> house prices have a fundamental ceiling, and it is determined by the size of the monthly payment that banks will allow the typical homebuyer to assume when approving a loan.
In the more irrationally-hot markets, why assume that housing is even being purchased on a mortgage by your average home-buyer, rather than being purchased cash-in-hand by a private or corporate investor looking to park wealth they've already generated? (Even if that isn't the majority of houses in those markets, the sales like that that do happen would still have an impact on property values in the affected neighbourhoods.)
Because the real estate sector is like 30-40 trillion. 2007 was the result of a massive infusion of debt by unsophisticated retail "investors" who bid prices up far higher than even their rental value. Lending standards dont allow this today.
If big institutional money is going to cause a frenzy it would need to be irrational money managers that somehow clear their purchases through a panel and none of them say anything. Some point out that blackrock is on the other side of this zillow unloading but they have trillions in assets and only 60 billion in real estate. This is the largest money manager in the world and thats all the exposure they have.
According to this article[1], large investment companies accounted to 16.1% of all single family home sales in the US in Q2. I'm not an analyst. But, I would think that would be plenty of extra demand to influence the price?
Perhaps. Unlike in 2008 though, those buyers aren’t typically hoping to sell those houses for a short term profit, most of those investors are hoping to turn them into rent income. This could easily distort prices, and have pernicious social effects, but might not be an asset bubble. After all, if those investors manage to actually charge enough rent to make a profit, is the asset really over priced then?
Investment companies are far less likely to lead a speculative bubble than retail buyers. They are professional investors who go through a valuation process. They have also always been part of the market.
History indicates the opposite. The largest speculative bubbles in history are typically driven by professional investors or high-net-worth individuals, not retail buyers.
Your fund managers make their money in short term win or lose. So they really do not have option to just sit on money, but have to look someplace to invest. Even if it doesn't work out in long term.
Where is this data coming from? Almost nothing you said is true or perhaps you don't actually understand what retail traders are. Retail traders, essentially by definition, do not have sufficient capital to cause large asset bubbles. Once an individual's net worth exceeds a threshold (generally enough to where their purchases or sales affect the spreads and liquidity of the underlying market) they are not considered "retail" by definition.
Even now, with retail being the most powerful they've ever been in human history, they might be able to squeeze a single, small or mid cap equity (GME being the most famous example) but they cannot move sectors of markets, much less create a generalized bubble in ANY asset class.
Crypto 2017 is the only "bubble" which you might claim was retail-driven (even then, you'd need to provide evidence for such a claim), and even that had institutional money such as Grayscale, high-net-worth speculators, and algotrading from high-net-worth speculators driving the bubble. Not to mention that was a tiny bubble relative to any equity market bubbles.
It's well-known Tech bubble 2001 was driven by investment banks. It's even more well known that the 2008 bubble was driven by investment banks, hedge funds, and derivatives trading. The current $2.5T+ market cap crypto bubble has been formed by large institutional buyers, high net worth individuals, and corporations pumping money.
Dutch Tulips, South Sea Trading Company stocks, 90s Japan were all from institutions or high-net-worth individuals (nobles, royalty, corporations, etc) as well. Your post really couldn't be further away from reality. The historic bond bubbles have all been inflated by institutions and governments. Making a claim that even one bubble, much less "most" bubbles are caused by retail, is an outrageous claim which requires extraordinary evidence that you would need to provide.
Im sorry but everything you wrote is just incorrect. The notion that retail cannot and has not caused bubbles in the past is asinine and your explanations of past bubbles are just factually wrong. Anyone in 2001 remembers their barber telling them which tech stocks they were invested in. The housing market was clear cut retail debt in 2007. And the entire crypto thing is retail. Blackrock is not invested in Bitcoin. You sound so confident but are just so wrong.
You need to read your last sentence out loud, to yourself, while looking in the mirror. You gave... an anecdote of a barber as proof? 2001 was caused by investment banks, venture capitalists, and changes in overnight repo lending. Not some folks each with an extra twenty grand chatting with his barber.
You're embarrassing yourself at this point between the barber and stating housing was "clear cut retail debt" in 2007 when it was actually a trillion dollar derivatives market that caused the bubble/crash, significantly driven by predatory/abusive from the mortgage lending side? Where do you think retail got all the money for the houses? "the entire crypto _thing_ is retail" uh, no, it's not. Tesla bought over a billion in bitcoin earlier this year, and large investment banks opened crypto desks early this year. And bringing up companies like Blackrock(?) which I didn't mention, oh my you are all over the place. Grayscale is not Blackrock... Can you present any evidence at all that retail has caused historical asset bubbles?
Sorry, you're just straight making things up and have a very poor or nonexistent understanding of markets. I won't waste my time here any longer.
Well you’re very dramatic and passionate but still very incorrect. The underlying housing market rise and collapse was from retail speculation, period. Sure they borrowed from banks but they still did the borrowing and actions. And who cares what the derivatives did in terms of diagnosing the underlying cause which was retail speculation. Wall street had a hand in causing the severity of the collapse theres no doubt about that, but they didnt drive the foundational bubble directly, only indirectly. The point is retail stupidity causes foundational bubbles. Derivatives made things worse but they were...derivatives, they're called that for a reason dimwit. And who cares about relatively small tesla position and “crypto trading desks” which have no permanent exposure. Thats absolutely nothing in the 2 trillion retail crypto environment. Crypto is retail driven regardless if its a big or small investor. Its not proper institutions buying. Please get real on this because you sound like a clown. I think part of the issue is you cant distinguish between retail and institutions. Retail doesnt become institutional just because they have a lot of cash/assets, rich people are still retail unless its a formal family office of which most people do not have (and even then Id say it more of a formality and still retail).
No, you're wrong on this and basically every single other statement you made. High net worth individuals are typically considered separate from retail traders, and yes, just because they have a lot of cash/assets. Part of the reason I kept saying [institutions OR high-net-worth individuals]. I didn't think that was such a challenging concept.
> Derivatives made things worse but they were...derivatives, they're called that for a reason dimwit.
>Please get real on this because you sound like a clown.
Real classy. Well at least I know now you were here just to be pompous and find a way to broadcast your lack of understanding of the market.
Nevertheless they are not buying houses for emotional reasons, but for the income stream.
FYI, the reason this is happening is that interest rates are so low that people are desperate for yield, and rental yield fits the bill.
There are a lot of benefits:
- professionally managed properties. Most small time landlords are incompetent -- the horror stories you see about landlords being petty or vindictive is from the small time landlord, not the professional manager.
- lower rental prices for properties people want to own. Institutional investors can move funds more quickly to increase rental stock where it is most in demand. Here, too, the yield will fall, which is another way of saying lower rents.
Moreover despite the moral panic by journalists that ordinary households are being priced out, this doesn't actually happen because most institutional investors operate in unconstrained areas, where home prices track construction costs, at most with a small delay. In these areas, an increase in renter demand will result in more property built much more quickly if the institutional investors participate. This actually drives down prices over the long term by increasing supply.
However in constrained areas, this would drive up prices for SFHs. But I thought people weren't supposed to buy SFHs in constrained areas - and institutional investors have been in the multi-unit market for over a century.
Yes, the correlation is not necessarily causation, but we can add some other data points -- for example the size of new construction has been steadily growing at roughly 2%, which does not suggest any kind of odd explosion in house size as a result of the price going up. Of course ultimately, ability to pay determines the price of housing and also house size.
> Because the real estate sector is like 30-40 trillion. 2007 was the result of a massive infusion of debt by unsophisticated retail "investors" who bid prices up far higher than even their rental value. Lending standards dont allow this today.
lol.
2007 was the end of a long road, paved by unsophisticated "money managers" and doubly unsophisticated "bank regulators" and even more unsophisticated "politicians" since WW2.
There are people buying houses for more than their rental value right now where I live. Because there's one crime-ridden trailer park maintained on the freeway nearby to make them all within a certain distance of a "disadvantaged zone" and thus every former manufacturing country factory boss looking to move to the US only has to lose $400-$500 dollars a month to buy his way to the top of the green card list.
> Under regulations ... an EB-5 investor would need to invest ... a minimum of $1 million normally or $500,000 in economically disadvantaged areas...
> You'll need to plan on having your money tied up in the business for several years. When you first get your green card, your permanent resident status will be conditional for two years. During the 90-day period before the end of the two-year conditional residency, you'll need to submit a petition to remove the conditions—to show you invested the required amount and created ten jobs. These two years and government processing times result in your money being parked until you finally get your unconditional permanent residency.
So practically it's pretty cheap to get yourself to the top of the list for permanent residency. All you have to do is buy a couple of $500k houses, rent them for whatever rent you can get for them, claim you created 10 jobs by hiring maintenance guys and landscapers and whatever else to maintain them, and then when you've got your paper from the US government you can turn around and sell them for what you paid for them (or even a little less, who cares, you bought your American residency).
The rules were changed from the original law to not only allow properties in economically disadvantaged areas but near them.
As I said, that's why there's a trailer park which resembles some "third world" country slums right on the freeway in the wealthier north Dallas suburbs where I live. All of those realtors selling rental houses to Chinese factory bosses, Russian mobsters' children, South American cartel finance guys, etc need them to be near the trailer park to qualify for the program. Similarly, via a ridiculous string of foot paths and bike lanes, Hudson Yards in NYC was determined to be economically disadvantage due to its proximity to Harlem, so they could also sell apartments that no one else wanted to Chinese factory bosses, children of Russian mobsters, South American cartel finance guys, etc.
If the current value of something is over a "fundamental ceiling" it means that it's already inflated. Why would an investor park their wealth in such an asset?
A large part of the "foreign ownership" plaguing west-coast cities like Vancouver and Seattle is capital flight from China. In this case, real estate has the valuable property of being harder for a foreign government (who happens to be the government to which the homeowner is subject) to confiscate+liquidate than other assets, so said government will prioritize softer targets. Real estate as an investment class here is acting like a club on a car steering wheel—de-prioritizing theft, rather than inhibiting it.
Sometimes there's just no good alternative. And real estate has less strict AML/KYC laws than other asset classes so we have some shady foreign money coming in.
Of course, taxes and regulations complicated this discussion.
It doesn't complicate the discussion, it is the discussion. Basically the only reason foreign investors are buying real estate in North America is because of issues directly related to regulations and taxes.
P/E ratios of much of the S&P500 would indicate prices/values far over the fundamental value, yet investors continue to flock to large-cap equities in droves.
It's a bubble but it's hard to fight it. US runs a trade deficit vs other nations meaning the trade surplus nations have too many dollars which they send into the financial markets of the US. They most likely buy international companies that have a presence in their own country.
Not the same thing though. The ceiling here is about affordability, not the value of the asset. A house is a need for the individual buyer, not an investment.
In the more irrationally-hot markets, why assume that housing is even being purchased on a mortgage by your average home-buyer, rather than being purchased cash-in-hand by a private or corporate investor looking to park wealth they've already generated? (Even if that isn't the majority of houses in those markets, the sales like that that do happen would still have an impact on property values in the affected neighbourhoods.)