Who was asking for a catalyst for the next leg down? How about this? 7.5-8.0% mortgage rates.
Started by Rhino86
almost 16 years ago
Posts: 4925
Member since: Sep 2006
Discussion about
Morgan Stanley Sees 5.5% Note as U.S. Faces Deficits (Update2) Share Business ExchangeTwitterFacebook| Email | Print | A A A By Oliver Biggadike and Daniel Kruger Dec. 28 (Bloomberg) -- If Morgan Stanley is right, the best sale of U.S. Treasuries for 2010 may be the short sale. Yields on benchmark 10-year notes will climb about 40 percent to 5.5 percent, the biggest annual increase since 1999,... [more]
Morgan Stanley Sees 5.5% Note as U.S. Faces Deficits (Update2)
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By Oliver Biggadike and Daniel Kruger
Dec. 28 (Bloomberg) -- If Morgan Stanley is right, the best sale of U.S. Treasuries for 2010 may be the short sale.
Yields on benchmark 10-year notes will climb about 40 percent to 5.5 percent, the biggest annual increase since 1999, according to David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. The surge will push interest rates on 30-year fixed mortgages to 7.5 percent to 8 percent, almost the highest in a decade, Greenlaw said.
Investors are demanding higher returns on government debt, boosting rates this month by the most since January, on concern President Barack Obama’s attempt to revive economic growth with record spending will keep the deficit at $1 trillion. Rising borrowing costs risk jeopardizing a recovery from a plunge in the residential mortgage market that led to the worst global recession in six decades.
“When you take these kinds of aggressive policy actions to prevent a depression, you have to clean up after yourself,” Greenlaw said in a telephone interview. “Market signals will ultimately spur some policy action but I’m not naive enough to think it will be a very pleasant environment.”
Yields on the 3.375 percent notes maturing in November 2019 climbed 4 basis points to 3.84 percent at 11 a.m. in London today, according to BGCantor Market Data. The price fell 10/32 to 96 5/32. They have risen 65 basis points this month, the most since April 2004, as government efforts to unfreeze global credit markets lessened the appeal of the securities as a haven.
Treasury Futures
Speculators, including hedge-fund managers, increased bets that 10-year note futures would decline more than fivefold in the week ending Dec. 15, according to U.S. Commodity Futures Trading Commission data. Speculative short positions, or bets prices will fall, outnumbered long positions by 52,781 contracts on the Chicago Board of Trade. It was the biggest increase since October 2008.
In a short sale, investors borrow securities and sell them hoping to profit by repurchasing the securities later at a lower price and returning them to the holder.
Ten-year notes will end 2010 at 3.97 percent, according to the average of 60 estimates in a Bloomberg News survey that gives greater weight to the most-recent forecasts.
Edward McKelvey, senior economist in New York at Goldman Sachs Group Inc., the top-ranked U.S. economic forecasters in 2009, according to data compiled by Bloomberg, expects yields to drop to 3.25 percent. Goldman Sachs says unemployment will average 10.3 percent in 2010, hindering the recovery.
Treasury’s Competition
The U.S. will face increased competition from other debt issuers, spurring investors to demand higher yields as the Federal Reserve ends a $1.6 trillion asset-purchase program, according to James Caron, head of U.S. interest-rate strategy in New York at Morgan Stanley. The central bank was the largest purchaser of Treasuries in 2009 through a $300 billion buyback of the securities completed in October.
The Treasury will sell a record $2.55 trillion of notes and bonds in 2010, an increase of about $700 billion, or 38 percent, from this year, Morgan Stanley estimates. Caron says total dollar-denominated debt issuance will rise by $2.2 trillion in the next 12 months as corporate and municipal debt sales climb.
Mortgage Rates Rise
Mortgage rates last reached 7.5 percent in 2000 as productivity gains slowed after the demise of some Internet companies. The average rate on a typical 30-year fixed-rate mortgage climbed to 5.05 percent in the week ended Dec. 24, according to McLean, Virginia-based Freddie Mac.
Yields on mortgage securities issued by Fannie Mae rose to a four-month high of 4.54 percent last week. Fannie and Freddie securities are used to guide borrowing costs on almost all new U.S. home lending.
Higher borrowing costs as the U.S. shows signs of beginning to emerge from the longest economic contraction since the 1930s puts Treasury Secretary Timothy Geithner in a situation similar to one faced by his predecessor Robert Rubin.
“This is the re-emergence of the bond market vigilantes,” said Mitchell Stapley, the Grand Rapids, Michigan-based chief fixed-income officer for Fifth Third Asset Management, who oversees $22 billion. “The vigilantes are saying, OK guys you want to do this, you’re going to pay a higher price for it.”
Bond Market Signal
Inflation-adjusted 10-year note yields have more than tripled this year to 1.5 percent at the end of November, according to Bloomberg data, subtracting the gains in the consumer price index excluding food and energy from the nominal yield on the securities.
A surge in so-called real yields to a seven-year high in the 1990s was viewed by the Clinton administration as a sign that they needed to address growing budget deficits, Greenlaw said.
“Rubin went to Clinton and said we have to do something to support the recovery, and taxes went up,” Greenlaw said. “You don’t really start to put pressure on policy makers to respond until the market sends a signal.”
Sales of existing homes rose 7.4 percent last month, following October’s 10.1 percent gain. The difference between two- and 10-year yields to a record 2.88 percentage points on Dec. 22 as traders added to bets a recovery will fuel growth and inflation. The yield curve contracted a day later after a separate report showed sales of new homes unexpectedly fell in November.
‘Indigestion Problems’
“When you couple the growing probability of a belief in a recovery combined with the supply, it could mean some indigestion problems for Treasury yields,” said James Sarni, senior managing partner in Los Angeles at Payden & Rygel, which oversees $50 billion. “As long as the demand is there, the supply won’t be a problem. I think what’s going to happen is there’s going to be a problem with the demand.”
Spending by Obama and lawmakers is increasing as the Fed winds down its stimulus programs. The Senate voted on Dec. 24 to raise the limit on federal borrowing to $12.39 trillion, enough to tide the government over for about two months. The House approved the legislation Dec. 16, along with a $154 billion aid package to pay for extended unemployment benefits, new infrastructure projects and help for state governments.
Greenlaw says the U.S. will probably have to offer investors such as foreign central banks and mutual funds real returns of more than 3 percent for 10-year notes to attract funding.
Deficit Spending
“There’s no free lunch, and when you take these kinds of aggressive policy actions to prevent a depression, you have to clean up after yourself,” Greenlaw said. “Foreign central banks are just not going to be able to finance these kinds of budget deficits for very long.”
Monetary officials in China, Japan and other countries helped Geithner lower U.S. borrowing costs by 15 percent in the government’s 2009 fiscal year. Indirect bidders, a group of investors that includes foreign central banks, purchased 45 percent of the $1.917 trillion in U.S. notes and bonds sold this year through Nov. 25, compared with 29 percent a year ago, according to Fed auction data compiled by Bloomberg News.
The decline in interest expense was the biggest decrease since before 1989 and came even as the nation’s debt increased by $1.38 trillion this year to $7.17 trillion in November, the data show.
An increase in yields may even add to demand for Treasuries, said Ian Lyngen, a senior government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. He doesn’t anticipate 10-year note yields rising above 4.25 percent in the first quarter.
Foremost Concern
“The data has yet to prove definitively more bullish for the economy and more bearish for the bond market,” Lyngen said. “A significant backup in rates will simultaneously make the debt more expensive for the Treasury and potentially make it more attractive for investors to buy.”
White House officials have acknowledged the bond market’s message about the need to cut the federal deficit. Rahm Emanuel, Obama’s chief of staff, said on Nov. 17 in a speech in Washington that a plan for reducing budget deficits “is foremost” on the president’s mind.
“Could one imagine the market for debt being saturated? Of course,” said Lawrence Summers, director of the National Economic Council, speaking in New York on Oct. 8. “We will not, as a country, as the economy recovers, be in a position to issue federal debt on anything like the scale that was appropriate to issue federal debt during a profound economic downturn.”
Jenni LeCompte, a Treasury spokeswoman in Washington, declined to comment on higher borrowing costs.
Morgan Stanley’s Caron predicts the spread between 2-and 10-year yields will rise to 3.25 percentage points next year.
“There is a lot of supply coming to the markets next year,” Caron said. “In 2009 there was a lot of support for that supply. The question going forward is what happens when there is not.”
To contact the reporters on this story: Oliver Biggadike in New York at obiggadike@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net
Last Updated: December 28, 2009 06:03 EST
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Response by Rhino86
almost 16 years ago
Posts: 4925
Member since: Sep 2006
I'd rather a bull tell me they simply dont care - they want to own and renovate their own space - then tell me these are normal price to rent ratios. The worst is that mental patient LICC, who is determined to deny history. Then you have printer, who insists that the cost of money is not a negative factor to the value of real estate. To make it worse, he twists what I have said into 'if interest rates rise, real estate falls'... No not in a 1990s style economy driven rate increase with rising rents off a historic bottom. Only a fool could not see the difference between that and a treasury glut driven increase in rates without strength in the local economy. Now if he were smart enough, he would argue we are going to see robust improvement in financial sector employment and income... I might not agree, but at least it would show he understood the factors in play.
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Response by printer
almost 16 years ago
Posts: 1219
Member since: Jan 2008
Now if he were smart enough, he would argue we are going to see robust improvement in financial sector employment and income... I might not agree, but at least it would show he understood the factors in play.
ah, but I did that back in the spring, when I tried to explain to you that the decrease in liquidity in the mkts would lead to wider bid/asks and greater trading profits for the inv. banks. you, as typical, resorted to name calling. and typically, I was right, and you were wrong (or have you not noticed the great year wall street has had)?
you just don't get it - you were all aboard the bear train at the mkt nadir - home prices, stocks, finance sector profits, GDP, employment, families fleeing the city for the burbs, crime, etc. And things have not only not hit the dire levels you wished for, but they have in all cases stabilized or improved.
Smart people, when they have a thesis which empirical evidence disproves, re-evaluate the thesis. You, on the other hand, use 10yr old epithets to shout down the facts.
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Response by stevejhx
almost 16 years ago
Posts: 12656
Member since: Feb 2008
"And you, Rhino, have no evidence that increasing interest rates will result in falling real estate prices. "
HAHAHAHAHA!
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Response by printer
almost 16 years ago
Posts: 1219
Member since: Jan 2008
so steve, where is your empirical evidence where protracted periods of increasing rates we coincident with decreasing prices?
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Response by stevejhx
almost 16 years ago
Posts: 12656
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The 1970's.
Not only that, printer, but it's fundamental economic theory: the more it costs to finance something the less that thing is worth if financing is necessary to purchase it.
I know, it's just a theory, like evolution.
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Response by Topper
almost 16 years ago
Posts: 1335
Member since: May 2008
Theory and Evidence
Alas, I've often found that the actual data behaves rather badly (at least relative to theory). For the most part I've found only the mildest correlation between interest rates and home prices over very long periods of time. Keep in mind that there are lots of other factors at work including inflation, supply, etc. that cloud the waters.
Year, Existing Single-Family Median Home Prices, Long Treasury Yield
Historically low mortgage rates has been touted as why to buy, but if they spike upward next year, people don't think that would affect sale prices? I'm not getting this.
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Response by lowery
almost 16 years ago
Posts: 1415
Member since: Mar 2008
oops. "have been"
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Response by West34
almost 16 years ago
Posts: 1040
Member since: Mar 2009
But....The West Village is Different
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Response by somewhereelse
almost 16 years ago
Posts: 7435
Member since: Oct 2009
"Rhino has been amazingly wrong about just about everything"
Wait, did LICC really just said that? Funny.
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Response by Topper
almost 16 years ago
Posts: 1335
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Theory and Evidence (Part 2)
Commercial real estate has also had relatively little correlation between long term interest rates and total returns.
For the period of December, 1972 to November, 2009, the correlation of monthly returns of the FTSE NAREIT Equity Index and the Barclays Long Treasury Bond Index was +0.12. For the statistically-challenged, "a very mild positive correlation - but pretty close to zero."
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Response by somewhereelse
almost 16 years ago
Posts: 7435
Member since: Oct 2009
"I really do need to understand how the market not falling in fall makes me 'wrong about everything', and how predicting prices would fall 25-30% after Lehman collapsed was so obvious - yet so many on this site wanted to debate it."
I know, I know.
Biggest recession since the depression, biggest S&P drop in half a century, biggest national housing crash of all time, and manhattan down 25-30%...
and you still have bulls who won't admit they were wrong.
It still gives me the chuckles.
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Response by somewhereelse
almost 16 years ago
Posts: 7435
Member since: Oct 2009
" Tell me how right Goldman was with their $200 barrel oil prediction:"
Tell me how right alpo was with this "THE MARKET IS NOW DOWN 20%. SHOW ME JUST ONE EXAMPLE".
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Response by somewhereelse
almost 16 years ago
Posts: 7435
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"You have no evidence that the stock market is the leading indicator of the Long Island City condo market...or the Manhattan coop market. But if you repeat it enough, maybe you can make it true...for Christmas."
Yes, a 4 year leading indicator.
ROTFL.
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Response by somewhereelse
almost 16 years ago
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BTW, any bull want to venture what happens when mortgage rates start increasing?
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Response by printer
almost 16 years ago
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Member since: Jan 2008
thank you Topper, for showing everyone that the historical shows that rising interest rates have not historically led to lower housing prices.
steve, you owe everyone a mea culpa for yet another wrongheaded remark. theories are pretty, but the evidence is what matters.
theoretically, were interest rates were the only factor influencing housing prices, then yes, higher rates would result in lower prices. but that's not the case. and in the past these other factors have obviously been meaningful enough to override the negative effect of increasing rates.
oh wait, i know....'this time it will be different'
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Response by concernedbuyer1
almost 16 years ago
Posts: 59
Member since: Dec 2009
Ok Printer..lets talk about this time...we have weakened demand along with strong supply. bank credit is tight. rates are already moving up. if rates were to run up more because of over spending by our government, how is RE going to do?
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Response by Topper
almost 16 years ago
Posts: 1335
Member since: May 2008
I'm a bear, concernedbuyer1.
That said, you can't just look at rates in a vacumn.
For example, what if inflation were to take off at 5% because of all that government spending? Maybe some "real assets" like land and superstructure would be a better inflation hedge than say a government bond!
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Response by printer
almost 16 years ago
Posts: 1219
Member since: Jan 2008
concerned - i think that if/when rates run up, it won't be in a vacuum. it will be the result of inflation fears. and history has shown that inflationary environments result in increases in the nominal value of real estate. this concept that we'll have rampant inflation everywhere except NYC housing prices makes no sense to me. please show me a time in history when this has happened.
the much more intellectually sound and scary (as a mtge holder) bear argument, is that we'll enter a protracted deflationary period like japan. they've been increasing their debt/deficits for 18 yrs, and yet you've barely seen interest rates budge there. and deflationary environments are horrible for real estate nominal values (despite the falling interest rates that accompany them).
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Response by concernedbuyer1
almost 16 years ago
Posts: 59
Member since: Dec 2009
I know there are many different factors to look at. in my opinion inflation will not save RE becuase there simply arent enough buyers to drive the price up.
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Response by bjw2103
almost 16 years ago
Posts: 6236
Member since: Jul 2007
printer, that last post is great. I think most people would agree the Japan scenario is the least desirable, though I don't think we'll follow the same route. And while inflation should help (as you correctly state it has in the past), I don't know what it leads to, given the other economic factors at work now.
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Response by columbiacounty
almost 16 years ago
Posts: 12708
Member since: Jan 2009
for the four hundredth time, please explain how we can have inflation with out demand. other than the possibility of taxes going up (which will lead to a quick change in management), what segments of our economy are successfully raising prices?
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Response by Post87deflation
almost 16 years ago
Posts: 314
Member since: Jul 2009
Not sure how monetary inflation helps, really. Nominal real estate values may stay flat or go up, but you would have done better buying corn futures than real estate . . .
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Response by Topper
almost 16 years ago
Posts: 1335
Member since: May 2008
In don't see inflation as a problem in 2010, cc. Probably something like 1.5%. Thereafter, though, the crystal ball gets foggy. Massive fiscal and monetary stimulus just might work all too well. That is the fear. Gold is up about 25% this year. Oil is up even more. Emerging markets may be headed to boom conditions and they are gobbling up commodities. There are at least grounds for longer term concern.
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Response by printer
almost 16 years ago
Posts: 1219
Member since: Jan 2008
post87 - the issue isn't 'is real estate a great bet for an inflationary environment'? i don't think anyone argues that it would be.
the issue is 'would nominal values get crushed if interest rates were to rise'?
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Response by columbiacounty
almost 16 years ago
Posts: 12708
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gold being up does not affect anyone except gold speculators and jewelers. demand for gas is down and has proven to react fairly briskly to increases in price. saying that there is long term concern with inflation is akin to saying that there is long term concern with aging.
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Response by inonada
almost 16 years ago
Posts: 7952
Member since: Oct 2008
I am the one who argued that times of high interest rates usually mean increases in RE prices and showed past evidence of this. The story is actually more refined, however. The link is through inflation expectations, which is not the only component of interest rates.
Interest rates can be broken down into a few components; I'll talk about 10-year rates as they are of a duration most closely matching mortgages. At the base, you have inflation expectations, which the market currently prices at 2% annually. Then there is the inflation risk premium, which is at 0.5%. This is the premium investors expect to be paid above expected inflation in order to compensate them for the asymmetric risk associated with inflation (i.e., it can spike). If you believe inflation is going to be higher than this 2.5% and want a cheap, liquid, pure inflation hedge, you can get that through TIPS; doing it through RE is silly because RE is convoluted with many, many other risks. Finally, there is the real cost of capital, which the market prices at 1.3% or so currently. Add these up to get to a 10-yr rate of 3.8%.
The cost-of-capital portion of interest rates are historically low. The short-end of the yield curve is being held negative by the Fed on purpose to stimulate the economy and encourage spending and investment. This is what all the complaints about "with inflation at 2% and savings rates at 0%, I'm losing money for being a saver" are about. This position from the Fed is expected to continue for a while, leading to the historically low real cost-of-capital numbers we are currently seeing in the 10-year real cost-of-capital rate.
However, as time goes on it is expected for the Fed to tighten this stance. Hence, a rise in 10-year rates is to some extent already expected. Furthermore, the tightening may happen at a quicker pace, especially if the economy heats up. All this can happen without an iota of change in inflation expectations, thereby not affecting RE valuations.
I think we can see a percent or two increase in rates without inflation expectation changes, but it's hard to imagine a spike in interest rates without some increase in inflation expectations. I also think we can see a 1% increase in mortgage rates simply from the removal of temporary government measures in the mortgage market.
So is it possible for conforming rates to go from 5% to 7% and jumbos to go from 6% to 8% without rising inflation expectations? Certainly, and in my opinion that is more likely than the increase to come from inflation expectations. However, if mortgage rates hit 10%, inflation is almost certainly going to be a likely part of the increase, leading to rising nominal RE prices.
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Response by inonada
almost 16 years ago
Posts: 7952
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This all got me to thinking about what could possibly save the bubble buyer long-term in the rent vs buy calculus.
The way I see it, in 2007 condos were renting at 4% of prices. Since then, rents dropped 20%, so now they're at a 3.2% gross yield. Maintenance, after-deduction taxes, insurance, and upkeep eat up 1.7% of this yield, so now we're talking about a 1.5% net yield. This yield will increase with inflation, which the market prices at 2%. A little present-value math will tell you that you can add the two numbers to get to a no-inflation equivalent: i.e., it is equivalent to a 3.5% yield without inflation.
Unfortunately, the blended cost of capital (I'm most interested in the multi-million market with jumbo rates and limited tax deductions) is 6% at best right now, assuming the bubble buyer refinanced to take advantage of bottom rates. So they're looking at overpaying by 2.5% of purchase price anually. For a more recent buyer, it's something better like 1.7% annually because their no-inflation equivalent is more like 4.3%.
So how can the bubble buyer be saved? One possibility is refinancing with a lower cost of capital. Given that we are at historic lows, seeing 30-year rates drop 2.5% seems highly unlikely.
The other possibility is for inflation expectations to go from 2% to 4.5%. This'll only help if the bubble buyer has a fixed mortgage, of course. Otherwise mortgage rate increases will cancel inflation benefits. For a 2.5% inflation expectation increase, we are looking at something like 10% mortgage rates since mortgage subsidies will surely be removed and Fed will tighten, increasing real cost-of-money expectations.
Is that possible? Maybe. Can inflation expectations go even higher, like say 6%, making buying even win rather than just break even? Anything is possible, but at that point we're talking about peak 1982-style inflation expectations. Not something I'd bet on, and if I wanted to make an inflation bet I'd do it through TIPS where I get paid for inflation beyond 2%, not 4.5% or 3.7%.
Realistically, bubble buyers are going to be "saved" by bad accounting in their own heads. E.g., imagine unrealistic rents, think cost-of-capital is the 0% banks pay for risk-free overnight deposits, blame losses in uncontrollable circumstances that "no one" could predict, etc.
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Response by inonada
almost 16 years ago
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BTW, that says nothing of the risk premium buyers should be afforded to put their capital at risk. Above, I'm only talking about the "If I stay long enough I'll win over renting" mentality that some "bulls" seem to express. Realistically, "rational" prices would include something like al risk premium on top of break-even with renting, say 1-1.5% anually. All-in, the price would be "rational" with long-term inflation expectation at 5-6%. Unfortunately for bubble buyers, the number is currently at 2%, and something's gotta give.
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Response by somewhereelse
almost 16 years ago
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> BTW, that says nothing of the risk premium buyers should be afforded to put their capital at risk
well, of course.
I can't tell you how many morons ignore the down payment in the buy/rent calculation, and then say "well, you'd only get 2% from it anyway".
Because RE entails no more risk than a money market. uh, yeah.
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Response by Rhino86
almost 16 years ago
Posts: 4925
Member since: Sep 2006
How does the dollar falling, and/or increasing yield requirements of foreign countries to purchase treasuries actually help Manhattan rents in such a way that higher rates could mean higher real estate prices?
For those who bought stock in March, good for you. Are you up on the combination of 2008 & 2009? I am. For those who bought apartments in March, your fate has yet to be determined. Your apartment value is not higher now than it was in March. So Printer, what exactly are you taking a victory lap for? Are you taking a victory lap because I said prices would fall this past fall and they didn't. Enjoy that. It seems like a pretty sad thing for you to get so much pleasure from. Aren't you the same a-hole who 'called financials' but didn't make ONE RED CENT from trading the stocks? Isn't that right? What kind of victory lap is that? You are pathetic. Your Christmas pleasure is that prices didn't continue to fall in fall, they stalled. You are such a loser.
"Not only that, printer, but it's fundamental economic theory: the more it costs to finance something the less that thing is worth if financing is necessary to purchase it."
Thanks Steve. Remember for stock though, you have rising earnings in dollar terms and a global market for equities to mitigate or even overwhelm this impact. For a local good like rents...not so much.
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Response by Rhino86
almost 16 years ago
Posts: 4925
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Ah ha Printer now I realize...you are still smarting from me making a fool of you back when you said you 'called financials' but didn't buy a single share. Haha.
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Response by West34
almost 16 years ago
Posts: 1040
Member since: Mar 2009
Re: I can't tell you how many morons ignore the down payment in the buy/rent calculation, and then say "well, you'd only get 2% from it anyway".
Probably the same number of morons who don't know what ceteris paribus means
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Response by Topper
almost 16 years ago
Posts: 1335
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qed
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Response by Rhino86
almost 16 years ago
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What's qed?
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Response by printer
almost 16 years ago
Posts: 1219
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well Rhino, I have a lot more money now by not following your prognostications than I would have if I did, though admittedly not as much as I would have had I gone all in back in the spring.
and I come home every night to an apt that is exactly to my specifications and a great fit for my family, while you wistfully wonder about someday, maybe, doing the same.
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Response by West34
almost 16 years ago
Posts: 1040
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Re: and I come home every night to an apt that is exactly to my specifications and a great fit for my family, while you wistfully wonder about someday, maybe, doing the same.
And then you log onto Streeteasy in your neverending quest to convince yourself and others that you did right in buying a deflating asset
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Response by printer
almost 16 years ago
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i log on to torture Rhino
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Response by West34
almost 16 years ago
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lol
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Response by Rhino86
almost 16 years ago
Posts: 4925
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Who's torturing who? You are obsessed with me. If there were a way to short Manhattan real estate this March, you wouldn't have lost any money doing so...so not sure what you mean.
I'm not sure why I wouldn't rather live half a block from Central Park in Carnegie Hill than where you live. Evaluating alternatives for the future is just enjoying the options...options you closed off for yourself. Till then talk about how you knew the stock market was oversold yet made no money. Talk about the apartment you bought that will not fall in value. The difference between you and me is if I bought, I wouldn't be defending it as anything but a mistake. Enjoy your mistake!
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Response by printer
almost 16 years ago
Posts: 1219
Member since: Jan 2008
Re: The difference between you and me is if I bought, I wouldn't be defending it as anything but a mistake'
so you do have a sense of humor after all.
we all know that you'd be telling us how your singular August 2008 purchase was a steal, was somehow still above water, and calling everyone who pointed out the numerous comps showing otherwise that they were all 'douchebags' and 'shitheads'. you are the last person on this board who would ever admit to making a mistake
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Response by Rhino86
almost 16 years ago
Posts: 4925
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I already did...I called for the market to fall over the fall and it didn't. You have done well to pretend this means that everything I have predicted has been wrong... I've only actually made one other prediction, and it turned out to be right.
So how underwater are you? Any good stock calls to share that you dont have the balls to act on, but wish to brag about?
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Response by printer
almost 16 years ago
Posts: 1219
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actually, you predicted that the stock mkt would tumble from the S&P 700s level, that crime would skyrocket, that families would exit in droves, that inv. banks would have a terrible year, among others. and saying 'i called for the mkt to fall over the fall' is quite the understatement - in the spring you expected prices to fall another 30-50%.
How underwater am I on my apt? If I assume that 2 bed/2 bath places in PS 6 are 25% off from the peak, then I'm off 10% from my purchase price, 25% of the equity. which certainly isn't a good thing, but its hardly catastrophic.
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Response by Rhino86
almost 16 years ago
Posts: 4925
Member since: Sep 2006
I do expect prices to fall another 30%...sure...but I never said by fall. Did I expect them to continue to fall this past fall, yes. I am not sure you can really find a claim by me that the stock market would tumble from the 700s. Crime and family exodus was hardly a prediction for this fall...and its hardly been disproved over such a short term frame.
I realize you have made your bed, and by attacking a personified bear, you can attack the notion that substantial risk to your purchase remains...risk to the quality of life in Manhattan, risk to demand vis a vis higher mortgage rates. It must difficult for you to be reminded of that. If it hurts too much then dont log in. Also funny is that you assume I can't have what you have...but I'd much rather be sitting in this 2/2 rental in PS 6 than in your purchase of same. I'm sorry you have such low expectations that a 2/2 represents your fit to spec perfect lifetime apartment. Again, with so many fewer banks, so many condos, and such a bad budget situation....you have a lot of downside. I hope you are as comfortable as you say. If you ever want to be smacked in your face in the nabe, let me know.
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Response by Rhino86
almost 16 years ago
Posts: 4925
Member since: Sep 2006
What's it like to be a family man, who would go back and search a strangers post to bait them? Is your kid old enough to know how pathetic their dad is? That kind of move is very 25-year-old single banker douche style. I can't imagine searching your posts. Did you have a creepy hard on when you did that? Did you say, wait little Johnny, I am searching a strangers post to develop a specific thread to call him out? Haha. The bragging about knowing financials had bottomed was the best.
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Response by printer
almost 16 years ago
Posts: 1219
Member since: Jan 2008
thanks for the hospitality, but 86th is a little seedy for me.
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Response by Rhino86
almost 16 years ago
Posts: 4925
Member since: Sep 2006
If you think its seedy now, wait a couple of years! I'm sure glad I'm not sitting on a starter apartment. Maybe if rates rise, it will be accompanied by another tech bubble and hiring boom like the 1990s to bail you out. As we know, the situation is very similar today.
Seriously, by attacking me are you really attacking your bear-case fears? Have you talked to your therapist about me? Why are you here? Do you really want to know in real time if your apartment is losing value? If you win your bull case argument with me, does it protect you from your real life downside. Face it recent buyers, you may be fucked. You may not be fucked, but you may be fucked. Deal with it. Does it feel that good to you that prices didn't clearly fall since Spring? Is that a victory?
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Response by printer
almost 16 years ago
Posts: 1219
Member since: Jan 2008
i like how you're turning the psycho-babble crap I used on you right back onto me - you are really upping your game. maybe you're not the pushover you've been so far. now if you can just find a way to end the arguments you lose without resorting to 5th grade insults things could get interesting.
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Response by Rhino86
almost 16 years ago
Posts: 4925
Member since: Sep 2006
Why do you derive such pleasure from my bear case playing out from Sep to May, but not May to Dec? Does it help you pretend you are in the clear? Does it help to paint me with fabricated bearish predictions to make me seem unreasonable.
Also, I need help searching the posts of specific individuals to attack them. Please advise. Also, if losing 25% of your equity (surely hopeful) is no big deal, why were you stretched though thin that you couldn't through a couple bucks at your brilliant financial stock call?
DO let me know if you still don't understand why an increase in interest rates that is not driven by an economic recovery would be a net negative for real estate prices.
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Response by Rhino86
almost 16 years ago
Posts: 4925
Member since: Sep 2006
Bye for now. When you are sick of looking at your family again, do another search of my old posts and start a thread about me. Bring quotes too, really spend the time. It will make you less nervous about the questionable investment you've made in Manhattan real estate in the early innings of the downturn. Enjoy the pause!
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Response by printer
almost 16 years ago
Posts: 1219
Member since: Jan 2008
ah, now you've resorted to making nasty comments about my family. you are truly a low-life.
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Response by Rhino86
almost 16 years ago
Posts: 4925
Member since: Sep 2006
Its more a nasty comment about your character. What does it say about your family life that you would search my posts and attack me personally? So in summary, you are a guy who's wishfully down 10% on his purchase...who brags about a stock market call he didn't act on...who calls out someone because prices didn't continue to fall after the Spring. You are 0-2 in your checkbook. This is the basis of a post calling ME out? You are a scared buffoon hoping that calling me a lowlife and denying the relationship between rates and values can protect you from your downside...hoping that you're in the clear. Go spend time with your rats and come back in 10 years when you might be back to breakeven.
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Response by printer
almost 16 years ago
Posts: 1219
Member since: Jan 2008
I love you too. Have a wonderful New Years.
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Response by Rhino86
almost 16 years ago
Posts: 4925
Member since: Sep 2006
Please call the bottom on something before the fact this year!
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I'd rather a bull tell me they simply dont care - they want to own and renovate their own space - then tell me these are normal price to rent ratios. The worst is that mental patient LICC, who is determined to deny history. Then you have printer, who insists that the cost of money is not a negative factor to the value of real estate. To make it worse, he twists what I have said into 'if interest rates rise, real estate falls'... No not in a 1990s style economy driven rate increase with rising rents off a historic bottom. Only a fool could not see the difference between that and a treasury glut driven increase in rates without strength in the local economy. Now if he were smart enough, he would argue we are going to see robust improvement in financial sector employment and income... I might not agree, but at least it would show he understood the factors in play.
Now if he were smart enough, he would argue we are going to see robust improvement in financial sector employment and income... I might not agree, but at least it would show he understood the factors in play.
ah, but I did that back in the spring, when I tried to explain to you that the decrease in liquidity in the mkts would lead to wider bid/asks and greater trading profits for the inv. banks. you, as typical, resorted to name calling. and typically, I was right, and you were wrong (or have you not noticed the great year wall street has had)?
you just don't get it - you were all aboard the bear train at the mkt nadir - home prices, stocks, finance sector profits, GDP, employment, families fleeing the city for the burbs, crime, etc. And things have not only not hit the dire levels you wished for, but they have in all cases stabilized or improved.
Smart people, when they have a thesis which empirical evidence disproves, re-evaluate the thesis. You, on the other hand, use 10yr old epithets to shout down the facts.
"And you, Rhino, have no evidence that increasing interest rates will result in falling real estate prices. "
HAHAHAHAHA!
so steve, where is your empirical evidence where protracted periods of increasing rates we coincident with decreasing prices?
The 1970's.
Not only that, printer, but it's fundamental economic theory: the more it costs to finance something the less that thing is worth if financing is necessary to purchase it.
I know, it's just a theory, like evolution.
Theory and Evidence
Alas, I've often found that the actual data behaves rather badly (at least relative to theory). For the most part I've found only the mildest correlation between interest rates and home prices over very long periods of time. Keep in mind that there are lots of other factors at work including inflation, supply, etc. that cloud the waters.
Year, Existing Single-Family Median Home Prices, Long Treasury Yield
1974, 10.73%, 8.29%
1975, 10.31%, 7.93%
1976, 7.93%, 7.64%
1977, 12.60%, 8.01%
1978, 13.52%, 8.99%
1979, 14.37%, 9.90%
1980, 11.67%, 11.73%
1981, 6.75%, 13.39%
"I know, it's just a theory, like evolution.
"
hahahahah
Printer needs a Reality Check:
The Bubble:
http://graphics8.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif
Historical Analysis of Rates v Home Prices (SoCal) 1977-2006:
http://piggington.com/historical_home_prices_payments_rents_and_rates
Historically low mortgage rates has been touted as why to buy, but if they spike upward next year, people don't think that would affect sale prices? I'm not getting this.
oops. "have been"
But....The West Village is Different
"Rhino has been amazingly wrong about just about everything"
Wait, did LICC really just said that? Funny.
Theory and Evidence (Part 2)
Commercial real estate has also had relatively little correlation between long term interest rates and total returns.
For the period of December, 1972 to November, 2009, the correlation of monthly returns of the FTSE NAREIT Equity Index and the Barclays Long Treasury Bond Index was +0.12. For the statistically-challenged, "a very mild positive correlation - but pretty close to zero."
"I really do need to understand how the market not falling in fall makes me 'wrong about everything', and how predicting prices would fall 25-30% after Lehman collapsed was so obvious - yet so many on this site wanted to debate it."
I know, I know.
Biggest recession since the depression, biggest S&P drop in half a century, biggest national housing crash of all time, and manhattan down 25-30%...
and you still have bulls who won't admit they were wrong.
It still gives me the chuckles.
" Tell me how right Goldman was with their $200 barrel oil prediction:"
Tell me how right alpo was with this "THE MARKET IS NOW DOWN 20%. SHOW ME JUST ONE EXAMPLE".
"You have no evidence that the stock market is the leading indicator of the Long Island City condo market...or the Manhattan coop market. But if you repeat it enough, maybe you can make it true...for Christmas."
Yes, a 4 year leading indicator.
ROTFL.
BTW, any bull want to venture what happens when mortgage rates start increasing?
thank you Topper, for showing everyone that the historical shows that rising interest rates have not historically led to lower housing prices.
steve, you owe everyone a mea culpa for yet another wrongheaded remark. theories are pretty, but the evidence is what matters.
theoretically, were interest rates were the only factor influencing housing prices, then yes, higher rates would result in lower prices. but that's not the case. and in the past these other factors have obviously been meaningful enough to override the negative effect of increasing rates.
oh wait, i know....'this time it will be different'
Ok Printer..lets talk about this time...we have weakened demand along with strong supply. bank credit is tight. rates are already moving up. if rates were to run up more because of over spending by our government, how is RE going to do?
I'm a bear, concernedbuyer1.
That said, you can't just look at rates in a vacumn.
For example, what if inflation were to take off at 5% because of all that government spending? Maybe some "real assets" like land and superstructure would be a better inflation hedge than say a government bond!
concerned - i think that if/when rates run up, it won't be in a vacuum. it will be the result of inflation fears. and history has shown that inflationary environments result in increases in the nominal value of real estate. this concept that we'll have rampant inflation everywhere except NYC housing prices makes no sense to me. please show me a time in history when this has happened.
the much more intellectually sound and scary (as a mtge holder) bear argument, is that we'll enter a protracted deflationary period like japan. they've been increasing their debt/deficits for 18 yrs, and yet you've barely seen interest rates budge there. and deflationary environments are horrible for real estate nominal values (despite the falling interest rates that accompany them).
I know there are many different factors to look at. in my opinion inflation will not save RE becuase there simply arent enough buyers to drive the price up.
printer, that last post is great. I think most people would agree the Japan scenario is the least desirable, though I don't think we'll follow the same route. And while inflation should help (as you correctly state it has in the past), I don't know what it leads to, given the other economic factors at work now.
for the four hundredth time, please explain how we can have inflation with out demand. other than the possibility of taxes going up (which will lead to a quick change in management), what segments of our economy are successfully raising prices?
Not sure how monetary inflation helps, really. Nominal real estate values may stay flat or go up, but you would have done better buying corn futures than real estate . . .
In don't see inflation as a problem in 2010, cc. Probably something like 1.5%. Thereafter, though, the crystal ball gets foggy. Massive fiscal and monetary stimulus just might work all too well. That is the fear. Gold is up about 25% this year. Oil is up even more. Emerging markets may be headed to boom conditions and they are gobbling up commodities. There are at least grounds for longer term concern.
post87 - the issue isn't 'is real estate a great bet for an inflationary environment'? i don't think anyone argues that it would be.
the issue is 'would nominal values get crushed if interest rates were to rise'?
gold being up does not affect anyone except gold speculators and jewelers. demand for gas is down and has proven to react fairly briskly to increases in price. saying that there is long term concern with inflation is akin to saying that there is long term concern with aging.
I am the one who argued that times of high interest rates usually mean increases in RE prices and showed past evidence of this. The story is actually more refined, however. The link is through inflation expectations, which is not the only component of interest rates.
Interest rates can be broken down into a few components; I'll talk about 10-year rates as they are of a duration most closely matching mortgages. At the base, you have inflation expectations, which the market currently prices at 2% annually. Then there is the inflation risk premium, which is at 0.5%. This is the premium investors expect to be paid above expected inflation in order to compensate them for the asymmetric risk associated with inflation (i.e., it can spike). If you believe inflation is going to be higher than this 2.5% and want a cheap, liquid, pure inflation hedge, you can get that through TIPS; doing it through RE is silly because RE is convoluted with many, many other risks. Finally, there is the real cost of capital, which the market prices at 1.3% or so currently. Add these up to get to a 10-yr rate of 3.8%.
The cost-of-capital portion of interest rates are historically low. The short-end of the yield curve is being held negative by the Fed on purpose to stimulate the economy and encourage spending and investment. This is what all the complaints about "with inflation at 2% and savings rates at 0%, I'm losing money for being a saver" are about. This position from the Fed is expected to continue for a while, leading to the historically low real cost-of-capital numbers we are currently seeing in the 10-year real cost-of-capital rate.
However, as time goes on it is expected for the Fed to tighten this stance. Hence, a rise in 10-year rates is to some extent already expected. Furthermore, the tightening may happen at a quicker pace, especially if the economy heats up. All this can happen without an iota of change in inflation expectations, thereby not affecting RE valuations.
I think we can see a percent or two increase in rates without inflation expectation changes, but it's hard to imagine a spike in interest rates without some increase in inflation expectations. I also think we can see a 1% increase in mortgage rates simply from the removal of temporary government measures in the mortgage market.
So is it possible for conforming rates to go from 5% to 7% and jumbos to go from 6% to 8% without rising inflation expectations? Certainly, and in my opinion that is more likely than the increase to come from inflation expectations. However, if mortgage rates hit 10%, inflation is almost certainly going to be a likely part of the increase, leading to rising nominal RE prices.
This all got me to thinking about what could possibly save the bubble buyer long-term in the rent vs buy calculus.
The way I see it, in 2007 condos were renting at 4% of prices. Since then, rents dropped 20%, so now they're at a 3.2% gross yield. Maintenance, after-deduction taxes, insurance, and upkeep eat up 1.7% of this yield, so now we're talking about a 1.5% net yield. This yield will increase with inflation, which the market prices at 2%. A little present-value math will tell you that you can add the two numbers to get to a no-inflation equivalent: i.e., it is equivalent to a 3.5% yield without inflation.
Unfortunately, the blended cost of capital (I'm most interested in the multi-million market with jumbo rates and limited tax deductions) is 6% at best right now, assuming the bubble buyer refinanced to take advantage of bottom rates. So they're looking at overpaying by 2.5% of purchase price anually. For a more recent buyer, it's something better like 1.7% annually because their no-inflation equivalent is more like 4.3%.
So how can the bubble buyer be saved? One possibility is refinancing with a lower cost of capital. Given that we are at historic lows, seeing 30-year rates drop 2.5% seems highly unlikely.
The other possibility is for inflation expectations to go from 2% to 4.5%. This'll only help if the bubble buyer has a fixed mortgage, of course. Otherwise mortgage rate increases will cancel inflation benefits. For a 2.5% inflation expectation increase, we are looking at something like 10% mortgage rates since mortgage subsidies will surely be removed and Fed will tighten, increasing real cost-of-money expectations.
Is that possible? Maybe. Can inflation expectations go even higher, like say 6%, making buying even win rather than just break even? Anything is possible, but at that point we're talking about peak 1982-style inflation expectations. Not something I'd bet on, and if I wanted to make an inflation bet I'd do it through TIPS where I get paid for inflation beyond 2%, not 4.5% or 3.7%.
Realistically, bubble buyers are going to be "saved" by bad accounting in their own heads. E.g., imagine unrealistic rents, think cost-of-capital is the 0% banks pay for risk-free overnight deposits, blame losses in uncontrollable circumstances that "no one" could predict, etc.
BTW, that says nothing of the risk premium buyers should be afforded to put their capital at risk. Above, I'm only talking about the "If I stay long enough I'll win over renting" mentality that some "bulls" seem to express. Realistically, "rational" prices would include something like al risk premium on top of break-even with renting, say 1-1.5% anually. All-in, the price would be "rational" with long-term inflation expectation at 5-6%. Unfortunately for bubble buyers, the number is currently at 2%, and something's gotta give.
> BTW, that says nothing of the risk premium buyers should be afforded to put their capital at risk
well, of course.
I can't tell you how many morons ignore the down payment in the buy/rent calculation, and then say "well, you'd only get 2% from it anyway".
Because RE entails no more risk than a money market. uh, yeah.
How does the dollar falling, and/or increasing yield requirements of foreign countries to purchase treasuries actually help Manhattan rents in such a way that higher rates could mean higher real estate prices?
For those who bought stock in March, good for you. Are you up on the combination of 2008 & 2009? I am. For those who bought apartments in March, your fate has yet to be determined. Your apartment value is not higher now than it was in March. So Printer, what exactly are you taking a victory lap for? Are you taking a victory lap because I said prices would fall this past fall and they didn't. Enjoy that. It seems like a pretty sad thing for you to get so much pleasure from. Aren't you the same a-hole who 'called financials' but didn't make ONE RED CENT from trading the stocks? Isn't that right? What kind of victory lap is that? You are pathetic. Your Christmas pleasure is that prices didn't continue to fall in fall, they stalled. You are such a loser.
"Not only that, printer, but it's fundamental economic theory: the more it costs to finance something the less that thing is worth if financing is necessary to purchase it."
Thanks Steve. Remember for stock though, you have rising earnings in dollar terms and a global market for equities to mitigate or even overwhelm this impact. For a local good like rents...not so much.
Ah ha Printer now I realize...you are still smarting from me making a fool of you back when you said you 'called financials' but didn't buy a single share. Haha.
Re: I can't tell you how many morons ignore the down payment in the buy/rent calculation, and then say "well, you'd only get 2% from it anyway".
Probably the same number of morons who don't know what ceteris paribus means
qed
What's qed?
well Rhino, I have a lot more money now by not following your prognostications than I would have if I did, though admittedly not as much as I would have had I gone all in back in the spring.
and I come home every night to an apt that is exactly to my specifications and a great fit for my family, while you wistfully wonder about someday, maybe, doing the same.
Re: and I come home every night to an apt that is exactly to my specifications and a great fit for my family, while you wistfully wonder about someday, maybe, doing the same.
And then you log onto Streeteasy in your neverending quest to convince yourself and others that you did right in buying a deflating asset
i log on to torture Rhino
lol
Who's torturing who? You are obsessed with me. If there were a way to short Manhattan real estate this March, you wouldn't have lost any money doing so...so not sure what you mean.
I'm not sure why I wouldn't rather live half a block from Central Park in Carnegie Hill than where you live. Evaluating alternatives for the future is just enjoying the options...options you closed off for yourself. Till then talk about how you knew the stock market was oversold yet made no money. Talk about the apartment you bought that will not fall in value. The difference between you and me is if I bought, I wouldn't be defending it as anything but a mistake. Enjoy your mistake!
Re: The difference between you and me is if I bought, I wouldn't be defending it as anything but a mistake'
so you do have a sense of humor after all.
we all know that you'd be telling us how your singular August 2008 purchase was a steal, was somehow still above water, and calling everyone who pointed out the numerous comps showing otherwise that they were all 'douchebags' and 'shitheads'. you are the last person on this board who would ever admit to making a mistake
I already did...I called for the market to fall over the fall and it didn't. You have done well to pretend this means that everything I have predicted has been wrong... I've only actually made one other prediction, and it turned out to be right.
So how underwater are you? Any good stock calls to share that you dont have the balls to act on, but wish to brag about?
actually, you predicted that the stock mkt would tumble from the S&P 700s level, that crime would skyrocket, that families would exit in droves, that inv. banks would have a terrible year, among others. and saying 'i called for the mkt to fall over the fall' is quite the understatement - in the spring you expected prices to fall another 30-50%.
How underwater am I on my apt? If I assume that 2 bed/2 bath places in PS 6 are 25% off from the peak, then I'm off 10% from my purchase price, 25% of the equity. which certainly isn't a good thing, but its hardly catastrophic.
I do expect prices to fall another 30%...sure...but I never said by fall. Did I expect them to continue to fall this past fall, yes. I am not sure you can really find a claim by me that the stock market would tumble from the 700s. Crime and family exodus was hardly a prediction for this fall...and its hardly been disproved over such a short term frame.
I realize you have made your bed, and by attacking a personified bear, you can attack the notion that substantial risk to your purchase remains...risk to the quality of life in Manhattan, risk to demand vis a vis higher mortgage rates. It must difficult for you to be reminded of that. If it hurts too much then dont log in. Also funny is that you assume I can't have what you have...but I'd much rather be sitting in this 2/2 rental in PS 6 than in your purchase of same. I'm sorry you have such low expectations that a 2/2 represents your fit to spec perfect lifetime apartment. Again, with so many fewer banks, so many condos, and such a bad budget situation....you have a lot of downside. I hope you are as comfortable as you say. If you ever want to be smacked in your face in the nabe, let me know.
What's it like to be a family man, who would go back and search a strangers post to bait them? Is your kid old enough to know how pathetic their dad is? That kind of move is very 25-year-old single banker douche style. I can't imagine searching your posts. Did you have a creepy hard on when you did that? Did you say, wait little Johnny, I am searching a strangers post to develop a specific thread to call him out? Haha. The bragging about knowing financials had bottomed was the best.
thanks for the hospitality, but 86th is a little seedy for me.
If you think its seedy now, wait a couple of years! I'm sure glad I'm not sitting on a starter apartment. Maybe if rates rise, it will be accompanied by another tech bubble and hiring boom like the 1990s to bail you out. As we know, the situation is very similar today.
Seriously, by attacking me are you really attacking your bear-case fears? Have you talked to your therapist about me? Why are you here? Do you really want to know in real time if your apartment is losing value? If you win your bull case argument with me, does it protect you from your real life downside. Face it recent buyers, you may be fucked. You may not be fucked, but you may be fucked. Deal with it. Does it feel that good to you that prices didn't clearly fall since Spring? Is that a victory?
i like how you're turning the psycho-babble crap I used on you right back onto me - you are really upping your game. maybe you're not the pushover you've been so far. now if you can just find a way to end the arguments you lose without resorting to 5th grade insults things could get interesting.
Why do you derive such pleasure from my bear case playing out from Sep to May, but not May to Dec? Does it help you pretend you are in the clear? Does it help to paint me with fabricated bearish predictions to make me seem unreasonable.
Also, I need help searching the posts of specific individuals to attack them. Please advise. Also, if losing 25% of your equity (surely hopeful) is no big deal, why were you stretched though thin that you couldn't through a couple bucks at your brilliant financial stock call?
DO let me know if you still don't understand why an increase in interest rates that is not driven by an economic recovery would be a net negative for real estate prices.
Bye for now. When you are sick of looking at your family again, do another search of my old posts and start a thread about me. Bring quotes too, really spend the time. It will make you less nervous about the questionable investment you've made in Manhattan real estate in the early innings of the downturn. Enjoy the pause!
ah, now you've resorted to making nasty comments about my family. you are truly a low-life.
Its more a nasty comment about your character. What does it say about your family life that you would search my posts and attack me personally? So in summary, you are a guy who's wishfully down 10% on his purchase...who brags about a stock market call he didn't act on...who calls out someone because prices didn't continue to fall after the Spring. You are 0-2 in your checkbook. This is the basis of a post calling ME out? You are a scared buffoon hoping that calling me a lowlife and denying the relationship between rates and values can protect you from your downside...hoping that you're in the clear. Go spend time with your rats and come back in 10 years when you might be back to breakeven.
I love you too. Have a wonderful New Years.
Please call the bottom on something before the fact this year!