The Bond Investor's Trilemma: Positioning for a Fed Rate Hike (4/16/15)

[ochotona]

By Kathy A. Jones

Key Points

We believe the Federal Reserve will likely hike rates this year, but that it will have a bigger impact on short-term yields than long-term yields, thereby flattening the yield curve.

Historically, higher credit risk sectors of the fixed income market have outperformed during periods of rising interest rates. But we are still cautious about stretching for yield.

Lack of liquidity in the bond market is a growing concern. We believe investors should match their need for liquidity with their fixed income investments


http://www.schwab.com/public/schwab/nn/ ... cmp=em-QYD

[sophie]

When everybody is convinced a thing is going to happen in a given time frame, you could do a lot better on average by betting AGAINST that event.

The NYC housing market is so frenzied that people have lost all sense of proportion.  I am selling my apartment (moving to a lower-cost but more convenient area) and am frankly astounded at the offers I got.  The winning one was 7% above asking price, and >30% over the price I bought it at 7 years ago.  It's all because people are convinced that mortgage rates are about to go up, and they're all desperate to buy now.

My guess is that rates will go up eventually but not soon, and probably not by much.

[ochotona]

I can't even imagine paying what the market demands in NYC and San Francisco. It all makes me very afraid!

[Pointedstick]

I have a friend who just bought a modest fixer-upper wreck near San jose for $870,000 and had to put nearly another $100k into making it livable. In San Francisco it would have been a few hundred thousand more, undoubtedly. The numbers are insane. I feel very nervous for people who buy into these markets. The downside risks are almost unfathomably enormous for an individual.

[sophie]

I guess there's always a lot of downside in real estate, but I doubt a solid market like Manhattan or Silicon Valley is really going to drop that much.  In Manhattan the prices went down some in 2009 but not that much, maybe 10-20%.  There's no shortage of people with a lot of money to burn whereas there is a shortage of housing stock, and that will keep pressuring the prices to stay high.

This is one reason, though, why I'd far rather put my money into the PP than into real estate.  If I bought a place to rent out, my exposure to the real estate market would be enormous.  Plus I've got better things to do than deal with cranky tenants.

[ochotona]

I guess there's always a lot of downside in real estate, but I doubt a solid market like Manhattan or Silicon Valley is really going to drop that much.

No one who gets affected by a bust thinks it's going to happen to them (or else they would've sold, right?). I always think back to the 1989 New England real estate bust. That affected my family particularly.

http://money.usnews.com/money/blogs/the ... ng-busts-2

[sophie]

Ah, but I doubt New England is as tight on housing stock as Manhattan.  It would take a significant drop in population before the pressure on housing eases here.  That could happen but I consider it unlikely.  If it does happen, there is probably something a lot bigger going on, like a nuke war or something.

[Pointedstick]

It's true that these places have limited housing supply with effectively unlimited housing demand, but the consequence of prices rising so high is that middle-class people are pushed out. These people will commute for a while, but as prices keep rising, eventually the remotely affordable housing will be so far away that the commute will be ridiculous, and people will start leaving. And a city can't survive if it's populated mostly by investment bankers, lawyers, doctors, and engineers. In particular, prices will be so high to capture enough of their high income that eventually enough of then will wake up and realize that the money their skills can earn them will go a lot farther in in Reno or Houston or Pittsburgh, and that those places really might not be so bad, and when they leave, the hyper-inflated economy will collapse.

[dragoncar]

It's true that these places have limited housing supply with effectively unlimited housing demand, but the consequence of prices rising so high is that middle-class people are pushed out. These people will commute for a while, but as prices keep rising, eventually the remotely affordable housing will be so far away that the commute will be ridiculous, and people will start leaving. And a city can't survive if it's populated mostly by investment bankers, lawyers, doctors, and engineers. In particular, prices will be so high to capture enough of their high income that eventually enough of then will wake up and realize that the money their skills can earn them will go a lot farther in in Reno or Houston or Pittsburgh, and that those places really might not be so bad, and when they leave, the hyper-inflated economy will collapse.

Sounds more like negative feedback will create an equilibrium point in housing prices.  I'm pretty sure you can still get homes within an hour of NYC under $400k, no?

[bedraggled]

dragoncar,

You certainly can get a home for under $400K.  Suffolk County, Long Island, in the southern half.  The schools are more likely to be a trial.  The better schools are in closer Nassau County.  The Bronx, where I grew up should have a selection under $400K but check with the local police precinct.  Skip considering Westchester County to the north.  Queens, by Belmont Racetrack down to Belt Parkway, maybe.  But check with the police precinct.

Across the George Washington Bridge in New Jersey is expensive, even though the toll is approximately $12 to cross that bridge, amidst commuter traffic, and at times, awe inspiring traffic jams.  On an older house in Fort Lee New Jersey, I think the taxes can be $12,000 per year- then you cross the bridge.  (Many laughs).  Oh yeah!  How about $40,000 in taxes on a new McMansion.  They have UN people living in some of them.

When you travel 80 minutes north to western Connecticut you will find <$400K.  You might find the same when reaching up to Interstate 84 in both directions, including across the Hudson River.  Keep in mind all the aforementioned should to be fixer up stock.  I'd be surprised, otherwise.

People do like the New York area. 

Alas, the Bronx will not be rebounding to 1964 (with Mickey Mantle @ 161st Street and River Ave) anytime soon.  Although, at University Ave and 181st Street, Bronx, NY, is the American Hall of Fame.  NO one visits this treasure.  That is a real shame.  I believe the official name is The Hall of Fame of Great Americans.  The hall is on a ridge overlooking northern Manhattan.  This was the old Bronx campus of New York University, now Bronx Community College (CUNY).  Make a left (west)  off University Ave  @ 181st Street onto "Hall of Fame Terrace."  I grew up nearby on 182nd Street.  "Kidworld" in NYC was a lovely experience.  Do a Google on this one.  If you are visiting the Bronx Zoo, consider the Hall of Fame.  I brought my children, too.

Oh, my but did I ramble.  I like NYC.

Cheers,
Bedraggled  PS My wife had me Google Levittown, Nassau County, Long Island, where News guy Bill O'Reilly grew up.  Lo and behold: houses <$400K!!

[ochotona]

I just learned today the median home price here in Houston is $200K, which is astronomical for us.

[bedraggled]

Subway and bus replace the car, for the most part in NYC.  I will need a good reason to leave.

[barrett]

I just learned today the median home price here in Houston is $200K, which is astronomical for us.

In the more desirable areas of Manhattan, the price per square foot of real estate is now over $1000. Even where I am way up town, it's closing in on $700. More if you you can see anything of note out your window.

[sophie]

There's a bubble in the making now, for sure.  Some places are going for over $700/sf in northern manhattan now.  Inwood is no longer a cheap haven, for example.

The problem is that middle income people aren't being pushed out, they're being pushed into smaller spaces.  What pushes people out is when they have kids and decide that they really want a backyard and some privacy.  Then they go to the outer boroughs, NJ, Long Island etc and pay the same amount of money but they get a house instead of a tuna can.  Then they find out that they have to drive everywhere and pay tolls.  I decided long ago that no amount of space would compensate me for having to drive an hour to work instead of walking 15 minutes.

[Pointedstick]

I decided long ago that no amount of space would compensate me for having to drive an hour to work instead of walking 15 minutes.

Wise woman.

[bedraggled]

Sophie,

The real estate bubble in Manhattan may not have started. 

Prices have awoken, a bit, on the Upper West Side- Columbia University neighborhood, but there are no sky rockets taking prices to the heavens yet.  Might take 2 years to see a really ridiculous bubble market.  Or if stocks collapse, nothing much may happen at all.

Things do not appear to be going parabolic but who knows.

[sophie]

Are you planning to buy in that area?  Nice part of town!

Talk to a real estate agent and ask if people are getting below, at, or above the asking price.  Asking prices on Streeteasy are only part of the equation.  It used to be that many sellers dropped prices, but now there are bidding wars and apartments are going for more than the asking.  It takes a while for advertised prices to catch up.

[MachineGhost]

No one who gets affected by a bust thinks it's going to happen to them (or else they would've sold, right?). I always think back to the 1989 New England real estate bust. That affected my family particularly.

http://money.usnews.com/money/blogs/the ... ng-busts-2

Great find!  California's first white middle class mass emigration (mostly to OR and WA) occured during that first bust.  The second middle class emigration (mostly to NV and TX) occured in the second.  I might have been typing this from Texas if a certain someone hadn't waited so long to put their house on the market (in 2007).  Although to be honest, the cockroaches and hot humid weather in Texas (not to mention the bigger is better machoism in terms of gigantic US flags, cowboy hats, Ford pickup trucks and cow steers on cars) was a huge turnoff.  Watching The Dukes of Hazzard is as close as I feel comfortable getting to the South again, thanks!

[MachineGhost]

In particular, prices will be so high to capture enough of their high income that eventually enough of then will wake up and realize that the money their skills can earn them will go a lot farther in in Reno or Houston or Pittsburgh, and that those places really might not be so bad, and when they leave, the hyper-inflated economy will collapse.

Hasn't happened to SF or LA yet.  I won't hold my breath.  I think the allure of bullshit will always triumph economics.

[MachineGhost]

People do like the New York area. 

I'm always curious about this subject.  Why?  What is the allure?  Other than Wall Street or Madison Avenue, where are all the high paying jobs that pay you enough to put up with the huge list of negatives (overcrowded, overcongested, overtaxed, overhot, etc?)  Do people just not realize the value of the lack of stress?

Bedraggled  PS My wife had me Google Levittown, Nassau County, Long Island, where News guy Bill O'Reilly grew up.  Lo and behold: houses <$400K!!

That was America's very first suburb, wasn't it?

[MachineGhost]

Wise woman.

Indeed.  I love the allure of not driving and all that stressful dull jazz, but not the allure of all the negatives that come with living in NYC with other people.  Is there not a happy middle ground?

[Stewardship]

I'm always curious about this subject.  Why?  What is the allure?  Other than Wall Street or Madison Avenue, where are all the high paying jobs that pay you enough to put up with the huge list of negatives (overcrowded, overcongested, overtaxed, overhot, etc?)  Do people just not realize the value of the lack of stress?

NY has always allured me.  I've never spent any time there, but back when I was in high school I hoped to eventually make it big in NY (life of course took me in an entirely different direction.)

NY just seems like the center of the world to me.