Sunday, June 09, 2013

Cash purchases driving a new real estate bubble - too much wealth, too few investments

Cash-only real estate speculation in LA, Boston, Miami, San Francisco and so on (emphases mine) ...

... These days, the only way for would-be buyers to secure a home, it often seems, is to offer all cash and be ready to do so within hours, not days.

...first-time home buyers are competing with investors to get into single-family homes with prices approaching $1 million.

... large investors purchasing thousands of properties

... a third of all homes purchased in Los Angeles during the first quarter of this year went for all cash, compared with just 7 percent in 2007. In Miami, 65 percent of homes sold were for cash deals, compared with 16 percent six years ago.

... In Los Angeles, the median price on an all-cash home this year is about $351,000, compared with $230,000 in 2009. Over the same period, the median price over all increased to $410,000, up $85,000. In fact, last month, home prices in Southern California hit their highest level in the last five years.

... Buyers in Boston are offering $100,000 more than the asking price or placing offers on homes they have spent only minutes in.

... He also waived the inspection clause, an increasingly common practice... offers today are more likely to include escalation clauses, saying buyers will pay an additional amount over the highest bid.

... cash purchases fueled in part by international investors and retirees awash in cash after selling their homes elsewhere....

This fits reports a few months back of large numbers of purchased but unoccupied condominiums in luxury markets.

Where is all the cash coming from? The article doesn't say, but there's vast wealth in China now and few safe places to park it. Real estate is a classic Chinese investment. There's also a large amount of boomer wealth in play as my generation (noisily, because we are nothing if not loud) shuffles off the stage.

What happens next? I assume we're in for another one of our worldwide boom-bust cycles...

Gordon's Notes: Stock prices - resorting to another dumb hydraulic analogy


Why are having these worldwide boom bust cycles? 

Ahh, if only we knew. Since I'm not an economist, and thus I have neither credibility to protect nor Krugman to fear, I'm free to speculate. I think the world's productive capacity has grown faster than the ability of our financial systems to manage it. There's too much wealth and potential wealth (in a fundamental sense, regardless of central bank actions) for our system to productively absorb. We're filling a 100 ml vial from a 10 liter bucket. Or, in Bernd Jendrissek's words: "The gain is too high for the phase shift for this feedback loop to be stable."

If there's anything to this idea then we little people may want to remember the advice of Victor Niederhoffer, a wealthy man who has lost vast amounts of money in the post RCIIIT economy:

... Whenever disaster strikes, the very sagacious wealthy people take their canes, and they hobble down from their stately mansions on Fifth Avenue, and they buy stocks to the extent of their bank balances, and then a week or two later, the market rises, they deposit the overplus in their accounts, invest it in blue-chip real estate, and retire back to their stately mansions. That's probably the best way of making money, to be a specialist in panics. Whenever there's panic hanging in the air, that's a great time to invest...

Of course this implies one has a relatively tax efficient way of moving money in and out of cash -- and lots of cash to gamble without fear of unemployment. When downturns hit most of us need our cash as a hedge against job loss; only the 0.05% don't need to work. Even so, there may be a lesser version of the long game we can play to at least limit our crash pain. For example, perhaps a 21st century John Bogle will create a derivative that retail investors can purchase on the rise (when we have cash) that pays off on the fall (when we don't).

How long will it be before the world's financial systems catch up with our productive capacity -- especially given the rise of Africa and the unfolding of the post-AI world?

I suspect not in my lifetime [1]. It's whitewater as far as the eye can see.

Update: In surfing lingo a hard breaking wave is a called a "Cruncher". Perhaps "new Cruncher" is a better term than "new bubble".

- fn -

[1] Though if wealth were better distributed we might have the equivalent of filling that 100 ml vial from 10,000 1 ml vials. Much easier to stop before overfilling.

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