Thursday, August 17, 2017
Bubble in real estate rentals and overall real estate market. In 2017, the ongoing apartment building boom in the United States will set a new record of 350,000 new rental apartments in buildings, with over 50 units each expected to hit the market -- three times the number of units that came online in 2011.
Deliveries in 2017 will be 20% above the prior records set 2016, based on data going back to 1997. Between 1997 and 2006, before the financial crisis, annual completions averaged 212,000 rental apartments, but 2017 will be 62% higher than those levels.
Furthermore, there is a high-rise crane craze in Seattle, but that's nothing compared to New York and Dallas, that are adding 27,000 and 25,000 units, respectively. Chicago is adding 7,800 units, despite a shrinking population and rents declining by 19%.
Fannie Mae and Freddie Mac are financing this rental housing boom, which made 53% of all apartment loans in 2016, down from their combined 68% market share in 2012. So, their conservator, the Federal Housing Finance Agency (FHFA), recently eased the lending caps, so they can make even more loans.
Fannie Mae and Freddie Mac are particularly dominant in garden apartments and in student housing, with 62% and 61% shares, respectively. The two agencies remain the largest mid-/high-rise lenders, but only hold 35% of the market.
Government Sponsored Enterprises (GSEs), such as Freddie Mae, guarantee commercial mortgages on apartments buildings, and package them in Commercial Mortgage-Backed Securities. Therefore, both taxpayers and banks are on the hook for these obligations.
Currently, the logic is to "build them and they will come" -- first renters, then, complex buyers.
Venture-Capital and Private Equity firm's are pushing developers to build more as fast as they can, who are all under the illusion that there's at least four more good years left in this cycle and are scrambling to purchase new sites. The supply of apartment units hitting the market in 2018 and 2019 will even be larger. For example, in Seattle, there are 67,500 new apartment units in the pipeline.
However, while no one was paying attention, the prices of apartment buildings nationally, after seven booming years, peaked last summer, and have declined 3% since then, with transaction volume of apartment buildings plummeting. And, asking rents -- the main point, because they pay for the whole construction -- have now flattened.
As usual, cheap money entices developers to over do it, and the fall will be just as painful.
The "lower for longer" interest-rate environment has largely fueled this rental and real estate bubble, as investors flee volatile markets in search of safe havens, and the December 2016 rate hike is beginning to send shockwaves through the broader markets.
Are we already in another recession? It appears we may have just entered a recession, which is defined as being two or more quarters of negative Gross Domestic Product (GDP) growth, which has been the case, when adjusted for inflation. The eight-year long "recovery," the weakest on record, has rolled over into another recession.
The real world economy numbers have been softening:
- Auto/light truck sales: either down or off a cliff, depending on how much the numbers have been inflated.
- Restaurant/dining sales: down, worst collapse since 2009.
- Tax receipts: down.
- Retail sales: flat, stagnant or down, depending on the sector, and if the numbers have been adjusted for inflation and loss of purchasing power.
- Rents in the high-rent regions: finally softening after years of relentless increases.
- Consumer debt: hitting new highs.
- Corporate profits: stagnant or down, when stripped of gimmickry.
Employment often tops out just before the economy rolls over into recession -- the last gasp of an expansionary phase.
There are several fundamental reasons why we might be in a recession that manages to avoid the official definition. There are observers that feel the economy never really exited 2008-2009 recession.
Those observers look at the fundamentals, not the stock market, which has been held up as a proxy for the real economy, when in fact it is only a proxy for the official selection of the market as the "signifier" of economic vitality and prosperity.
Recessions are supposed to clear the financial deadwood -- failed enterprises are liquidated, borrowers who are in default forced into bankruptcy, and bad debt is wiped off the books through the acceptance of losses.
These "clear the deadwood" dynamics were suppressed through this so-called recovery, from 2009 to 2017. Rather than accept painful losses, the authorities saved bankrupt banks and encouraged an artificial economy in which borrowers and enterprises are kept alive through low-cost loans, and the masking of default via financial trickery. For example, non-performing student loans are not labeled "in default," but are placed in a special category of "forgiveness," without actual write-downs of the debt.
Households are being offered 0% loans, since they can no longer pay interest on the new debt. Corporations sell near-zero interest yield bonds to impressionable investors, if they need to roll over debt.
Federal agencies, such as FHA, are offering near-zero down payment mortgages and guaranteed private lenders against any losses for households that can no longer afford to buy homes.
Taxpayers will fund another $100 billion bail-out, when these agencies get in trouble, due to the horrendous costs of encouraging un-creditworthy borrowers to take on debt that they simply cannot afford.
Full-time jobs, productivity, and profits are all subpar. Wages for the bottom 95% have gone nowhere since 2000, when adjusted for inflation. Households can no longer afford more debt, unless it's at near zero rates of interest.
Full-time employment -- the foundation of consumer spending and borrowing -- has barely moved in eight years. Part-time workers can't afford to buy homes or vehicles.
Wealth and income can only be generated in the real world by increases in productivity, but in this so-called "recovery" productivity is tanking.
In essence, this "recovery" economy is living on large amounts of new debt that can't be serviced. Eventually employment declines, forcing employers to trim cost by cutting positions, hours worked, etc., due to weakening sales, profits and tax receipts.
Eventually borrowers give up trying to service un-payable debts, close their doors, and the illusion of "growth" collapses in a heap of corrupted numbers and false "signifiers."
The "recovery" game will shift to massaging GDP, so it shows even 0.1% level of positive growth every quarter. This artificial economy can be kept alive indefinitely, and Japan is a perfect example, but it's not a healthy or vibrate opportunity-type economy. It is a sick economy of fake narratives and statistics, where the government will continually surprise with revised GDP, so that it remains positive.
Summary and Conclusions. Central banks have totally taken over the financial markets, by setting short and long-term market interest rates, which affects the valuation of all assets, directly impacting the stock, bond, and real estate markets.
These actions prevents the economy from properly re-balancing. Markets experience this re-balancing with a "common cold," when they go through various crashes, corrections, and recessions, which come now and then to clear out the system and make it healthier.
Therefore, the more prolonged before this happens, the more unhealthy the system can become. The more Central Banks push down interest rates -- to prevent recessions, making the world seem risk-free -- the more everybody speculates. The longer the stock market and real estate goes up, the more people ask: Why am I working so hard? And, why don't I get rich speculating?
This rampant speculation has lead to the formation of the biggest bubble in 2017, possibly in history, which will likely wipeout trillions of dollars in the process!
All investors will be affected with a substantial decline in the stock market, real estate valuations and commodity prices, unless they're prepared, choosing to utilize a conservative and flexible wealth management services -- outperforming in Bull and Bear market conditions, as suggested below.
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Posted by Private Wealth Management at 11:37 AM