Price Index for New Condos in SF Drops AgainAugust 26, 2016
For the second month in a row, and following the trend we first noticed emerging last year, the price index for new construction condominiums in San Francisco, as compiled by The Mark Company, has dropped on a month-over-month basis and is running 2 percent lower versus the same time last year, down 6 percent versus an August 2015 peak.
At the same time, while the inventory of unsold units in developments across the city (1,150) remains over 50 percent higher versus the same time last year, new condo sales in San Francisco totaled around 40 in July, down over 60 percent on a year-over-year basis.
And the overall pace of new construction sales in San Francisco is now running 36 percent lower in 2016 versus the first seven months of last year, down from 32 percent lower in the first half of the year.
Comments from Plugged-In Readers
I wonder if by now the lemming uber bulls can concede that the market has shifted and price corrections are coming. It is not even debatable any longer if you are of sound mind. The Fed will do everything is can to prevent a price collapse and will in turn destroy our fiat currency. Get ready for the ride!!
Heard it here first, folks! Runaway inflation right around the corner. Mr. Miyagi, I assume you’re shorting the dollar?
Truly the dumb money is out right now. If you are a house buyer right now you are truly lacking any grasp of basic economics or have spent more time tweeting than you have studying housing runs and the troughs that inevitably follow. In other words, you are dumb and will be parted from any money you have. Sorry, too straight forward for you? Tough medicine.
What is presumptuous about arriving at conclusions based on hard data? Besides, even if one ignored the hard data altogether it is obvious that this bloated market is heading to slaughter. All of the leading indicators are there. If I hadn’t made a lot of money with contrarian real estate plays then I would let the uber bull lemming sentiment corner me into a stupid buy.
If you are planning to hold the asset long term (7-10+) no reason to think now is a bad time to buy. Real estate has always been a long term play and remains no different today.
7-10+ is a pretty large window my friend. Of course if one waits forever then at some point their property will not be under water. One will also be dead at some point. It is more prudent to buy real estate cheap. Even if you plan on holding it long-term as you are saying then what logic is there in paying an inflated prices with fixed high property taxes, borrowing costs etc? That argument doesn’t make any sense. Exercising patience and buyer for cheaper regardless of how long your hold pattern is makes infinitely more sense.
Well no one knows if any item is “cheap”, its actually a matter of affordability and need. Housing has utility for the resident beyond monetary value. Its where you live your life. You have to live somewhere and with that is an associated lifestyle. And your life is finite,money and time aren’t exchangeable. The alternative to buying may be paying rent that is clearly isn’t a monetary investment or living in a place that you don’t like,
Ha I remember the same discussions here from the mid-2000’s.
Separately, I’m curious – does anybody know if the issues at the Millennium Tower have had an impact on sales in other high-rises?
Really good question. I was wondering that myself. If I had been thinking of plunking down several million for a condo in a nearby, to Millenium, tower, I’d maybe think twice. Certainly I’d do extra due diligence on foundation issues/construction.
Exactly Andy C – in 2000 and beyond the rhetoric has been don’t buy don’t buy too expensive too expensive it will come down. I didn’t listen….and the real estate is now worth much more….no guarantee the same happens over the next 10-15 years but historically speaking odds are in your favor. Add in no more land, job growth continuing, global destination, tech revolution in its infancy….I like my chances that when I’m looking to get out I’ll be better off then giving rent to someone else
Danielson, you could also take Andy C’s comment as referring to the uber bullishness from supposed exerts in the mid 2000’s just before real estate fell off a cliff. Perhaps that is what he is referring to? And as someone who is a landlord for a living I am telling you that rents and values are both in a bubble and this is a bad time to buy.
Any successful RE investor (barring new money or mortgage yahoos with ironic beards) will tell you that buying now is foolish. There are alternatives to buying at the peak. You could be ‘throwing away’ your money renting or doing ten times more damage in a leveraged scenario where contracts have more teeth than the CAA form you inked your studio lease on. I could care less if you or anyone else on here ignores sound investment advice. I need lemmings to create value for me in the form of distressed sales or my entire business model breaks down. Sayonara.
It’s such a personal and complex calculation, really I don’t believe there is one answer. Prices did come down and lots of people did lose money. I suppose with a 10-15 year window the odds may be good. But renting is not always throwing money away. If renting is cheaper and you are saving the difference you could end up with some decent cash ‘equity’. Down payments, mortgage rates, property taxes, dues/maintenance/renovation, insurance, costs/fees to buy, costs/fees to sell etc can take a big chunk of equity (if any) if you are forced to sell in under 5-10 years. The New York Times used to have a pretty decent buy vs. rent calculator. I don’t know if it is still out there.
As for the tech revolution being in its infancy – yeah maybe but that doesn’t mean the bay area continues to get its share.
I’m a CS engineer now in management for a large very well known global company. We only hire new engineers out of the top tier schools. We haven’t hired any into the bay area (main) office in 5 years. We hire them all into 2 other terrific US locations and one asian center. Why? Too damn expensive for us and for new hires. We are not the only ones. Something’s gotta give. The beauty and nice weather of this area notwithstanding, it isn’t necessarily sustainable forever.
Agree completely. The Bay Area/SV will remain the tech center but more and more of the “worker bee” jobs will be shifted to other regions. Management will remain in the SV, but the very nature of the business does not require the bulk of the workforce to be nearby.
Not all tech workers have family trusts or have gotten a boat load of cash through an IPO. Many are making six figures but can’t afford a home in the SV or SF. Half a dozen techies rent rooms in homes near me. Rather than pay 3000/month for a one bedroom apartment. This works when one is in their 20’s but get into your 30s and living as you did in college gets old.
Anecdotally – I know techies who have relocated to other areas or are trying to. The cost of living being the main reason for wanting out.
It is not sustainable and there are other areas with nice weather and beauty. And much more affordable housing. Companies know this and tech workers do too.
People have been saying this since 1995 (or before). Perhaps it will eventually come true, but there’s not much reason to think that it’s happening now.
What “very large well known global company” in the Bay Area has not hired anyone in the last five years? I assume that this isn’t a technology company?
probably the same company that would hire someone who thinks they are a ‘computer science engineer’
What is the actual value of the index?
It’s not like real economists said this was a horrible bubble. It’s not like Michael Hudson, Yves Smith, Nomi Prins, Pam Martens, William Black and so many others that predicted the 2009 crash, didn’t also say, within two years of the Obama administration of QE and ZIRP, that half the country was going to suffer another rentier class of sucking wages from us, and a feed into a global depression…. It’s not like any of the ‘smart men in the room’ could not see this coming. It’s more like……it’s just a little correction . Just keep on evicting people, destroying affordable housing for the working and middle class…cuz well….it’s just a ‘good’ thing to do.
You are absolutely all over the place there with regard to time, timing, who said what, linking various factors local and meta, predictions, local economy, and on and on. What is your point? You truly think that condos ticking down is an indicator of the United States’ place within a global recession? Most economists point to the United States’ economy as one of the best big economies currently functioning.
That isn’t what I said.
Not hiring new engineers into the bay area.
@jake bscs and msee actually
So this is a large well known company that hasn’t hired a single engineer in the Bay Area in the past five years. Nothing about that sounds remotely plausible unless your company is not in the technology industry at all and/or has little in the way of Bay Area operations. For example, it’s believable if you work for John Deere.
I’m seeing similar behavior but less severe. A company with HQ in Silicon Valley hires only about 10% of its workforce in the Bay Area. About 70% of new hires are in Asia and specifically in low cost regions.
Sure, that’s to be expected. Literally no hiring is a flat out fabrication though.
Charles Schwab, of course. Not a technology company.
I know for a fact that Schwab has hired plenty of engineers in the area over the past five years. Net movement out of the area isn’t the same as “haven’t hired any into the bay area in 5 years”.
Still curious if anyone knows whether there’s been an impact on high-rise sales due to the issues the Millennium is facing. I’ve been a little surprised not to see anything on this site about it unless I’ve missed it. That could skew statistics.
They’re just completing a Millennium Tower in Boston and a friend is considering a unit. He’s asked for info on the construction methods there. Not sure if that tower is on landfill though – it seems more Back Bay adjacent. We’ve seen reference to their drilling to bedrock to support the cranes used in the Boston construction but nothing yet about supporting the slab. It makes me wonder about some of the other SOMA towers too. It doesn’t seem like easy info to find. Maybe I just don’t know where to look. If anyone has any pointers that’d be great.
Millennium Tower in Boston is near the Downtown Crossing T stop, close to the n.e. corner of the Common – it’s very much on “original” and solid land.
Beautiful photo for this post. Example of how a good camera location and shot composition can make a rather mundane group of buildings into something greater than the sum of its parts. Lots of nice color and texture contrasts, the bay bridge of course is key and the angle chosen, perfect.
We are 2% lower than this time last year. And 6% lower than August 2015 which was this time last year.
So which is it?
I would direct you to the Mark Company’s web site, but I can’t find any information or July reports published there that support this story. Dave probably correctly parsed the June’16/August ’15 reference here. The index is “proprietary” to the Mark Company and is a sort of imaginary pricing of a hypothetical 2 bedroom (IIRC) condo. We don’t know if they are accounting for a change in mix regarding size of sales, or finish levels, or floors of condos that are selling. It’s probably mostly created for the benefit of the Mark Company’s clients who are trying to figure out how to price their own developments. I suspect the index is provided as a best-guess estimate, so you should devote as much attention as you think appropriate to a 2%/6% change in price. Apparently prices aren’t going up(!) You wouldn’t be able to recreate the “index” if you wanted to do, as the methodology is not public, that I am aware.
Buyers who wait another year or so will probably be able to get a good deal at the Millenium, once things have bottomed.
This is a month over month compare so I assume the 2% drop is July 2016 vs July 2015. The month of August is not over yet so no August 2016 figures are not available. The 6% drop is, I expect, a compare of July 2016 to the August 2015 numbers.
This leveling/small drop is not a surprise. Its all cyclical and a modest decline is prices seems to be on the horizon. No major drop IMO despite the fears of some of a big drop. The Bay Area is somewhat buffered from big price declines because of the many external factors influencing real estate here. In the last big downturn the inner Bay Area dropped less than other markets and came back earlier than other markets.
That said, I believe that certain other markets will outperform the Bay Area appreciation-wise for the next decade plus. A re-balancing of sorts between markets that is overdue and healthy for the Bay Area.
Again, in past times the Fed has been able to respond with lower rates, no longer. We are entering totally uncharted waters with the next bust. I’m sure the government will respond with some sort of half baked, morally hazardous, currency debasing plan to kick the can down the road. Maybe they’ll even ban cash and start buying equities too. But will it work, or will it once again accomplish just barely enough to keep the banker class propped up at the expense of future generations?
This is just simply untrue. Rates can go negative and are in fact have been negative in many countries around the world in recent years (Japan, Germany, the US and elsewhere are a few examples that spring to mind).
And what have negative rates that accomplished in those countries? Zip, zero, nada, zilch.
At the last FOMC meeting, eight of the twelve members voted to increase rates, they must know something you don’t. Anyways, what’s so great about a plan for economic growth that puts the taxpayer deeper into debt and then taxes them again by inflation? Who really benefits from that? Centrally planned economies have always collapsed and we can often look to debasement of the currency.
Germany is one of the strongest economies in the world and has had a positive current account balance for at least 10 years. Negative rates probably aren’t the cause but rather the effect …
@Sabbie, it is refreshing to finally hear from someone like yourself who understands we are truly “entering uncharted waters with the next bust”. Outside of some select urban regions there has been no recovery in the U.S.
Haven’t you argued for fiscal stimulus in the past? How is fiscal stimulus less “centrally planned”?
I argue for fiscal stimulus over monetary stimulus, I am also not so laissez faire as to deny that there are some things better left to collectivism than capital. I also don’t think we should end the Fed like some people, but it needs to be curtailed as former member Kevin Warsh says in the WSJ.
I’m still baffled that you argue against “central planning” by advocating for fiscal stimulus. It’s like Marx arguing for communism by advocating the need for private property.
I’m still baffled how anyone can argue for “lower for longer”. These distortions cause much more painful busts when they finally happen.
Interest rates will be low-to-negative for at least another decade if not longer. I am waiting for mortgage rates to drop into the sub-2% range (which is the case in many other countries right now) and possibly even sub-1% for short term mortgages. I can’t wait to see this happen. In fact any move that compels savers to put their money into higher yielding fixed assets or better yet, invest in real businesses, is good for the economy.
Also consider the overarching and immutable demographic shift that is occurring all over the Western world right now– an aging population is retiring, consumption drops and that is an overall deflationary force. We need long term economic stimulus to force savers into action (ie spending or investing in higher-yielding asset classes), and central banks around the world recognize this and are responding correctly.
There’s a key difference between providing tools and dictating results. Building schools vs fixing wages. Growth friendly zoning and building codes vs fixing rents. Improving your economy’s global competitiveness vs fixing your currency’s exchange rate. Providing a stable financial system vs fixing the economic growth rate.
Centrally planned economies go most awry when they implicitly or explicitly become command economies and try to fix the stats without fixing the underlying problems. That’s a world away from a government spending money to fix issues with the real economy.
The same old pathetic argument based on the MSM narrative and patently false assumption that zero/negative rates push people to spend. Again, please for the love of god, either show us any scrap of evidence that this actually works or just give it up already!! Europe, Japan, and the US all have RISING savings rates as this lame experiment carries on.
“I’m still baffled how anyone can argue for “lower for longer”. These distortions cause much more painful busts when they finally happen.”
Examples would be useful. I’m aware of the ECB raising rates prematurely in 2011 and plunging the eurozone back into recession, but that seems to argue against your point.
I’m still baffled that there are two people here claiming that maintaining a low fed funds rate is akin to central planning of the economy, but raising interest rates is not. What kind of logic is that? And to top that, the government literally borrowing and spending money on investments planned by the government (fiscal expansion) is not central planning either?
“Europe, Japan, and the US all have RISING savings rates as this lame experiment carries on.”
Zoom out to the 5 year chart and draw the trendline since 2013. Basic stuff here!
Why would I only look at 2013 – now? We’ve had zero interest rates since 2009, so wouldn’t we draw the trend line from a time BEFORE zero interest rates? What does that trend line look like from 2006 or 2007 or 2008?
It doesn’t matter. In 2006-2008 the savings rate was bouncing around below 4% and now it’s bouncing around above 5%. Again, zero evidence that these negative rates push spending. In fact since Japan and Europe went negative, the sale of safes has skyrocketed.
2006-2008 was literally the record low for savings rates (zoom the chart out to max). You’re claiming that it has “pushed up” the saving rate because we’re not at a new record low?
The sales of safes have skyrocketed because negative rates do encourage saving cash, but that doesn’t mean that overall savings has increased. It just means that we should be doing all that we can to eliminate paper currency.
Ban cash, oh boy, now I am starting to wonder if you’re just trolling me. I’ll refer you to this brand new article that might enlighten you regarding everything I just said.
And I’ll direct you to this brand new Economist piece disagreeing with everything that you’ve been saying. The Fed has major, major problems, but not tightening monetary policy fast enough is just not one of them.
I said nothing about “banning” cash, btw.
Rising savings rates or merely paying down debt faster?
Let’s suppose I (hypothetically) have a newly remodeled house in a prime Peninsula neighborhood that is renting for $6000/mo. My mortgage (PITI) costs are $3900 @ 3% interest. Now drop the interest rate to 1%. My carrying cost just dropped $720/month, money I am going to pocket of course …
I think for the average American it goes more like this: my wages are down, my expenses are up, I’ve got $500 in the bank, I’m getting zero return in my retirement account, so instead of borrowing more money to buy some stuff that I don’t need, I’d better save as much money as possible, because if this keeps up I will be living on dog food, and I don’t mean the nice canned stuff.
Are you describing the past five years? The same time where retirement accounts have seen outsized returns due to the stock market returns that you feel are “fixed”? Or are you claiming that most Americans save for retirement in CDs?
Huh, Calpers for example returned 1% this last year, not enough to keep up with inflation. The S&P 500 adjusted for inflation is about where it was in 2000. And only about half of Americans own stocks, and it is heavily skewed towards the wealthy.
Sabbie, you’re cherry picking data. 2000 the peak of the last boom….and it is slightly above inflation since then.
Over the last five years, though, the S&P 500 has gone from 1173 to 2180. Hard to dispute that’s a huge success.
lol, ignore the huge bull market and focus on the peak of a bubble and/or a super short time period.
Only about half of Americans have any savings for retirement, so I’m not sure what your point is re: stocks.
“the peak of the last boom”
“focus on the peak of a bubble”
If it’s unreasonable to make an comparison to the peak of a bubble, is it also unreasonable to try and re-inflate the economy to the peak of past bubbles?
Should tech companies look to the first dot com bubble for guidance on their business models?
“is it also unreasonable to try and re-inflate the economy to the peak of past bubbles?”
Of course it would be. How is that happening, exactly? I need something more specific than “you know, a low fed funds rate”.
It’s possible. I really have no idea what average people do.
So we should kill the economy with a rate hike in order to “save” it?
No, not at all! We should blow the bubble much bigger and longer, even though the bigger and longer it goes, the more painful the aftermath.
We’re waiting on your alternative plan instead of just snark. We raise rates and then?
You’re engaging in an unimaginative Manichean logical fallacy. Fed policy was one of the main factors that led to the bubble (and massive inequality, stagnant wages, and general immiseration, outside of the Bay Area and a few other cities). However, there is nothing the Fed can do now to get out of this mess without a lot of carnage (for working people; for the wealthy, not so much- they’ll get bailed out). The Fed can only react, and it has no ammo left to react with. Pushing on a string, as Keynes said long ago.
First, there needs to be a strong, counter-cyclical fiscal program (eg a Manhattan Program for clean energy, update the energy grid, etc), which is empirically proven to work, but which is politically incorrect under the idiotic neo-liberal austerity hegemony that reigns over the political duopoly. When the economy recovers (as it quickly will with a proper fiscal program) and there is economic data to react to with the tools the Fed has, then you monetarists can start chirping again. Until then, the neo-liberal monetarist jokers who destroyed the global economy over the last thirty years should learn proper economics.
In short, yes. Here’s what legendary bond trader Bill Gross wrote this morning, which touches on all the points you keep denying: “the primary problem lies with zero/negative interest rates; that not only do they fail to provide an “easing cushion” should recession come knocking at the door, but they destroy capitalism’s business models — those dependent on a yield curve spread or an interest rate that permits a legitimate return on saving, as opposed to an incentive for spending. They also keep zombie corporations alive and inhibit Schumpeter’s “creative destruction” which many argue is the hallmark of capitalism. Capitalism, almost commonsensically, cannot function well at the zero bound or with a minus sign as a yield. $11 trillion of negative yielding bonds are not assets — they are liabilities. Factor that, Ms. Yellen into your asset price objective. You and your contemporaries have flipped $11 trillion from the left side to the right side of the global balance sheet. In the process, you have deferred long-term pain for the benefit of short-term gain and the hopes that your ancient model renormalizes the economy over the next few years. It likely will not. Japan is the petri dish example for the past 15 years.”
“they destroy capitalism’s business models . . . that permits a legitimate return on saving, as opposed to an incentive for spending”
That’s the whole point, of course. This long downturn has been driven by a slack in demand. We need to encourage spending (i.e. increase demand) to prime the pump of the economy. It would be better to do so with fiscal stimulus, but since the republicans have shut that down, the Fed is taking what it admits to being less direct and effective measures to accomplish the same thing.
You can’t really take anything Bill Gross says seriously on this – he is just talking his book. He is a bond buyer. He makes lots of money if interest rates are high (because he then gets a good return from holding bonds), or if interest rates are falling (because the bonds he already has become more valuable). But he does not make money if interest rates are low and not falling, as appears to be the situation today. Bill Gross is not interested in the health of the economy. He is interested in more money for Bill Gross. He complains that lower borrowing costs for companies are bad because they “keep zombie corporations alive”? That is such nonsense it completely discredits him.
What you keep failing to comprehend over and over and over and over is that the model of lowering rates to increase demand only works above zero. At zero or below the model breaks down. Again, the proof is in the pudding. They’ve been trying it for years and it hasn’t worked. Not one shred of evidence that it works. Tons of evidence that it doesn’t work. Yet you just keep repeating the same old line: must lower rates to coerce spending. What is your proof please? It’s just total insanity based on a mis-interpretation of an economic theory. Please read Keynes here:
“If a tolerable level of employment requires a rate of interest much below the average rates which ruled in the nineteenth century, it is most doubtful whether it can be achieved merely by manipulating the quantity of money. From the percentage gain, which the schedule of marginal efficiency of capital allows the borrower to expect to earn, there has to be deducted (1) the cost of bringing borrowers and lenders together, (2) income and surtaxes and (3) the allowance which the lender requires to cover his risk and uncertainty, before we arrive at the net yield available to tempt the wealth-owner to sacrifice his liquidity. If, in conditions of tolerable average employment, this net yield turns out to be infinitesimal, time-honoured methods may prove unavailing.” In other words, it doesn’t work IF THE RATE IS TOO LOW.
“This long downturn has been driven by a slack in demand.”
But is the problem that demand irrationally dropped post 2007 or is the problem that demand was irrationally driven up during the ’07 era housing boom?
Does everyone get a 4,000 sqft McMansion with a boat and two jet ski’s even if their skills are unremarkable on a global level?
“He complains that lower borrowing costs for companies are bad because they “keep zombie corporations alive”? That is such nonsense it completely discredits him.”
Companies can unsustainably rack up a great deal of debt and just keep rolling it over with lower and lower rates. Bond buyers need not really look at a company’s long term viability as long as they find a greater fool to unload the bonds on.
incog, talk to any major bond buyer (we represent a ton of them). If you think they do not care about the long term viability of the companies whose debt they buy because they can just find a “greater fool” down the road, then you need to become a bit more familiar with this market and the due diligence involved.
Indeed, were this the case, the issuers would just sell to that “greater fool” in the first instance at a lower rate. Why let the middleman reap the benefits?
Lower costs to companies are only a bad thing to those with an interest in lending money at a higher cost, like Bill Gross.
So a bond trader has no credibility, but a person like Janet Yellen who has spent her entire life in ivory tower academia does? Here’s what she had to say about the last housing bubble including SF home values.
I’m not saying not to listen to a single thing that Bill Gross says because he’s a bond buyer. I’m saying that his comments are nonsense. And then pointing out the reasons why he would say such nonsense – because he has an interest in changing the status quo as he can’t make any money this way.
He says that $11 trillion of negative yielding bonds are not assets but liabilities. Seriously? More nonsense. He, or anyone else, who wants to unload that “liability” is free to hand that $11 trillion in bonds to me. I will take that “liability” off anyone’s hands and take over collecting the principal payments less the tiny bit of negative interest.
How would you feel about holding those negative bonds if let’s say the interest rates a year from now are half a percent higher?
But Gross (and you) are urging an interest rate hike. That would lower the value of all bonds. So bonds transform from an asset to a liability because interest rates might go up. Thus, let’s, er, raise interest rates because . . .
As I said, Gross is speaking nonsense here.
Bill Gross? Seriously? We’re talking about taking monetary policy advice from someone who literally built a business that depends on business cycle booms and busts rather than stable growth. No thanks, a million times no thanks.
“Yet you just keep repeating the same old line: must lower rates to coerce spending. What is your proof please? ”
That’s right, I’m advocating a rate hike, because I did not buy negative bonds, and I’m guessing that he did not either. But people did indeed buy about $12T of them. And you guys keep saying the economy is doing great, so in that case the Fed will have no choice but to hike eventually. And also for political reasons, since the savers are getting quite angry. I would also add, to maintain their credibility, but it’s too late for that. Then what do all those negative bond holders do? They try to sell them. But who in their right mind would want to buy them? Ever see those soccer games in third world countries where everyone tries to stampede for the exit?
You snowflakes need to realize that there is no participation trophy in capitalism, sorry. It is such a powerful system because it rewards the winners, but at the same time it punishes the losers. If you try to get rid of that last part, it’s no longer capitalism, it’s something else, and it’s destined to fail.
Politically the Fed has never encountered this sort of thing, they have either punished young people through low growth, or older people with low interest. Today they are punishing both at the same time. That’s why Trump could win in November, and I’ll bet one of the first things he does is give Yellen the pink slip.
Again, eurozone 2011. It looks like you missed my answer to your “question”.
Not sure what you are referring to with Euro 2011. Interest rates were still in positive territory back then.
The ECB raised rates prematurely, with the explicit goal of moving high enough from the zero bound to have “ammo” for the next downturn. They ended up sending the eurozone into a double dip recession before eventually dropping lower than they had previously.
The Fed funds rate isn’t at zero now, so I’m not seeing much of a difference. You’re asking the Fed to tighten policy prematurely, and you’ve even gloated about the recession that it’s likely to start.
Yes, guilty as charged. It’s time to admit the ZIRP experiment has failed. Sure the market will throw a tantrum and probably drop 20%. Big deal, it’s happened before and we always recover. Either way, if history is any indication then a recession will happen with or without the Fed, in the next few years. Hopefully this next business cycle will be less based on debt and more on production. One can dream. The 2% inflation threshold may not be realistic in modern times anyways. With demographics and technology etc. Maybe they should lower instead of raise it.
So you’ve admitted the downside of raising rates (recession, etc), but still haven’t shown what the upside is. You want to start a recession now so that we can potentially prevent one later. What kind of sense does that make?
Good article about monetary vs fiscal, monetary offset, etc.
I have many times, you’re just not listening because you’re so indoctrinated. It’s because rates at this level don’t have the desired effect, they make things worse. The consumer is 75% of the economy and these rates make them less confident, not more. Meanwhile, businesses engage in financial engineering instead of real growth. This has been repeated ad nauseum and is well established by data and ample evidence.
“Established data and evidence” – right.
You keep bringing up quacks writing op eds or conspiracy theorist blogs. Meanwhile, I’ve linked to the FT and Economist multiple times.
There is consensus or even strong minority of economists that believe that higher rates build consumer confidence (!) or result in more “financial engineering”.
The link you posted hurts your case. The author of the Bloomberg piece is basically saying fiscal stimulus could disappoint, which I agree with. But he also says this; “Monetary policy has done the heavy lifting to date… but the law of diminishing returns seems to be neutralizing central-bank efforts to do anything more than stop the global economy from cratering; never-ending interest-rate cuts and expanded quantitative easing halted the economic slide, but don’t seem able to generate robust growth.” Which is my point exactly. Monetary stimulus is ok in an emergency and is ok when rates are above zero, but at this point it is failing.
Um, I didn’t link to a Bloomberg piece. The link that I posted follows up that ridiculous quote with this:
“There are so many fallacies here one hardly knows where to begin. The central banks have not done any ‘heavy lifting’. They can print money at virtually zero cost and their massive portfolio of bonds is generating enormous profits, more than twice as large as before the recession.”
If traders are biased, then so are you and these other folks (mostly the 1% and their corporate media crony capitalist shills) who want to keep drinking from the government teat at the expense of future generations. I don’t listen to economists, I listen to the world’s most successful traders. Who would you choose to win a boxing match, the world’s foremost boxing expert, or the world champion boxer? Studying something is very different from doing it.
Traders are not “boxers.” They are people who gamble on boxing. I take things that gamblers say about the subject of their gambling with a grain of salt. Not that everything they say will be wrong, but they clearly do not have an objective viewpoint.
“The only function of economic forecasting is to make astrology look respectable” John Kenneth Galbraith. Not only have economists failed to create a stable economy, they’ve usually made it worse. Since there is no evidence in history of negative rates until today, you could say that we’re in the worst recession since 5000 BC.
If this is the worst recession since 5000 BC, with our GDP growth, falling unemployment, and record highs in the stock market, then I’m going to stop worrying about recessions. They sound awesome.
Then sounds like it’s time for a rate hike! You guys say a rate hike right now is fringe conspiracy stuff, when 8 of the 12 Fed banks voted for it in the last meeting, please.
I don’t actually have a huge concern over a .25 rate hike, I just think that it’s ludicrous that the Fed hasn’t hit its own stated inflation goal for 8 years. We need some accountability, and we need to force the Fed to hit its targets.
The piece that I think is fringe conspiracy stuff is your idea that we need to jack rates up to 5-6% because “history” or “bubble” or “financial engineering”. The 8 of 12 Fed banks are certainly not proposing anything remotely in that territory.
From the econolib article: ” If we have sluggish growth due to productivity, there is nothing that monetary policy can or should do about that.” and “There are no “diminishing returns” in monetary stimulus, ”
So the author admits that even massive QE will have no effect on fixing productivity, i.e. the real economy. And sees no diminishing returns with carrying on monetary stimulus, with the returns he refers to presumably being NDGP.
I don’t doubt that you could print money or QE your way to ever increasing heights in nominal terms. But what happens as you push nominal GDP, the stock market and housing prices further and further away from values which could be supported by actual productivity?
You’re already worried that a tiny change in rates could ” Plunge economy into tailspin, increase unemployment above 10%, etc” what happens years from now if GDP and asset prices have been pushed even higher and productivity hasn’t kept pace?
This is like a doctor who says: “I know that prescribing painkillers does nothing to fix the underlying problem, but prescribing ever increasing doses has no diminishing returns for feelings of euphoria”
What if the Fed doesn’t have the tools to hit its targets? Why would that be? Because zero rates don’t work, that’s why. Again, here we are eight years and $4T later, still no 2%. If we’re not in the worst recession ever, but interest rates are the lowest ever, perhaps that means the Central Banks overreacted. And since it’s also failing to generate real growth, perhaps that means the policy is counter productive. And since inequality in the developed world is higher than it has been in many decades, perhaps that shows us who is really driving these policies and why.
Any central bank that pretends not to be able to create inflation in a currency that they literally print is lying to you.
The three of us aren’t even disagreeing on the end result of low interest rates – it overwhelmingly helps the rich and well-connected. However, we’re disagreeing on the fix. Sabbie and incog think that government fiat alone can raise interest rates, where I put more faith in the market to correctly price interest rates in the private sector based on the fundamentals on display currently and/or expected in the future.
The fed raising rates now when inflation teeters on deflation tells the market that interest expectations on all types of debt is miniscule or negative for as far as the eye can see. Actually getting the fed to do its job and hit 2%+ inflation would shift that future outlook to higher rates, which could get us out of this low inflation/rates trap. You can’t “will” higher rates, you have to make the market see and believe that the fed will hit its inflation target or above for years to come, something that it has failed at for 8 years now – I do agree with Sabbie that this is intentional and a part of a global desire (conspiracy?) on the part of the rich.
“Sabbie and incog think that government fiat alone can raise interest rates, where I put more faith in the market to correctly price interest rates”
This is quite backwards as the elephant in the room isn’t short term rates, but the massive QE meant to push down medium and long term rates.
There already is a bond market which was pricing interest rates. But central banks decided by fiat that these rates were too high and engaged in massive bond buying operations to push rates lower. And some seem to believe that there are no diminishing returns to propping up nominal growth by further suppressing interest rates even into negative territory.
So why are you asking for the fed to raise short term rates then? What do you think that will accomplish?
There hasn’t been QE since 2014, so how is that the elephant in the room? Seems like the elephant left awhile ago.
And we have positive rates now. In Europe they just expanded their QE to include corporate and even some junk rated bonds and they’re currently the ones with a yield curve in the red up to about 11 years out.
And even the threat of Fed intervention in the mid/long term markets suppresses rates much as the implicit government support of the mortgage market suppressed risk premium in the last housing bubble
I don’t think raising rates is the magic fix. But someone who is backed into a corner must eventually fight their way out of that corner. The policy error happened a few years back, maybe 2012 or 2013?
When the Fed should have just let the market do its work but instead they poured too much fuel on the fire.
I’m still wondering why fed “inaction” is any less of an intervention than fed “action” is. If they begin selling the mass of bonds that they own from QE, is that a market intervention? Or winding down a market intervention?
Interesting question. This guy (an economist turned trader) actually breaks down the intervention into two components, a systemic (which I think we both support) and an activist (which I strongly oppose) type of intervention, and I think he does a pretty good job of showing that the latter simply does not work.
That just seems to support my belief that we shouldn’t be focusing on interest rates to determine appropriate monetary policy, but should instead move to a completely systematic approach that removes focuses on “deviations from measured and statistically-defined responses to output, employment and inflation” like, oh, I don’t know, level increase of NGDP?
Thank goodness for someone like Sabbie who gets it.
Look around the bay area and you can see exactly how poorly (equity) capital is being allocated. There will never be moderate, let alone robust, long-term viable economic growth until thousands of zombie companies are weeded out of existence and only the strong survive.
One day there will be a massive glut of available office space in the Bay Area and a mass exodus of people. It has happened before and will happen again.
There has never been “a mass exodus of people” from the Bay Area.
Soccermom sort of has it correct.
The Mark company “model” is “crafted” for the sensitivities of their clients — meaning it will always be an enthuiastic view of the market. without that they cannot get hired.
BUT, it also is crafted with the idea of motivating clients to sell units quickly and close out project sooner rather than later. So they will always be pushing clients to price to market, especially if there is a price drop.
So, it works both ways. Remember the broker business model is based on selling for something now rather than holding to sell for more later. No matter what.
On a side note, i dont think liquidity will return to the MIllenium sales within one year, will take much longer. Anecdotal info says buyers are just walking from contracts and there is no “retrade” value.
I wonder how the Mark Company is incorporating the sale of properties like Unit 606 at 2121 Webster, “The Pacific” for $3,750 per foot, in their index.
Despite what has been reported as a backlog of new condo inventory, apparently Trumark Urban has sold over $120 million worth of condos in the building in a few weeks.
UPDATE: Price Index for New Condos in San Francisco Has Dropped 11 Percent
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