Posts Tagged ‘Shiller’

Housing Bubbles, Taxes, Leverage, etc. And What It Means For The Biosphere

October 31, 2021

What does housing have do with wisdom? Everything. We used to be called cavemen…When we were more honest. 

Owning real estate has, in many nations and states, a taxation aspect. Consider California’s top real estate areas. The prices of houses there doubled, or trebled, in the last ten years. Purchase such a house now: one will have to pay 2% of the cost of the house, as a tax, annually. Typically. 

So say the house was worth 500K ten years ago. That means one has to pay $30,000 tax, every year, after purchasing that same house at inflated 2021 prices. Then say the worth of the real estate market collapses by 50% as it has done several times in the past in the hot areas. The house price will collapse down to 750K, but the new owner still has to pay the 30k annual tax. It gets worse when one considers leverage. The same house would have been, typically, purchased with 20% down (typically wiping out most of a middle class family saving, after closing costs, etc.). So suddenly these savings are wiped out at any 20% downturn in real estate… The same 300K could have been saved and invested at the typical 7% financial markets provide with. The typical leverage of one to five of real estate guarantees sharp downswings, as observed: owners who were speculating by buying real estate always try to get out fast enough to prevent the wiping out of their principals.  

Meanwhile President Biden says he will not raise taxes for people making less than 400K in income, and went to the Glasgow climate conference in an 85 car fossil fuel caravan (several jumbo jets carried all that)… But an inflation of 10%, pretty much guaranteed at this point, lowers that promise, in constant dollars, down to 360K… Those below 360K will not be spared, especially if very poor and on government assistance: because the assistance they get will suddenly be worth 10%… LESS!

To cool inflation, interest rates will have to go up, and average interest rates are typically much higher. That will make purchasing a house much more expensive, and the market will have to correct accordingly.

Usually real estate is viewed as an edge against inflation, and often works well that way… But not in a massively overbought market: right now one can get, typically, only a fraction of housing ownership cost by renting the owned property, a sure indication that the real estate market can only go down. 

***

The preceding was a comment upon an essay of the very clever Robert J. Shiller, a 2013 Nobel laureate in economics, Professor of Economics at Yale University and the co-creator of the Case-Shiller Index of US house prices. Shiller is the author of Irrational Exuberance, Phishing for Phools: The Economics of Manipulation and Deception (with George Akerlof), and Narrative Economics: How Stories Go Viral and Drive Major Economic Events.

And now for the connection with wisdom…

The well connected phools who lead the biosphere (into catastrophe) are meeting in Scotland, to enjoy electricity made from coal plants. Neanderthals used coal… 100,000 years ago. The pretext is the Conference Of Parties 26 (COP26), 

Guess what? Housing, especially the individual family home, anglospheric people are fanatical about, is a big part of the climate problem. Americans of course are all into that kind of luxury. Apartments use only a third of the energy of individual houses, recent French government data show. Meanwhile in politically correct Berkeley immensely overpriced houses are the object of bidding wars and get sold for up to 100% above the already grotesque asking price. (This depicts the… typical case, of a house which was purchased for 1.6 million dollars five years ago, got proposed for sale at 2.75 million, was the object of a bidding war, and got finally sold for 4.25 million… roughly 50 years of family income, PRE-tax…)

So a house which is an average house for the USA (300 square meters), luxurious for the rest of the planet, can end up being sold for 60 times the average US family income… To which have to added gigantic real estate taxes….  

Of course Berkeley liberals are fake and more than slightly deranged, I know them well, having lived among them and their corrupt descendants, for decades… so they may as well splurge into housing frenzy, it goes with their territory…

When one will get serious about the climate, housing frenzies will have to be washed out, and go down the drain of climate correctness...

Patrice Ayme

***

From Robert Shiller: According to the latest S&P CoreLogic Case-Shiller Home Price Indices, US home prices rose at a record rate of 19.7% in the last year, and now look very unstable. They might increase further for a while, but that may be followed by serious declines….

…”investing in housing in booming locations may not be as safe a long-term bet as many seem to think. Prospective US home buyers might logically assume that their tenure in a house will outlast any interruption to an upward trend in home prices, enabling them eventually to benefit from new highs. After all, real home prices in the United States fell by 36% nationally from December 2005 to February 2012, because of the Great Recession, but then increased by 71% to a level 10% above their 2005 peak.

However, I have been arguing for years that the US housing market’s performance since 2005 is not the only relevant example of long-term home-price trends. My historical data show that real US national home prices were sometimes lower in the 1990s than in the 1890s. Over that century, cities spread out to cheaper land, and building tools, technology, and transportation became more efficient.

So, let’s imagine that, for the past 1,000 years, home prices had beaten the US stock market’s average 7% annual return (after reinvesting dividends) in the twentieth century. During that time, these home prices, after compounding, would have increased by a factor of 24 followed by 28 zeroes.

But hardly any homes from a millennium ago remain today, and hardly anyone would want to live in those that have survived. Furthermore, the land they sat on is often no longer valuable. In Biblical times, for example, Ephesus in western Turkey was a coastal city with magnificent buildings. But its once-valuable harbor has since silted, so that the city’s ruins are now miles from the sea.

… buying a house with a mortgage serves as a self-control mechanism that helps people to save more. The discipline imposed on young homeowners by regular amortizing mortgage payments is a key driver of retirement saving. And buyers can hedge some of their risk in the home price index futures market.

Make no mistake: homeownership clearly has its benefits. But people who really want to buy now need to be sure that they can accept what could be a rather bumpy and disappointing long-term path for home values.

Stock Market: Roller Coaster With More of A Brain Than It Looks

July 12, 2020

Robert J. Shiller, a 2013 Nobel laureate in economics, is Professor of Economics at Yale University and the co-creator of the Case-Shiller Index of US house prices. He is the author of Irrational ExuberancePhishing for Phools: The Economics of Manipulation and Deception (with George Akerlof), and Narrative Economics: How Stories Go Viral and Drive Major Economic Events.

Professor Shiller is baffled by recent stock markets antics:

NEW HAVEN – The performance of stock markets, especially in the United States, during the coronavirus pandemic seems to defy logic. With cratering demand dragging down investment and employment, what could possibly be keeping share prices afloat?

The more economic fundamentals and market outcomes diverge, the deeper the mystery becomes, until one considers possible explanations based on crowd psychology, the virality of ideas, and the dynamics of narrative epidemics. After all, stock-market movements are driven largely by investors’ assessments of other investors’ evolving reaction to the news, rather than the news itself.

That is because most people have no way to evaluate the significance of economic or scientific news. Especially when mistrust of news media is high, they tend to rely on how people they know respond to news. This process of evaluation takes time, which is why stock markets do not respond to news suddenly and completely, as conventional theory would suggest. The news starts a new trend in markets, but it is sufficiently ambiguous that most smart money has difficulty profiting from it.

 

NEW YORK, NY – JUNE 18: Traders and financial professionals work on the floor of the New York Stock Exchange (NYSE) at the closing bell, June 18, 2019 in New York City. U.S. markets surged on Tuesday after President Donald Trump announced that he plans to meet with Chinese President Xi Jinping to discuss a trade deal at next week’s G-20 summit in Japan. Guy on the right was probably short…(Photo by Drew Angerer/Getty Images)

Prof Shiller:

There are three separate phases of the puzzle in the US: the 3% rise in the S&P 500 from the beginning of the coronavirus crisis, on January 30, to February 19; the 34% drop from that date until March 23; and the 42% upswing from March 23 to the present. Each of these phases reveals a puzzling association with the news, as the lagged market reaction is filtered through investor reactions and stories.

The first phase started when the World Health Organization declared the new coronavirus “a public health emergency of international concern” on January 30. Over the next 20 days, the S&P 500 rose by 3%, hitting an all-time record high on February 19. Why would investors give shares their highest valuation ever right after the announcement of a possible global tragedy? Interest rates did not fall over this period. Why didn’t the stock market “predict” the coming recession by declining before the downturn started?

… The second phase began when the S&P 500 plummeted 34% from February 19 to March 23, a drop akin to the 1929 stock market crash. Yet, as of February 19, there had been only a handful of reported COVID-19 deaths outside of China. What changed investors’ thinking over that interval was not just one narrative, but a constellation of related narratives.

What changed is that the Turin-Milan region, the economic powerhouse of Italy, had to lock down, following the extremely severe lockdown in China. It was obvious that the world was going to lockdown. Indeed, Shiller admits the crisis was terrible:

…”some people in locked-down China reportedly were reduced to searching for minnows and ragworms to eat. In Italy, there were stories of medical workers in overwhelmed hospitals being forced to choose which patients would receive treatment. Narratives about the Great Depression of the 1930s flourished.” Some people were also caged in their houses in Wuhan, with bars added to their windows…

“The beginning of the third phase, when the S&P 500 market began its 40% rise, was marked by some genuine news about both fiscal and monetary policy. On March 23, after interest rates had already been cut to virtually zero, the US Federal Reserve announced an aggressive program to establish innovative credit facilities. Four days later, Trump signed the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, promising aggressive fiscal stimulus.

Both of these measures, and similar actions in other countries, were described as resembling the actions taken to counter the 2008-09 Great Recession, which was followed by a gradual but ultimately huge increase in stock prices.”

And professor Shiller to conclude with his trademark:

“In all three phases of the COVID-19 stock market, the effects of genuine news are apparent. But price movements are not necessarily a prompt, logical response to it. In fact, they rarely are.”

Here is my comment, I see cleverness and logic, where Shiller is lost and baffled (but he got his irrational exuberance Nobel, I didn’t!):

This roller coaster seems all very logical to me. In the first phase, the epidemic seemed a blip. The important news was that the Trump impeachment was a hoax, which had failed. Trump and his light taxation, and capital repatriation, good for earnings, and the future US economy, were marching to re-election. 

Then it turned out that the world was confronted to a nasty, unstoppable pandemic, the world economy  was going to crater, thus so would earnings. Earnings doomed to crash, stock markets crashed. 

Then, in phase three, a financial miracle and cosmical bonanza was discerned, by the wealthiest, for the wealthiest. The central banks, and even Germany, decided to make and distribute enough free money to get the biggest companies to keep going, even if their standard earnings had mostly disappeared (say airlines). Call that synthetic earnings, but earnings nevertheless. 

Also the way out of the pandemic is to innovate (so the tech heavy NASDAQ took off). 178 vaccines are under development. Some biotech will, and have, scored (especially as quinine + macrolide antibiotic is neglected).

So now what? More of the same. There are tweaks, though, as some trends are increasingly blatant: small companies are getting less help than the big ones. Some countries (Taiwan, Korea, Japan, dreaded China) are mostly industrially intact because they mastered the pandemic. Many other emerging countries will get submerged, having lost their money making exports (and no central bank will save them). Some sectors (fossil fuels) seem doomed (as investment goes down, fields perish). 

All of this new reality is reflected in stock valuation trends, worldwide. The US presidential election guarantees that central bank money will keep on flowing. TINA: There Is No Alternative. Just don’t invest in what is dying. 

By the same token, if Biden gets elected, standard health stocks and green stocks should go up… And notice the market is smiling…

***

We are in a logical world. If some of us don’t see the logic, it does not mean its’ not there… And yes, free money goes to the wealthiest. They are those the wealthiest (central banks, and large “private” banks) lend to. Not easy to change, and there are easier ways to improve the lives of We The People…

Patrice Ayme


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www.grrrgraphics.com

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because all (Western) philosophy consists of a series of footnotes to Plato

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Striving For Ever Better Thinking. Humanism Is Intelligence Unleashed. From Intelligence All Ways, Instincts & Values Flow, Even Happiness. History and Science Teach Us Not Just Humility, But Power, Smarts, And The Ways We Should Embrace. Naturam Primum Cognoscere Rerum

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ianmillerblog

Smile! You’re at the best WordPress.com site ever

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Military and general security

RobertLovesPi.net

Polyhedra, tessellations, and more.

How to Be a Stoic

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Rise, Republic, Plutocracy, Degeneracy, Fall And Transmutation Of Rome

Power Exponentiation By A Few Destroyed Greco-Roman Civilization. Are We Next?

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in truth, only atoms and the void

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Omnes vulnerant, ultima necat

GrrrGraphics on WordPress

www.grrrgraphics.com

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because all (Western) philosophy consists of a series of footnotes to Plato

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ianmillerblog

Smile! You’re at the best WordPress.com site ever

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Military and general security

RobertLovesPi.net

Polyhedra, tessellations, and more.

How to Be a Stoic

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