February 28, 2013

Bits Bucket for February 28, 2013

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February 27, 2013

Bits Bucket for February 27, 2013

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February 26, 2013

The Biggest Risk To The Stability Of The Economy

A report from AFP on China. “It was billed as China’s Dubai: a cluster of sail-shaped skyscrapers on a man-made island surrounded by tropical sea, the epitome of an unprecedented property boom that transformed skylines across the country. But prices on Phoenix Island, off the palm-tree lined streets of the resort city of Sanya, have plummeted in recent months, exposing the hidden fragilities of China’s growing but sometimes unbalanced economy. Now apartments on Phoenix Island which reached the dizzying heights of 150,000 yuan per square metre ($2,200 per square foot) in 2010 are on offer for just 70,000 yuan, said Sun Zhe, a local estate agent.”

“Phoenix Island is part of Hainan, a Belgium-sized province in the South China Sea that saw the biggest property price increases in China after a 2008 government stimulus flooded the economy with credit. Eager buyers camped out in tents on city streets as prices shot up by more than 50 percent in one year. ‘I just got a call from a businessman desperate to sell,’ Sun told AFP. ‘Whether it’s toys or clothes, the export market is bad… property owners need capital quickly, and want to sell their apartments right away.’”

The Economic Observer Online on China. “Yingkou is a third tier coastal city in Liaoning Province located between Shenyang and Dalian. The city’s goal is to become a large tourist city with a population of one million, but at the moment, it’s the new focus of China’s real estate bubble. A Yingkou real estate market research report obtained by the Economic Observer shows that in 2012, the potential future supply of properties from 42 major projects in the city reached 14 million square meters. If the properties are sold at the 2011 rate of 2 million square meters annually, it will take six to seven years to unload all of them. A developer said that the city has the most serious real estate bubble in Liaoning and that the six to seven year estimate is probably too conservative.”

“A worker at a real estate agency in Yingkou estimated that, even if the entire existing 500,000-person population in the downtown area all moved to the new developments, many homes in the area would still be unoccupied. Yingkou’s real estate bubble is not an isolated case. A report by E-house China ranking the real estate market risk in Chinese cities shows that the severity of Yingkou’s real estate bubble was ranked 26th among 287 cities.”

The South China Morning Post. “Just three months after Hong Kong rolled out a tough new round of property cooling measures, home prices have again climbed to record highs with demand unusually strong for new flats over the normally quiet Lunar New Year holiday break. Property prices per square foot now exceed HK$10,000 even in drab, unglamorous districts such as Taikoo Shing on Hong Kong Island, where thousands of 700 square-foot units sell for more than US$1 million apiece, more than a large cottage in Provence, France, a 2,700 square-foot bungalow in Hawaii, or a 1,300 square-foot flat on Manhattan’s Upper West Side.”

“With affordability reduced in a city with a monthly median household income of about HK$20,000 and one of the widest wealth gaps in Asia, anxiety has grown among its 7 million residents. That anxiety however, didn’t stop buyers flocking to newly built units at Sun Hung Kai Properties’ Residence 88 in a far-flung district close to the border with China, snapping up 150 of the 352 units over three days at an average price of some HK$8,000 per square foot. ‘Sun Hung Kai was testing the market,’ said property research analyst Wong Leung-sing with Centaline Property. ‘People still want to buy flats. The desire is strong. They don’t think the market will fall.’”

“‘We don’t even have enough money for food…but the government has hardly done anything to fix the market,’ said Michelle Wong, a single mother raising her baby daughter in a damp, 80 square-foot sub-divided flat with a ruptured sewage pipe that she rents for HK$3,000 per month.”

“After five previous rounds of efforts to curb prices since October 2009, including a 15 per cent property tax on foreign buyers, mortgage restrictions and quick resale taxes, the home-price juggernaut rolls on and the challenge remains enormous. ‘The overheating property market remains the biggest risk factor to the stability of the Hong Kong economy,’ said Norman Chan Tak-lam, head of the Hong Kong Monetary Authority, who also said household debt was now at 59 per cent, close to a record high of 60 per cent in 2002.”

This is Money on the UK. “Chinese, Malaysian and other Far Eastern investors are spreading their wings outside the traditional London hotspot and driving demand for new build investment properties across Britain, according to a new report. Buy-to-let specialist by Assetz says that seven years ago, there were near enough zero transactions to Chinese and Far Eastern investors, but they now account for nearly 10 per cent of its investor purchases.”

“It comes as the property market in Beijing, Shanghai and other leading Chinese cities has ‘overheated’ in recent years, according to the firm. It says a chronic oversupply of property there driving down rents with an average gross yield of just three per cent. The Chinese, for example, are allowed to move $50,000(US) ($100,000 for a couple) out of the country each year - enough to put down a deposit for a mortgage on a good quality property. The Bank of China is offering sterling mortgages to Chinese investors, usually at 60-70 per cent Loan-to-Value.”

“As a property investment firm, Assetz is obviously keen to publicise its claimed trend. But it backs its figures up by saying it handles around five per cent of all residential investment property purchases in the North and estimates there have been in the region of 2,000 buy-to-let properties sold to Far Eastern investors in the North last year.”

“Naomi Heaton, chief executive of LCP, says: ‘While yields have cooled slightly, they reflect both diminished returns across all asset classes and the low cost of borrowing, meaning that they are set to harden when interest rates rise. Whilst overseas investors may be tempted by high yields outside London, capital upside is far less likely and total returns will be considerably less, with much higher risk.’”

The Globe & Mail in Canada. “The ruse went sideways not long after the broadcasts aired. Two sisters, identified as eager home buyers, perused a downtown Vancouver condo development in news segments about a spike in sales over the Lunar New Year. If they liked the suite, the sisters said, their parents – visiting from China – would purchase it for them. What followed was a PR disaster. Observant web sleuths identified at least one of the sisters as an employee of MAC Marketing Solutions – the firm selling the condo. Confronted by media, MAC president Cameron McNeill admitted both women were employees and apologized for misleading the public.”

“It reignited a debate among real estate observers: Just how much truth is in the long-standing narrative that foreign money is driving the local market? In one case study, for example, Andrew Yan of Bing Thom Architects looked at the amount of energy consumption in a sample of downtown Vancouver condos. Working on the assumption that a condo is empty if it uses less electricity each month than it takes to power a refrigerator (75 kilowatt-hours), the urban planner and researcher concluded 5.5 per cent of the sample is empty at any given month.”

“However, even the slightest tweaks led to significantly different results: Raising the threshold to 100 kwh, for example, meant the percentage of potentially empty condos rose to 8.5 per cent; 150 kwh to 17 per cent.”

“Jeff Fitzpatrick, a realtor with Sotheby’s International Realty Canada, said influxes to certain pockets of a city can have a cascade effect. If offshore buyers scoop up the real estate in Point Grey, for example, a young professional in Vancouver who might have purchased there years ago might instead move to Main or Fraser streets. As a result, those markets are then priced up. ‘Now the janitor who was hoping to buy a house along Main Street is now buying in Burnaby,’ he said.”

“However, Mr. Fitzpatrick also notes the difference between investors and new residents: ‘The people that are buying this stuff are [often] residing there; they’re making an investment in the neighbourhood as well,’ he said. ‘They’re going to be buying milk, and buying gas and buying a car. They’re not just going to be renting these [properties] out. So does that technically qualify as a domestic purchase or a foreign purchase? It muddies the water a bit.’”

The Asia Times. “This from the Federal Reserve Bank of St Louis president James Bullard on February 21: ‘Let me just talk a minute about [Fed governor] Jeremy Stein’s speech…My main take away from the speech - he pushed back some against the ‘Bernanke doctrine.’ The Bernanke doctrine has been that we’re going to use monetary policy to deal with normal macro-economic concerns, and then we’ll use regulatory policy to try to contain financial excess. And Jeremy Stein’s speech said, in effect, ‘I’m not sure that you’re always going to be able to take care of the financial excess with the regulatory policy.’ And in a key line, he said, ‘Raising interest rates is a way to get into all the corners of the financial markets that you might not be able to see or you might not be able to attack with the regulatory approach,’ Bullard said.”

“Bullard continues: ‘I thought this was interesting and I would certainly listen to him. This is an argument that maybe you should think about using interest rates to fight financial excess a little more than we have in the last few years, where we’ve always said we’re going to use regulatory policies in that dimension. I thought it was a very interesting speech, but let me give a little broader context.’”

“‘The Fed has been talking about asset bubbles since the ‘irrational exuberance’ speech which was 1996. So it’s nothing new. We had a big bubble in the nineties. A big bubble in the two thousands. Those two bubbles ended very differently. The Fed’s been talking, talking, talking about this. So it’s certainly been a concern. It is a concern today. But it’s like nothing new. This has been going on for 20 years. Frankly, there aren’t good answers because we don’t have great models of financial instability,’ he said.”

“There is dissention as well as confusion at our central bank. There is broad disagreement as to impacts, benefits and costs associated with the Fed’s long-term zero rate policy, quantitative easing, the mix of asset purchases, the ongoing balance sheet expansion (and, supposedly, eventual ‘exit’), pre-committing on the future course of policy and communications more generally. While no one wants to admit as much, it’s all become one big and consequential mess.”

“By accommodating even bigger - and more systemic - bubbles, the Fed has perpetrated even bigger policy debacles. Please explain how ‘regulatory policy’ is to address the unprecedented issuance of government debt coupled with unconventional experimental reflationary monetary policy - the heart of today’s ‘global government finance bubble’? It hasn’t - and it won’t. And, clearly, I’m not alone in recognizing the obvious: the Fed has become a rather conspicuous enabler of Washington fiscal dysfunction. The Fed has become an enabler of global speculation, along with ever-mounting financial and economic imbalances.”

“Recall that Chinese officials were in the process of attempting to cool an overheated economy and a national housing Bubble before the ‘European’ crisis last year risked unwieldy downturns. Officials cautiously retreated from measured ‘tightening’ and, as bubbles tend to do in the face of timid policymaking, the Chinese economic, credit and housing market bubbles sprung right back.”

“One can see a central bank institution that’s flailing. They’ve opened the money-printing Pandora’s Box - without a doctrine, a strategy or even a consensus view for how to approach its latest experiment with ‘open-ended’ quantitative easing. In reversing last year’s potentially destabilizing global ‘risk off,’ the Fed and global central bankers incited a historic period of ‘risk on’ excess and attendant fragilities. Now they’re stuck.”

“A lot is riding on the current ‘risk on’. Six months ago, the consensus view was that monetary policy was largely out of ammunition. Today, irrational exuberance has central bankers enjoying unlimited firepower. Central banks will be there the moment markets require additional liquidity. And the more markets inflate, the more confident players are with notion that central bankers won’t dare rock the applecart. It’s increasingly clear that ‘risk on’ comes with heightened excesses and imbalances.”

Bits Bucket for February 26, 2013

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February 25, 2013

Bits Bucket for February 25, 2013

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February 24, 2013

What Would We Do Without These Guys?

Readers suggested a topic on the latest political showdown. “How will the sequester affect your local housing market if it happens? In particular, will it have an effect on real estate markets in areas with heavy concentrations of federal workers, like San Diego and Washington, DC?”

One asked, “What government programs would you rather get rid of completely rather than going through the sequester? And I don’t mean a moronic list where you just say get rid of every acronym you can think of. So, I mean specify the programs, or military equipment being bid or the NASA projects or the loan guarantee or the tax subsidy or whatever.”

“What do you want to get rid of. Bonus points if you can find out how much money it would actually save. Triple points if you can find out how much money it would save and how many people would lose their job because of it. Quadruple if you can explain the eventual outcome, like how much house prices would fall (at least in wealthy areas) if the mortgage interest deduction went away, or how much extra time it would take to track down sources of salmonella if the FDA lost certain programs.”

One had this, “Too many departments. There must be hundreds what do they all do? How they would howl if you cut one more than the other?”

“What would we do without these guys?? Securities and Exchange Commission (SEC). Government National Mortgage Association: without these guys we would all be living in caves. Fiscal Responsibility and Reform, National Commission: the Department nobody pays attention to.”

“Federal Housing Finance Agency: provides supervision, regulation, and housing mission oversight of Fannie Mae, Freddie Mac and the Federal Home Loan Banks. really …”

And another said, “The problem with getting rid of Departments and agencies outright is that many of those employed therein are suddenly dumped into a jobless economy, further straining the whole system as the survivors regroup and recoup. Moreover, the expertise and social infrastructure they’ve amassed and developed is lost along with them. In my experience, federal employees are a lot more qualified and accountable than state (or certainly municipal) employees.”

“A more rational approach would be to implement 1% across-the-board cuts in EVERYTHING paid for by US government check this year. Everything. Tax returns, DoD contracts and foreign aid allotments, Medicare reimbursements and SSI payouts, federal salaries, state subsidies, corporate kickbacks and contracts, agency budgets, military hardware, salaries, and benefits, grants and loans, bond payouts. Everything.”

“Then next year, cut 1% from THAT amount etc., until we’ve reached the desired level of austerity. That way the pain is distributed equitably and gradually, organized blowback in minimized as everyone is involved on some level, and no one is disproportionately ‘punished’. A 1% reduction for everyone is far less disruptive than a 10% (or 20%) cutback in selected established systems, while still allowing for streamlining and managerial evolution as they adapt.”

“Secondly, the Tobin Transaction Tax (.001%/share traded on any market or bourse) should be instituted forthwith. Overnight end to high frequency trade manipulations by ’sanctioned’ players, with the money collected going directly to UN-monitored relief efforts. That should help rein in the FED and keep the IMF accountable to the markets, not the bankers who feed from them.”

A reply, “The problem with 1% cuts for everything, is that some stuff should be cut 100% (corn and soy bean subsidies for a start) and some stuff should be funded more (effectiveness research for medical procedures and drugs). Congress often doesn’t allow the departments to make those decisions. That is their prerogative, but then they also refuse to make the decisions as to what should be 100% cut themselves.”

Bits Bucket for February 24, 2013

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February 23, 2013

Bits Bucket for February 23, 2013

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February 22, 2013

Pushing The Bubble As Far As Possible

It’s Friday desk clearing time for this blogger. “There are growing concerns around the country about the potential of another housing bubble. Home prices are rising too fast, some economists say, especially in areas like Boise. Median home prices for Ada County are showing a 33 percent increase in January 2013 compared to the same month last year. I would suggest not getting too excited about these jumps in home price statistics. They are great for consumer confidence, but to put this into perspective, let me share a comment I received from Barbara in Boise.”

“‘I beg to differ with these recent stats,’ said Barbara. ‘My $440,000 home that I purchased in May of 2011 just got appraised for $410,000, so I don’t understand where all these housing stats are coming from.’ Many homeowners who are trying to sell or refinance are noticing this same issue. The positive housing statistics do not match their experiences with their own homes.”

“Given the improvement in local and state residential real estate demonstrated by last week’s 2012 Florida Realtors statistics, there’s a lot of positive buzz, and possibly a bit of wishful thinking taking place among would-be sellers, Realtors, mortgage brokers, appraisers, developers and contractors. But a reality check still shows a murky future: Up to a tenth of Florida homes, and almost a fifth of Manatee-Sarasota area homes are in some state of distress”

“‘Of the 475,000 completed Florida foreclosures since 2006, banks, realty funds and other financial players still hold an estimated 200,000 housing units,’ said Jack McCabe, CEO of McCabe Research & Consulting. That is roughly equivalent to the total number of 2012 statewide single-family home sales as reported by the Florida Realtors. ‘There are currently 377,000-plus open foreclosures in Florida state courts, and 80 percent of them will become distressed transactions in the coming two to three years,’ McCabe estimated.”

“But that is the tip of the iceberg, says McCabe. ‘Another 550,000 additional Florida homeowners are 90 days-plus delinquent and thus subject to future foreclosure filing,’ he said. ‘Taken together, there are 1.1 million distressed residential properties in the state. About 40 percent of Floridian mortgage holders who are current on payments are nonetheless underwater.’”

“‘Bottom line is that, if you only pay attention to Realtor data, everything looks great,’ summarized McCabe. ‘However, if you remove the blinders and consider underlying financial market activity and data, there’s still trouble in paradise and it’ll take another two to three years to achieve a normal healthy real estate market.’”

“California’s rate of homeownership continued a years-long slide in 2012 and is now the second lowest in the nation, according to a new Census Bureau report. Just 54.1 percent of Californians lived in homes during the last quarter of 2012 that they or their families owned. Only New York, at 53.1 percent, had a lower rate. The report covers the annual housing survey dating back to 2005, when California’s home ownership rate was 60.1 percent. It has declined every year since.”

“Gov. Dannel P. Malloy and state Attorney General George Jepsen said they are submitting a bill to the General Assembly that would require banks to dispatch only mediators who have the authority to enter into a settlement. State officials said the foreclosure crisis has not yet abated in Connecticut, noting there were 16,500 foreclosure petitions filed with courts in 2011 and 19,300 in 2012. ‘Our goal is to help people stay in their homes as long as possible,’ Jepsen said.”

“Linda Casanova, of Branford, said she knows what it’s like to enter into mediation with a bank. After losing her job, Casanova said she faced foreclosure in the fall of 2010. ‘Mediation was never a good experience for me. My goal is to keep and afford my home. And I’m still dealing with Bank of America,’ Casanova said.”

“The Brazilian government is keen to offer as much support as it possibly can to the nation’s housing market. President Dilma Rousseff is still committed to helping people get themselves on the first rung of the property ladder. Brazilian house hunters are already benefiting from the lowest interest rates in the South American country’s history and this extra investment from the state is an added bonus.”

“Adolfo Sachsida, an economist in Brasilia at the Institute for Applied Economic Research, told Bloomberg that ‘the government is throwing more money at it [housing sector] to keep it expanding. This market employs a lot of people and they want to keep it heated so employment doesn’t drop,’ he added.”

“In an interview with the Bloomberg news agency, Martin Andersson, the head of Sweden’s Financial Supervisory Authority, expressed his concern about Swedes’ mounting debts. ‘Swedish households today are among the most indebted in Europe and we cannot have household lending that spirals out of control,’ Andersson said.”

“According to Sweden’s National Housing Board, Sweden is already in the midst of a housing bubble, with homes overvalued by around 20 percent. As property prices have risen 25 percent since 2006, Andersson warned of a possible ‘downturn’ in the Swedish housing market. ‘House prices cannot just continue upwards in eternity,’ he told Bloomberg.”

“When Poland joined the European Union in 2004 there followed a massive property boom with price increases of 23% recorded in 2005 and 28% in 2007. Since 2008 house prices in Warsaw have fallen by 13.1% in that period but the biggest casualty has been the city of Lodz which saw its house prices plummet by 35.7%.”

“Marcin Plazinski, of Emmerson Real Estate, said: ‘Poland’s property market has not rebounded and prices may drop further yet because some developers who anticipated a recovery in 2010 and 2011 began developing and now there is an oversupply of housing.’ In addition, cash-strapped owners wanting to sell are adding to the problem and the market is described as being ‘awash with unsold units.’”

“Like other export-led economies in East Asia, China experienced a property bubble during the export and investment boom. The difference is that the government in China controls all the land and gets most sales proceeds as revenue. It has motivated the government to push the bubble as far as possible. This is why China has both a price and quantity bubble.”

“The quantity side is especially severe. NBS data showed that 10.6 billion square meters of properties were under construction at the end of last year, of which half were residential and the other half office and commercial. An average price close to the market price now would put the value of this inventory at around 1.5 times GDP. Such a high level of inventory value has never occurred anywhere else. It is hard to imagine where the money would come from to absorb it.”

“Sherry Sheng, a 29-year-old Shanghai policewoman, bought herself a 4,000 yuan (S$792) black fur jacket, splurging for the last time before she starts paying off the mortgage on her first home. Ms Sheng is part of a generation of middle class that Chinese media has dubbed ‘fang nu,’ or housing slaves, a reference to the lifetime of work needed to pay off their debts. They’re taking on mortgages even as the government maintains property curbs to damp prices that have almost tripled since China embarked in 1998 on a drive to increase private home ownership.”

“‘It’s a treat for myself because I could never afford such a luxury after I start repaying my housing loans next month,’ said Ms Sheng, who paid 1.1 million yuan for the one-bedroom apartment on the city’s western outskirts and will be using about 70 per cent of her salary to service her mortgage.”

“Some home buyers are taking advantage of low interest rates and federal programs to get better deals on houses and use the current housing market in their favor. ‘You get more house for the money with the rates being so low,’ says Fayon Haines, loan officer for the Arkansas Federal Credit Union. Austin, a suburb outside of Cabot, is booming because Haines says buyers also qualify for the federal government’s Rural Development Program. ‘Your town must have less than 25,000 people. You can get 100 percent loan as long as you have 660 credit score and good credit,’ said Haines.”

“Instead of letting the market go through a much needed correction after the crisis began, new Federal Reserve chairman Ben Bernanke pursued a policy bent on ’stabilizing’ the value of assets. Since 2008, Bernanke’s Fed has kept the Federal Funds Interest Rate close to zero percent and it has increased its balance sheet by just under three trillion dollars by purchasing Treasuries and mortgage-backed securities from member banks.”

“According to David Stockman, the former head of the Office of Management and Budget, what Bernanke’s policies have created is simply another housing bubble. He sees a similar combination of artificially low interest rates and speculation producing the current housing boom just like the boom during Greenspan’s tenure. Unemployment and underemployment are still very high. Many employed middle income buyers are still reeling from the last bust. The huge price increases we are seeing is the work of speculators fueled by Bernanke’s easy money policies.”

“The bust will come when rates rise, the malinvestments of the boom become unsustainable at the higher rates, and the speculators liquidate their positions leaving small investors holding the bag. It will be 2008 all over again for many, except this time it will be Ben Bernanke’s Housing Bubble.”

“In the past four years, central banks in the advanced economies have been opting for new rounds of quantitative easing (QE) because the global financial crisis has exhausted the traditional instruments of monetary policy. Initially, these policies were characterized as ‘extraordinary’ but ‘temporary.’ As these monetary policies remain in place, they are growing less effective, but continue to inflate potentially dangerous asset bubbles in Asia, Latin America and elsewhere.”

“During the past four years, the bloated balance sheets of the central banks of the United States, the European Union and Japan have doubled and then almost tripled to almost $10 trillion. While these monetary policies create a perception of stability, they also provide a pretext to defer structural reforms, which, in turn, creates a moral hazard.”

“Theoretically, bloated central bank balance sheets in the developed world are a means to an end. In practice, they have become a part of the problem. Printing self-illusions is a dangerous way to play with fire.”

Weekend Topic Suggestions

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Bits Bucket for February 22, 2013

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February 21, 2013

Bits Bucket for February 21, 2013

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