 2nd – Stagnation

 

Must Read: I’ve been saying for months now that higher mortgage rates in a declining inventory environment would lead to higher prices and construction stagnation rather than a decline in home values.  Ben Casselman’s story from the NY Times this past weekend does as good a job of explaining how housing is defying textbook economics as any that I have seen.  :

Introductory economics textbooks suggest that high prices should attract more supply or suppress demand — or both. Inventories of unsold homes have risen in Denver and other markets in recent months, and the real estate site Zillow found that price cuts have become more common.

Over all, however, the housing market is not behaving as the textbooks say it should. Inventories remain low despite the recent increases, and new construction is slowing, not picking up.

Part of the problem, local real estate agents say, is that the furious pace of price growth has essentially gummed up the market, making homeowners reluctant to sell for fear of being unable to find a new home.

……

Rising interest rates are compounding the problem because would-be sellers do not want to give up their low interest rates, a phenomenon economists call the lock-in effect.

The rest of the article discusses how cost inflation and regulations make it impossible for builders to construct product that is priced low enough to meet the market.  It’s well worth the read.

Economy

Pure Speculation: This excerpt from Bloomberg’s Joe Weisenthal about how crypto and cannabis have become the perfect vehicles for post crisis speculation in an era of low stock market volatility is awesome:

The Bitcoin frenzy moved in the opposite direction from the housing bubble. In The Big Short, the ultimate tell that housing was going to crash was the scene where a stripper was talking about her real estate speculation. There were stories about strippers accepting Bitcoin all the way back in 2012. When they make a movie about Bitcoin, the stripper will realize Bitcoin is peaking when a Wall Street client starts talking about launching a crypto hedge fund.

Sign of the Times: A new Oaktree-backed fund is launching to lend money to start up employees whose liquidity is locked up in equity.

Deleveraged: Household leverage is now at a 33-year low as saving, investing and home price inflation helped bring American families back above water.  Remarkable, considering that we were at an all-time high just 10 years ago.

Wrong Way: The fact that the US budget deficit is moving in a pro-cyclical direction – growing while the economy is growing as well – is reason for concern.

Commercial

The Search for Yield: Not only has foreign investment in US commercial real estate slipped, its also more focused on secondary markets and non-traditional asset classes like student housing than earlier in the cycle.

Residential

On The Upswing: Home ownership is becoming more expensive.  This, combined with a strong economy is juicing demand for apartment rentals and pushing rents higher.

On the Road Again: High housing costs in the Bay Area have forced people to move further away into the Central valley and turned commuting into a dystopian nightmare.

Flattening Out: Home prices in the US are decelerating but not declining.

Profiles

Funding Secured: The SEC is suing Tesla CEO Elon Musk for fraud, related to tweets about taking the company private.  The background that the SEC provided on how Musk came up with his price is pure unintentional comedy:

“According to Musk, he calculated the $420 price per share based on a 20% premium over that day’s closing share price because he thought 20% was a ‘standard premium’ in going-private transaction,” the SEC alleged in its suit. “This calculation resulted in a price of $419, and Musk stated that he rounded the price up to $420 because he had recently learned about the number’s significance in marijuana culture and thought his girlfriend ‘would find it funny, which admittedly is not a great reason to pick a price.’”

LOL at anyone who actually believes that Musk’s girlfriend was dating him for his sense of humor.  Update: He settled.

Shake Down: China systematically steals technology from international companies by forcing them to joint venture with local firms and provide access to trade secrets in exchange for access.

Odd Couple: How a Goldman Sachs trader and a star NFL linebacker ended up embroiled in an insider trading scandal.

Chart of the Day

Home sales are slowing….

As mortgage rates increase….

Leading to terrible home builder stock performance

Source: The Daily Shot

WTF

Tastes Like Chicken: A cannibal wife suspected of eating up to 30 people is facing jail time over goading her husband into murdering a waitress because Russia.

Why? Mac and Cheese candy canes are actually a real (and disgusting) thing. (h/t Mike Glenn)

Dumped: A body found in an Ohio nature preserve turned out to be a sex doll because Ohio.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

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