May 31, 2013

A Ponzi Scheme For Anybody Who Wants The Chance

It’s Friday desk clearing time for this blogger. “The recent surge is U.S. home prices has market watchers and money managers already playing defense to deter the notion that the market is entering another bubble. ‘You’ve still got decreased supply and increasing demand, and the values are still incredibly affordable by historic standards,’ said Brad McMillan, chief investment officer at Commonwealth Financial Network. ‘We’re probably in the third inning of this recovery, but there’s no reason to believe we’re in a bubble right now.’”

“According to Mr. McMillan, low interest rates — courtesy of the Federal Reserve — remain one of the most powerful forces driving the housing market rebound. ‘When the price of housing gets so high that an average family can’t afford to buy a house, that’s a bubble,’ he said. ‘Right now, mortgages are lower than rents in most places, and the average family can afford two homes.’”

“At a recent open house in Glassell Park, a neighborhood in northeast Los Angeles, curious buyers and neighbors streamed into a green stucco house that had just come onto the market. Michael Delacruz is one of the real estate investors from Dossier Capital, the group hoping to sell this house. He says it was purchased a few months ago in a short sale. Records show Dossier Capital bought it for $390,000. It’s now listed for more than $720,000.”

“‘Typically, our houses are in escrow first week,’ Delacruz says, ‘maybe even the first day that it’s listed.’”

“The successful return of Home Flipping in California is indicative of the housing market’s recovery. In California alone, 6,000 homes were reportedly flipped between January and April of this year. ‘Flippers can be anybody,’ said Troop Real Estate’s Robin Karcich. ‘It’s for anybody who wants to take the chance, and jump in and go ahead and do it.’”

“Some real-estate experts think flippers could quickly get swamped in a market that is still prone to shocks. ‘They’re a real concern to me,” says Stan Humphries, chief economist at Zillow. ‘They create volatility and make prices go up more than they should. And it’s usually the less sophisticated participants who get hurt the most. The most successful flippers will probably be those who recognize the formation of new bubbles and get out before they burst. ‘Flipping is like a Ponzi scheme,’ says Humphries. ‘It’s not a bad idea for those who get into it first, it’s a bad idea for those who get into it late.’”

“Lex Levinrad, head of the Distressed Real Estate Institute in Boca Raton, said he recently bid $52,000 for a three-bedroom Lauderdale Lakes home listed for $36,000. But his offer was rejected because there were other buyers willing to pay more. Levinrad’s club is hosting an event this weekend to teach investors how to buy foreclosed homes, and he expects the lack of inventory to be a main topic of discussion. ‘There are so many bidders, and they’re swarming over every property,’ Levinrad said. ‘Even if banks have hundreds of homes in a ZIP code, they’re only trickling out one at a time.’”

“Lenders are being deliberate because they aren’t getting any pressure from regulators to sell their distressed real estate, said Mike Larson, a housing analyst at Weiss Research in Jupiter. At first, banks were taking their time to prevent big price declines, Larson said. But as the market improved, lenders decided that delaying sales would help prices rise and boost their bottom lines. ‘It’s not really in the banks’ own best interest to dump this stuff,’ Larson said.”

“The federal government is getting a return on its investment. The return on some of the financial industry bailout money comes in the form of dividends from mortgage servicing firms Fannie Mae and Freddie Mac. Earlier in May, Fannie Mae announced a record annual profit for 2012 and plans to send the U.S. Treasury Department a dividend check for $59.4 billion. Freddie Mac said it will send the Treasury $7 billion.”

“The financial giants remain state-run today despite an improving housing market and record profits. It may even be the case that the housing market is overextended. Perhaps the government itself is fueling another housing bubble.”

“The government also keeps a big stake in the banking industry despite growing profits. More than four years after the financial crisis the government can’t seem to get out of the banking business. U.S. taxpayers have an equity interest in more than 150 banks. The Federal Deposit Insurance Corporation reports that U.S. commercial banks as a group earned more than $130 billion in 2012, an 18 percent increase over 2011. But all is not equal in the banking industry. More than 92 percent of the industry’s profits go to only 9 percent of the institutions.”

“Testifying before Congress this month, Stanford economist John Taylor pointed out that under Dodd-Frank, big banks appear ‘to be enjoying a huge subsidy on their borrowing costs due to market expectations of bailouts. This expectation of bailout of some creditors increases the risk of financial instability.’”

“Rising prices are a big nothingburger. They just mean that more yield-crazed speculators are scavenging the market looking for their next big killing.”

“The banks have been playing hide-n-seek for the last 4 years. That’s what the phony mortgage modification programs were all about; helping the big lenders extend and pretend while they recapitalized. Take a look at this: ‘Housing industry leaders and congressional lawmakers are ramping up their push for regulators to resolve a residential mortgage rule without placing strict down payment requirements on borrowers. Bankers, real estate agents, home builders and lawmakers got a renewed jolt after President Obama’s State of the Union address to press their point that new rules determining a borrower’s ability to repay a loan will be the central consideration for obtaining a mortgage.’”

“Obama’s blundering mortgage modification fiasco, dubbed HAMP, was actually a sop to Wall Street. The program was designed as a holding tank for underwater borrowers. Here’s a brief update on the program: ‘As of March 31, 2013, the oldest HAMP permanent modifications, from the third and fourth quarter of 2009, are redefaulting at a rate of 46.1 percent and 39.1 percent…”

“46 percent default rate. That’s worse than subprime. Hell, that’s worse than any batch of loans in history. But, that’s okay, because it’s good for the banks, and that’s what matters to Obama. And, guess what? Now Obama is planning to surpass his own record of failure by launching another bank welfare program more idiotic than the last. He’s given the green light to ‘no documentation’ loans for borrowers who haven’t made a payment on their mortgage in two years.”

“After five years of unemployment, government deficits and financial struggle, every American wants to call it a recovery. That’s why some optimistic economic data this week seem to have messianic importance. But if evil has one power, it is the power of illusion, to mask reality. And, in this case, that is also the power of the positive economic data.”

“The idea of a strengthening recovery is out of step with some bubblicious activity, including the dubious and sudden rise in housing prices. However, the sources of that rise - as with all sudden booms - are dubious. While house prices are rising, incomes, purchasing power and lending are not keeping up.”

“Still, why should we question good news? Even if a recovery is made of vapor, it can make people feel good. So why not believe in a recovery if it makes us feel better? The reason to maintain skepticism of good times a-coming is that an economic recovery can – and is – used to package a lot of political snake oil. As long as people believe in a recovery, Congress can keep ignoring the unemployment and equality crises and enjoy ginning up imaginary problems. If Americans believe in a recovery, CEOs can keep claiming that they don’t need to invest in the United States or hire American workers.”

“A mythical recovery gives cover to a lot of irresponsible people hoping that Americans won’t look behind the curtain. There is a momentary discomfort in realizing that the recovery is weak. When the absurd illusion of a ‘better economy’ is gone, lawmakers and CEOs may be forced to stop believing in the myth of a good economy and actually start working to create the reality of it.”

“A key element of asset bubbles is that the primary impetus of irrational money chasing too few assets is always recognized. Pretty soon real measures of value are assigned as reasons for increased asset prices - say for example in the Internet bubble era: folk started going for top-line revenues as the key measure on the logic that while these companies were losing money initially they would eventually turn around as long as the top line grew. Then any improvement in the top line whether by organic means or acquisition was hailed as evidence of the investment thesis and so on.”

“Perhaps the worst of all the bubbles though is in the former tier 2 and tier 3 cities in the US where house flipping is back on. The treatment of housing stock as a trading good has potentially serious consequences for longer-term investments, as well as the systemic risk of US banks. This then is the worst of all the unintended effects of central bank involvement in the markets; instead of ushering in investors who could help turn around economies, the central banks have created a class of traders who roil asset prices, maximize leverage, but produce no lasting benefits for the underlying economies. Ironically such rising asset prices also make it more difficult for engendering a real economic recovery.”

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