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.”

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