The Housing Bubble

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A poster suggested this topic. “Any chance Congressional Republicans will muster the political might to put the kibosh on Yellen’s nomination? Given the political importance of the Federal Reserve Chair appointment, would it make sense to reconstitute it as an elected position?”

A reply, “Where were those same republicans when Greenspan was running the show ??”

From Forbes. “When Ben Bernanke completes his second term as Federal Reserve Board chairman in January, Janet Yellen should be more than ready to take the helm of the U.S. central bank, according to Wharton faculty and other experts. ‘She has to thread the needle between the Democrats, who want assurances for further supports for the economy, and the Republicans, who are concerned that [continuing] QE forever will give rise to asset bubbles that will set up the next crisis,’ says Phillip Swagel, a University of Maryland public policy professor and former assistant secretary of economic policy at the Treasury during the George W. Bush administration.”

“If growth and employment don’t pick up, we could be in QE for a lot longer than expected, says Kent Smetters, Wharton professor of business economics and public policy. ‘We could have a Japanese-style lost decade. The conditions are very similar: We have a bad banking sector and lots of government debt. But in many ways, we’re in a worse position, because Japan has a high household savings rate, and we have a low savings rate. Tapering could be pushed off for 10 years, starting from the beginning of the crisis.’”

“The enormous injection of liquidity by the Fed also threatens another bubble. Both the Fed and the banks have trillions of dollars on their balance sheets as a result of the Fed’s asset purchase program, says Wharton finance professor Joao F. Gomes. ‘The Fed will have to manage these amounts carefully to prevent an explosion of credit in the years ahead. The magnitude is so large — it’s never happened before — that it’s an act of faith that they have all the tools to prevent another boom and bust and inflation.’”

“Smetters concurs. ‘The Fed tripled money supply in the last four years, almost all held by banks in excess reserves. Even though we think subprime mortgages are behind us, they are not. The whole commercial side of the real estate bets will come to light next year, as the leases come up and we see the renewal rates and whether commercial loans are viable. There’s still a lot of uncertainty.’ Moreover, there’s another great ‘crisis at our doorstep — the tidal wave of [public] debt,’ Smetters adds. ‘How does the Fed keep the economy [running] when so many resources are going out to service higher debt and the budget deficit? Historically, the challenge has been met by printing money, which causes inflation. I give it a 95% chance that this crisis will come on Yellen’s watch.’”

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It’s Friday desk clearing time for this blogger. “Portland is easing into the real estate market’s slower months, and prices and sales volume are falling as a result. ‘The first half of the year was such an active market that I’m not sure we could have continued on that trajectory,’ said Jason Waugh, president of Prudential Northwest Properties. ‘You’re talking double-digit appreciation in every category across the board. Quite frankly, that’s what happened in ‘03, ‘04, and ‘05, and look at what happened.’”

“‘Phoenix has slowed down a little bit over the last two or three months,’ said Floyd Scott, owner of the Arizona Foothills franchises of Century 21. ‘The inventory has been creeping up, and that’s dampened price increases,’ Scott said, and added that multiple bids evaporated two months ago. ‘There may also be some resistance to higher prices.’”

“In Southern California, the frothy run-up of earlier this year has similarly slowed in the second half, reversing the usual seasonal trend, according to a Realtor. ‘The market has cooled off some,’ said Tom Adams, owner of Century 21 Adams and Barnes, in Glendora and Monrovia. Adams said there has also been a marked slowdown in Chinese investors’ interest in area real estate, which had been brawny through the spring. Rapid price escalation has played a part in that, he said. ‘Interest rates ticked up a little bit, prices have gone up and consumer confidence has dropped,’ Adams said. ‘Our first-time buyers are being hit by rising prices and interest rates, and the strictness of the mortgage qualification system is still squeezing a lot of people out.’”

“People who are shopping around for a condo unit to buy in Toronto have lots to choose from these days. ‘There’s a lot of inventory to choose from,’ says real estate agent Christopher Bibby. Mr. Bibby points to the example of the coveted DNA lofts at King and Shaw. In the past, agents would set an offer date and wait for multiple bids. Last spring a one-bedroom plus den was listed with an asking price of $379,000. It sold after four days for $420,000. More recently Mr. Bibby says, a unit with the identical layout was listed for $399,000. It sold after two-and-a-half weeks on the market for $10,000 below asking. ‘I feel the buyers are in the driver’s seat right now,’ Mr. Bibby said.”

“Real estate agents witnessing the strongest spring in a decade say it’s no surprise Sydney prices have surged. While property owners will be happy to see the value of their homes increasing, Australian Property Monitors senior economist Andrew Wilson warned the party may not last. ‘We are now getting a flood of listings from sellers who want to take advantage of these strong conditions,’ he said.”

“In ‘China’s Housing Bubble Born to Burst,’ a well known Chinese financial commentator and columnist states that the communist regime’s totalitarian economic system will cause an impending economic crisis in China. Niu Dao is an award-winning blogger who is a financial commentator on the state-run CCTV, a consultant to Essence Securities, and a teacher at Tsinghua University. His post on Sept. 26 warns that the coming crisis will bring disastrous consequences.”

“In a subsequent Oct. 8 article, which was deleted from the website Sina shortly after it was published, Niu explained that the Chinese people’s human rights are not protected at all under the communist totalitarian regime. In a sense, the Chinese people are not citizens, but veritable ‘residents’—they are nothing without a dwelling. That is the main reason why the Chinese Communist Party (CCP) dares to magnify the housing bubble indefinitely, and why the Bank of China dares to print money wantonly, Niu wrote. The housing bubble has become a tool for the ruling class to plunder national wealth.”

“In the over 20 years since Japan’s asset bubble burst, it has had 13 different prime ministers. For China, Niu wrote, it won’t be an issue of a change of prime minister, but rather the fall of the regime. China’s bubble is even bigger than Japan’s bubble was back then, according to Niu.”

“Societe Generale analyst Albert Edwards says that ‘exactly the same bozos who missed the last bubble deny there is one now.’ In November 2008 Queen Elizabeth II asked why ‘no-one saw it coming.’ Edwards says they did - ‘but were ignored amid the euphoria - exactly the same way they are being ignored now.’ He reflects back to five years ago when ‘we were standing in the ruins of the worst slump in living memory.’ He says we are now back to that point.”

“Now ’signs of bubbles abound, the most visible one being house prices.’ Edwards thinks we ‘have truly slipped into another space and time dimension’ where he sees headlines concerned with a German property price boom. London house prices have just risen by 10 per cent in just one month. Edwards says we’re ‘in the midst of the mother of all housing bubbles.’”

“Since March first-tier cities such as Beijing, Shanghai, Guangzhou and Shenzhen have seen annual price rises of over 15 per cent. Societe Generale’s Wei Yao has called these rapid house price increases ‘hopelessly strong’ with policy makers locked in what Edwards calls ‘the same old failed credit stimulative policies as the west to keep growth going.’”

“In November of 2010, Ben Bernanke shocked the world with an unprecedented editorial in the Washington Post. In it, he presented the ‘virtuous’ case for an extended period of quantitative easing. For the first time in history, a Fed Chairman was openly admitting to pursuing a policy to pump up the stock market. By itself this would be shocking, but Bernanke was not stopping there. Bernanke was essentially advocating the creation of another bubble in housing through lower mortgage rates.”

“This, of course, has disproportionately helped the wealthy, who own the vast majority of financial assets. Bizarro Robin Hood is causing the wealth gap to widen to extremes, leaving many disenchanted by stock market gains. As for the real economy, growth remains anemic and the average household (real median income) is still faring worse today than at the supposed end of the last recession. As Stan Druckenmiller said on CNBC in September after the Fed’s no taper decision, ‘This is fantastic for every rich person. This is the biggest redistribution of wealth from the middle class and the poor to the rich ever.’”

“President Obama has now officially announced his intention to nominate Janet Yellen, current vice chair of the Federal Reserve, to succeed current chair Ben Bernanke. Yellen has done little to make anyone believe she is ready to challenge that institution in any serious way. When asked about her time at the San Francisco Fed, a district which covers not just California but also Nevada and Arizona, she responded that regulatory oversight during the housing boom was ‘careful and appropriate.’ Perhaps that explains why she missed the greatest housing boom in US history, despite sitting right on top of it.”

“The Beige book reports from Yellen during this time also repeatedly reflect a regulator who perceived mortgage credit quality as strong. If some of us could spot an overheated housing market from Washington, you really have to wonder how anyone could miss it sitting in San Francisco. The answer is that she wasn’t even looking for it.”

“Just as we now repeatedly hear concerns about a weak US labour market, which is true, we heard the same concerns after the Dot com bubble. But the Fed reaction was to keep the pedal-to-the-metal with loose monetary policy for far too long, and the result was a massive housing bubble. Since that bubble was creating jobs, it was largely viewed from the Fed as a good thing. All evidence suggests Yellen shared this benign perspective on the housing bubble, at times echoing Bernanke’s claim that everything was well contained.”

“If Barack Obama’s objective in nominating Yellen is to signal continuity at the Fed, he’s achieved it. We will have continuity in a belief that asset bubble-driven consumption creates jobs, despite considerable evidence to the contrary. We will have continuity in a Fed that generates massive imbalances in our financial system and then injects endless liquidity into that system to cover up its mistakes. We will also have continuity in a Fed that does not hesitate to rescue Wall Street. But the Federal Reserve is an institution desperately in need of change. Yellen isn’t it.”

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