Bubble Finance in SF Bay: Home Sales Plunge, Prices Soar

by Wolf Richte

It starts here: evictions of tenants in San Francisco during the 12 months through February 2014 rose to 1,977 – the highest since 2001-2002. At the time, the dotcom bubble was disintegrating unceremoniously. Everything these days gets benchmarked against the last bubbles: the dotcom bubble that blew up in 2000, and the housing bubble that blew up in 2007, and whether we are either almost there or long beyond it, and why there is never anything to worry about.

Evictions can take place for a variety of reasons, but “Ellis Act” evictions, which occur when the owner of a rental property wants to get out of the landlord business, jumped to 216 during that period, up from 116 in the prior 12-month period, and up from 64 two years ago. According to the SF Examiner, “City officials and tenant advocates say most uses of the Ellis Act are by real estate speculators who have just purchased a rent-controlled building.” Board of Supervisors President David Chiu called it an “affordability crisis.”

It’s the outgrowth of the new housing bubble in San Francisco – and in the Bay Area – where home prices have become gravity-defying phenomena. But something else is happening too: sales volumes are crashing.

The industry can’t blame the weather. This rainy season, which started in the fall, has been warm and gorgeous.

In the nine-county Bay Area, according to San Diego based DataQuick, February home sales volumes plunged to 4,963, the worst February since 2008 and the second worst February in the history of the data series going back to 1988. By comparison, the highest volume February occurred in 2002 with 8,901 sales.

It’s not a fluke. January had been the worst January since 2008, December the worst December since 2007, just months after the prior Bay Area housing bubble peak which occurred in June and July 2007 (there’s that benchmark again). The simple fact is sales are drying up.

But the median price soared 33.3% in February from a year ago to $525,000. It was the 23rd month in a row that the median price has risen year-over-year, and the 16th month that it has risen 20% or more. At this rate, it’ll hit the prior bubble peak of $665,000 in about 9 months.

Adjustable-rate mortgages – the landmines that blew up during the collapse of the last housing bubble – made up 24.8% of all purchase mortgages in February, a notch down from 25.1% in January, but more than double the 11% last year, as homebuyers, not all of whom are sudden IPO millionaires, surprisingly, twist and stretch to finance the incredibly ballooning cost of their homes.

Meanwhile, absentee buyers – “mostly investors,” DataQuick points out, including those Ellis Act speculators in San Francisco – bought 24.5% of all Bay Area homes, same as in January. While that sounds like a lot, it was way down from 32.3% a year ago. The collapse in investor interest is even more stunning in absolute numbers: they bought 2,118 homes in February last year versus 1,216 in February this year. That’s a 42.6% dive. While total sales dropped by 441 units, sales to investors plummeted by 902 units. The smart money is losing interest, given these prices – while the dumb money is still piling in.

My beloved and crazy San Francisco has an uncanny knack for inflating bubbles further than other places and keeping them inflated longer, only to watch them end in tears all over again. The peak of the prior housing bubble in San Francisco occurred in November 2007, long after the hot air had started hissing out of bubbles in other cities. That month, the median home price hit an all-time phenomenal record of $814,750. The $1 million mark was on everyone’s mind. San Francisco would be immune to the collapse of the housing market that was playing out across the rest of the US. Everyone knew the reasons for this immunity. It all boiled down to the fact that San Francisco was different than any other place. And by February 2011, the median price had plummeted to $589,000, and sales were drying up. That was the bottom.

But for the last two years, prices have been skyrocketing. In December, the median price hit $813,000, nudging up against the 2007 peak, continued to soar in January to an all-time high of $884,500, and then, in February to $945,000. Up 34.9% from a year ago. By other measures, including RealtyTrac’s, the median price in San Francisco already exceeds the one-million mark.

Hard-to-get mortgages – try to get one for a median home costing $1 million on a median San Francisco household income of $74,000 per year! – and affordability “certainly play a role today,” said DataQuick president John Walsh. “It’s going to be fascinating to watch how things play out between now and June. At some point rising home prices will trigger a more significant increase in the number of homes on the market. It’s just a question of when.”

That’s what they thought at the last bubble. And that’s exactly what happened. I remember walking down the streets, dodging two or three realtor signs on certain blocks. On weekends we went to open houses in our neighborhood just to see how other people lived. The only problem was: there weren’t enough buyers to mop up these homes. And prices began to dive.

So who the heck is going to buy these super-pricey homes this time when, as Mr. Walsh speculated, they will finally show up on the market as current owners want to cash out? The bedraggled and strung-out denizens of the middle class? Forget them. They’ve long ago been priced out of the market.

Teachers are a symbol of that middle class. In California, they earn on average $69,300 annually, fifth highest in the country. Not exactly a pittance. But it is a ludicrous pittance if they’re trying to buy a home.

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Joe Friday…25% S&P 500 declines were led by this…happening again?

by Chris Kimble

CLICK ON CHART TO ENLARGE

Since 2000, the S&P 500 has declined over 25% twice, each decline had this in common.... These S&P 500 bear markets followed a breakdown of a bearish rising wedge at falling resistance by the Nikkei index.

The Nikkei looks to be slipping below support of a bearish rising wedge and is kissing the underside of the wedge as resistance!

Joe Friday.... The prior two times the Nikkei broke down from this pattern at resistance, in time the S&P 500 followed it!  This is not a prediction that the S&P 500 will fall 25% plus!  Joe just suggests to keep your eye on this leading index, because continued weakness by the Nikkei, could impact the S&P 500 again!

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5 Things To Ponder: Macro Investing Thoughts

by Lance Roberts

This past week has seen the market struggle due to continued weak economic data, rising tensions between Russia and the Ukraine and an extended bull market run.  As I discussed in yesterday's missive, the market internals are showing some early signs of deterioration even though the longer term bullish trajectory remains intact.  Therefore, this week's "Things To Ponder" wades through some broader macro investment thoughts from the safety of your investments to how market tops are made.

1) The Delusions Of Real Returns by Brett Arends, WSJ

This is a topic that I discuss very often with clients.  Past performance is no guarantee of future results and making investment decisions based on such is likely going to leave you very disappointed.  Extrapolating 110 year historic average returns going forward is extremely dangerous.  First, you won't live 110 years from the time you start saving to achieve those results, and starting valuation levels are critical to your expected returns.  Brett does an excellent job discussing this issue.

"Money managers point to historical data going back to the 1920s to show that in the past stocks have produced total returns of about 10% a year over the long term and bonds, about 5%—meaning a standard "balanced" portfolio of 60% stocks and 40% bonds would earn just over 8% a year. (Naturally, their legal departments quickly add that the past is no guide to the future.)

Are these forecasts realistic? Are they sensible? Are they even based on actual logic or a correct reading of the past data?

A close look at the data reveals a number of disturbing errors and logical flaws. There is a serious danger that investors are deluding themselves and that returns from here on may prove far more disappointing than many hope or believe.

This has happened before. Money invested in a balanced fund of stocks and bonds at certain points in the past—such as in the late 1930s, or during the 1960s and 1970s—ended up losing money for many years, after accounting for inflation.

Far from making an annual profit, investors went backward in real, purchasing-power terms. And those losses were even before deducting costs or taxes."

2) Lessons From The Bull Market by Jason Zweig, Joe Light and Liam Pleven

If you do nothing else this weekend - read this article.  There are simply too many nuggets of wisdom for me to summarize, but here are a couple of my favorite points.

"Every day, in the newspapers, on financial-news shows and online, dozens of market strategists make bold predictions about the direction stocks are heading.  Take their forecasts with a mound of salt. After all, current prices already reflect the sum of stock-market buyers' and sellers' opinions. If one investor is bullish, there must be another investor on the other side at the current price."

"In a speech about intellectual honesty 40 years ago, Nobel Prize-winning physicist Richard Feynman said, 'The first principle is that you must not fool yourself—and you are the easiest person to fool.'

What they should be asking is this: Am I fooling myself into remembering my losses as less painful than they were? Am I itching to take risks that my own history should warn me I will end up regretting? Am I counting on willpower alone to enable me to stay invested and to rebalance through another crash?"

"Investors who hear the phrase 'bull market' might decide it is time to get in on the rally. On the other hand, investors who hear the current bull market in stocks has been running for five years might worry it will soon end. In either case, investors would do better to tune out the chatter. The definition of a bull market is arbitrary, and the term tells investors little about what will happen next."

3) How Market Tops Are Made by Barry Ritholtz via Bloomberg

This is a great follow up to my articles this past week on "10 Signs Of Exuberance" and "Market Internals."  Barry interviews Paul Desmond, the Chief Strategist and President of Lowry's Research, who has spent the past five decades analyzing markets.  From Barry:

"I spoke with him [Paul Desmond] recently, chatting about his work in identifying market tops. Rather than focus on the usual noise, Desmond suggests anyone concerned about a top should be watching for very specific warning signs. He notes the health of a bull market can be observed by watching internal indicators that provide insight into the overall appetite for equity accumulation.

These four include:

1. New 52-Week Highs

2. Market Breadth (Advanced/Decline Line)

3. Capitalization: Small Cap, Mid Cap, Large Cap

4. Percentage of Stocks at 20 percent or greater from their recent highs"

4) New All Time Highs = Secular Bull Market? by Cam Hui via Humble Student Of The Markets Blog

I wrote an article recently entitled "Correcting Some Misconceptions About A New Secular Bull Market" as the markets pushed toward new highs at the end of 2013.  At that time there was a flurry of articles suggesting that the markets had entered into a new secular bull market.  However, my argument against this thesis revolved around the fact the no secular bull market in the history of the known universe has ever started from peak market valuations.  Cam Hui brings forward an excellent point:

"Here is a difficult question for those in the secular bull camp. What's the upside from here? Ramsey of Leuthold Weeden Capital Management projects limited upside under a secular bull scenario, even assuming that everything goes right:

If the current cyclical bull unfolds into a secular one that is perfectly average in duration and magnitude (a very tall achievement, in our book), the annualized total return over the next ten years will still be a bit below the long-term average return of 10%. Frankly, we don't find this all that compelling, considering all that must go according to plan for the market to achieve it (i.e. sustained EPS growth at a healthy 6% and an inflated terminal P/E multiple).

He added some of these gains depends on assuming the resumption of a stock market bubble:

Based on the relative positions of these time-tested measures, secular bulls seem to be implicitly betting on the reflation of a multi-generational stock bubble less than 15 years after it popped. The pathology of 'busted bubbles'—which we've detailed at length in the past—doesn't support that bet.

When he puts it all together, my inner investor thinks that, if we are indeed seeing a new secular bull market, the extraordinary measures undertaken by global central banks in the wake of the Lehman Crisis has front-end loaded many of the gains to be realized in this bull."

5) Does Shiller's CAPE Still Work? by Bill Hester, Hussman Funds

It is becoming more difficult for more mainsteam commentators, analysts and managers to justify their arguments for a continued bull market when having to contend with rising valuation levels.  However, as would be expected, at the peak of every major bull market in history there have always been those that have suggested that "this time is different." In 1929, stocks had reached a new permanent plateau.  In 1999, old valuation measures didn't matter as it was about "clicks per page."   In 2007, subprime credit was "contained" and it was a "goldilocks economy."  In 2014, old valuation metrics simply don't account for the new economy.  We have always heard the same "sirens song" during every major bull market cycle and, like the sailors of the past, we are ultimately lured toward our demise.  Bill Hester does an excellent job breaking down the arguments against Shiller's CAPE valuation metrics.

"More recently the ratio has undergone an attack from some widely-followed analysts, questioning its validity and offering up attempts to adjust the ratio. This may be a reaction to its new-found notoriety, but more likely it's because the CAPE is suggesting that US stocks are significantly overvalued. All of the adjustments analysts have made so far imply that stocks are less overvalued than the traditional CAPE would suggest.

We feel no particular obligation defend the CAPE ratio. It has a strong long-term relationship to subsequent 10-year market returns. And it's only one of numerous valuation indicators that we use in our work – many which are considerably more reliable. All of these valuation indicators – particularly when record-high profit margins are accounted for – are sending the same message: The market is steeply overvalued, leaving investors with the prospect of low, single-digit long-term expected returns. But we decided to come to the aid of the CAPE ratio in this case because a few errors have slipped into the debate, and it's important for investors who have previously relied on this ratio to understand these errors so they can judge the valuation metric fairly.

Importantly, the primary error that is being made is not even the fault of those making the arguments against the CAPE ratio. The fault lies at the feet of a misleading data series."

EXTRA:  Just Good Stuff To Know

I use Google for just about everything.  Email, picture uploads, all of my spreadsheets that I use for blogging, analysis, newsletters, etc.  From my phone to my computer, Google has just about all of my data.

That makes me a little more than uncomfortable. If you are like me, then you will find the following links very useful in adjusting things from what Google knows about you to archiving the stuff you put on the site.

Here are 10 important links that every Google user should know.

Have a great week.  I have enjoyed the many great emails and tweets (@lanceroberts) that you have sent me.  Please keep them coming

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Soybeans Extend Weekly Loss on Concerns for Chinese Cancellation

By: Bloomberg

Soybeans fell, heading for the biggest weekly loss in more than five months, on signs of slowing demand from China, the world’s top importer. Wheat rose, erasing earlier declines.

China has delayed shipping about 500,000 metric tons of soybeans, with crushers asking suppliers to change March and April cargoes to June and July, according to a Bloomberg News survey of five crushers, traders and researchers in China. The cargoes are mostly from Brazil, according to the survey. Processing soybeans into animal feed became unprofitable this month in China, according to Shanghai JC Intelligence Co., while hog prices fell and demand from poultry farms dropped amid bird flu outbreaks.

"The oilseeds complex remains extremely volatile with large price swings a seemingly daily occurrence," said Jonathan Lane, trading manager at Gainsborough, England-based Gleadell Agriculture Ltd., in an e-mailed note. "Chicago soybeans have been sold off heavily with the market anticipating imminent Chinese cancellations."

Soybeans for delivery in May dropped 0.4 percent to $13.9125 a bushel at 5:36 a.m. on the Chicago Board of Trade. That would leave prices 4.6 percent lower this week, heading for the biggest decline since the week to Sept. 20.

Brazil’s Production

Chinese demand and concern about production losses in Brazil, the top exporter, helped spur a 7.6 percent increase in soybean futures this year. The U.S., the second biggest shipper, sold 27.8 million tons of soybeans to China since the marketing year began Sept. 1, with 1.87 million tons still waiting to be shipped as of March 6, U.S. Department of Agriculture data show.

Wheat for May delivery rose 0.1 percent to $6.7425 a bushel after earlier dropping as much as 0.6 percent. The price climbed to $6.965 yesterday, the highest since Oct. 25, before ending 1.5 percent lower. In Paris, milling wheat for November delivery fell 0.4 percent to 202 euros ($281) a ton on NYSE Liffe.

Wheat entered a bull market this week in Chicago on expectations demand for U.S. supplies will rise amid concern that cargoes from the Black Sea region may be affected by the crisis in Ukraine. The grain is up 11 percent this year and on course for a second weekly advance.

Ukraine’s Crimea region is set to hold a referendum on March 16 on whether to join Russia. Any halt of grain shipments from ports in Crimea will have little impact on Ukraine’s total exports, Dmitry Rylko, director of Moscow-based Institute for Agriculture Market Studies, said in an e-mail yesterday.

Corn for May delivery fell 0.4 percent to $4.8325 a bushel in Chicago. The grain headed for a 1.2 percent decline this week, the first such loss since the week ended Jan. 17.

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Rock, Taper, Scissors - Shoot

by Marketanthropology

ed by their respective miners, precious metals continue to block and tackle higher out of the broad base they established last year. Should the anxieties delineated by the pattern continue, a brief retracement window for the sector will be opening with the March Fed decision next week. 
Having said that, we do not believe at this time the reward in market-timing potential retracements warrants the risk of missing the next leg higher. Primarily, because the space has benefited from several different motivational catalysts, which often is the case with early but dominant trends. 
While Crimea and China provide fodder for the business headlines as to why precious metals have received a strong bid of late, we take our cues largely from 10-year Treasury yields and the currency markets which have provided variable and overlapping tailwinds for the sector. 
Although Draghi succeeded yesterday with jawboning the euro lower, its effects to the markets will likely be fleeting without material action by the ECB in the near-term. The same is true for the yen, with respect to further action required by the BOJ to arrest the retracement rally that has sapped broader risk appetites this week. 
As we have followed and shown with our value-trap comparative with the banks (circa 2009 & 2011), the miners worked off the last layers of the ill-timed inflation premium worn last year with a successful retest of the financial crisis lows. From a confluence of different long-running perspectives, the outlook for the precious metals sector still looks strong.

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Global Equity Market Correlation Matrix

by Bespoke

The grid below is a correlation matrix of most major stock markets around the world.  It quickly shows the correlation of daily returns between any two country stock markets, and it's heat-mapped to show which countries are most or least correlated with each other.  There are two matrices shown: one for the period from the start of the US bull market to present and one for the last year.  So...what does it all mean?

Correlations give us an idea of how similarly two markets perform.  For instance, since the start of the bull market, Canada and the US have had a 0.78 correlation.  This implies that if one market is up 1%, the other would usually be up by about 78 basis points. The more positive the correlation, the more likely the two indices will move together.  A correlation of zero would imply that there is no relationship between two markets, while a correlation of -1 implies that when one market moves up by 1%, we could expect the other to be down by 1%.  It's important to note that these aren't absolute statements!  Correlations measure past relationships over periods of time, and aren't by any means an absolute predictor of what happens on any given day in the future, now, or in the past.  They are an indication, not a definitive statement.

Looking at the first matrix, there are a couple of notable patterns.  First, the US has very few "middle of the road" correlations: only three countries have correlations between 0.60 and 0.30.  The correlation between the US and Canada is one of the highest of any pair of countries on the map, and 9 countries have correlations above 0.60 with US stocks.  The US is least correlated with Asian markets; China-US and Japan-US are two of the three least correlated markets on the grid.

Generally speaking, correlations are highly regional; Australia's most correlated markets are Hong Kong, Japan, Singapore and South Korea, all of which are also developed Asia-Pacific markets.  Meanwhile, the UK is most correlated to other European markets such as France, Germany, Spain, Sweden and Switzerland.  The three most-correlated pairs are all European and specifically English: UK-France, UK-Germany, and UK-Switzerland. 

Please click the image below to enlarge.

The second matrix paints a slightly different picture from the longer-term matrix above it.  In aggregate, the average correlation of this matrix falls from 0.46 to 0.40 when looking at the more recent time frame instead of the whole US bull market.  We see this as a healthy move, as higher correlations imply a world driven more by binary outcomes: "risk on" when policy makers intervene to end a crisis and "risk off" when another one rears its ugly head.  Improvement in Europe (we view the Ukrainian crisis as a temporary speed bump, not a serious threat to the region like periphery issues in Spain/Italy/Greece were), stabilization in Washington DC, and Chinese financial market liberalization (even with the temporary uptick in volatility it brings) are all positive steps forward from where the outlook was five years ago.  The single largest decreases in correlation between the entire bull market and just the last year are US-Brazil (-0.28), US-Mexico (-0.25) and Switzerland/UK-Brazil (-0.21).  Broadly speakng, Asia-Pacific markets have decoupled from the Western Hemisphere, with correlations between Japan and Brazil or Malaysia and Brazil as low as 0.01 and 0.03 respectively; meanwile most major Western markets such as Canada, France, Germany, the US, Spain, and Switzerland have a correlation in the single digits with China.

China's economy has deccelearted recently, and its returns have been the worst of any major stock market over the course of the bull market (see this chart from our bull market anniversary post).  Meanwhile most of the developed world has been on a massive rally.  Whether the drop in Asia-Pacific correlations will continue is largely dependent on China and Japan.  If China can stave off a financial crisis (likely, in our view) and Abenomics is ultimately succesful (less likely), we may see correlations rise from these low levels in the future.

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