September 20, 2013

The Unwinding Of Unsustainable Speculative Positions

It’s Friday desk clearing time for this blogger. “If you see a Houston realtor with a big grin on his or her face, they’ve probably just cashed their commission check for August. The Houston Association of Realtors is posting sales figures for the month, making for a 27th consecutive month of gains in the market. The reason realtors are smiling is because of the dollars generated by the sales of over 8,900 units. ‘Total-dollar volume soared nearly 36% to $2.2 billion,’ says HAR Chairman Danny Frank. ‘Last August, total sales generated $1.6 Billion. This has definitely been a summer sales season unlike any we have seen before,’ he says.”

“U.S. home sales in August rose to their highest level in six years, even higher than during the recent home buyer tax credit. Still, Realtors were uncharacteristically pessimistic in their predictions for sales this fall. ‘We are getting early signals from lock boxes that show a significant change in direction in August,’ said Lawrence Yun, chief economist for the National Association of Realtors, referring to the small key boxes that hang on the doors of for-sale homes. The number of times they were opened in August dropped dramatically, signaling a big drop in potential buyer traffic.”

“After years of stagnant home prices throughout Riverside and San Bernardino Counties all signs are pointing to a housing market recovery. But who is benefiting? ‘Sellers,’ says realtor Doug Shepard. Low housing inventory has made it difficult to find the right house for a buyer. ‘You’re not going to see us crying in the streets, but it can be tough,’ said Shepard. ‘We only make money when a home gets sold.’”

“‘What’s troubling is the recovery doesn’t happen at the same rates for everyone,’ said UCR professor Vanesa Estrada. ‘Inequalities that were already there are being exacerbated.’ Christopher Thornberg, one of the founders of Beacon Economics in Los Angeles, vehemently disagrees with Estrada. ‘Everybody,’ declared Thornberg when asked who is benefiting. ‘Listen to me, everybody.’ He said housing sales are also helping people who are underwater get some of the equity in their homes back which is spurring the overall economic recovery. ‘You don’t have to worry about housing,’ said Thornberg.”

“Ever wondered why, in the face of a sharp inventory shortage, new home construction still lags so far behind other housing indicators? Two reasons, according to Trulia Chief Economist Jed Kolko: 1) Because household formation, which fuels demand, is only half its normal rate. 2) Because, despite a supply shortage, the vacancy rate remains elevated, thanks to a glut of unlisted vacant properties, many of them foreclosures. The market does not have a housing shortage, just a shortage of for-sale listings. ‘Many of those vacant, off-market homes could come onto the market, especially if their owners are just waiting for prices to rise enough to make selling worthwhile,’ Kolko wrote in a blog post.”

“The Federal Reserve’s surprise announcement that it would not taper its economic stimulus program this month is rattling through world markets. But one of the biggest and direct impacts could be on the housing market. The longer-term effects, notes David Berson, former chief economist at mortgage lending giant Fannie Mae, are difficult to guess, because this housing recovery is unlike any that have come before.”

“‘Usually housing, because it’s so rate-sensitive, it tends to recover first,’ he says. The pickup in existing homes has previously been followed closely by new construction and jobs, but this time, ‘housing starts haven’t picked up that much. The overall impact has been muted because there were still large numbers of vacant homes.’”

“After signaling his faith that real estate could weather increasing home-loan rates in June, Fed Chairman Ben S. Bernanke opted to exercise caution in reducing support for the economy. He said yesterday at a news conference in Washington that policy makers are seeking more information on how higher borrowing costs are affecting the housing recovery. Fed officials ‘finally realized that housing is fading in anticipation of the tapering and even higher rates, and that they could not do it without irreparable damage to the housing recovery,’ said Robert Bostrom, a former general counsel at Freddie Mac.”

“Weekly applications to refinance mortgages have slumped 66 percent from a 2013 high, according to Mortgage Bankers Association data released yesterday. Investors also funded $554 billion of government-backed home loan securities and $86 billion slices of repackaged mortgage bonds through short-term loans in the tri-party repurchase agreement market as of Aug. 9, according to monthly data from the New York Fed. Real-estate investment trusts that rely on the borrowing owned $343 billion of the securities on March 31, while commercial banks, whose deposit costs are also tied to the Fed rates, now hold more than $1.3 trillion, central bank data show.”

“‘Ability to fund cheaply remains critical for these levered carry trades,’ as well investments often made by hedge funds known as inverse interest-only notes, the BNP analysts wrote.”

“In his post-FOMC press conference, Fed Chairman Ben Bernanke made it clear that he had lost control of the market, causing a tightening of financial conditions that directly hit the highly supported housing market through higher mortgage rates. Bernanke lied. At one point, the Chairman of the Federal Reserve told reporters: ‘we are somewhat concerned. I don’t want to overstate it. But we do want to see the effects of higher interest rates on the economy, particularly mortgage rates on housing.’ Yet Bernanke, and the rest of the FOMC, are gravely concerned.”

“As I previously reported: ‘In the three months since the June FOMC meeting where tapering was formally introduced, the yield on 10-year Treasuries has jumped more than 70 basis points, increasing ‘by a greater amount than during the entire previous interest rate tightening cycle between June 2005 and June 2006,’ Tradeweb’s analysts explained. This tightening hit homeowners where it hurt. Goldman’s data showed that as rates on 30-year fixed mortgages rose 1.2 percentage points since May, the monthly mortgage payment for a median-priced home with a 20% down payment rose by $110. ‘The Fed is particularly sensitive to the rise in mortgage rates given the special effort it has devoted to supporting the housing market through its credit easing policies (MBS purchases),’ explained Goldman’s team.”

“The minutes from the FOMC’s July 30-31 meeting reveal central bankers’ concern about the market’s reaction to a potential reduction in stimulus. ‘Some participants felt that, as a result of recent financial-market developments, overall financial-market conditions had tightened significantly,’ according to the minutes, which were released Aug. 21. They ‘expressed concern that the higher level of longer-term interest rates could be a significant factor holding back spending and economic growth.’”

“At the same time, ’several others’ at the July gathering said an easing in bank lending standards would ‘largely offset’ the impact of rising interest rates. ‘Some participants’ also said the move may have ‘helped put the financial system on a more sustainable footing’ by prompting the ‘unwinding of unsustainable speculative positions.’”

“Why would the Fed know that the capital markets were fully prepared to absorb a $10 billion tapering of this bond buying, and then not even do that? The Fed knows that the day of reckoning has to come. No ‘housing recovery’ can be considered real when it cannot even sustain the modest tapering of a bizarre Fed bond-buying program. The tool the Fed is holding on to for dear life is whatever will work to provide the appearance of health and momentum in the housing market. So as we sit here on the fifth anniversary of ground zero to the biggest financial crisis since the Great Depression, one caused by a cult of housing market obsession.”

“The media would have portrayed the taper, if it had happened, as a tightening exercise. That’s how low the expectations of the media have been set by central banks – not only by the US Fed, but also by its counterparts in other parts of the world. Most central banks, including our own RBI, are running massively accommodative policies whose deleterious effects have only just started playing out. And yet, all that we can hear in terms of expectations from the government, industry bodies and the media channels are requests for further easing.”

“So what should Bernanke have done? Bernanke should never have lowered the rates to zero in the first place and indulged in this exercise of bond buying. It was the monetary easing by the previous Fed Chairman, Alan Greenspan, that led to the housing bubble with all the accompanying imbalances in the US economy. This round of easing has been greater, by a wide margin at that, and so the consequences are going to be that much worse than in 2008 when the current bubble in treasuries/ bonds, fiat currencies and ‘confidence in governments’ bursts.”

“As Ludwig von Mises of the Austrian School would love to compare, any economy on a central bank-induced cheap credit binge is like a drug addict… with time, one needs greater and greater dosages to even maintain the status quo. Any cleansing process of this addiction has to start with the rather painful, but much needed, withdrawal symptoms.”

“The path that Bernanke has put the US on is very different. He has taken the route of greater doses of stimuli that would allow him to temporarily postpone the withdrawal symptoms, but would ultimately cause the death of the patient.”

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