June 30, 2013

Ticking Time Bombs Of Moral Hazard

Readers suggested a topic on the GSE’s. “How about a topic on Fannie and Freddie - their planned demise, what is going to end up taking their place, is there the slightest chance that nothing will take their place, etc. I’m pasting this from the NYT. Don’t ususally post entire articles, but I can’t figure out how to cut this one. It is largely about what is being considered for now, not what should be considered, but it is still very interesting. And it raises the issue of the entire idea of whether the availability of 30 year fixed mortgages should be a policy or not.”

One said, “I read a different article on this, and one question I have is whether the new government insurance will also cover NEW apartment loans. The article I read noted that they would continue to guarantee existing apartment loans. If you really want to see the affect of rising rates, you should look no farther than multifamily and multifamily cap rates. Cap rates (yields) are currently at remarkably low levels, and rents have nearly fully recovered in many places. The combination of the two have resulted in apartment values being at VERY high levels…driven substantially by low financing rates that are available…through the good graces of the FHA and Fannie/Freddie.”

“An estimate that I’ve heard is that if Fannie/Freddie were to go away tomorrow, that interest rates and cap rates for apartments would rise by 1% overnight…if your starting point is a 5% cap (infill So Cal commonly sees these cap rates), a 1% rise reduces your value by 17%. AND if we are in the context of a rising rate environment generally, cap rates could rise even further. The only option for the apartment owner is to raise rents to try to make up this difference…and at today’s home prices, that would simply tend to push more renters to buy.”

A reply, “If an ‘expert’ sez it, then it must be true…at least at bubblelicious price levels which reflect subsidized insurance! A politician tells a NY Times journalist that the private market cannot possibly take over the role of the GSEs, and suddenly the laws of economics are repealed.”

And finally, “Given the ‘time bomb’ of maintenance costs a 30 year mortgage is an accident waiting to happen. 15 year should be the norm - maybe 20 years for new construction. Or maybe not as lumber is not as good now as in years past.”

Investor’s Business Daily. “Can Washington stay in the mortgage game without putting the taxpayers at risk once again? Some senators think so, but there’s reason to be skeptical. No one ever said it would be easy to replace Fannie Mae and Freddie Mac. The two hold some $5 trillion in mortgages. That’s a lot to unwind.”

“If worse comes to worst, the taxpayer is still there to absorb the losses. That’s a big problem for two reasons. One is that any taxpayer backup invites overly risky behavior — as happened with Fannie and Freddie. The other reason is that the real estate, banking and construction lobbies will do all they can to make the limited government role less so. This lobby tends to get (and keep) what it wants. Witness the continued sacred-cow status of the mortgage-interest deduction and the continued survival of Fannie and Freddie themselves.”

“The big question is whether this smaller federal ‘footprint’ stays small. Our guess is that it would morph under political pressure into something like the Fannie and Freddie we have today — too-big-to-fail monsters that, profitable for the present, are ticking time bombs of moral hazard in the long run.”

US New & World Report. “According to the National Association of Realtors, only 15 to 20 percent of the homes that were foreclosed on during the downturn were making their way to the market in 2008 and 2009. The remaining 80 to 85 percent of the homes were bought back at foreclosure and are now owned by the banks. One might ask why the banks would want to own these properties. The answer is both telling and very scary.”

“Current bank regulations do not require the banks to ‘mark-to-market’ their real estate holdings. Bank management, therefore, would rather continue to book an inflated real estate value and pay the debt service and management costs to hold the property rather than sell the property and book the losses. This is why some markets have no inventory, why banks are still hesitant to lend money and why we are not free from the issues we created in the U.S. and globally by overextending our leverage.”

“We have seen a decline in this inventory of about 35 percent from the peak in 2010, however, the last quarter saw a fairly dramatic increase of 9 percent. So which way is the pendulum swinging next? In April of 2012, the finalization of the national mortgage settlement clarified acceptable foreclosure processing procedures giving the banks better ability to effectively foreclose and avoid a lengthy court process. We have seen a rise from $175 billion to $205 billion in the estimated value of the shadow inventory and I am guessing there is more to come.”

The Lake Spokane Outpost. “HomePath®.com is the official website owned by Fannie Mae on which they post information about all their foreclosed homes for sale and any special financing terms. You can use any type of mortgage to purchase a Fannie foreclosure, but the special HomePath® financing can only be used to purchase Fannie Mae owned homes.”

“Why use the HomePath® loan instead of a regular Conventional, FHA, VA, or USDA? There are two very significant advantages to using this special program. First, the appraisal is waived which saves you about $500 and shaves at least 5 days off the escrow process. And with no appraisal there is no fear of the appraised value coming in less than the sales price and jeopardizing the entire transaction.”

“Second, there is no mortgage insurance required when putting less than 20% down. While many people chose to put as little down as possible this feature is particularly beneficial to first time home buyers who might not have saved up a large down payment. The monthly cost of mortgage insurance can easily be $150 or more (the actual amount depends upon loan amount and your FICO score). Not having to pay that equates to about $20,000 extra in house price you can afford.”

“In addition, the private mortgage insurance companies are very restrictive on their approval of applicants. Avoiding this hurdle opens up home ownership to many families who would not have met the requirements for mortgage insurance had they chosen a standard loan instead of using HomePath®. Even investors are allowed on this program – you can buy the home as a rental with 15% down and no mortgage insurance.”

Bits Bucket for June 30, 2013

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June 29, 2013

Bits Bucket for June 29, 2013

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June 28, 2013

Throwing Out All Rational Home-Buying Practices

It’s Friday desk clearing time for this blogger. “Despite a devastating housing crash and a persistent recession, house flipping is back. So too may be the housing bubble. It looks like people haven’t learned much in the last seven years. Back in May, NPR reported on the return of house flippers, noting, ‘Flipping is up in some parts of Southern California by as much as 45% over last year. And in April, the region reached a milestone: Home sales hit their fastest pace in seven years.’ Most economists are applauding the growth, citing the boon it’s been to recovery of the broader economy.”

“Of course, that was the opinion back in 2002 as well. Back around the time Paul Krugman famously blogged: ‘To fight this recession, the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that… Alan Greenspan needs to create a housing bubble…’ Mission accomplished. And we’re still not done paying the price.”

“In March, Rudy Dvorak, the founder of ReInhabit, sold a three-bedroom, two-bath bungalow in Echo Park, a low-income neighborhood in central L.A., for $922,000 after a bidding war. The firm had paid $300,000 a year earlier, renovated the property, and hung a chain saw on the wall as art. On the popular real estate site Curbed, one commenter wrote of the sale, ‘The 1968 RCA console TV just shows that they have vision. You can sell anything to hipsters as long as you make them believe it’s hip.’”

“‘People are making all-cash offers of 10 percent over asking with no contingencies,’ Dvorak says. ‘They’re throwing out all rational home-buying practices and saying, ‘Here’s a suitcase of money.’”

“When most people think of the Katy of Sugar Land areas’ real estate market, flipping houses isn’t usually the first thing that comes to mind. But the practice has begun to gain popularity in Greater Houston’s outlying areas. Scott McClellan, president of NetWorth Realty of Houston, said that the practice has seen a resurgence due to a combination of an improving economy, a loosening of lender guidelines, and this country’s often short memory.”

“‘We quickly forget here in America,’ McClellan said. ‘And I think we’re far enough removed [from the 2008 financial crisis] that everything’s kind of coming together. We’re seeing the stock market doing great, people are making money, job growth — this is a culmination of everything. And then you’re seeing all these big money people up in Washington and California coming in and buying this real estate, so it makes sense. It’s just becoming more popular. It’s never gone away.’”

“‘There are neighborhoods where a week on the market is a long time now,’ McClellan said. ‘There are a lot of neighborhoods where if it’s not gone in a week, something’s wrong.”’

“Armando Montelongo Seminars offers long weekends of questionable advice, raucous showmanship and tours of foreclosed homes in some of America’s poorest sections. His secret formula: Go deeply into debt to buy distressed properties, fix them up minimally and sell them quickly. ‘People throw money at me to become multimillionaires,’ Montelongo, a large, stocky guy with shoulder-length black hair, tells the crowd. ‘This is the means to your end.’”

“The seminar company rates an F from the Better Business Bureau. ‘You don’t get anything substantive,’ complains Lori Jakubowski, a Realtor from near Pebble Beach, Calif., who paid $1,500 for two sessions. ‘There were a lot of people who were unemployed just looking for some easy way to make money. And I felt like an idiot because I was right in there with them.”

“American Homes has quietly amassed a still-growing portfolio of more than 650 houses from Clarksville to Spring Hill, becoming one of Middle Tennessee’s largest single-family landlords in just a year’s time, public records show. In all, the company invested more than $140 million in the Nashville area in that time frame. The company is among several large investment firms — backed by billions from Wall Street — buying houses nationwide and turning them into long-term rentals.”

“But Colony withdrew its IPO earlier this month, citing rising interest rates and market volatility, as American Residential and Silver Bay’s stock have fallen and remain below their initial offering prices. That has some housing experts questioning how long the buy-to-rent strategy can last, especially on such a large scale. ‘For now, it seems to be working for several companies,’ said Karen Gibler, a real estate associate professor at Georgia State University in Atlanta. ‘Long term, five to 10 years from now, I’m not so sure.’”

“Just north of Interstate 10 and Varner Road are five unfinished houses. These Santa Fe style homes sit in the middle of a dirt lot, vacant and vandalized. Visible are open garages with cabinets on the ground, graffitti on the windows, holes on the walls. According to officials at Riverside County, the houses have gone into foreclosure in the last few months, and the ownership of the properties has changed. They say the damage to the houses began under the new owners; they are trying to locate them to start repairs soon. Property records show each house was originally valued at about $500,000.”

“‘I just want someone to buy them up and sell them,’ said Bob Miller who lives in Indio, ‘I’d like to buy one.’”

“In rich and poor areas, homeowners have walked away from homes after they could no longer make their mortgage payments and banks gave notices of foreclosure. Even though the homeowners moved out, the banks have not completed the foreclosures or put the properties up for sale. ‘The scope of this problem is enormous,’ said Buffalo Housing Court Judge Patrick M. Carney. ‘Trying to get something done with these properties before they’re worthless – it’s horrible.’”

“Experts warn of another wave of homes headed into this foreclosure abyss. And what of the homeowners who thought they walked away from it all? They often end up surprised they are still legally responsible for the house. For years, Patrick V. Occhino thought he was free and clear of his former home in South Buffalo. Occhino, 29, bought the house in 2006 but walked away six years ago when he could not pay the mortgage.”

“He sent Wells Fargo his bankruptcy filing and considered his connection to the property finally over. He did not hear from the bank again. ‘I’ve been trying to get out of this house,’ he said.”

“Jim Rokakis was the Cuyahoga County Treasure. Rokakis is now the VP of the Western Reserve Land Conservancy, and has been appealing to officials at the state and federal level to make money available. ‘If we don’t deal with these distressed properties, there are parts of Cleveland and Dayton and Toledo and Youngstown that will end up looking like Detroit. The only way you get ahead of this problem is by aggressively moving after these vacant structures. If you don’t, the structures that are not vacant in those neighborhoods will become vacant,’ he said. ‘That’s not even a ‘maybe’ – that’s a ‘for sure’. Why would you live in a neighborhood where every other house is vacant? You wouldn’t. You’d leave.’”

“Marshall Chesrown, who became the face of posh housing and gated golf course developments in the region but struggled as the economy soured, has filed a $72 million personal bankruptcy to complete the stunning collapse of his fortunes. His assets include $500,000 of equity in a $1 million Legacy Ridge mansion still in his name, along with $9,500 in a retirement fund; $450 cash in pocket; $580 in two bank accounts; and several thousand dollars in furnishings and personal items.”

“In 1999 he made a big local splash when he announced plans to build The Club at Black Rock, a luxury golf community overlooking Rockford Bay on Lake Coeur d’Alene. His plans and projects were foiled by the housing bust and economic collapse of 2008. Within three years, he had either lost most of his projects to foreclosure or sold them. He has been named in at least 16 lawsuits and other legal actions in the past several years.”

“In court documents, Chesrown disclosed that he earns about $13,500 a month – not enough to meet his monthly expenses of $24,131 that include a $4,000 monthly lease payment for a Mercedes and two mortgages that together exceed $8,600. And Chesrown is not immune from the problems plaguing many people: In 2011, a prowler broke into his car and stole computers, an iPad, his wallet, passport and a watch, according to court records. He also lost $30,000 gambling.”

“New data shows that home prices in 20 cities jumped 12% from a year ago. That’s the biggest annual rise since March of 2006 (i.e. - before the housing bubble burst). the housing market isn’t the only sector to benefit from the boost in home prices. As real estate value goes up, consumers become more confident and less fearful about spending their hard-earned cash in other areas, too.”

“As S&P Dow Jones Indices’ David Blitzer says, ‘Rising housing prices have increased wealth. More people own houses in this country than own stocks, and as home prices go up, people are richer, and they feel richer.’”

Weekend Topic Suggestions

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Bits Bucket for June 28, 2013

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June 27, 2013

Bits Bucket for June 27, 2013

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June 26, 2013

Putting Some Additional Air Into The Bubble

The BBC reports on Colorado. “The city’s Office of Economic Development recently declared Denver’s housing market ‘the strongest in the nation,’ in terms of price appreciation and value. But it is precisely this strong, or ‘hot,’ market that is making getting that first step on the housing ladder so hard for Kait, 25, and Ryan, 29. The couple want to move out of their one-bedroom rented apartment in the cosmopolitan Capitol Hill neighbourhood and are looking for a house worth up to $240,000. ‘We chose not to get married [in order] to buy a house,’ says Kait.”

“The competitive housing market has left buyers frustrated, even resorting to writing letters to sellers or sending them videos featuring their children in order to plead their case. Most estate agents or real estate brokers in Denver actively encourage buyers to do this, to make their offer stand out and pull at sellers’ heartstrings.”

“Gary Bauer, an independent real estate analyst, acknowledges that frustration among buyers is high right now, with the added frustration of having to compete with investors buying up available properties and ‘flipping’ them. He says home buyers have to ‘establish and manage expectations’ and become more creative, and writing personal letters to sellers is one way of doing that. ‘If you really want your offer to be looked at, you have to make your offer the best you can and that’s not on the price alone. You have to touch the emotions,’ Mr Bauer says.”

KRWG on Arizona. “During the Great Recession, home builders in the suburbs abandoned neighborhoods that were only half built. The so-called zombie subdivisions left a ring of unfinished construction around cities like Phoenix. But now the zombies are waking up as developers in the Southwest are scrambling to keep up with another frenzied demand for housing.”

“Back in 2011, Realtor Greg Swann took me to the Laveen Farms subdivision in West Phoenix, where fire hydrants emerged dolefully from the desert floor and sidewalks lead to nowhere. The scene is not much better in 2013. ‘When you recover from a heart attack it takes time,’ said Swann, as he observed a crew of workers milling outside a dozen big, new homes. ‘This year is definitely better than two years ago, but there are limits to the enthusiasm you can express for this.’”

“Swann’s point is this: when things are really moving in this city, you’ll know it. ‘If there’s a truss on a truck everyday when you’re driving on the freeway and you’re trying to angle around that truss because you can’t see, then they’re building houses,’ Swann said. ‘If that’s not a problem, then nobody is building anything.’”

ABC 15 in Arizona. “Thousands of Arizona families have lost their homes to illegal foreclosures based on forged, faked and phony documents. Gabriella Westfall has served her community as a police officer for more than 25 years. Westfall said she faithfully paid her mortgage every month until the bank inexplicably raised her monthly payment and told her she needed a modification. She could only get one if she defaulted.”

“‘I contacted the AG to say, ‘Look, I’m a victim,’ but I have not heard from anybody in the attorney general’s office,’ Westfall said. ‘I’m a victim of the system and a victim of fraud.’”

NPR on Nevada. “High-paying investors have helped Las Vegas’ real estate prices to bloom in a place that once ranked as the country’s foreclosure capital. The housing market is so tight that Realtors are calling people to try to get them to sell their homes. Agents are always trying to find homes to sell, but right now in Vegas, it’s taken on a new fervor.”

“‘Right now, on average, an average listing we have we can say there’s no less than 15 offers on a property that we have,’ says Noah Herrera, VP of the Greater Las Vegas Association of Realtors. ‘We have institutional investors that are coming in and taking all of our inventory — overbidding, paying cash.’”

“Another big reason, he says, is a local law that did what other federal laws did nationally after the housing market crash: It made it harder for banks to foreclose. In September 2011, there were over 4,000 notices of default in the state of Nevada. In October, after the bill passed, there were 80.”

“According to an appraisal, Clara Padilla Silver was underwater $35,000 on her Las Vegas home. ‘And we didn’t qualify for any kind of modification,’ Silver says. Her only option, she thought, was to do a short sale — to sell the house for less than it is worth — even if it damaged her credit. That’s what her neighbor was doing. But then Silver thought about it. ‘The craziness is escalating in Las Vegas. So I said, ‘Let’s take a chance. We’ll list it for a couple of weeks,’ she says.”

“And wham! ‘We got a cash offer for $233,000′ — $50,000 over what she thought the house was worth, she says. That deal fell through, but a week later, she got a similar offer, one that she expects to close in the next few weeks. But it better happen fast — for the buyers, she says, because when she checks online real estate databases ‘the value of my house increases by about $1,000 every two days.’”

Nevada Public Radio. “The newly-created Nevada Housing Stability Index shows the market is ‘out of whack,’ said its designer, Jeremy Aguero. Nevada is currently a national leader in price appreciation. ‘We’re also at or near the nation’s highest in terms of the number of people that are living in homes they’re not making payments on. Those two things cannot go on together,’ he said.”

“Aguero is predicting ’some kind of shakeout.’ The number of homes for sale is ‘artificially low’ and that’s pushing up prices. More instability would come if banks start selling off homes where the owner is behind on mortgage payments or owners stop fighting to keep their homes. The high number of mortgages still under water and the fact that nearly 50 percent of homes are distressed sales – where the owner is facing foreclosure or cannot meet the mortgage – are also troubling.”

“‘Right now, we’ve created a second bubble within the housing market and what we’re doing right now is putting some additional air into that,’ Aguero said.”

The Associated Press. “Across the U.S., rural counties are losing population for the first time ever because of waning interest among baby boomers in moving to far-flung locations for retirement and recreation, according to new census estimates. Living in a rural Nevada town, Moe Royels recalls a more bustling time years ago when retirees poured in to enjoy the warm desert climate, nearby casinos and quiet community. But soon boom turned to bust, and years after the recession ended, Royels still wonders if things will ever fully turn around in small towns like his.”

“In Royels’ Lyon County, Nev., about 30 miles east of Reno, small towns prospered during the housing boom. Spillover residents from California’s expensive Bay Area flocked to the area, drawn to the affordable housing, temperate weather and lack of a state income tax. But after the housing bubble burst, the retirees stopped coming.”

“On Main Street in the town of Fernley, the Wigwam, one of the town’s oldest restaurants, now does half the business it used to, according to Royels, who opened the diner in 1961 and sold it five years ago. ‘People moved out of town,’ Royels said from his seat at the restaurant. ‘Some of these subdivisions are still sitting vacant, with the curb and the gutter in but nothing else.’”

Bits Bucket for June 26, 2013

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June 25, 2013

People Are Crazy Not To Buy

The Sun News reports from South Carolina. “Single-family home sales along the Grand Strand in May clipped along at a level not seen since before the Great Recession, but area Realtors said there are enough brakes on the local market that they’re not worried about Bubble, the sequel. Marvin Heyd, CEO of Prudential Myrtle Beach Real Estate, said there are still 12 months inventory left for short sales and foreclosures, which will hold down price pressures in the traditional market.”

“In 2014, he sees a buyers’ market emerging from the dregs of the recession, and in 2015, he believes that activity will pick up more speed and that prices will return to what they were in 2004 to 2005. But while he’s got an eye to the future, he’s enjoying the present. ‘Right now,’ he said, ‘all the Realtors are smiling.’”

The Atlanta Journal Constitution in Georgia. “Recently, an Atlanta couple became frustrated with their search to purchase a home. They made several offers on homes they liked but kept losing out to higher bidders. One day, they found a home that had hit the market that very day. They were so determined to win that bid, they immediately submitted an offer — and then asked if they could see the house for the first time the next day. They just wanted to jump in line and be considered as a buyer early.”

“The couple who recently bid on the house before they ever saw it didn’t win the bidding; they are still out there looking. They are persistent, and they will eventually be the highest bidder and be back in the housing game. That story and others like it illustrate what is happening in Atlanta’s residential real estate market today. We are witnessing the beginning of a new boom in real estate.”

From Northfulton.com in Georgia. “Rhonda Duffy, owner of Duffy Realty, recalls a period in 2007 before the crash when the metro Atlanta market experienced a record high of 110,000 homes for sale, a level that even forced Metro Brokers to switch their sign on Interstate 75 and I-85 from an analog system to digital because the number surpassed the five digit limit. ‘Ever since then we’ve slowly gone down to where we’ve been for the last two or three years which is 36,000 homes,’ Duffy said. ‘When interest rates go down like that and then they start to pick up again, it starts to freak buyers out.’”

“The averages sales price for Harry Norman Realtors is now about $350,000, Aiken said. One year ago, it was about $250,000. ‘Before you had so much inventory that you couldn’t get what they were worth, then people were underwater. Now they’re not underwater, now they can sell them, but they want more for them than they’re worth,’ Aiken said.”

“James Stephens, property and real estate appraiser, says the home appraisal problem relates to a large influx of investors that feel like the time is right for buying. ‘I think what you’re seeing in a lot of different markets in the metro Atlanta area is a shortage of available homes compared to years past,’ Stephens said. ‘Prices are appreciating rapidly and previous homes sales that have happened earlier this year don’t really reflect the current pricing.’”

AAP on Florida. “The open house on a leafy street near South Miami featured a snack wagon with cupcakes and chilled beverages, but the real draw was the newly-listed house for sale for $435,000. Over a two-hour stretch on a Sunday afternoon, 44 groups of couples and families streamed through the well-kept two-bedroom, one-and-a-half-bathroom house on a large block. They didn’t come to eat cupcakes. Five purchase offers came sailing in - three that day, two the next.”

“Mortgage rates are at historic lows, thanks to the Federal Reserve’s unprecedented manoeuvres to stimulate economic growth. Banks have begun to ease terms on mortgages, with down payments of 10 per cent and less increasingly available, widening the options for prospective buyers to jump in. ‘Interest rates are so low, people are crazy not to buy,’ said Philip Vias, a broker associate with Prudential Florida Realty in Fort Lauderdale.”

“And, with housing prices marching higher in many areas, many buyers are feeling a sense of urgency to act now or miss out. ‘We have a chance to grab something. We want to take advantage of this great market. Interest rates are low,’ said Leonard Bridgnauth, a 36-year-old courier who, with his wife Kimmy, has been scouring the Miramar, Florida, area for a house in the $US250,000 range since December, so far without luck.”

“‘Because inventory is so low, it’s creating some kind of a frenzy,’ said Chuck Bonfiglio, president of the Greater Fort Lauderdale Realtors. ‘People are pricing their homes over what the market is … Buyers know inventory is low and are willing to pay over appraisal to get the deal done.’”

The Tampa Tribune in Florida. “An investor buying spree has the Tampa Bay area’s home prices soaring, the latest housing figures show, leaving some to wonder how much longer it will continue before the investors back down. Around Florida, some Realtors are whispering about a bubble in the housing market.”

“John Tuccillo, chief economist for Florida Realtors, challenged that assumption. Investors today have sophisticated financial models that tell them how much they can pay for a house and still get a decent return from renting it out. Once prices rise too high, they’ll stop buying. That should keep investor buying from getting out of control, he said. Already, a shortage of inexpensive houses is forcing investors to move upscale and buy pricier homes, he said.”

“‘There aren’t as many unsophisticated investors out there as there was back in 2004 and 2005,’ Tuccillo said.”

The Brevard Times in Florida. “‘The numbers continue to move in the right direction,’ said Florida Realtors Chief Economist Dr. John Tuccillo. ‘We remain concerned about the rise in the percentage of sales accounted for by all cash buyers. These numbers understate the true condition of the market in that a great many sales are conducted directly with the financial institution holding the property, and thus do not appear in the Multiple Listing Service (MLS).’”

“‘But those crying doom-and-gloom who read this growth in investor activity as the sign of a new bubble are far off-base and simply don’t understand the texture of the current market,’ Tuccillo added.”

The St. Augustine Record in Florida. “A return to health of the lower end of the housing market in St. Johns County is adding to consumer confidence and to the overall economy. But those same increases in home values could also keep some middle-class families from getting into the market. One thing that has kept some lower-income families optimistic about buying a home is the continuation of low interest rates. Dirk Schroeder of Century 21 said banks have been making money available to more buyers recently. He said people with credit ratings around 580 are often getting approval.”

“Lenders are certainly reviewing files of perspective buyers more carefully (than during the housing bubble),’ he said. ‘You can have damaged credit and still be able to make purchases.’”

Bits Bucket for June 25, 2013

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June 24, 2013

A Recovery Predicated On Reigniting Bubbles

Some housing bubble news from Wall Street and Washington. FX Street, “In its annual report, the Bank for International Settlements is urging central banks to weigh the risks associated with delaying their QE exit strategy. They argue that ‘there is a limit to what central banks can do, and there is a need for the involvement of other sectors and a shift to structural economic and financial reforms.’ Up to now, ‘kicking the can’ down the road has effectively been about borrowing time. In hindsight, people will be asking if the time was well spent?”

‘Policy makers have only so far been able to postpone the inevitable. The low interest rate environment coupled with various ‘unconventional policies’ has only made it easier for the ‘private sector to postpone deleveraging and government to finance deficits and delay reforms.’”

From Reuters. “Through the dark days of the financial crisis, and the grey days of the halting recovery that have followed, investors have always been able to count on backing from two sources - Ben Bernanke and Beijing. They have provided stimulus, mainly by pumping funds into the U.S. and Chinese economies in various ways, when other pillars of support had become unreliable. That helps to explain why global financial markets took such a beating last week when both signaled that they are getting tired of being leant on so heavily.”

“The big problem is that there isn’t much precedent for normalizing an economy that has been artificially supported for so long with low interest rates and a massive injection of funds through bond buying. The risk is that rising interest rates and a decline in the value of stocks and bonds starts to feed into the real economy as consumers and companies cut back spending. That could stall the housing market recovery and reduce expectations for retail sales and capital investment, which would quickly feed into lower corporate earnings growth and weaker job creation.”

“To be sure, on housing and the economy, Bernanke was hopeful last week - saying that people ‘expect house prices to continue to rise’ - and stressing that when interest rates rise for the right reasons, including optimism about the economy, it is ‘a good thing.’”

From CNBC. “The People’s Bank of China (PBOC) triggered the latest sell-off after it in effect told participants in the Chinese banking system that they would be left to their own devices in handling an apparent liquidity crisis. As Breakout co-host Matt Nesto says in the attached video the concerns bedeviling the Chinese economy should be familiar to U.S. investors. ‘There are banks over there reporting a quadrupling in their non-performing loan ratios and that’s why their hand-braking on the lending between each other.’”

“The perception is that the global central bankers may be losing their grip over the system; a prospect that makes sitting out the volatility increasingly appealing. As one Wall Street wag put it earlier this morning,’we’re going to need bigger sidelines.’”

From MoneyNews. “Federal Reserve Chairman Ben Bernanke is a confused man, says Michael Pento, president of Pento Portfolio Strategies. ‘So in the beginning of 2013, which was not even six months ago, the man thinks that inflation is way too low, and the economy is way too weak and that QE4 needs to be launched five years after the first QE was inaugurated,’ says Pento. But now, Bernanke ‘puts out a timeline for reversing QE,’ Pento says. ‘The man is either 100 percent focused on his legacy, or he’s actually starting to fear this $3.5 trillion Fed balance sheet and says what we’ve done to this point — taking it from $800 billion to $3.5 trillion — hasn’t worked, and we have to stop.’”

“The economic recovery has been ‘predicated on reigniting bubbles that had once popped,’ Pento says.”

Here Is The City. “Ben Bernanke might as well have tried to reason with a roomful of toddlers on a sugar high. At Wednesday’s Federal Reserve press conference last week, he explained, in the moderate tones of a parenting manual, his plans to gently withdraw the markets’ comfort blanket. They responded with a full-blown tantrum.”

“If the markets get ahead of themselves, selling off bonds too aggressively and pushing up yields, that would drive up borrowing costs across the economy – including the cheap mortgages that have been key to the housing revival – and choke off the recovery before it can get under way. But there will be an ever-present risk of the markets over-reacting: like toddlers, they don’t deal in nuance.”

The San Francisco Business Times. “Wells Fargo CEO John Stumpf shared an optimistic outlook on housing with CNBC this week, saying that it’s important any changes to the government’s role in financing housing not be rushed. ‘We can’t kill the golden goose,’ Stumpf said.”

“The man overseeing the bank that makes one in three U.S. mortgages jumped headlong into one of the economy’s greatest debates: Will housing prices continue rising? ‘Housing prices will continue going up,’ he predicted. ‘This is a bargain.’”

“Stumpf tried to put in perspective how millennials view the housing market and mortgage rates vs. older generations with painful memories of much higher rates. ‘If you were born after 1980, you think 4 percent is a normal rate,’ he said.”

From The Street. “According to the latest Campbell/Inside Mortgage Finance HousingPulse Tracking Survey, investor share of home purchases dropped from 22% in April to 20% in May based on a three-month moving average — the sharpest drop in investor activity in three years. The Investor Traffic Index, an indicator of future home purchase activity, was also down for three months in a row ending in May.”

The Standard. “The local home market turned sluggish over the weekend after Federal Reserve chairman Ben Bernanke said the US central bank could wind down its stimulus program later this year. Bernanke’s comments also prompted the government to warn of further downside risk to the property sector. Financial Secretary John Tsang Chun-wah blogged yesterday that the SAR is likely to see large-scale capital outflow.”

“He urged the public to pay attention to the downside risk in the local home market and consider one’s affordability when interest rates rise. ‘By then, interest rates in Hong Kong may be raised even before the US,’ Tsang stressed.”

“Only 16 homes changed hands at 10 major housing estates over the weekend, down from 22 a week back, said Centaline Property Agency. Home viewings also dropped. Among the major estates, four - Taikoo Shing, Kornhill, Whampoa Gardens and Caribbean Coast - saw no deals. Most of the apartments that were sold carried relatively cheaper prices, including those at Kingswood Villas in Tin Shui Wai. A 705-square foot unit at Mei Foo Sun Chuen was sold for HK$6.43 million after its price was slashed by HK$570,000 - down 8 percent from the market average.”

“The buyer of a 1,330-sq-ft unit at Provident Centre in North Point lowered his offer price by HK$1.2 million to HK$16.8 million. Despite the bearish sentiment, Kerry Properties (0683) is launching Bayview in To Kwa Wan this week. The first batch of 50 flats at the 175-unit project was priced at an average of HK$15,589 per sellable square foot.”

From CNBC. “”Corey Alhawat, a mortgage banker at Cardinal Financial in New Jersey, says his bank will provide a FHA loan to a client with a minimum credit score of 640. He says he’s seen other lenders who will do a FHA loan, with a 3.5 percent down payment, for someone with a score as low at 580. ‘If we have even a slight reversal [in home prices], we’re going to be stuck in a much worse position than what happened five years ago,’ Alhawat said.”

Metrowest Daily News. “With all of the positive news reports about the improving housing market, you wouldn’t expect that we’re on the verge of another housing bubble, but that may, in fact, be the case. As with the stock and bond markets, there is a disconnect between the real world and the housing market. As Fitch Rating put it, ‘Demand is artificially high … and supply is artificially low.’”

“Russian minister Grigory Potemkin created a fake village to impress Empress Catherine II during her visit to Crimea, giving us the term ‘Potemkin’ to mean an illusion; reality propped up to look bigger and better than it really is. Today’s housing market is likewise affected by Fed actions, but it’s a Potemkin village in reverse. While the Potemkin village gave us houses that weren’t there, today’s housing market has rallied based on buyers not seeing houses that are there.”

“There are plenty of homes available, including many that are vacant because of foreclosure. They’re just not on the market right now.”

“Many people are still out of work or are earning less than they did before the housing bubble burst. Based on current income and recent increases in housing prices, Zerohedge found that median new home prices are at an all-time high and homes are more unaffordable than they have ever been.”

“The federal government has done everything it can in recent years to make housing more affordable for Americans who can’t afford their own homes. Ironically, as a result of the latest government programs, housing is becoming so expensive, fewer and fewer Americans can afford to own a home. With a lack of qualified buyers, and the potential for increasing supply and rising interest rates, another housing bubble may be on the horizon.”