August 26, 2013

Call It Anything You Like, Just Don’t Call It A Bubble

Some housing bubble news from Washington and the world. The Herald Sun, Australia, “Boom, price surge, recovery, strong market, call it anything you like, just don’t call it a housing bubble - not yet, anyway. Yes, residential property prices are rising. Yes, households are willing to carry high debt levels and, yes, property prices are historically expensive. But that’s where the similarity between a bubble and the current market increases end. According to the experts, most property markets are just in a typical bull-market phase, before an expected return to more modest price growth.”

“‘Talk of a bubble pre-election is rubbish. Everyone is clearly cooling their jets at the moment. There are no runaway results or evidence of a bubble,’ says David Morrell, director of buyers advocacy firm Morrell and Koren. ‘Obviously, if you’re buying as an investor out of a super fund then you’ve got a bit more fire power than a young couple gearing themselves up. But anyone talking of a bubble now is talking rubbish, they’re delusional.’”

“Cameron Kusher, a senior analyst at research house RP Data, questions if Australia has ever had a real property bubble. ‘You can’t say we are entering a housing bubble when home values are still below their previous peak,’ Mr Kusher says. ‘I would describe a bubble as a ‘phenomenon’ in which home values become overvalued and ultimately burst. Outside of select coastal markets, it is difficult to say this has really occurred elsewhere in Australia over the recent past.’”

“Stockbroker Bell Potter Wholesale managing director Charlie Aitken says there is a fair degree of ‘fear of missing out’ going on around the nation. ‘There is no country in the world where the man in the street gets greater FOMO (fear of missing out) than Australia,’ Mr Aitken says.”

The Irish Independent. “Let the latest property price figures from the Central Statistics Office serve as a cautionary tale for anyone looking to dip their toe in the property market, particularly in the capital. It seems the Irish are still obsessed with the concept of home ownership, despite the bust. I know – I was there. Right at the height of the boom, I bought my two-bed townhouse in Finglas and I have the negative-equity scars to prove it.”

“The urge to own my own home was stronger than the many warning signs that I, and many others, chose to ignore. But I was driven by a fear that I wouldn’t get a mortgage – that I would be priced out of the market. At the time, the lending market was already showing signs of drying up and I didn’t want to be left behind. But looking back, I had no excuse really.”

“Prices in Dublin and its suburbs shot up by 8pc in the year to July. In the month of July alone prices jumped by 3.3pc – the highest rise in eight years. And apartment prices rose by even greater amounts as buyers competed for a limited number of properties. And property experts are reporting that up to 100 people are showing up for each viewing in South Dublin, while some people with mortgage approvals are finding that Dublin prices are moving beyond the amounts banks were prepared to lend them.”

“But a sustained recovery in the housing market will be driven only by better employment prospects and disposable incomes. Now that the budgetary and pay cuts have kicked in and nearly all the treats have dried up, I can’t help sometimes feeling a little resentful towards the house – at the risk of sounding ridiculous.”

From Lew Rockwell. “The President has been talking a lot of late about the bubble economy. Obama has talked bubbles four times in five days. Recently Obama said, ‘When wealth concentrates at the very top, it can inflate unstable bubbles that threaten the economy.’ The newspaper account in which I read of the president’s radio remarks about ‘bubbles and busts’ filled out the story with reference to the likely replacements for bubbling Ben Bernanke at the Fed: Janet Yellen and Larry Summers.”

“For a comment on these two peas in the short-list pod it turned to – of all people – a former Fed official! And he offered that ‘both candidates can claim bubble-battling expertise.’ How is it that we’ve had more bubbles than Lawrence Welk and his Champagne Music Makers, what with the president and all these bubble-battlers bustling about?”

The Foreign Policy Journal. “In his latest column, Paul Krugman asks, ‘Why have we been having so many bubbles?’ His answer is instructive. ‘One popular answer’ to his question ‘involves blaming the Federal Reserve—the loose-money policies of Ben Bernanke and, before him, Alan Greenspan.’”

“Krugman’s argument, however, simply is not honest. His claim that interest rates were ‘within historic norms’ during the housing bubble, for example, is what one might call a ‘lie.’ Krugman asserted that since interest rates weren’t low by historical standards, therefore low rates couldn’t have caused the housing bubble. Yet we see that rates were low by historical standards, and thus, his conclusion that the Fed was not the culprit is false.”

“Moreover, the real question isn’t whether interest rates were lower than they had historically been in the past, but whether they were lower than they would otherwise have been if determined by the free market rather than efforts to centrally plan the economy. And the answer to this question is self-evidently in the affirmative, since it has been one of the central purposes of the Fed’s intervention in the market to push rates down below where they otherwise would be.”

“And we don’t need data and charts to illustrate how Krugman is being dishonest with his readers. One may simply examine what economists were saying at the time about the influence of the Fed’s low interest rates on the housing market:

“Millions of Americans have decided that low interest rates offer a good opportunity to refinance their homes or buy new ones.” – May 2, 2001

“To reflate the economy, the Fed doesn’t have to restore business investment; any kind of increase in demand will do…. [H]ousing, which is highly sensitive to interest rates, could help lead a recovery.” – August 14, 2001

“Low interest rates, which promote spending on housing and other durable goods, are the main answer.” – October 7, 2001

“[T]he Fed’s dramatic interest rate cuts helped keep housing strong” – December 28, 2001

“To fight this recession the Fed … needs soaring household spending to offset moribund business investment. And to do that … Alan Greenspan needs to create a housing bubble to replace the NASDAQ bubble.” – August 2, 2002

“[T]hose 11 interest rate cuts in 2001 fueled a boom both in housing purchases and in mortgage refinancing….” – October 1, 2002

“Mortgage rates did indeed fall briefly to historic lows, extending the home-buying and refinancing boom that has helped keep the economy’s head above water.” – July 25, 2003

“Low interest rates … have been crucial to America’s housing boom.” – May 20, 2005

“Now the question is what can replace the housing bubble…. But the Fed does seem to be running out of bubbles.” – May 27, 2005

“[T]he Federal Reserve successfully replaced the technology bubble with a housing bubble. But where will the Fed find another bubble?” – August 7, 2006

“Back in 2002 and 2003, low interest rates made buying a house look like a very good deal. As people piled into housing, however, prices rose—and people began assuming that they would keep on rising.” – July 27, 2007

“Which economists said those things? All of the above quotes are from Paul Krugman, whose record on the housing bubble I documented in my book Ron Paul vs. Paul Krugman: Austrian vs. Keynesian economics in the financial crisis.”

From Bloomberg. “Politicians have been promising more than they can deliver since the dawn of democracy. So it’s no surprise that President Barack Obama wants to make housing more affordable, ensure that home prices keep going up, reduce taxpayer support for the mortgage-finance system and prevent future crises — simultaneously. But some of the items on his wish list, as outlined in a speech in Phoenix, are contradictory.”

“It’s all well and good to say that the government should ‘cut red tape’ and ’simplify overlapping regulations’ so that ‘responsible families’ have an easier time buying homes. But what does this mean in practice? Should income and down-payment requirements be eased? Lest we forget, lowering lending standards was precisely what got us into the housing mess in the previous decade.”

“As things stand, the federal government is on the hook for all of the losses on nearly every mortgage issued since 2009.”

“Economists have shown that, during the recent housing bubble, prices rose as down payments fell. This empowered buyers who had been shut out of the market, which pushed up prices and temporarily increased the homeownership rate — until it came crashing down. To keep this from happening again, Obama, regulators and lawmakers must avoid the siren song of homeownership for everyone.”

The Washington Post. “It haunts me when I think of some of the mortgage loans I’ve seen and still see. Too many people, who certainly should have known better, agreed to buy homes when their monthly mortgage payments were 50 percent to upward of 70 percent of their net pay. That’s just too much.”

“President Obama has laid out plans to rebuild the housing market. The plans focus on Fannie Mae and Freddie Mac. Now, Obama says it’s time to phase out the two agencies. Obama also said something that shouldn’t be overlooked. ‘In the run-up to the crisis, banks and governments too often made everybody feel like they had to own a home, even if they weren’t ready and didn’t have the payments. That’s a mistake we should not repeat.’”

“When mortgage rates and home prices hit historical lows, people would ask me if they should buy a house. ‘Are you ready?’ I asked back. Blank stares often greeted my question. Even if you could get a zero-percent home loan for 30 years, if it eats up more than half your net pay, you probably can’t afford it. Notice I focus on net, not gross, income.”

“As we reinvent the housing finance model, we also have to throw out old advice and lending models. Start with the way we look down on renting. When you rent, you are not a financial failure. You are getting something for your money — a roof over your head. You also maintain flexibility when you rent, allowing you to move easily if you need to find a better-paying job in a different location.”

“Consumer advocates want to make sure any changes the government makes don’t prevent creditworthy individuals from owning homes and improving their economic status. I support that mission. But I also want a more realistic approach to mortgage lending so we don’t repeat past mistakes.”

Bits Bucket for August 26, 2013

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