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.”

People Are Afraid Prices Are Going Up, Up, Up!

The Santa Cruz Sentinel reports from California. “Near historically low mortgage rates, relatively low median home prices and solid median income have joined to create an excellent buying opportunity for the prospective homebuyer. In fact, the last time that housing affordability reached a high was in 2000 and as we all know, housing prices went on a tear for the following 6 years; that is, until the bubble popped. Housing affordability has been improving since it reached a low in 2007, when mortgage rates were stuck in the 6 to 7 percent range and home prices reached their peaks — the median price in Santa Cruz County hit a high of $790,000 in August. May’s median price in Santa Cruz County is $625,000, which represents an increase of 25 percent since May, 2012.”

“Although economists like to say that monthly housing costs should stay below 25 percent of household income to remain affordable, the mortgage industry allows a borrower to spend up to 50 percent of their gross monthly income on their PITI (Principal, Interest, Taxes, Insurance), which is a much higher ratio than we were able to offer homebuyers when I got into the business in 1986.”

“Given housing affordability today, real estate might just be the best possible investment that one can make. When you buy a home, you are combining a good investment opportunity with owning your own home with a forced savings account; it is a winning combination.”

The Los Angeles Times. “Real estate agent Mickey Knickerbocker was as surprised as anybody when her client closed on a $905,000 Manhattan Beach town house using ‘piggyback’ financing: a two-mortgage deal designed to minimize the down payment. Popular during the housing boom, piggybacks all but disappeared after the mortgage meltdown taught banks and regulators a big lesson: Borrowers needed to have skin in the game. So the loans seemed like a throwback to the days of carefree lending, especially on such a pricey property.”

“With home prices rising, risk is creeping back into mortgage lending. In addition to creative down-payment arrangements, mortgages on high-end properties — so-called jumbo loans — have also gotten plentiful and cheap. Meanwhile, banks are accepting borrowers with lower credit scores and allowing them to take on more debt relative to their incomes, experts and industry professionals say.”

“‘I don’t think, a year ago, I could have gotten loans that would have served this purpose,’ Knickerbocker said. ‘I didn’t even know … that this was going to be possible.’”

From CNBC. “Only a year after the housing market bottomed, ‘bubble’ talk has surfaced as soaring, double-digit price gains sweep markets across the country. An open house in Cheviot Hills—a neighborhood in West Los Angeles—attracted 150 people and brought in 14 bids before the home sold for 7 percent above the listing price at $2.9 million. ‘Prices in some areas are just out of control,’ said Scott Tamkin, an agent in Los Angeles. ‘As soon as a good property comes on the market at a reasonable price—bam! It’s gone in multiple offers, often times in cash.’”

“‘I wouldn’t be surprised if a bubble happened again,’said Eileen Bermingham, a local realtor servicing the Bay Area. ‘It definitely has the same characteristics as the last time it happened. People are afraid prices are just going to go up and up and up.’”

The Sacramento Bee. “A posh golf course community in rural Placer County that bankrupted bridge-building magnate C.C. Myers has been relaunched under new ownership. But the question remains: Is the Sacramento region’s housing market ready for the Winchester Country Club, with its million-dollar houses in the boondocks? Even during the housing bubble, Winchester had trouble selling its pricey lots. Now, however, experts say it may be perfectly poised to attract part of the massive wave of retiring baby boomers, especially with the price of entry for a house and golf membership far below what it was in the mid-2000s.”

“In a phone interview with The Bee last week, he estimated he lost $150 million on Winchester. He also lost his own palatial home in the development in 2009. The bank initially listed the unfinished home for $1.5 million, but in 2010 Myers bought it back for $650,000. Today, Myers, 75, lives in the hilltop home. ‘Our dogs like it, and we like it,’ he said. ‘As much money as I lost up there, I ought to be able to get something back.’”

“Home sites that Myers said reached $600,000 at the height of the housing market boom are currently valued in the $200,000 range, said land appraiser David Jarrette. Construction estimates range from $100 to $200 per square foot, builders said. ‘This is going to be a test for the market,’ Jarrette said.”

NBC Los Angeles. “A new national survey says homebuilders are feeling optimistic about sales, and in parts of the Inland Empire, like Corona, new home construction is booming. But the construction comes as foreclosure filings took a noticeable jump over the past several weeks, putting Riverside and San Bernardino counties in the top 15 highest foreclosure rates in the state.”

“According to RealtyTrac foreclosure filings in Riverside county actually went up 13 percent in May from April and 9 percent in San Bernardino county. ‘What you have is a legacy of still a large number of homes that are underwater where they haven’t been paying and I think the financial institutions are starting to take action,’ says John Husing, an economist in the Inland Empire.”

“He says in January there was a noticeable lull in foreclosure filings, which could be why foreclosures are now climbing. ‘And they’re now in the process of catching up,’ says Husing.”

The Fresno Bee. “Fresno City Council Member Clint Olivier on Thursday introduced an act that would cut development impact fees for builders and encourage infill development within the city. The idea is to make it affordable for owners of vacant residential city lots, one acre or smaller, to rebuild the homes that once stood there. There are nearly 3,000 empty lots collecting trash, weeds and inviting crime in the city, Olivier said.”

The Desert Dispatch. “A lower cost of living has drawn a new migration of residents from the Los Angeles area to the High Desert, but many of the new arrivals have struggled to find work. Shauntay Lazard, 24, a single mother of two-year-old twin girls, moved three months ago from East Los Angeles — first coming to Victorville to stay with a relative before getting her own place in Barstow. She had a simple explanation for the choice. ‘It’s cheap,’ she said.”

“Lazard said Barstow was recommended to her by the San Bernardino County Housing Authority in order to avoid a year-long wait for government subsidized housing in other parts of the county. A former student at California State University, Los Angeles, pursuing a bachelor’s degree in finance, she said she is continuing her education online and job-hunting. So far she’s had no luck. ‘I’ve applied everywhere,’ she said, ‘I’ve been putting in applications but I haven’t heard back.’”

“While some want to get out, there are plenty trying to get in. David Andre Johnson, a Realtor in Barstow, said that the housing market in the High Desert is at ‘an incline.’ On Thursday, he was showing a home to a family of five from Long Beach. ‘You really are starting to see people move up from the Los Angeles area,’ Johnson said. ‘I think they’re basing it off the price of the economy and low crime. I guess they’re looking at Barstow, Victorville, Apple Valley and the High Desert in general as a better place to raise a family.’”

“But he also said many home offers in the High Desert are being made by investors. ‘The housing market is definitely picking up pace,’ he said. ‘We see a lot of houses that have sold and they’re having multiple offers on them. … It started picking up toward the end of last year.’”

Bits Bucket for June 24, 2013

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