The Housing Bubble

Readers suggested a topic on the economy. “The whole world may go into a deflationary spiral soon. Look at Japan now. Probably GD2. Does US president election even matter anymore? Whoever is in the office cannot do much about it and in fact speed up the process of downfall by printing more and spending carelessly.”

One added, “Why not add the pitfalls of trade protectionism to the scope of discussion? The Smoot-Hawley Tariff Act, which was intended to protect American jobs, was credited by many historians with worsening the severity of unemployment and production slowdown of the Great Depression.”

A reply, “The pitfalls of free trade are deeper than the pitfalls of trade protectionism. I don’t recall multinationals sending career jobs overseas by the hundreds of thousands during the 1920’s. S-H may have made GD-1 worse, but sending those careers oversees was a large cause of the Great Recession. (which would be a GD if it weren’t for food stamps etc).”

Another asks, “I was going to suggest a topic on the the flip side of the deflation coin, inflation. There is an enormous amount of money being created. My sense is that inflation is the path that the Fed will use to work out the crisis so the underwater and distressed loans will come closer to being paid off at their nominal balances. In real terms, not so much. This mess is going to play out over a long period of time.”

A reply, “The only way for the loans to be paid off at their nominal balances is for there to be inflation in wages/taxable incomes. The Fed can make more money. It can’t force the money into wages.”

To which was said, “But they can raise the minimum wage, and significantly. What I observed in my years in Mexico was that a minimum wage that tracked high inflation (Mexico never quite reached true hyperinflation) forced higher paid jobs to increase their wages as well as minimum wage would catch up with them. Mexico had other gimmicks to put money into consumer’s hands: Mandatory year end bonuses (aguinaldo) which was 20 days pay (90 days pay if you worked for the government!) and mandatory profit sharing (8% of profit is shared with employees). I’m not saying that that this would be good, but if the PTB wants wage inflation, it can be accomplished.”

And finally, “The scary thing about central banker policy today is that it’s not just one country engaging in money printing…it’s: Japan, UK, US; and all of Europe (”sterilized” for now). These four areas represent about $41 Trillion of the world’s $70 trillion of GDP. If you add China with their currency substantially pegged to the US dollar, it brings the total to $48 of $70 Trillion of the world’s economies engaging in money printing (68.5% of all the world’s economies).”

“There is a race to the bottom occurring right now for paper money. What will go up the most in value relative to paper money? Food? Energy? Materials? Precious Metals? Real Estate?”

From Reuters. “New home sales held near two-year highs in August and prices vaulted to their highest level in more than five years, adding to signs of a broadening housing market recovery. Home resales surged last month, homebuilder sentiment jumped to a six-year high in September and home prices in 20 major metropolitan areas rose in July for a sixth straight month, recent reports have shown.”

“Still, the housing market lacks sufficient strength to take the baton from the faltering manufacturing sector as the main driver of the U.S. economic recovery. The Federal Reserve targeted housing this month as a channel to spur faster economic growth. Fed Chairman Ben Bernanke said housing was the ‘missing piston’ in the recovery and the central bank announced it would buy $40 billion in mortgage-backed securities per month until the outlook for employment improved significantly.”

“Those measures have pushed mortgage rates to record lows, and led to a rebound in demand for loans to purchase homes last week, a second report showed. Fixed 30-year mortgage rates hit an all-time average low of 3.63 percent last week. While residential construction accounts for only about 2.5 percent of GDP, economists estimate that for every new house built, at least three new jobs are created.”

“In addition, economists said rising home values could support consumer spending. ‘The turn in home prices is important, not only because the housing industry is an important employer, but also the wealth effect created by rising home prices can lift consumer spending on other big-ticket items,’ said Steven Ricchiuto, chief economist at Mizuho Securities in New York.”

The Australian Financial Review. “I’ve covered the housing question many times in this newspaper, and my view remains the same: house prices are not nearly as overvalued as some suggest. Long-term measures of mortgage affordability, for example, have been broadly stable over recent decades. While there’s been a run-up in house prices relative to income, this largely reflects our enhanced capacity to bid more for properties due to the structural decline in interest rates over this period.”

“Properly measured, house prices relatively to average incomes are also not drastically out of line with international norms – especially once allowance is made for high land premiums due to our highly urbanised lifestyle. If you dig into the details on household debt, you’ll find most of it is held by those on high incomes with decent levels of housing equity. Like poverty, mortgage stress exists, but thankfully it is not widespread.”

“So far, so good. Indeed, earlier this week in this newspaper, I suggested nationwide house prices could rise by around 10 to 15 per cent over the next year or so if – as I suspect – the Reserve Bank of Australia is required to cut interest rates aggressively as the mining boom winds down.”

“I’d also concede that in today’s low inflation environment and with higher levels of household financial exposure, nominal property prices are likely now more sensitive to the economic cycle. Property prices are more likely to spike higher in good times yet also correct reasonably firmly in bad times.”

From China Daily. “In contrast with Shanghai, the market for luxury property in Hong Kong and Taipei is more active. Hong Kong is the most sophisticated luxury housing market among the three cities. In the second quarter, about 30 percent of Hong Kong’s luxury homes were bought by the wealthy from the mainland, said Doris Lam, director of investment services at Colliers International. Over the past five years, luxury property prices in Taipei surged between 60 and 70 percent, with low mortgage interest rates between 2 percent and 2.7 percent boosting the market, the report said.”

“About 58 percent of Chinese wealthy buy a luxury property for their own use, but 73 percent believe that a luxury property has better investment returns than a common residential property, a separate report showed. ‘Having a high-end residential property, a villa, a winter house in Sanya (Hainan province) and a summer home on Lushan Mountain (in Jiangxi province) has become a new lifestyle choice for China’s most wealthy people,’ said Chen Sheng, VP of the China Real Estate Data Academy.”

From NBC News. “With many U.S. consumers still lukewarm about buying into the American dream, Canadians, Chinese and Mexicans are burning up Realtors’ cell phones and emails, grabbing up swank vacation nooks, secure places to stash their cash, or just old-fashioned bargains. Foreign purchases of U.S. homes have climbed by 24 percent since 2011, reports the National Association of Realtors, reaching $82.5 billion in total annual sales, and helping brace once-creeky markets like Miami.”

“‘They love the U.S. because their money is safe here. Even if they only break even on a property, they know they can get their money out,’ said Matey Veissi, broker-owner with Veissi & Associates in Miami.”

“‘On the West Coast, you might have five or 10 families from China who pool their resources to purchase something, have a student live in it and then rent out the rooms. At the end of the student’s time, hopefully they sell the place for a capital gain. Those are the middle-class Chinese, buying for an investment,’ said Jed Smith, an NAR economist.”

From CBC News. “Ben Rabidoux, creator of the Economic Analyst blog, which looks into housing and mortgage trends, suggests the Canada Mortgage and Housing Corporation has ‘absolutely been the key driver in the boom in the ownership rate in Canada,’ and that this is having an inflationary impact on everyone. ‘Without that government support that’s allowing people with very little down to jump into the ownership pool, you just would not see the ownership rate expanding the way that it is,’ he argues.”

“He also believes the CMHC mandate is inherently self-defeating. ‘They don’t provide affordable housing, they provide affordable financing. And when all you do is provide affordable financing, you inflate house prices.’”

“While not against home ownership per se, Rabidoux believes that at some point housing starts will fall substantially, and that more homes are being built than demographics would warrant. The problem is the Canadian economy is more reliant on the current housing boom to generate GDP and labour market growth than ever before, Rabidoux says. ‘So in my mind what’s going to end up happening is when this whole thing turns to normalcy there’s going to be a period of readjustment in the economy where there’s going to be unfortunately high unemployment and persistently high unemployment.’”

“‘What happens when you have a high home ownership rate is it reduces worker mobility and that’s a fairly well known phenomenon. So there’s that danger as well,’ he said.”

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It’s Friday desk clearing time for this blogger. “Real estate sales activity in Garfield County through mid-summer continued ahead of last year. For the three-county area extending from Parachute to Aspen, though mid-year, real estate transactions were about one-third each bank sales, short sales and traditional sales, said Mike Dunn, who owns the Roaring Fork Property real estate company in Glenwood Springs. ‘So, you’re still basically looking at two-thirds of the activity being distress sales,’ said Dunn, who specializes in short sales.”

“It’s not difficult to find homes for buyers, but they are going fast and oftentimes have multiple offers,” he said. ‘And the prices are being held lower because of the distressed properties still coming onto the market.’ That could change quickly once the distressed properties clear the market, Dunn also said. ‘We will likely see a big price jump after that. And, we could even see another housing bubble, because there hasn’t been any new construction,’ he said.”

“Veronica Roberson, VP for sales and marketing at home builder Taylor Morrison, said the company sold all its homes in a 70-unit project in Elk Grove. The houses ranged from 2,400 to 3,600 square feet with options that could boost the biggest model to 4,000 square feet. Prices ran from $350,000 to $450,000, she said. ‘We had about 30 (homes available) at the beginning of the year,’ Roberson said, ‘We went through them pretty quickly.’”

“Buyers were mostly families who were looking for ‘lots of room,’ she said. With prices and interest rates near record lows, ‘they want to purchase as much as they can,’ she said.”

“Older Americans are struggling to make ends meet on nest eggs earning paltry returns, but the underlying factors of the mortgage crisis began long before the recession. As housing prices soared, older homeowners took home equity loans and second mortgages on their houses, just as their younger counterparts did - but with less time to weather the financial storm if the monthly payment became unaffordable.”

“Marta L. Carreno, 70, managed to rent an apartment in June after the bank started foreclosure proceedings on her condo in Pembroke Pines, Fla. Her dream retirement has turned into a nightmare, she added. The two-bedroom condo she bought in 2005 for $230,000 is worth less than half that now. Even before her husband died in 2010, the couple had asked for a loan modification. Now without his pension or Social Security, there’s no way she can afford to keep it. Instead of fighting the foreclosure, she has decided to let the bank take over her property.”

“‘I live one day at a time,’ she said, her voice wavering with emotion. ‘I never thought I would end up this way. I’ve lost everything.’”

“Bank of America offered Ronni and George Mandell a chance to modify the loan on the house they’ve owned for 10 years in order to make payments more manageable, but only with conditions that include essentially agreeing to a gag-order when it comes to the deal and the financial institution. That means keeping quiet about opinions of the bank on Facebook, blogs, websites and in the media, and taking down any existing postings.”

“The Mandells said they fell behind on payments starting in 2010 after George Mandell was laid off and out of work for a few years,. Because they fell behind, they tried to adjust their monthly payments with Bank of America, but didn’t qualify for certain modifications. Mortgage documents say they owe $229,000 and bought the home for around $108,000 in 2000. They haven’t sent in a mortgage payment since 2010. The Mandells rejected the settlement. ‘I cherish my rights to free speech,’ George Mandell said.”

“Jumana Bauwens, a media relations representative of Bank of America Home Loans, said such non-disparagement clauses are not part of loan modifications for ‘customers in need of assistance’ and that more than 1 million Bank of America clients have been helped by loan modifications. The Mandells have too much income to qualify for assistance under that type of program, she added. ‘The bank has provided them several opportunities for home retention and they have defaulted on every modification.’”

“In writing about the new book recently released by former Federal Deposit Insurance Corp. chief Sheila Bair, a Wall Street Journal columnist notes some of Bair’s assertions about housing policy in the U.S. during her tenure at FDIC. ‘To require every borrower to essentially prove that he or she could qualify for a new loan was stupid—the loan had already been made,’ Ms. Bair writes. The program, she writes, was ‘designed to look good in a press release, not to fix the housing market.’”

“As Southern Arizona’s economy slowly climbs out of a horrific recession, hard cash is the new king that reigns over the land empire business. Once the housing bubble burst in 2007, the industry entered a ‘gray market’ of uncertainty. Many speculated and hoped the federal government would step in with a rescue program like the Resolution Trust Corporation (RTC) of the early 1990s. The RTC was formed by the federal government to liquidate troubled real estate assets from failed savings and loan institutions.”

“Expecting a recovery in 2011, builders acquired about 1,900 lots from mid-2009 through 2010. However, the renewed demand for housing didn’t materialize as hoped and just over 1,425 new home permits were issued in 2011. That was the lowest volume since 1,307 permits in 1967.”

“Absent the pressure of an RTC-like mandate, some land experts believe the current down cycle has lasted longer than it should have. ‘Last time, many people thought the RTC was destroying the market. Dumping assets was killing prices. This time, some felt that an RTC-type program would have healed, reset the market quicker. But that’s something we’ll never know now,’ said Jim Marian, a principal at Chapman Lindsey Commercial Real Estate.”

“Jackie Zhang didn’t stay up late crunching the numbers before he decided that China’s Xinyuan Real Estate Co. Ltd. should pay $7.4 million for a portfolio of residential properties in northern Nevada. Zhang believes that residential development in northern Nevada potentially could draw big investments — maybe $100 million at a time — from Chinese investors. And he expects to be in the forefront of that deal-making. ‘I want to be the first Chinese mayor of Reno,’ he laughs.”

“Gu Yunchang, deputy head of the China Real Estate and Housing Research Association, said there is little chance for the price to rebound substantially as major customers in the market now have changed. Compared with 2007 or 2010, self-use buyers now dominate the market because of the policy to restrict the amount of homes a family can purchase. ‘They are more sensitive to price changes and their purchasing power is not as strong as investment-oriented buyers. Therefore a big rebound will definitely restrain their demand,’ said Gu.”

“The price rebound did change some buyers’ plans. Liu Gang, who failed to buy an apartment in May because of a three-month business trip overseas, has now postponed his home purchase plans. ‘Since the price has rebounded, I am not in a hurry to catch up. The price has exceeded my affordability so I have had to give up,’ said Liu, who had planned to buy an apartment ahead of marrying.”

“If younger property prospectors do not act fast they could miss out entirely on the chance of ever getting a foot in the property market, according to the accounting and wealth advisory group Chan & Naylor. The group said Gen Y’s ‘popular blind faith in the property bubble popping soon’ served as a major hindrance to investing, adding now was the time for the hesitant ones to make their move. Chan & Naylor director Ken Raiss pointed to projections by the Australian Bureau of Statistics which show the demand for housing would rise by 15 per cent on the previous generation. Raiss said potential investors, especially first-time buyers, sitting tight for a bubble to pop could be waiting a long time.”

“Raiss recommended first-time buyers adopt a more strategic approach to property investment, like using their purchase for rental purposes rather than personal occupancy. ‘Property acquisition should be treated as a business process as opposed to an act of the heart, and realise that it can be a stepping-stone towards acquiring the perfect home later in life,’ Raiss added.”

“Michael and Sarah Moy, 31 and 30, built their family home in The Ponds, on the city’s northwest fringe, where more than 64 per cent of households are making mortgage repayments in excess of $1800 a month. ‘I do consider having to pay more than that stressful, that’s a big chunk out of anyone’s wages,’ Mr Moy said. ‘I know it (only) leaves near half our money for the month, so it’s a big chunk.’”

“These are the people most affected by the tiny percentage point fluctuations of the Reserve Bank of Australia. The Moys have two children. ‘We have to think about what’s coming in and what’s going out before we do it, most of the time,’ Mrs Moy said.”

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I suggested this topic. “Can the nation survive another four years of Bernanke?”

A reply, “Now that we have perma-QE its only matter of time until it all comes crashing down. It seems that they refuse to see the 800 lb gorilla in the room, namely that the world is awash in goods that low paid workers around the globe have no hope whatsoever of being able to afford or buy. Meanwhile the middle class has become an endangered species in the first world. Who is supposed to buy all the crap?”

One asked, “What does the inevitable collapse look like? He may win his battle but at what cost?”

A reply, “I say yes, but it won’t be pleasant. Our economy has a lot of inertia. I’ve seen large companies take decades to dwindle after their business model no longer worked. We have been sitting here watching this meltdown in suspended animation for the better part of a decade already.”

“Half the country is so happy with where we’ve been for the past few years that they want to keep the current administration. Then we’ll get six more years of Bernanke. The other half is so clueless about what is happening, they think a new, yet clueless administration will make everything better. The very few who think we have more than a flesh wound to deal with cannot be heard over the party music.’

“I don’t believe we will get any real changes from our leadership until a significant number of the citizens see clearly what has happened and get animated about it. Change will come when the pols are more afraid of the citizens than they are of their campaign contributors. We are not even close to that.”

Another question, “Can a nation free itself from behavioral economics? Can they reverse 6 decades of quick gratification consumerism? Will the population shrink? There will always be another chairman like Greenspan/Bernanke but will there ever be another Volcker?”

One had this, “All I know is that the last 7 years has been a big waste as far as the Powers doing anything that would correct the problems that got us into the jams to begin with . Nothing but policies designed to either bail out the Money Changers or keep the corrupted systems going. I won’t be able to stand another 4 years of Ben Bernanke.”

And another, “Instead of moving to protect consumer deposits from the Wall Street gambling machine, breaking up the TBTF entities, nothing of consequence has been done to reign in Wall Street over the four years since Lehman.”

“The US economy is morphing from one where a cautious financial sector serves to provide loans to the real economy, we’ve moved to a system where the rest of the economy is bled to keep Wall Street profitable. This makes a small group of people fabulously wealthy. Is this sustainable? Is it just?”

And finally, “Can I expand the question slightly? Can the World survive another four years of central bankers?”

From MarketWatch. “The Federal Reserve’s third round of asset purchases should put some downward pressure on home-mortgage rates and help the housing sector recover, Sandra Pianalto, president of the Cleveland Federal Reserve Bank, said Thursday. ‘These lower rates should provide further support for the housing sector by encouraging home purchases and refinancing,’ she remarked in a speech.The program might help bolster consumer confidence if it can help stabilize housing prices, she said.”

The Financial Times. “Guido Mantega, Brazil’s finance minister, has warned that the U.S. Federal Reserve’s ‘protectionist’ move to roll out more quantitative easing will reignite the currency wars with potentially drastic consequences for the rest of the world. ‘It has to be understood that there are consequences,’ Mr. Mantega told the Financial Times. The Fed’s QE3 program would ‘only have a marginal benefit [in the U.S.] as there is already no lack of liquidity . . . and that liquidity is not going into production.’”

“The Bank of Japan on Wednesday said it would buy another Y10tn ($128 billion) of government bonds, expanding its asset-purchasing program to Y80tn – an operation aimed in large part at weakening the yen. Mr. Mantega said Brazil had ’so far only seen the consequences of a change in expectations’ from the launch of QE3 as the resources had not yet been released. ‘Risk aversion has fallen and animal spirits have increased,’ he said.”

The Telegraph. “(At) the World Economic Forum in Tianjin last week, Jamil Anderlini from the Financial Times reported a pervasive tone of ‘despondency and cynicism’ from Chinese officials and economists, in marked contrast to the bullish certainties — or naïveté? — of foreigners at the event. ‘I believe China is going to experience a very serious economic downturn and I think it has already started,’ said one leading economists. ‘The government is trying now to stabilize the economy but the instruments they have are very limited. If it can’t turn things around then I expect huge and widespread social unrest.’”

“The Politburo clearly misjudged the difficulty of deflating a property bubble after letting loans grow by almost 100pc of GDP in five years (IMF data), almost double the rate in Japan over the five years before the Nikkei bubble burst or in US before the sub-prime peak. Let us not forget that reserve accumulation — the side-effect of holding down the yuan to pursue export share — was the prime cause of China’s credit bubble in the first place.”

“It automatically forced China to import a US monetary policy that was far too loose for the needs of a fast-growing, over-heating economy, as Alan Greenspan warned at the time. It seemed to work marvellously, but Faustian Pacts come due. This powerful process is now going into reverse. Lombard Street Research estimates that capital flight has reached $320bn over the last year. Monetary policy is tightening by default.”

“‘It is a massive shift down through the gears for the monetary printing press. And if the capital outflows accelerate, the next gear may yet be reverse,’ said Albert Edwards from Societe Generale.”

“China’s $3.2 trillion reserves may be large at 22pc of the M2 money supply, but they were even larger — 35pc — for the Asian Tigers just before their currencies buckled in 1997. The reserves prove nothing either way. The issue that matters is whether they are enough to overwhelm the actions of China’s own elites, should they continue to squirrel money abroad as fast as they can.”

From News Talk CJME. “They say a housing boom is a good indicator of how a city’s economy is doing, but in Regina the housing market is also helping increase our economy. That was the finding of a new Conference Board of Canada report issued on Tuesday. It says the city’s economy is expected to improve by 3.7 per cent in 2012 thanks in part to our on-going housing surge. Both the Conference Board and the Regina Home Builders Association agree that the city will likely see 2500 new housing units built in 2012. If that number seems high, that’s because it is.”

“Stu Niebergall with the Regina Home Builder’s Association says the housing boom leads to a lot of positive spin-off effects for the economy. ‘That translates into a little over $1 billion worth of investment, over 5,000 jobs in new construction, renovations and related fields, over $300 million dollars in wages which will certainly show up in purchases across the whole regional economy, and actually millions and millions of dollars contributed to three levels of government through taxation of fees and levies,’ he said.”

“Dundee Development’s Paul Moroz says they are building as fast as they can. He explains the market has simply undergone a formative change in recent years. He says the old Regina market, with two-story houses on 50 foot lots and bungalows on 40 foot lots with a few condos in corners around the city, isn’t the reality today. ‘That was six or seven years ago when you could get that big house on the 50 foot lot for $150,000. That world doesn’t exist anymore,’ Moraz commented.”

“He points out that the new norm is for smaller lots and denser construction. He says basement suites are routinely being built into new homes in the area, something that would have been inconceivable just a few years ago. ‘We’ve had to change our entire business model so that we can build stuff that people can actually afford. Things are getting smaller, smaller and smaller - density is getting higher and higher and higher,’ Moraz explained.”

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