Wednesday, 04 January 2017 06:01

To Bust or Not To Bust: Are We In A Real Estate Bubble? Featured

Banks are showing thin NIM, yet many of the big banks are able to boast stable if not slightly improving credit metrics. This doesn’t make sense considering the explosive growth of real estate development and prices amid an environment of much slower income growth. When comparing income growth to real estate price and rent growth, an obvious bubble seems to appear. The answer seems to lie in financial engineering. Once the credit metrics of the bank's loan and loan products deteriorate (that is, when the financial alchemy once again fails to turn MBS lead into AAA gold), they will pull back on financing, putting a hard stop brake on inflationary home purchasing, and there goes the bubble pop!

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Banks are showing thin NIM, yet many of the big banks are able to boast stable if not slightly improving credit metrics. This doesn’t make sense considering the explosive growth of real estate development and prices amid an environment of much slower income growth. When comparing income growth to real estate price and rent growth, an obvious bubble seems to appear. The answer seems to lie in financial engineering. Once the credit metrics of the bank's loan and loan products deteriorate (that is, when the financial alchemy once again fails to turn MBS lead into AAA gold), they will pull back on financing, putting a hard stop brake on inflationary home purchasing, and there goes the bubble pop!

 

There has never been a time in recorded history when US Treasuries have been this inflated in price and this low in yield.

These record low rates have created bursts in financial asset appreciation and incomes.

But… and there always is a “but”, financial asset price increases have dramatically oustripped increases in incomes.

This has, and always will mean… Bubble! This bubble is only 9 years after the peak of the previous property bubble - which banks are still trying to recover from. Amazing! As was the previous bubble, there are pockets of growth that outstrip others, and it’s not uniform across the board. For instance, NYC has condo bubble (from new construction being priced above income growth, yet getting purchased anyway) but single family detached housing hasn’t topped previous bubble highs.

We have identified several public companies and several other markets who seem to have an oustized exposure to this new "bubble". We are currently digging deeper. Our findings are available as a one time purchase (The 2017 Real Estate Bubble) or part of an annual subscription (email us at This email address is being protected from spambots. You need JavaScript enabled to view it.). 

Below is an illustrative Veritaseum Smart Contract (the reference client doesn't read Case Shiller tickers) that we are offering as a rebate for the research purchase. You will get 10x the relative price difference of long GLD (gold ETF) vs short S&P Case Shiller 20 City Home Price Index, up to the net capital at risk. This is heady stuff people, and is a perfect way to demonstrate both our superb research and our fantastic, patent-pending smart contract/blockchain technology.

Last modified on Friday, 06 January 2017 10:28

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