The US Real Estate Bubble 2.0

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To make outsized returns or avoid some nasty losses in investing, you have to go against the grain.

There are few people who live that principle more than Reggie Middleton, the CEO of fintech (financial technology) company Veritaseum.

On his independent research website BoomBustBlog, he called the demise of Bear Stearns, Lehman Brothers, and BlackBerry maker Research in Motion, the subprime market, and a correction in Apple.

In this exclusive interview, Mr. Middleton tells us why he is getting worried about U.S. real estate again in 2016.

Journalist: You called the latest housing crash in 2007 and 2008. Why are you worried about U.S. real estate in 2016?

Reggie Middleton: Let’s pick New York in 2005. You had gentrification, where many of the buyers would move from the suburbs into the urban areas, which was a fundamental reason, a legitimate reason, for these prices to go up.

Now, at the same time, the buyers were getting cheaper money, looser credit, and easier underwriting requirements. That drove prices up even further.

Then speculators jumped in, which increased demand, and then you had what was a legitimate increase turn into a bubble, into a frenzy, and then you had the consequent pop. Then the bubble burst, but nationwide.

After the bubble had popped, you had corporate welfare come in where regulatory agencies and central bankers insisted that they did not want the markets to go down to their clearing level. So you had quantitative easing, zero interest rates, TARP, and all these other acronyms giving free money to save risk-taking entities who didn’t want to take their losses; they just wanted to make profits.

They privatize the profits and socialize the losses. In doing that, they create another bubble within the bubble that hadn’t even finished deflating.

The second bubble was very hard to see coming. But it limited supply because a lot of the builders were still insolvent from the last bust and those who were able to build were reluctant, so when you limit supply, you automatically inflate demand relative to supply.

When that happened, prices started shooting up again. But when prices started shooting up, they shot up in a very uneven perspective. Affordable housing is harder to come by, and most of the money is in the high end; that’s where most of the development came on. Now, if you look around here in New York, there are cranes everywhere—from New York City going down to Miami.

Journalist: In our neighborhood alone, we have five developments within a couple of blocks.

Mr. Middleton: Massive amounts of inventory. In Miami, it’s the same thing. In South Beach, downtown Miami, up and down Biscayne, everywhere. If you go to D.C., Philadelphia, Georgia, Texas, on the West Coast, it’s the same.

Demand is also going up because of tight supply in certain areas, but income has only gone up incrementally. When income goes up this much, supply goes up that much, who’s going to buy these or pay for these houses?

 Journalist: Especially in the high-end market.

Mr. Middleton: Exactly. The high end has already softened. The Hamptons, much of the Upper East Side, Aspen. The middle and low end are going to soften as well. The reason is that supply’s starting to pick up more and more.

It’s picking up because of zero interest rates and negative interest rates; we have institutional investors who are trying to get yield because they are pension funds, and they rely on income-producing investments.

Banking products simply don’t supply it anymore, so we’re looking at real estate. We’re looking to increase the risk to get more income, and in doing that, it’s going into real estate development despite the fact there’s just not enough qualified buyers to pay for this real estate.

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Now, this perspective seems to differ from many of the real estate publications and analysts you’d see, where they say there’s significant demand and tight supply. I look around; I just don’t see it. Unless an extra 5,000 to 6,000 people are going to move into this six-block or this three-block area like where we are right now, or an extra 200 or 300 extra businesses are going to move in over the next 12 months, then I think there’s excess supply.

It’s the bubble 2.0, but this bubble seems to be an elastic bubble that’s difficult to pop. Every time we stick a needle in the bubble, the Fed comes in and papers over with another acronym: TARP, MARP, bubble patch, etc.

In the United States, you had—if you don’t count the bubble—for the last 50 years, you had roughly 1 to 3 percent residential housing appreciation per year. Now, you have 5, 10, 15, or 20 percent annually in certain areas.

That’s ridiculous. Unsustainable. Especially when you have the same income. If you factor in unemployment, you have negative income growth. That means housing is going this way; income is going that way.

Journalist: Unless they start giving away free loans again to people who can’t pay back.

Mr. Middleton: You can do that. But the value has to come from somewhere, and that’s bank equity, but there’s no more equity left in banks, though. So, everybody’s following the Fed. The hedge funds are following the Fed. Nobody does analysis. It’s like they look at the news, and they buy and sell stocks and options based upon what’s on the news.


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