Dow 11000....nice

Good if you own stocks which track the Dow, bad if you own something else.

bob_d..for poor stockpickers sure but for overall economic confidence the Dow industrials have the greatest impact.

Uhm, steveF: when stocks AND gold rally at the same time, and when stocks completely ignore all bad news like today's job reports, and when volume is as thin as 120 - 140 million shares a day, don't expect the rally to hold. In fact, under these circumstances, the higher it goes, the lower it's likely to fall. All measures of the stock market show it to be vastly overbought since the end of August - just check out the slow stochastics.

This is all predicated on the belief that the Fed will ease more - it may, but it still won't be enough without further fiscal stimulus, and when asset bubbles start to form - gold, stocks - then Riversider's favorite economic theories start to work: what happens is that interest rates get so low that bank's WON'T lend, and money starts getting allocated to other assets.

Which is precisely what we're seeing. None of this is based on economic fundamentals, which is what makes it so dangerous.

Read here:

http://www.marketwatch.com/story/dow-tops-11000-on-thoughts-of-fed-moves-ahead-2010-10-08

Rallies based on a) fantasy, or b) government intervention, never last.

stevejhx,
the avg Joe and Jane Shmoo do not look at all that marvelous data you just rolled out. They don't function that way. They just look at the Dow. Higher means economy better lower means economy worse.

btw, Gold is rallying as a hedge against inevitable fed induced INFLATION. btw another great inflation hedge is real estate and inflation is on it's way.

I have no clue whether the stock market will go up, down or sideways. What I do see is a progressive disconnect between homebuyers whose purchasing power is derived primarily from wealth and those whose purchasing power is derived primarily from income. The first group has played a huge role in the stabilization of apartment prices during the past year. The wealthy were largely spooked and sidelined at Dow 6,500, a situation doubtless compounded in many cases by job loss or insecurity. Since the Dow returned to quintuple-digits, the rich have been Manhattan buyers, with cash-heavy offers for much of the best product that has come to market in the past year.

So, from that perspective, SteveF is right: an important portion of the buyer pool seems to be influenced profoundly by the value of their portfolios. That's only logical. If my net worth falls from $5MM to $3MM, I can still afford $2MM for an apartment, but suddenly it represents a 67% asset allocation instead of 40%. That's a really big deal, and maybe that same apartment only makes sense to me at $1.2-1.5MM. More importantly, a lot of my peers (those likely to bid against me for that apartment) are feeling the same pain. When our portfolios reinflate to $4.5MM, we can bid against each other aggressively again, especially if our incomes seem more secure.

That leaves the question, though, of how deep that part of the buyer pool really is, and how long a market can be driven primarily by wealth rather than income.

Obviously, I'm vastly oversimplifying the factors at play here, and of most buyers fall somewhere along a wealth/income continuum, not at either extreme. But I do think there's a point where confidence and wealth aren't enough, and prices reflect a reversion to norms in loan-to-value and debt-to-income ratios.

On the other hand, SteveF, if you believe a family with modest or non-existent equity holdings is influenced significantly by the Dow, I think that's nonsense. People know their own economic circumstances and prospects better than that.

If I own stocks, and my stocks go up, I can pay more for an apartment. The value of other people's stocks (whether measured by the Dow, the S&P or a divining rod) does not influence me one bit.

Obviously, I'm vastly oversimplifying the factors at play here, and of most buyers fall somewhere along a wealth/income continuum, not at either extreme. But I do think there's a point where confidence and wealth aren't enough, and prices reflect a reversion to norms in loan-to-value and debt-to-income ratios.

great parapgrah.....and prices should always reflect the norms and no where are the norms LTV/DTI more protected then in Manhattan with it's Co-op and to some Condo boards.Very efficient market that's what shielded us from the credit crisis(no subprime allowed)

sorry have to jet.."extent Condo boards" and "manhattan is a very efficient market that shielded us"...

Nor should it, W81. If you want to buy a house, you should keep your money safe, not in an unreliable stock market.

see the other idiot who said you should put your downpaymemt in stocks instead.

To anyone advocating purchasing real estate, particularly single family units: With interest rates almost as low as they can possibly go, where will prices go when (not if) rates increase? Of course the answer is obvious, I'd love to hear how one might spin it to a prospective buyer though.

Roro
HIGHER interest rates will lead to HIGHER prices b/c higher interest rates means the economy is cranking and people are employed, getting raises etc., the whole thing. An increase in salaries and higher employment more than offsets the cost of any mtg rate increases.

There's your answer. Of course IMHO.

SteveF: That scenario seems implausibly rosy.

The way I learned the cycle, an economic recovery initially generates stronger demand and higher asset prices. THEN interest rates rise, and asset values fall again.

As for the current situation, do you really expect the kind of increases in income and employment that would be needed to offset a return to historically normal mortgage rates?

yes, West, steveF has it backwards - the higher interest rates will lag or be co-incident to the higher prices, not lead them. To your second point, the answer is simply that we won't return to historically normal rates if we don't see dramatic increases in income and employment.

not in the immediate short term no but once the snowball starts rolling......seriously I expect the recovery cycle to continue as it always has.

Offtopic, my main interest is in where will inventory be in a year/2 years. What impact did the credit crunch have on new residential construction. if I was a buyer I would be more concerned about future supply. The economy will get there but the inventory situation is a big unknown. That is a risk to be aware of. Shadow inventory talk has been around forever so I'm not concerned. But 3 years ago NO ONE COULD BUILD so where is the effect? Supply constraints s/b happening, well, about now.

The way I learned the cycle, an economic recovery initially generates stronger demand and higher asset prices. THEN interest rates rise, and asset values fall again.

exactly...did I word it the wrong way? that was my evil twin Fsteve.

"once the snowball starts rolling" - when's that going to be? What event(s) will get the ball rolling?

I'm actually not too fearful of huge price drops anymore. As long QE2 takes place, it'll stabilize/lock in prices for the longer run. Barring any huge exogenous shocks to the economy, this could be a shot in the arm for housing. Can you say 3.5% 30 year mortgage rates!?

"bob_d..for poor stockpickers sure but for overall economic confidence the Dow industrials have the greatest impact."

If you're a working stiff with no money invested in the stock market, then it hurts you when the market goes up, because it makes rich people richer, who then bid up the price of real estate pricing you out of the market.

Joe sixpack should be rooting for the market to go down.

fed intervention by buying up evrything and injecting unprecedented amounts of money into the economy. Bernanke has stated that he will pump money into the economy for as long as it takes. Deflation is not a concern on his watch. That HAS to lead to inflation. Has to. The fed won't be able to tighten as fast as needed to reign the money back in. They can't do it b/c they will jolt the economy.

I love the logic of the bubble days. It was easy:

- If interest rates go up then that is bullish for RE.
- If Interest rates go down then that is bullish for RE.

- If the dollar strengthens then that is good for Manhattan RE (foreigners will want to invest Euros in assets that will apreciate).
- If the dollar depreciates that is good for Manhattan RE (Foreigners can now afford more Manhattan RE).

The answers are easy, they are always the same.

Of course they will tighten hard when inflation rears its head. dramatic inflation is the 2nd most toxic environment for a healthy economy after broad asset deflation. And there is a strong historical precedent set by Paul Volcker. No one fears a hard jolt to the economy from an 81-82 type of tightening since it was considered the most brilliantly executed central bank move in the last century. It made Volcker a hero.

They only wish they could engineer such a situation. They can't because all the QE gets locked up in bank holding accounts. Until the velocity of money increases we are stuck with a stagnant environment where the gove't and central banks are propping up the values of hard assets.

Since they are doing it at levels above historical price/income levels and other metrics, then something has to crack because one rule in economics never gets broken: If something can't go on forever, it won't.

Sure Volcker did what he had to do but inflation had already pushed prices up dramatically during the 70s and early 80s and prices never looked back.

AvUWS: Well said. A little closer to home, any thoughts on 255 W.84th #11E - particularly the trade-off between purchase price and high monthlies?

Sorry to hijack the thread with a discussion of an actual listing, but I think it's relevant to the wealth-vs.-income question.

The rather significant difference this time around is that the Fed cannot raise rates as that would lead to the USA defaulting on its debts (either outright or through printing its way out in a hyperinflationary scenario).

I say huge market manipulation before the elections.
Small investors are screwed: Face they win, tail you lose.

Forget the developed world - although the U.S. is the best of the bad.

Buy emerging market equities. VWO (Vanguard's very low cost ETF) is the best. High growth, good demographics, reasonable valuations.

nice....

Are emerging markets self-sustaining? Can China thrive without the US buying its cheap products? Or does the death of credit-driven over-consumption in the west portend major economic problems for emerging markets too?

Emerging markets are increasingly trading among themselves. What is Brazil's biggest trading partner. It used to be the U.S. Now it's China.

American consumers have historically consumed 70% of GDP. That figure is closer to 35% in China as a far larger share of GDP is going into savings and investment. Internal Chinese consumer demand will play an increasingly important role in the growth of the Chinese economy. That goes for many other emerging markets as well.

According to the U.N., the population of Europe and Japan will not only be lower in 2050 than it is today but it will be even older with a far higher dependency ratio than today. (The U.S. should have about 27% higher population in 2050 than today - largely because of immigration. It's dependency ratio will be lower than in Japan or Europe - but far higher than in most emerging market countries.)

In addition, most emerging market countries have small government debt relative to GDP relative to the burgeoning debt ratios in the developed world.

Despite this PE ratios in the developed and emerging markets are almost identical. Virtually no premium for growth and good fiscal discipline. In addition, the emerging markets do not have the mountain of Medicare/Medicaid/Social Security payments about to burgeon as the boomers retire. (The emerging markets did not experience a baby boom after World War II as we did.)

Lots of possibility for a future bubble. But no where near there today.

Hi Westie,

I am flattered you asked me but multi-million apartments are way above my pay and income grade.

I can compare the apartment to the A line which I know well. The A line is both grander than this and in a way not as good a value. I like the way you can easily combine the living and dining rooms in this apartment, which you can't in the A (divided by the gallery) and this line has more "servants" space, which with some creativity can be used well.

The A line works best as a 2 BR with a huge living room and a dining room (or make the dining room the 3rd BR?).

Drawback would be the tiny 2nd bath.

Again, I am not nearly the expert you are, I only have a bit of (outdated) experience with the building.

who remembers who said this infamous statement in a fit of panic just before the bottom 2 yrs ago

"dow 6500.... There is very little doubt now that that's where we're headed."

"- If interest rates go up then that is bullish for RE.
- If Interest rates go down then that is bullish for RE."

LOL. Come on, don't stop SteveF, he's on a roll. Some good laughs this evening.

It was nice while it lasted...

"It was nice while it lasted..."

Ha. Good one. malthus, I'm jealous of your ability to dig up past threads that put fools on the record

It's a bit different when the 11,000 threshold is on the way down, eh steve?

I am waiting til 10500.

We're back!

wheres ericho ?

I'm waiting for 9000.

erichoooooooooooooooooooooooooooooooooo

bought a teensy bit of stox today--felt eerily like buying nikkei in 91

Well at least if you buy the stock market today according to Grantham & Hussman looking at round a 5% return over the next ten years up from 3.8%