I thought you might enjoy this article written by Robert Shiller, Sterling Professor of Economics, Yale University:
http://insights.som.yale.edu/insights/housing-mark...
Agree/Disagree? Comments? Thoughts?
With great respect for the work of Robert Shiller, this statement:
""In San Francisco we found that while the median expectation for annual home price increases over the next 10 years was only 5%, a quarter of the respondents said they thought prices would increase each year by 10% or more. That would mean a net 150% increase in a decade. These people are apparently not thinking about the supply response that so big a price increase would generate. People like this could bid prices in some places so high that eventually the local market will collapse."
demonstrates a fundamental misunderstanding of the function of local real estate markets, and willful ignorance of the old maxim, "Location, Location, Location."
In physical terms, San Francisco is virtually entirely 'built out.' Constructing new homes means tearing down old structures and building new ones. Simple right? You just tear down an old industrial building and build some condos, right?
Wrong. The San Francisco planning code, in the aftermath of the first Internet bubble enshrined for posterity industrial uses for most existing uses in San Francisco. You can't tear down a PDR (Production Distribution Repair, fancy name for 'Industrial'.) building or EVEN CONVERT THE USE TO OFFICE OR RESIDENTIAL in most parts of the city.
So you just build up, on existing residential parcels, right? No so fast. Getting a demolition permit will take you about 3 years, even in the best case scenario. Also, you probably won't get one. "But my house is only 20' tall and the lot is zoned for 40' height limit!" Tough cookies. Your pretty little old house contributes to the architectural environment. You can't tear it down.
The people at the top of the food chain (picture little old ladies who paid 15K for houses now worth $1.5mm) don't want their neighborhoods to change. They don't want more or more dense housing. They are against new housing.
People at the bottom (fixed income people living in rent controlled buildings) see new development as increasing the likelihood they are displaced from their neighborhoods. They are against new housing.
There is no natural political advocacy group for middle and upper middle class people who would like to buy or rent new housing.
Thus, the only projects that could make a meaningful impact on supply are the massive condo and rental towers being constructed. At the same time we are adding office space so that there will at least be one new job for every new housing unit constructed. Most new condos aim for at least $900 to $1000 + ppsf, so even when those are sold, they do little to lower the average selling price or make available more affordable housing.
Does this mean that prices in San Francisco can never go down? Of course not. We are pretty overheated and if the tech market slows down, there will be a drop in speculative energy. But will high prices be mitigated by a rapid increase in supply. Nope. It's almost impossible to see enough housing being built to materially impact the market clearing price. We would have seen it in SF already....
Thanks to all of you who posted. This is turning into a great discussion.
Okay, so let's forget for about whether or not the real estate market is efficient. Let's assume it isn't. If that's correct, then where should one focus to exploit this inefficiency?
I think the funds, like BlackStones Invitation Homes, America 4 Rent, and @Jay Hinrichs and @Brian Burke, did a good job exploiting the unusual drop in house pricing nationwide.
Where else are inefficiencies that can be exploited? I would like to develop a way to more effectively "short" housing. I see this as an opportunity.
Yes, you mentioned several of the reasons I became a real estate investor.
I wasn't investing prior to the Internet, but I wonder how the Internet and people's ability to freely access information has changed the in RE investment business. I would imagine that the changes have been dramatic. As information gets more accessible, investors will have to work harder to exploit inefficiencies and build good deals. Maybe building/exploiting good relationships to get opportunities will become even more important than it already is.
What is your specialty at RealStarter?
What type of deals are you raising for?
Do you allow pooled funds?
Do you only do flipping funds like many of the other crowdfunding sites?
You may think differently about shorting when your large short gets called in when you can least afford it.
There are ways to short most things these days but its far from an easy task unless you get everything right and/or have great traders. Even great short funds don't typically have amazing long-term track records and its not because they can't find good candidates its more because most markets are setup against them.
For instance, right now you could play the housing market with price futures and options if you wanted. Problem is the rolls of the futures or options will hurt you unless you get timing right.
You could also think about shorting the banks that over leverage on the up cycle.
We don't really have specialties to date, but once we launch for third party deals we'll be focusing on debt projects (interim construction loans, bridge loans, SBA 504 2nds, etc.), apartment repositions, and ground-up development projects. We're probably about 2 years behind most of the other prominent funding platforms to date, but we're erring on the side of being conservative with compliance and are not taking venture money to get started. So getting started slower is to be expected. Our goal is to be the best; not to be the first to market or the platform with the most capital behind it with venture investors demanding that we do stupid things in the name of growth.
I am in the process of forming a new 506(c) fund for pre-funding hard money deals. So yes, we'll have funds to invest in. Right now we'll prefund deals with partners and private equity folks I know. We have a committee with folks with years of experience from various perspectives (deal, legal, banking, etc.) that will review deals before they're presented our our portal. We'll also be focusing on central Texas for now since it is what we know well and can underwrite properly. I think sites are crazy for doing underwriting on deals all over the country.
Our platform started as Inner10Capital and has pivoted to a new name for third party deals. This happened after many of my developer buddies expressed interest in me raising money for them. I hope to have some third party deals live in September of this year, but to date we have only done 4 successful raises via the crowd. We learned a lot and I have decided to insource our software development and move away from a white label service. We have also spent a ton of time and money on getting the legal just right for doing deals for third parties. To my knowledge we'll be the only platform doing deals with national exemptions in Texas. There is one other in Houston doing TIC deals and one using the new intrastate exemption in Texas.
The title of this forum is the title of the Robert Shiller article from the NY Times last month. I'm sure that's what you were referencing but I will put the link at the bottom of this post for anyone who needs it.
I don't think the housing market can ever be an efficient market unless policy and law is dramatically changed. Shiller emphasizes 2 things that are required to be an efficient market: the equal availability of new relevant information and the ability to directly bet or hedge against market movements.
The ability to bet against housing is there via CDO's and maybe other investment vehicles I don't know about, but I don't think the scale is large enough to compare to the affect shorting has on the stock market. Shiller was making the comparison by saying that shorting the stock market helps prevent bubbles from forming and that the use of CDO's in 2003-2006 was an attempt to mirror that action for the housing market in order to hold down the bubble, but it was a fail.
He explained that it failed because with CDO's, you are essentially shorting housing using mortgages and in his opinion there is a disconnect between mortgages and homes. While that's technically true, I believe mortgages have everything to do the price of homes because more often that not, the appraiser that is working through the bank issuing the mortgage is the one determining the sale price which directly affects the loan amount. So I don't think they failed because of the disconnect.
I think the real reason why CDO's failed to hold down the bubble was because of the lack of scale. CDO's are complicated and not as accessible or popular as shorting a stock. I can short stock from my computer at home. If 10 people read this, Id be surprised if 1 person knows what a CDO is much less how to get involved with them. I don't have data to back this up, but im willing to bet that the volume of CDO's in the housing market is a tiny fraction of what shorting is to the stock market. I don't have any data on this because I can't find any reliable volume data on CDO's. That's how unpopular they are. Any ideas? Maybe I'm wrong.
Also on a side note- Because Texas is a non disclosure state, wouldn't that be an example of a reason that our housing market is and will forever be inefficient? (unless law is changed)
Link to article below
I would add that Shiller has in the past advocated for a housing futures market with derivatives based on the prices of different MSAs that would allow people to short different real estate markets.
This opinion piece is sort of a re-statement of his general thesis behind these futures that no one seems terribly interested in trading. Somehow the so-called 'smart money' has yet to see the value I guess...
I just saw this thread and am a huge fan of Robert Shiller. Such a futures market does exist. I use it as a source of data (among many) for predicting future home prices in my market of Chicago. There are futures contracts for 11 cities based on the Case Shiller that trade on the CME. If anyone thinks SF is overpriced you are welcome to buy puts in this market.
Unfortunately for efficient-market economists and "smart money" investors these derivatives are thinly traded. These derivatives will have no effect on making the housing market more efficient (to the point of Mr. Shiller in the original article) but will allow smaller market participants to hedge their risk and/or profit from their knowledge of home price inefficiencies. Here is a link to a recap of July trading for these securities:
Thanks Brian!
Interesting. Good source of info. Do you think those making bets are professional non-real estate investors? Any info on who those better are would validate the quality of the predictions.
Thanks Brian!
Interesting. Good source of info. Do you think those making bets are professional non-real estate investors? Any info on who those better are would validate the quality of the predictions.
Jon,
I highly doubt that these traders are real estate investors. Most likely speculators from the financial industry executing trading strategies and some larger entities that are hedging their SFR residential bets (think Blackstone). It appears to me that the futures are fairly efficient, reflecting all available information, but not perfectly so - allowing opportunities for arbitrage.
I personally would not bet against housing prices rising further. Even in the frothiest SF market there may be another 5-year rise before things are too far out of whack and MUST correct. Even then, the fundamentals of income growth and lack of new supply may support this growth in prices. Back to the point of Mr. Shiller's article, the market is inefficient and thus, the "smart money" (that recognizes a bubble) has no market power to affect sales prices. Homebuyers can be irrational for longer periods than you can short the index.
At the end of the day, there are less risky ways for real estate investors to make money (ie. invest in real estate). I don't think trading financial derivatives is an efficient allocation of investor resources UNLESS that investor is confident in the impending crash, has sold all his/her holdings and is so certain of the timing/severity that they can allocate the time to bet a substantial portion of his/her available capital on it.
Cheers,
Brian