Bubble, Bubble, Real Estate Toil and Trouble: Macro Climate for Real Estate Still Sucks, Despite New Bubbles

A reader wrote me complaining about the nonsensical bubble blowing in multi-family properties before the last bubble was even finished bursting. I feel his pain. Let’s run through a quick pictorial of how I see the macro climate for real estate as of right now…Everybody is getting squeezed, businesses, consumers, homeowners… Everybody!

Businesses have been pressured by wage inflation, but have managed due to growing revenues. The growing revenues portion has slackened considerably after .gov bubble blowing wore off.

I know many of you are saying, “But wait a minute!!!”. You said the employment market was weak! Yes, I did say that and yes, it is. We have historically high and stubborn unemployment, but that doesn’t tell the whole story. That high unemployment crams more dollars into the “average” hour worked, but many less hours are worked by less people in the aggregate. See On Employment and Real Estate Recovery.

The reported unemployment numbers materially understate the amount of actual real unemployed there are in this country for it does not include the labor force participation. If you are not actively (or more to the point, have given up looking) for a job you are not included in the count.

The amount of people no longer counted in the labor force has been steadily growing, thus steadily underestimating true unemployment.

Add to all of this the fact that banks had practically halted foreclosures, thereby significantly exacerbating the shadow inventory problem, and you have a mess on your hands. Subscribers should review the latest Shadow Inventory Analysis Spreadsheet online to see exactly what I am talking about. There is at least an additional year or two of inventory not shown in (hidden from) these already pessimistic numbers.

Add to this the fact that interest rates are going up around the globe, in some places eventually by force – reference Reggie Middleton ON CNBC’s Fast Money Discussing Hopium in Real Estate, and then reflect upon inflation vs. stagflation – Inflation + Deflation = Stagflation ~ Lower Real Estate Values! and don’t forget to remember that we are in a real estate depression: In Case You Didn’t Get The Memo, The US Is In a Real Estate Depression That Is About To Get Much Worse.

Sound gloomy enough yet? Don’t worry. Despite all of this, guess what? The .gov/central banking cartel has successfully reblown another bubble in real estate by messing with the circle of economic life.

This is an email that I got from a reader last week…

Reggie, FANTASTIC presentation.  I have been following your website for a while and I feel you are one of the few individuals that sees things clearly…very clearly.

I hope you have a few minutes to help clarify a few isssues from your ING PPT.

CONUNDRUM:  Single Family is deflationary at the moment but Multifamily pricing is in a bubble thanks to Fed’s flooding of liquidity (Greenspan on steroids); and the impact of artificial demand from single family foreclosures.

Quick History:

My company bought 9,500 apartment units in Arizona ($550M) during the last cycle (2004-2006).  We sold our Phoenix portfolio (5,500 units) in June 2007 for a record price. Our remaining properties in Tucson were whacked when the market turned.

I have been sitting on the sidelines waiting to jump back into the market. I have not bought any properties to date.

Observations:

Single Family foreclosures have been extremely high in Arizona; one of the highest rates in the country.  We are running 50k foreclosures per year minimum; there are 75-100k VACANT SF homes sitting in limbo that the banks won’t address due to ROBO signing issues and/or fear of selling at such a loss that they will cripple their puffed/fictitious balance sheets.  SF homes built in the 2000 era are selling for $40/sf…..

Arizona is one of the unique states whereby the is a significant supply/demand imbalance of housing inventory.  We built way to many homes in the 2004-2008 period.  Not that many MF units but a ton of SF units.

The apartment market was on its ass until SF foreclosures took off.

We have only created 700 new net jobs year over year and our population has slowed to a trickle due to lack of jobs and people not being able to sell their homes in the states they typically migrate from.  We lost 250k jobs between 2007 and 2010.

Apartment Net Effective Rents (NERs) are accelerating at parabolic rates now, thanks to the SF foreclosures.  It is not job growth or population growth, statistically speaking.  Foreclosed home owners are renting like crazy due to lack of credit.

By this time in the NER recovery, I would have bought at least 2k units.  However, I have not pulled the trigger because of prices being paid.

My belief is that you only make big profits contrary to liquidity flows; meaning, during the last cycle, we purchased properties at 8% cap rates when debt was slightly higher and there were fewer buyers and on very depressed NOIs.  We sold our properties after growing NOIs, and when cap rates compressed to 4%.

Right now it is very reminiscent of 2006 and 2007 when liquidity was running rampant.  Buyers are posting non-refundable earnest money deposits at the signing of the contracts and closing for all cash in 20 days…$20-plus million properties.

Currently, I believe the buyers who are buying on 4.5-6% cap rates may be shocked when the bond markets get rocked and interest rates are forced up.  The increase in interest rates (cap rates following interest rates up) will have a much greater impact on value of these properties than NOI growth.

Questions/Conclusions:

Based on your presentation, how are NERs effected by SF foreclosures on a short term and long term basis?  I understand your inflation, deflation and stagflation points, but there are other large factors effecting the supply/demand fundamentatls; albeit, artificial demand from single family foreclosures.

Properties are transacting like crazy and at extremely high prices.

Liquidity is running rampant.

My partners are wanting me to buy properties because NERs continue to recover rapidly.

I have advised my partners to be patient and wait for the interest rates to pop up and values to decline.

I don’t believe we have felt the full impact of the vacant SF homes because the banks are sitting on them and it is a matter of time before they will have to sell even though Fed policy has been designed to inflate SF housing when actually it is deflating.

I have been waiting for the bond market to back up (I believe that is very close now that Gross pulled out of T’s along with many other bond investors) and interest rates to spike.

In short, I have to believe we will be seeing a huge adjustment in pricing soon.

REGGIE, ANY THOUGHTS YOU COULD PROVIDE WOULD BE GREATLY APPRECIATED.

Thanks for you time, and keep up the fantastic work…

My next post on the CRE topic will include some of my thoughts on this gentleman’s situation. In the meantime, comments are always welcome.

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