Tuesday, November 10, 2015


I was watching the early stock market commentary this morning and things weren't looking so good (it wound up OK up about 30 points).  Anyway, one of the talking heads mentioned that the two bright spots recently had been real estate and health care.  Now that got me thinking.  "Hang on," I said, "the latest in the news has been all about how much trouble Obamacare is facing and in particular, the insurance 'co-ops,' half of which seem to be in the tank.  The other thing dominating the news is the Fed about to be raising rates.  So Self, how come these are the two bright spots?"  Self thought about it for a while and didn't have an answer.

Self still doesn't.  I'm going to leave health/Obama Care to the political pundits but unless things have changed a hell of a lot since I have been getting older and I missed the change, real estate is dependent on one thing--leverage--and that's true for either the personal sector or the commercial sector.  So if the cost of leverage is going up, how come the sector is looking so good?  Almost right on cue, He Who Knows All Things sent me a couple of posts that came out today on the twin subjects of financing and real estate that are at the same time interesting but scary.

You have watched me babble on about the amount of liquidity floating around out there as a result of the Fed's unprecedented actions and the search for yield in investments that has come from the Fed's largess.  What I didn't realize at this point was that the building boom in commercial real estate has been unprecedented and as from time immemorial it has been financed almost entirely by debt at unprecedented levels and at unprecedented prices.  Did you know that construction and long term financing has been completed at fixed rates as low as 4.00%?  Neither did I and this is not for my house in the fly-over zone (Jumbos are around 4.00% out here).  Nah, this is for BIG stuff on both coasts and in places like Chicago.  So far so good, but if the outlook for the global economy is as weak as folks like the OECD claim, it doesn't take long for office buildings built with expected tenants in mind or condos in Miami and New York sold to Chinese buyers who don't live there except for a couple of weeks a year  to become permanently empty if things don't pick up because, what the heck, I'd walk away from the joint if my financing is 95% of the purchase price.  Come chase me in Beijing.  The industry term is "see-throughs."  The cause is called a "bubble."  Gee, where have we seen this before?

Now that in itself might be troublesome but the guy who just cottoned on to this  is none other than Eric Rosengren the president of the Boston Fed, who announced in a speech that he was struck by the number of construction cranes while walking along the streets of Boston one day, and said something to the effect. "Gee, that's a lot of cranes.  Could this be the start of a bubble?"  That's scary.  What is even more scary is that he would admit in a speech that he really had no idea what was going on in his own back yard.  Funny, neither did Alan; neither did Ben  These bubble thingies seem to sneak up on these guys.  Problem is it's never a bubble until it bursts.  History doesn't always repeat but when you don't learn from it...I have to think about this a bit more.

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