A Huge Real-Estate Bubble Again

Rates are low, the weather is hot, and builders are more active than they’ve been in years. “Groundbreakings on new homes surged 26.6% and permits to build new homes rose 30% in June compared to one year ago, the U.S. Commerce Department said Friday,” reports Forbes. Housing construction hasn’t seen this kind of action in eight years.

Nevermind that median income has gone nowhere for two decades except down the last seven years. Plus, plenty of scar tissue remains from the housing crash with nearly 16.5 million homes vacant and over five million homeowners still underwater.

But builders build when lenders lend and “Valuation pressures in commercial real estate are rising as commercial-property prices continue to increase rapidly, and underwriting standards at banks and in commercial-mortgage-backed securities have been lossening,” the central bank reported to Congress last week.

And so it goes in Las Vegas. “Developers have forgetton the last seven years happened,” one of my appraiser friends told me when I visited. He mentioned a particular land parcel that had quadrupled in value, and a shouting match he had with a builder who insisted his land should appraise for double what he had just paid.

Meanwhile, report-writing wonks are not so sanguine. The Economic Innovation Group says a third of Nevada’s population lives in economically distressed communities, the highest percentage in the nation. Nearly half of Las Vegans live in distress, sixth highest among cities in the country.

The EIG index takes into account factors such as, education levels; housing vacancy and unemployment rates; poverty levels; median income ratios; and percent change in employment. Much of the report uses dated 2013 census data, and Sin City has never ranked high in education levels. However, first quarter data from RealtyTrac had 28.4 percent of Las Vegas homes seriously underwater with over 57 percent of those homes in some stage of foreclosure.

Las Vegas developers are undeturred. Through April, builders had pulled 32 percent more permits than a year ago.  The number of resales is up 18.5 percent from a year ago with prices increasing 8 percent.

Local housing guru Dennis Smith wrote in his May letter,

The resale segment is also trying very hard to resurrect itself from being perceived as a place investors can cherry pick homes to flip and make a bundle. The experienced investors already know their days of making easy profits on distressed homes are pretty much over … for now. However, according to some of the active brokers we talk to, many of the local buyers believe they can still find a house that is priced well below the market but might need a little TLC to shine like new.

Land is again where the action is. Recent Bureau of Land Managment (BLM) auctions have been tame compared to the boomtime land disposals of 2003 and  2004, but valley land prices popped 30 percent last year and builder Larry Canarelli says he’s buying to build on and hold for investment. “Builders are frantic for land,” he told the Las Vegas Review Journal.

Canarelli, founder of America West Development, looks forward to later this year. “The next auction will be interesting.” His company has already purchased just over $105 million of land in Clark County during the past 18 months. The “grab for land will get more pronounced,” he predicts.

Smith echos Canarelli’s view. “It is clear though that the prices for raw land and finished lots are NOT receding. At this time we can’t perceive any way land owners will rush to lower their pricing expectations. Therefore, for the near term prices [for houses] will have to stay at or above the current level.”

So does the Fed’s zero interest rate policy have anything to do with this? Some argue that housing is not what Austrian economists consider a higher order good and thus is not influenced by artfically low interest rates engineered by the Fed. For example, Tom Palmer called Tom Wood’s Austrian analysis of the housing crisis in Meltdown, “religion.”

He wrote, ”In fact, what we saw was a bubble in housing, which is not a ‘long-term project’ that will ‘bear fruit only in the distant future,’ but a speculative investment in a durable consumer good, with an additional twist: the low refinancing rates and the inducements to refinance led many to treat their homes as ATM machines and withdraw cash to finance, not ‘long-term projects,’ but consumption.

More recently, in his very fun and insightful new book Popular Economics, John Tamny insists the financal collapse was not financial at all but “an economy fixing itself” from the over consumption of what he calls a consumption good–housing– “instead of productive entreprenuerial ventures.”

However, as I pointed out in a piece for mises.org, while a house might be just like a big refrigerator, the land and entitlements under it do not resemble consumer durables at all but are very much long term investments that low interest rates make much more viable with a lengthened capital structure.  As Ludwig von Mises wrote, “If the market rate of interest is reduced by credit expansion, many projects which were previously deemed unprofitable get the appearance of profitablity.”

So, are builders, keen to acquire more land, reading the market’s tea leaves correctly?  After all, Janet Yellen claims she’s ready to raise interest rates. The tightening has already begun according to real estate analyst Jeffrey J. Peshut, proprietor of RealForecasts.com who uses Austrian principles in his research.

He wrote in a March 26th post, “the Fed has indeed been raising the Fed Funds Effective Rate under the radar since January of 2014.  They’ve just been using the tapering of Quantitative Easing to reduce reserve balances instead of the more traditional method of raising the Fed Funds Target Rate.”

Perhaps more ominous is the biggest home buyer in the nation is beginning to pare its inventory. Blackstone Group LP’s Invitation Homes spent $9 billion buying single family homes after the crash, but now, “It’s that stage in our lives where we’re now in a position of looking at dispositions as an active part of portfolio balance,” Chief Executive Officer John  Bartling told Bloomberg. “You should expect us to sell 5 percent of our portfolio every year.”

Surely, entrepreneurs are too smart to be fooled again, so soon? However, as Robert Murphy and Mark Erickson write, “Actors in these economies have no idea what the free market rate of interest would be in the absence of such interference; even if the Fed raises rates, the new rate could still be below the ‘natural rate’ of canonical ABCT.”

Las Vegas land prices fell over 75 percent just a few years ago. But cheap money makes short memories. With apologies to George Santayana, those who don’t understand what happened in the past are doomed to repeat it.