It Has Been a Very Long Time Since I Have Penned a Real Estate Update

Bob Sievers 0 comments 11.04.2022

During my 30 year career on Wall St prior to my last 8 years in real estate, I was intensely focused on watching monetary policy by the federal reserve and other impactful economic forces such as government spending, social trends, etc...Coupled with my degree in finance at USC wayyy back in 1980-84, I believe this can be value-added to my clients and friends. So if you are interested in a different perspective, please read on...It is lengthy but I hope worth the read...

Other than the very short-lived coronavirus dip in home and rental prices (roughly 10% March 2020-June 2020), the market has been booming since 2011.  Once the federal reserve made perhaps the biggest policy mistake in its history in the summer of 2020, prices have exploded near parabolically as anyone has clearly noticed.  Let me quickly break down the gains and their source as well as some other salient points regarding inflation, fed policy and market outlook.  

1. In  2020 the Federal Reserve Bank or the "fed"  increased the supply of money by 25%.  This means that PRICES of most everything would increase by 25%.  This does not mean the VALUE (what a dollar can buy) increased by 25%.  As a matter of simplicity, the VALUE of any asset that is 25% higher priced in dollars that are worth 25% less is unchanged.  Despite good intentions (maybe), this has increased the wealth gap by holding up real values for asset owners and crushing those with savings or those who live paycheck to paycheck.  So when they tell the masses they are helping them by sending checks in the mail, one should be skeptical since the people sending the checks just so happen to be the people with assets.
2. Since the 10% blink of an eye dip in 2020, prices have increased by more than the 25% debasement of the currency.  As a matter of fact, most homes in our area are up at least 35-40% from that low point and the frenzy continues with multiple offers on virtually anything that is priced to the most recent comps.  The market is clearly in a hyper bull stage.  
3. Inventory is at an all-time low due to both a lack of building during covid, the cost of building during the fed-induced inflation and even more importantly the explosion in government spending on "covid relief", and a ton of pork to go along with it.  This is like dropping gasoline from helicopters on a brush fire of inflationary forces.  The supply chain has artificially boosted most goods far beyond the numbers above, however that is likely to work itself out over a year or so, which is why the fed felt the inflation was "transitory".  They were wrong and anyone with a brain knew it.    The supply chain part was likely transitory but there is no reeling in the spending which put too much stimulus into the economy thus causing 70s style inflation.  However, the fed has embarked on draining some liquidity out of the market for the first time in 15 years.  More on that below.  
4. On the subject of housing inventory, it is so low, one cannot but conclude prices will continue to climb in the SHORT TERM.  There are 35 homes for sale in ALL of Manhattan Beach.  3 in the tree section!  By contrast, even in the past strong years, inventory was 4x+ that.  2009 it was 8x+.  Other forces causing this besides a lack of building, pent-up savings, have been ultra-low rates, free money, the "work from home" phenomena as well as FOMO (fear of missing out) as cash holders rush to guard their savings from inflation.
5. Most everyone knows the fed is now embarking on aggressively raising interest rates to try to cool inflation.  What many do not fully understand is quantitative tightening.  Let me explain.  Since the financial crisis, the federal reserve bank has been buying mortgage bonds, municipal and even junk bonds and other interest rate instruments.  This is another way to lower interest rates buy propping up the bond market (which trades inversely to rates).  These are longer-term rates, to which mortgage rates are tied.  When you hear about the fed lowering or raising rates, this is the OVERNIGHT rate which does not directly affect long-term rates, though has some influence.  They have bought 11 trillion in these bonds since 2009.  Who do they buy them from?  The federal government, which is how the government finances their drunken spending.  Other buyers of the government debt are foreign governments (China noteworthy), institutions and the public.  However, other sovereign nations have begun reducing (selling) their US debt holdings.  As the 10 Year bond, a great barometer of mortgage rates hit a low of .38%, the main buyer was the federal reserve bank (they print money to buy them). This is how rates were pushed artificially low by the fed.  The fed was the biggest buyer of the government debt...until now.   
6. The fed suspended buying more bonds from the government and has announced that in May they will begin to SELL them.  About a trillion per year.  While at the same time raising short-term rates.  They are soooo far behind the curve they will need to clobber the bond market to get rates to a level to cool off inflation.  This is no easy task.  Smart people know this.  This is why I am personally short bonds and many hedge funds are building similar positions.  Alongside this, sovereign governments are selling bonds.  Worst yet, the federal government must sell bonds monthly to finance spending, but they can low longer sell them to the federal reserve bank.  They are actually BOTH sellers.  As bonds go down, long-term rates go up.  The 10 year now stands at 2.75% and 30-year mortgages have topped 5%.  These are still somewhat low in longer historical terms but have plenty of room to move higher.  It is my personal opinion that the unwinding of the fed's bond purchases will have a much more dramatic effect on rates than their planned increases of shorter-term rates (fed funds, discount rate).  Worse still, as rates rise, the federal debt which is near 30 trillion becomes more expensive to finance and a MUCH larger part of our federal spending goes just to service the debt at higher and higher rates.  Not pretty.
7. For a lot of people this is probably pretty technical but I can't tell the story without the details.  The real estate market presently tells 2 tales.  Low inventory points to higher prices, RAPIDLY rising rates and an almost certain recession as a result, is normally a huge drag on prices and rents.  One data point that stopped me from my recent rental property search is the cap rate on rental property.  This is simply what a property yields after expenses assuming no debt.  The beach area is presently averaging 1.7% which is an ALL TIME LOW.  In a sane environment, cap rates should be a percent or two ABOVE the risk-free rate (government bonds) which is presently 2.7% and RISING.  So with zero risk, I can make 2.7% or I can buy a rental property and make 1.7%.  Why would anyone do that????  Of course, because they expect the property to APPRECIATE.  
8. Appreciate they will until inventory returns to normal or demand falls off a cliff due to high rates.  So far, neither has happened.  But do not forget, the fed has not even begun to sell their bonds.  I am not and have never been a doom and gloom person.  The result of all this could be a soft landing, but likely not.  The fed has been backing themselves into a corner since 2008 and the only thing that has saved them has been low inflation.  So it appears to be hangover time after the biggest easy money party in the nation's history.  

I have been perplexed lately as I have cash to put to work that inflation is eating away not so slowly anymore.  Low inventory continues to be the one thing keeping the train moving at full speed.  I abandoned my rental property search when I asked myself a very simple question.  When the inventory was at its highest level in my lifetime (2009), was that a good time or a bad time to purchase property?  The answer is obvious.  So conversely with inventory at an all-time low, is it better to be a seller or a buyer?  Of course, I am not running out and selling my home.  Coastal real estate has always been the most resilient in any market.  However, when it comes to investment property, I continue to hold what I own (not much) since the property tax basis is lower and the rents have risen.  But when it comes to a NEW investment in rental property, the 1.7% cap rate, the panic buying, and most importantly the looming bond sales flash some pretty strong warning signals.  My personal take is that we rise into the summer, then begin to level off and that 2023 may be tough sledding for some time.  However, every downturn creates OPPORTUNITY and I look forward to taking advantage should that come to pass.

This is my opinion, and should not be interpreted as investment advice.  I welcome points of view contrary to my own as my view is dynamic and adaptive.  I hope this blog finds you well.

The Recent Market Drop

admin 0 comments 09.02.2018

Fall 2017 Market Update

admin 0 comments 11.09.2017

After a long, not so sunny summer, I settled down long enough to share my thoughts again on the state of the market.  A very interesting bifurcation has formed between high end and entry level homes in the southbay.  For those of you who watch the Strand market closely, the "bubble" has clearly deflated.  Burst would be a more accurate description.  While many of my peers jokingly point the finger (hopefully not the middle one!) my way after my 716 Strand sale in January, I need to remind them that I represented the BUYER and claim no responsibility for the 5 million dollar drop from the prior comp on the 600 block (14mm vs 9.3mm).  Both of these were dirt sales and yes, we bought ours for roughly 2/3 of the prior 2 sales.

The Strand market, particularly on the south end of town had simply run way too far, way too fast.  A number of Strand properties sat without buyers as sellers had simply gotten over optimistic.  We just happened to be there when the first shoe dropped.  Since then, a number of price cuts by those who live in reality have resulted in a readjustment of Strand comps.  Several sales have taken place since that affirm our transaction was not an anomaly, but a reset.  A healthy reset.

Giving credit where credit is due, my well respected friend and fellow agent/developer Rob Friedman made a comment at that time that has come to past.  He predicted that the Strand adjustment would work its way to the rest of the Sand Section.  High end real estate price corrections start at, well, the high end (that would be the Strand) and work their way back.  Once Strand properties could be had for such bargains as 9-11mm for dirt (so cheap I know), what then do we value walk street dirt at?  Note: I use lot value as a mode of comparing apples to apples since every home is unique.  As Rob and I both agreed, a high end slump ensued and Sand Section inventory has swelled to 60 at the time of this letter as opposed to 35 last years.

So why do I still have frustrated home buyers coming to me with stories of losing out against 10 other offers time and time again on entry level homes?  Before I answer that question, I have to interject my standard response, which is quite honestly true....

"...Well I am glad you have chosen me to represent you because as much as you hate bidding wars, you will only have to endure one more!"

Back to the question at hand (sorry Snoop)  Why ARE there bidding wars in one segment of the market and sluggish sales in another?  There are probably several reasons.  First, many doubters are finally realizing that burning rent money and sitting on cash with no return makes no financial sense.  Second, banks are lending more freely now as the memory of the crash fades.  Loath to say, I have even seen stated income loans making a comeback.  Yet another take, demographics are coming into play.  With a swell of millennials looking for a first time home and boomers looking to downsize, it only makes sense to see the high end contract while the low(er) end surges.

Since I have made prognosticating my business for the last 30+ years, I may as well keep the trend in-tact.  Interest rates will STILL remain low.  At least through the first half of 2018.  An unpopular, if not non-existent opinion, I know.  However, check my previous blogs.  All last year I predicted mortgage rates would remain low despite the federal reserve hiking short term rates.  Not only did they barely budge on the upside, the 10-year treasury has been falling precipitously all summer.  This will continue to stoke the flames of the condo and entry level home market.  There will be more price cutting in the 2.5mm-15mm segment over the next 6 months.  Too much inventory will force sellers to come to terms with this reality.  The low end will remain strong, but will taper soon as price points just above add to the inventory.  And for a non-real estate bonus call....equity markets, which I have been feverishly bullish on, will likely see a notable correction soon.  This may shake the confidence of some home buyers.  Geopolitical risk, a potential government shutdown looming, and a bull market that has been in place longer than average are being brushed off by investors.  This type of complacency generally leads to some sort of shock to the markets.  And, well...it's almost October, a notoriously bad month for markets.

I will, as always,  end on a positive note.  As I have stressed time and again, there may not be such thing as a sure thing (I know, death and taxes), but the next closest thing is beach real estate.  They aren't making more of it.  If you own it, and you are in it for the long haul, next year doesn't really matter much.  Nor does the state of the market now because in 10 years, 20 years, we will all look back and say, if only I could go back and buy more.  Given that, I hope my "state of the market" was worth a muse, as I truly believe it doesn't matter that much what happens in the short run.  We are so fortunate to call the South bay our home.   Prayers go out to Texas and Florida and Mexico.  Be well and have a great Indian Summer, the best time of year!

Market Muse

admin 0 comments 18.05.2017

Bob Sievers, former Wall Street hedge fund manager, and Warren Dow, President/CEO of DIGS, discuss the state of the Manhattan Beach Strand real estate market, now and into the future.

Manhattan Beach 2017 Market Trends

admin 0 comments 09.02.2017

El Porto is On Fire While the Strand is Falling Into the Sea!

Few may realize that just within our little (?) town, each section has its own trends and cycles.  Demographics, building trends, and price points play a large part.  Areas of our city can boom while others are experiencing mean reversion (analyst speak for declining prices) Nothing could contrast this more than looking at El Porto duplex trends vs South Strand.  To do so, we need to back up just a bit.

Following the 2009 trough, Strand prices on the south end of town literally exploded while El Porto Strand nearly stood still.  As Manhattan Beach has continually become a “brand” city, (much to the chagrin of some of our long-time residents), the big money scooped up the AAA properties.  This created a bit of a mini-bubble on ultra-high end properties.   Lot value for a standard 3500 square foot lot south of the pier topped out at about 14-15 million, while El Porto Strand dirt has held steady at roughly 6 million.

What has many developers and realtors scratching their collective heads is how a 600 block Strand property could go for 14.5 million last year, only to see 716 Strand close for 9.3 million on Jan 13 of this year.  I know this because I represented the buyer on the latter.  Granted, there is a bathroom on the beach just north of said property, yet my clients were not bothered by it one bit.  Even if you knock off a million or so due to the bathroom, how can one explain another 4 million dollar decrease in value?  Amazing negotiating skills?! Ok maybe a little but….It seems the air may have just left the balloon.

Strand inventory has been building quite markedly in recent months.  The reality is that there was some irrational exuberance in the stampede to buy these properties.  Most Strand sellers, and there are plenty, are unwilling to admit that asking prices need to come down to match what others are selling for.  Time will tell if my purchase was an outlier or the new comp to compete with.

Now let’s take a quick peak at El Porto duplexes.  Last Spring, I purchased a fixer for 1.6 million and resold it for 1.83 million.  Only months before that, I sold a turnkey SFR for a client on 40^th Street for 1.6 million (175k above asking).  A few heads turned when I paid the same price for my flip in such short order.  However, there are two duplexes now in escrow here will close another 10% to those prices.  In six months!  While I cannot discuss the exact prices publically until they close to protect the sellers, rest assured, El Porto comps are exploding.  Unlike Strand properties, there is next to NO inventory here in our neighborhood, despite a softening in the rental markets.

The bottom line is that real estate is TRULY local!  More so than people realize.  Here is a snapshot of the health of MB sub-markets.

MB Strand- high inventory per norm (8 including a new one today), no turnover
COLD.

Sand Section < 3mm excluding El Porto- low inventory (7), high turnover
HOT

Sand Section > 3mm high end- moderate inventory (16), low turnover  COOLER with highest the price points COLD.

El Porto- next to no inventory (2), high turnover
SMOKING HOT

Tree Section-moderate inventory (22) decent turnover
LUKE WARM 

MB Village- low inventory (2) fast turnover
VERY WARM

Hill Section-moderate inventory (10) decent turnover
COOL

East MB-moderate to lower inventory, decent turnover
LUKE WARM

Pain Is…Good?

admin 0 comments 08.09.2016

I am often asked about my opinion as to where home and other asset prices are headed. I promise this diatribe will lead to an economic conclusion applicable in today’s world. Where shall I begin?

We live in a generation of pain avoidance. Somewhere along the line, we decided that somehow we could shield ourselves from pain. It honestly started with my own generation. We did everything we could to spare our kids from pain or discomfort. I myself recall ranting to my kid’s teachers about some inequity bestowed upon my child in school. We wiped tears and cleaned the slightest of knee skins. We had nanny’s and gardeners to spare our kids (and u-hum, us) from having to take time from club soccer or volleyball to exercise our discomfort muscle and actually get our hands dirty. Of course a bottle of hand sanitizer was always handy just in case. We made our kids soft. For better or worse, it’s an undeniable truth.

The fictional Gordon Gecko once famously said, “…greed is good…”. While clearly that is preposterous on one level, it is still a natural part of the human psyche. A much more salient and astute statement may have been, “pain is good”. No one likes it, yet it exists for a reason. Pain keeps our hands from resting on hot stoves.   Pain keeps us from making the same stupid mistakes over and over. Pain is what turns busts to booms. Greed is what turns that tide. Enter moral hazard.

When I made my debut on Wall Street, the Dow was trading just under 800. Yep, that’s not missing a zero. August 12, 1982 will be indelibly etched in my mind forever.   After a decade of massive inflation and plenty of pain, then fed chairman, Paul Volcker began an easing of rates that would continue to this very day. With plenty of fuel to burn, this propelled high single digit GDP gains throughout the sweet spot of the 80s. Despite a rude intermission in 1987, this hyper-growth lasted past the turn of a new millennium. In another venue, I could write reams about that day on the trading desk, but I digress.

Irrational exuberance gave way to, you guessed it, moral hazard! The loose definition of this is the notion that the fed will always be there to save us from, well, another great guess, pain. Why is pain good? Ramped speculation gives way to huge economic imbalances. Our lawmakers as well as the “independent” federal reserve in all their wisdom decided they could spare us the pain. Social and economic engineering are both well intentioned and doomed for failure. From legislation in 1999 to make homes affordable to everyone, to massive bailouts once that didn’t work quite as planned, we have made it a practice of sparing ourselves pain.

For millennia, there have been economic cycles. Like the forest, which cannot sustain without the pain of wildfires, too the economy is destined to booms and busts. The Great Generation was great for a reason. They came of age at a point in history of unmatched economic pain. Yet, what became of them? Did they all lay down and curl up in the fetal position or did they get off their proverbial asses and put their noses to the grindstone to ensure their survival? Humans are much more resilient then we give ourselves credit for. The 1930s was the cornerstone of mental and physical toughness. Patriotism. Hard work for a day’s pay.   It cleared the markets of the speculative foolishness of the late 20s and then paved the way for generations of prosperity.

Until, it got too easy. Again. I say again because this is the natural long wave cycle noted by Russian economist Nikolai Kondrateiv (later shot by a firing squad under Stalin). It predates well before the Dutch Tulip bubble in the mid 1600s and likely back to the dawn of civilization. The basic idea is that these major market catastrophes occur about every average lifespan. This is due to the fact the it takes a generation to die off who remember what excess and complacency ultimately lead to. The CLEANSING mechanism once the speculative fever returns just so happens to be, pain. So how does this relate at all to today?

In essence, we put the wildfire out prematurely through impossibly easy monetary policy, massive bailouts for whom many had no business getting. Everyone was culpable yet not many paid. When zero interest rates didn’t work, they took it another step further through “quantitative easing”. In essence, our fed basically bought mortgage bonds to artificially force rates below the market clearing supply and demand level. To put it simply. THEY SPARED US THE PAIN. I seriously doubt we would find ourselves in this insane election we find ourselves in, had we not fooled ourselves into believing we could finally conquer the economic cycle. Well congratulations, we may have done just that. The problem is, 2% growth is not exactly what the fantasy envisioned.

It is said that economists have predicted 9 out of the last 8 recessions. It’s a cheeky way of saying that no one has a crystal ball. Not even the “experts”.   While I don’t wish to hold hands with the soothsayers, I do feel this has to play out in one of 3 ways. Either the false hail Mary forever cured us of long term pain, or….ok forget that one.   Let’s say there are 2 ways this likely plays out. The deficits that were a necessary tool in shielding us from the last wildfire,( the one that could have given birth to a GREATER generation) have consequences.

The first scenario is that of the fate, yet to be fully played out in Greece and most of the EU. That is, a day of reckoning that brings on massive deflation. A depression that would make the 1930s look like a gentle squall. For those who aren’t paying attention, this is already playing out in Europe, as they continue to defer their pain. The second scenario which I believe we are smack dab in the middle of is that of accrued pain. That is several decades of poor job growth, weak GDP in the 0-maybe 3% range on a good year. The best way to understand this is to take the real pain that should have lasted 3-5 years and spread it over decades. Another way to understand it is, well, Japan.

Okay, so what does this mean for our future? Going back on my word not to make predictions, here goes. No matter who is president, no matter what these geniuses do, we have a price to pay. The big party is behind us. We have enjoyed a boom in asset prices due to the massive liquidity created by money printing. We will continue to monetize our debt. No matter what armchair quarterbacks are telling you, interest rates have nowhere to go but…….remain where they are. The fed is in a box. They indicate tightening under huge criticism for letting things get this out of hand. However, this is a symbolic gesture. They know that if they raise rates, they will endanger the already weak and deflationary environment. They will raise 1 more time this year. You can go back to last year to see that I predicted no more than 2 rate hikes this year. Higher rates would mean a still higher dollar since we are the best house in a very bad neighborhood. Exports, which are already pathetic, would decline further. Protectionism would ensue, which is already starting to play out. They can’t raise and they can’t NOT raise. Quagmire. So the aforementioned party is due its hangover. Instead of getting it over with, we decided to keep drinking the Kool-aid until it claims what it deserves.   Maybe there is a day of reckoning. Maybe not.. Maybe we just take a 5 year hangover and spread it out over 30 years. The latter is my personal view, but at some point the piper gets paid either way. Grandpa say sorry kids.

So how do we invest in this unparalleled climate? Do we run to cash as so many have as if cash is somehow the dugout in a tie game and there is no risk? If your team is down 2-0, staying in the dugout is not going to win the game. Cash is nothing but another asset. It’s a bad one too. With inflation running at an albeit tepid 2% or so, cash earns zero. Better put, cash returns negative 2% per year as of late. Stocks and real estate have lost some of their momentum. It doesn’t mean crash. It means, the stimulus is disappearing for the time being and assets are taking a break. Metals are on fire. Some think this is a predictor of inflation. I don’t think so.   It may support a mirage of rising assets prices, but real inflation, the kind made of wage push and an overheating economy is laughable. One thing you can bet on, our government will continue to both create and spend more money. This “stimulus” can keep it going, but has lost the punch of the mid 80s and will likely continue to do so.

We can’t live our lives in fear of the next doomsday. Most of my counterparts that went bust over my finance career did so because they thought they were smart enough to predict the end of the race and were perpetually predicting market tops. Wrongly. Costly. We have to go on. Optimism is good. Pain is good! The pain we were denied post 2009 is just playing out in different ways. A divided country. Divided races. Unstable world affairs Worse income gap, despite attempts to bury Adam Smith and engineer our way out. Loath a finance, real estate guy saying this, but maybe we just need to accept low returns and focus on something other than things. This may be a cleansing yet. Sometimes painful, but as humans have in the past, we too will overcome our mistakes.

So in conclusion, keep a well diversified portfolio of real estate, stocks, metals, bonds and you will do just fine. I believe in quality. Own quality real estate. Observe demographics. We live in the best there is. Own great companies. Own AAA bonds. Don’t be tempted to chase the allure of “high return” risky assets. I am not one to say this lightly as I have lived my life with a disproportional degree of risk taking both financially and physically (I have broken most of the bones in my body engaging in extreme sports), but it’s time to play defense. Play it safe. You cannot “hide” in cash as so many Americans are doing. It is just another bucket in a field of many and you are hiding behind your hands. There is really no “hiding” from consequences is there? Who knows, maybe we will wring out a new “great generation”. It may just take a little longer than we planned.

Brexit, Rates, and Trends

admin 0 comments 25.08.2016

At the time of this writing, the Great Britain's vote to leave the EU is underway.

Should Britain leave the EU? At this moment, the early exit polls have it at nearly a dead heat.  While noble in their intentions to avert wars between neighboring nations, the EU has grown to an economic experiment that is bound for failure.  One cannot expect different cultures and vastly different economies to share the same economic course, let alone a single currency. The idea that stronger (relatively) economies like Germany should bail out the disastrous socialist policies of the likes of Greece where 2 of 3 workers is employed by the government, is as ludicrous as the free handouts our own government pledged at the taxpayer's expense. Against the poll numbers, I believe Britain should go. The Pound will take a..well, pounding, and world markets will likely not love it, but in the end, the bandaids our world leaders continue to put on the mortal wounds caused by reckless spending will eventually be too soaked to do any good. Sooner or later the piper gets paid.

I am humored by the plurality of backseat rate watchers still holding their breath for some wild spike in rates. Folks, the world is in a deflationary spiral and that is NOT the backdrop for rising interest rates. The fed, which will likely raise the fed funds target again this year, is only doing so to send a poorly crafted signal to the markets that they cannot be accomadative forever. The fed has transformed from a central bank to a market saver. Adam Smith knew very will, tinker all you want, the economy has a mind of it's own.  I am here to say, rates are going to stay depressed for quite a while.

Local markets have slowed. That scares some folks. Can you imagine we aren't gaining 15% again this year? That is terrifying! The word "slowed" is misinterpreted by some to mean declined. To others, an alarm sounding 2008 all over again. If something grows at 15% and now grows to 5% it has slowed. Is that really bad?? That does not mean crashed. It is quite typical after a generational crash for people to expect another one as soon as the rebound ebbs.  History has never born that out.  So before cashing in your chips to go back to earning .002% in a Bank of America CD, contemplate what you would do with that pile of cash. Yes, the market could flatten. The usual culprits are risings rates, which I say...not happening, or overbuilding. This is mildly the case in some areas outlined in prior letters. Either way, we live along the very the last western mile of the entire country, bound by a massive (and beautiful) body of water! Where exactly will they build once all the little ones are gone? If you are in it for the long run, hang tight and don't sweat the blips.  I predict home prices along the beach will be affordable for only the most wealthy of Americans at an increasing rate. They seem to be making more of them, but not a lot more coastline.   That is a formula for long term parabolic growth.  You couldn't pay me to sell my coastline real estate. If we see a move down at some point, and rest assured we always will, that will be nothing more than a chance to pick up Boardwalk and Park Place at a discount. Happy 4th!

A TALE OF TWO CITIES…

admin 0 comments 22.03.2016

It's that time of the season again. The Fed sat tight on interest rates during the March meeting. After raising a 1/4 point last December, only to witness act VI of the financial crisis play out in other parts of the world, the Fed had little choice but to keep their hands in their pockets. Ironically, and somewhat predictably, rates fell to new post war lows in the early part of this year, despite the hike in the funds rate. As a matter of fact, I had a client lock a loan in during the week of the market swoon, only to re-adjust 7/8 of a point lower before closing! I had advised many to take advantage of the stock market panic and buy. The adage, buy when there is blood in the streets has proven (so far) to be correct. The Fed had reason to wait as becoming too hawkish in the wake of world events could put us at risk of making the same mistakes Japan did in the 80s, 90s, 2000s, and....well. Assuming things stabilize, I will not be surprised to see a hike at the next meeting as the USA is the best bet in town.

Trees don't grow to the sky, but castles made of sand may not in fact, melt into the sea. The Tree Section has seen an enormous number of new listings in the last weeks, particularly in the 3mm price point. A slew of new construction has come to market with more to follow. I would expect modest reductions in prices in the Trees and have already seen prices of tear downs come down. Not to panic, just an adjustment to the increased inventory.. At last count, there were 85 listings in the Trees, about double last year at this time. Sand Section listings number 21 with quality inventory still near historic lows. In short, people want beach front property. There are several factors at work. There are fewer build-able lots in the Sand. The vintage duplexes that remain still provide steady incomes to those who have owned them for a long time and still have low property tax. Additionally, the tax bite is hefty as ownership in years, far exceeds Tree Section homes.  For this reason, we see very few come up for sale. The remaining inventory of dirt value lots is very low.  The aging baby boom population is also at work. As kids move out, many are choosing smaller homes, closer to the beach.  Another factor keeping the boom sizzling in the Sand is the rise in wealthy young entrepreneurs from nearby technology hub, Silicon Beach. They are far more likely to purchase something smaller in the Sand and have no need for a 4500 square foot 5 bedroom house in the Trees or East Manhattan. Of course there are the Rams. Finally, the Sand Section has been a historical out-performer. Notwithstanding a massive polar ice cap melt, there is a very finite number of ocean front, or near ocean front property.  

In short, the boom is still alive and healthy down here in our neck of the sand. By no means is there any meaningful decline elsewhere in Manhattan, but prices have moderated a tad east of Highland. I continue to believe the average price of south bay real estate will still increase in low single digits this year, with aforementioned areas outperforming. We live in one of the most desirable communities in the entire country! Never forget how fortunate we are.

Are We in a Bubble?

admin 0 comments 06.01.2016

So where do we find ourselves now? The worry by many of a bubble in stock and real estate prices is rooted in the rapid rise in prices dating back to the 2009 lows. Their error lies in the fact that the rise occurred, not from an already rising market, but to the contrary, generational lows. Just as bubbles reach emotional extremes the ensuing crashes mirror this in the opposite direction. When the Dow hit sub 7000 in 2009, many, including myself felt that the financial system was literally imploding to a point of no return.  Since that year, the market has risen roughly 150%. Land value has risen anywhere between 30% and 100% depending on the area. OMG! BUBBLE!!!!  Actually no. Had these gains occurred from high starting points, I would be crying bubble along with those who are. However, they occurred from massively depressed, emotional lows. I would suggest that half of the gains of the last 6 years, were merely unwinding the anti-bubble, or to put another way, the artificially low prices brought on by fear and forced selling. What’s more, this run has been characterized by well qualified borrowers and cash buyers. Far from over-leveraged.

To further this point, let's look at the 15 year return of both stocks and real estate. Rather than cherry picking small time frames to make a case, it helps to look at longer, more normalized periods. On Jan 1, 2000, the Dow Jones Average stood at 11,473. With today's level of roughly 17,000, this represents a 15 year increase of roughly 50%. Not taking into account dividends, this equates to roughly 3% annualized gains. If you include dividends, you could argue the number is more like 6%. With the long-term norm of something closer to 10%, this is far from bubble behavior. Without getting too deep in the weeds, real estate gains have similar metrics nationally, albeit coastal land numbers fair better for obvious reasons. 

The reality of the situation is that despite unprecedented volatility, the last decade and a half have actually seen sub-par returns. We are actually now in a place that has normalized some of the extremes seen in the 21st century. Could we see a correction in these markets?  Of course! Can you time these by trying to sell high and buy low? Very unlikely. Wealth is created by investing in quality and avoiding the wrath of the tax man by holding for the long run. Ask Warren Buffet. If we are lucky enough to see a meaningful correction, and you are fortunate enough to have some dry powder (not the kind we are seeing in the Sierra's), take that cash and shop while things are on sale. There is no bubble. The world is not ending. America is still the best place on the planet in which to put your hopes and dreams, despite questionable leadership. Prosperity awaits anyone with patience, vision, and discipline. So forget the bubble scenario. Keep your eye on the ball. Live life without fear and trepidation and have an AMAZING 2016!

Fed raises rate as expected

Bob Sievers 0 comments 20.12.2015

Just a quick follow up after the fed raised 1/4% as I forecasted.  As I expected, the fed raised and publicly traded interest rate futures actually saw yields DROP.  After an initial relief rally from the stock market, the last few days have turned ugly.  This is NOT a reaction from the fed raise but a reaction to the current meltdown in energy prices.  This meltdown is precipitated by both OPEC overproduction as well as a world wide deflationary cycle.  Lower oil prices, once stabilized (We could see something as low as 25 per barrel) will be a big stimulus to our economy.  While oil sector companies cut dividends and face bankruptcy, the rest of the economy will find some tailwinds.  Barring a major worldwide stock market decline (which is a risk), we should see a steady economy and housing market in the coming year.  Happy holidays again!    Bob