Real Estate Bubble?

While the optimism from economists and the citizens in general is high, the economic headwinds are higher. Trump economic message is inconsistent, so it remains to be seen what he gets done. He has a mix of populism and capitalism. He spouts anti-free trade rhetoric and discusses cutting regulations. These messages don’t mix. Only a laissez-faire capitalist agenda will give the country the success it deserves. I try to remain objective in my critiques of Trump’s plans because they vary from great to terrible, depending on the issue.

On the negative side, Trump posted an Instagram picture which has the caption “My Administration will follow two simple rules: BUY AMERICAN and HIRE AMERICAN!” This is a protectionist mentality which doesn’t portend high global growth. Trump’s campaign message of putting America first can be interpreted many ways. If Trump encourages people to buy American, he is saying to subsidize lesser products because it supposedly helps the economy. However, buying an inferior product hurts your personal productivity, so I don’t see it as a worthy practice. I like the part of Trump’s plan where he wants to make it cheaper to hire American workers, but it is authoritarian to penalize firms who want to hire workers abroad.

This protectionist tone won’t necessarily cause an outright trade war with China or Mexico because it’s in neither country’s best interest to do so. However, any negative impact on trade is a big deal because of the recent slowdown in global trade growth. As you can see from the chart below, trade has been stagnating for 2 years. Trade makes economies more efficient as each place specializes in specific industries. Declining trade is a signal of a weak global economy and one that is becoming more inefficient.

worldtrade

While I’m of the opinion that interest rates will decline in 2017, the risk that interest rates rise further and disrupt the real estate bubble are real. Job losses combined with rising interest rates could put a damper on housing prices like what happened in the burst in the mid-2000s. The chart below makes an interesting point. It shows what various interest rates do to home affordability. If you have a budget of $3,000 per month, home affordability drops drastically as interest rates rise. Anecdotally, there are two houses on my block which buyers are in separate bidding wars. This could be a sign of a top for my area in New York. Low interest rates play a large role in this situation.

3000mortgage

Another way to look at the real estate bubble is that high prices have made housing less affordable, so rising interest rates can be the straw that breaks the camel’s back. Interest rates have risen one percentage point since bottoming in July. The chart below shows the Redfin Housing Demand Index which has had a moderate blip lower partially caused by rising interest rates which are seen to be putting off buyers in Los Angeles in particular. The index, which relies on the number of national Redfin customers asking for home tours and making offers, declined 7.3% from October to November. The main reason for the decline in home tours and offers is actually because of the decline in the number of homes on the market. The number of homes on the market in November was down 10.2% from last year. This the 18th straight month the number of houses on the market declined, so the prices may still have room to move higher in the near future.

redfin

My anecdotal evidence of bidding wars is supported by the number of housing flippers in the market. As you can see from the chart below, the gross profit per house flip has reached 2007 levels and the number of flippers has increased steadily since the bottom in 2008. According to the Wall Street Journal, there are loans exceeding the value of houses. This means banks making riskier loans which is a top signal. The loans to flippers are about 7 months, so there is a time crunch. The first sign of housing market weakness will come from these flippers. Usually flippers have a foreclosure rate less than owner occupied homes. The average default rates are 0.43% and 0.60% respectively. However, in 2016 the investment default rate is more than double owner occupied defaults. This is a signal their profit margins are shrinking. As the number of flippers increases, it makes the business tougher because of increased competition.

flipper

While Trump has been excellent at using statistics to suite his political agenda, the true expert is President Obama as the population not in the nonfarm payrolls metric only fell 1.1 million from 2010 to 2016 which signals a stagnant job market, not a flourishing one like he claims it is. Either you can look at this as an optimist and say Trump will do the opposite of what Obama has done which means job growth will finally occur or you can look at this as a pessimist and say the cycle’s peak didn’t create jobs, imagine how bad it will be when the cycle weakens. I think the truth lies between those two viewpoints because the cycle is going to weaken, but by lowering taxes and regulations Trump will spur job growth.

nojobs

The final chart I have is the New York Fed’s Coincident Economic Index. The indicator looks to be peaking which has worked in coordination with every recession since 1965. It decreased at an annual rate of 1.9% in November and decreased 1.1% in October. For New York City it slowed to growing 0.4% in November from 0.7% in October. It improved in New Jersey from decreasing 0.4% in October to being flat in November. In Trump’s own area, the economy is showing sign of heading into a recession, but he conveniently ignores this.

newyork

Conclusion

            Trump’s protectionist Instagram post makes it look like the flatlining global trade growth will continue. The rising interest rates could pop the real estate bubble, but it’s too early to tell if that will happen in 2017. It depends on how high interest rates go. The indicators of the New York City, New York, and New Jersey economy are disconcerting. They are flashing yellow meaning a recession could be coming soon.

Spread the love

4 Comments

  • Anthony Giraudo

    December 31, 2016

    Good work! Thank you. Wishing you a happy and prosperous new year.

  • Maqbool

    January 7, 2017

    Please do not Publicize if you are Not sure about Real Estate bubble bursting for the whole year of 2017. I have lost over $ 650,000.00. because of such unrealistic forecasts, in 2008 to 2010 RE. recession.

    Maqbool

    • TheoTrade Support

      January 8, 2017

      Maqbool, only you are responsible for your gains and losses.

  • Maqbool

    January 7, 2017

    The Interest rates do not matter. People are immune to the consequences of higher Interest Rates. People were buying Real Estate even at the rate of 8%. The so called Real Estate recession was preplanned by The Republicans, which created thousands of Millionaires, buying millions of properties at 10 to 20 cents on the dollar. Roughly 35% foreigners enjoyed the benefits. Leaving millions of home owners deprived of their homes and lifetime savings. Many of them died homeless and in poverty. A bill was passed authorizing Condo Associations to foreclose and sell. They started charging owners tremendous amounts to ensure the owners cannot pay and they could foreclose (e.g FOUNTAIN's Condo Association of Ponte Vedra Beach, Fla. Condos Charged $400,000.00 for repaving the roads). The media especially CNN stopped publicizing the number of millionaires created at the figure of 3500 under the pressure of Bush administration. In short no authority intervened even the Governor when requested.
    Where were you at the time?.

    MAQBOOL