Are RBS the New MBS Bonanza?

[lektrode]

Re: My Prediction

Aka, the Great Transfer of Wealth . . .

and here we thot it was the great recovery ?
when its really more like the great train robbery...

[vinoveri]

Re: My Prediction

Aka, the Great Transfer of Wealth . . .

Going strong and out in the open for all to see since Dec 2008.

[Forrest]

Re: My Prediction

I don't think it's optimism. I just think they may have more tricks up their sleeve than I know. Don't forget, ZIRP is both cause and solution. Tens of millions of middle Americans lose their pensions on planet ZIRP. Nobody keeps a savings account on planet ZIRP. The middle class loses income and spends its cushion instead of leaving it in the bank to get 0.002% interest or whatever they're offering these days.

As long as all the people in the world that want to put their money someplace 'safe' are turning their cash into $Dollars (as compared, to say, Iraq, or Russia, or worse, Europe) there will still be a lot of buyers for single family rentals, the stock market, and those wonderful new RBS regardless of the risk.

I would like to put my 'still in probate jail' cash into something worthwhile, but I don't see anything much as worthwhile anymore...just damned risky until people find out that the Real Estate, Stocks, and RBS are outrageously overpriced from too much money chasing too few safe investments. And alas, they don't find out until the little people get dangerously restless.

And by the by, a money market savings account gets you a whole 0.01% on your money up to $250,000.00. But they will give you 0.02% once you are over the insured limit per bank. Nice, huh!

I still can't find anything out there to invest in with any sense of security for a reasonable return, so I still can only see financing construction swing loans at 14% at 50% LTV. There is only a little security on lending to a recently purchased foreclosure/fixer-upper with an approved take-out loan...at 14% in 1st TD position, and that's still the best thing out there that I can see...and only because I used to broker those loans prior to 1995.

But I sure don't like all that rental Real Estate floating around, and being flipped to people with cash on the run from outside of America...we still don't know what Real Estate might fetch after the pension funds and savings accounts get raided in Europe. I figure that will trigger our big slide...in everything, right after a hugely glorious top.

[don]

Rental Nation Update

One often hidden story in the housing market is the boring rental market. Sure, we talk aboutinvestors and regular home buyers but there is rarely any deep analysis regarding renters in the mainstream press. There is no powerful lobbying group for renters or massive marketing engine out in the market to give a more nuanced view on renting. Any true funding and advertising goes into the buying and selling crowd. What is interesting is that sales figures are still abysmal even with the big 2013 mania with prices (not directly with sales). The rental market is definitely hot since many would-be buyers are being out played for one bathroom crap shacks. You also have professionals unwilling to plunk down $750,000 for essentially a dog house with a yard. While the mania of last year is cooling off during a typically hot selling summer season, the rental market is still very tight. In fact, a good portion of new permits being issued are going to multi-family units as demand for rental housing is booming. In California, you have 2.3 million adults living at home so their likely first step into forming a household would be a rental. You also have many places like Arizona, Nevada, and Florida where investors have been buying up for years now turning their single family homes into rental units. With the tight rental market, are we slowly running out of rentals?

Where are we building?

I’m obsessed with following the numbers when it comes to real estate. I really find the industry fascinating. For most people, the one segment of the economy that is going to eat most of your paycheck is going to be housing, either through mortgage payments or rents. People that own homes understand that there is always additional costs when you purchase a home. Upgrades, repairs, and for many trying to keep up with the Joneses with the latest cars, technology, and furniture. Buying a home creates spending in a multitude of other industries so it should be understandable why the obsession on housing exists.Yet incomes across the country are stagnant. Employment growth in a lucky month is barely keeping up with population growth. Yet smarter builders realize that we will need more housing units in the future and many are building out multi-family projects:

Multi-family starts are actually near a 10 year high. What this reflect is builders understanding thedemographic changes hitting our country.A few e-mails came through regarding the “epic” rise in new family home sales. So I went to the data:

Does that look epic to you? At the peak, we were selling over 1.2 million homes per year. Today, we are barely bouncing off the 400,000 mark with a much larger population than we had 10 years ago. You would expect this to be even more robust given the stock market is near a peak right? Since you actually need an across the board employment and wage recovery, you simply are not seeing builders putting in that much money into this sector with single family homes. Keep in mind those multi-family starts versus single family starts:

We have certainly bounced off the bottom but we are a far cry from the over 2 million starts back 10 years ago. Much of the excess housing units are being sold off in this low inventory market. The question of course is what happens when you price families out? Many have no other option but to rent or live at home with parents.Household formation is still weakHousehold formation is another good metric to look at to examine pent up housing demand:



Household formation continues to be near a generational low. Until we start seeing this increase, there is little reason to believe that home sales will take off again. And keep in mind that when someone moves out into a rental, this is a new household formation. This would be the first step before thinking that someone is stepping out of their parent’s home into a $700,000 stucco box. We are simply not seeing this and that is why investors have filled the gap for all the years since the housing bubble popped. They very much have cash or alternative methods of financing outside of mortgages.

Not much building pushing vacancies downThere has been little building of homes in areas with high demand. This is across the country. The home vacancy rate has plunged and this has soaked up excess capacity:




Higher prices and stagnant household incomes have also pushed families into rentals:




The demand is much higher on the rental side and is more in line with actual incomes of US households. People have champagne tastes but beer budgets. I still get many e-mails from people asking about buying advice (more like timing advice). I’ve always believed that you should rarely spend more than one-third of your gross monthly income on your total housing payment. California is a boom and bust market so good luck trying to time it but if you are comfortable with your monthly payment, go for it and buy that Great Depression drywall sarcophagus. Deep down though these folks are eyeing their next property on the revolving property ladder cycle. We know that people stay in homes from 7 to 10 years so this nostalgic notion that people will buy and stay put for 30 years until they have their mortgage burning party is more of a kick back to the Mad Men days when the “good old days” are more of a mythology story versus actual fact. Heck, talking to some in the industry they have already forgotten about the 7,000,000+ foreclosure graveyard we just passed up.

BLS measures rents or owners’ equivalent of rent and prices are going upThe current tight market has pushed rent prices up:



The rental market is tight and prices have gone up.


The CPI although a poor measure for actual home prices, does a good job of measuring rents. It uses the owners’ equivalent of rent measure and this has certainly moved up.What is interesting is that you are seeing a higher quality of rentals hitting the market. You are also seeing a lot of do-it-yourself folks putting up their home for a rental to capitalize on some cash flow.Demand for apartments via GoogleThe hive mind of our society can be seen by looking into the search queries with Google. Take a look at searches for rentals and apartments:

Source: Google Apartments and Residential Rentals Index

Compare this to the actual homeownership rate:

It is fairly clear to see where the numbers are. You would expect to see more rental housing units filled followed by a jump in home buying across the board if the economy were truly booming. GDP took a big hit in Q1:

The futures market is saying this was a one-off event (but it did happen and was much deeper than most expected). Both bulls and bears can agree that the middle class is shrinking in many metro areas across the country and we can see this with the net domestic migration out of California for lower priced states. A large part of growth in places like California is coming from foreign born migration and new births. It is an interesting time but also helps to explain the current real estate market. It does look like we are entering into an inflection point and rentals are a good measure of overall household economic well-being. Landlords are going to charge as much as they can get from local area families and families will ultimately pay as much as they see fit. Yet there is only so much you can charge before people start making economic tradeoffs.