ASSET PRICES 5/8/21
ASSET PRICES 5/8/21
REAL ESTATE:
Morgan Stanley said recently that the average LTV for residential mortgages was 37%+-. I have no idea if this is an accurate number or how it was determined.
I suggest however that this number just does not matter: what really matters is the carrying cost of mortgages, not their dollar balance. Monthly carrying cost actually has to be paid reasonably promptly while as a practical matter long term debt never has to be repaid, at least not in current dollars
Extremely low interest rates mean that the time value of real estate investment almost always will exceed the long term carrying cost when reduced to present values.
Extremely low interest rates mean that real estate WITH LONG TERM VALUE is a highly desirable long term investment .
Todays low interest rate enviroonment is thus 180 degrees different from 2008.
Existing buildings without functional obsolescence in good locations will become ever more desirable to the extent that the cost of new building construciton increases more than the cost of required renovation. If renovation becomes more expensive, or new building techniques provide better buildings, buildings reqiring extensive renovation will be worthless
That said, any asset WITHOUT FAIRLY CERTAIN LONG TERM VALUE is a bad investment, real estate not excepted. If a piece of real estate will never have any sensible use, it has no more value than. a broken lawn mower. This would be true of property over sink holes, high radon seepage, subject to regular or future serious flooding, or just too distant from economic activity. Another destroyer of value would be extreme neighborhood blight or high crime, or any cataclysmic threat to desirability.
I think that the sink hole threat in certain parts of Florida is enormous and imminent, the worst of combinations. A building six inches about sea level is more than likely than not to be without value within 50 years . On the other hand it is probably 100% useful for at least 25 years and the land no doubt has some salvage use, if only for a canoe marina.
Locations with partial permanent obsolecence----a house under electric transmission lines or at the end of a runway or six inches from a speedway or with no parking, no utility hookups, no septic practicability---is never going to have any value greater than a similar house without this problem. A large supply of better properties and such a property will have greatly reduced if any value.
Houses in Dorchester Mass, Stockton California, East Sy Louis and parts of Madison County Illinois, even parts of Seattle, were at one time worth little or nothing. Dorchester and Seattle are how highly desirable. But as JM Keynes observed "in the long run we are all dead". The present value of highly radioactive property is close to zero. Petrochemical contaminated property can usually be cleaned up, albeit at fair cost.
The flooding of the economy with excess liquidity has resulted in an at least temporary increase in all prices, even real estate. When that liquidity dries up there will be a stall, probably brief, or even a modest temporary decline, in housing values. The number of transactions will certainly stall for at least a couple of months, conceivably even a year.
BLOCK CHAIN COINS ETC.
Like electric cars, eventually block chain financial products are going to be very important. Some electric cars no doubt have present value, as, more remotely, some of the block chain coins might have some value. None of the block chain coins currently available seem to have any underlying value except scarcity (and some not even that!!!). Scarcity without demand however is not enough to create value. If it were every original artist would be financially successful. Most however starve.
EQUITIES.
Stocks are probably very overpriced at the moment.
The historically high P?E ratio is not in itself however dispositive. Many entirely possible future economic scenarios can justify this or even high P/E.
Chances are however that the economy will transmogrify over time through binary random walk just as it always has, that things like interest rate expectations will vary over time.
Again "in the long run we are all dead". What matters is what is apt to happen in the relatively immediate future SINCE THAT HAS THE MOST EFFECT ON PRESNT VALUE.
The biggest risk to current equity valuations is EARNINGS. I suspect that earnings are artificially high at the moment, inflated by excess liquidity and increased consumer demand. More importantly, I suspect that productivity is crashing for the first time in many years: transportation costs skyrocketing, labor costs skyrocketing---nobody wants to work----, supply chains being impaired for unexpectedly long periods of time. Inflation, although I think high inflation somewhat unlikely, is also a major earnings concern.
A drop in earnings expectations could easily PRECIPITATE A 30% OR GREATER IMMEDIATE DROP IN EQUITY PRICES FROM WHICH THRE WILL NOT BE ANOTHER IMMEDIATE RECOVERY,
FOR NON BANKABLE COMMERCIAL PURPOSE MORTGAGES--- firsts, seconds, multiple pieces of collateral, life estates, remainder or partial interests, bad titles.....
PL Goduti
781 608 7306
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