December 6, 2013

The Lessons We Could Have, Should Have Learned

It’s Friday desk clearing time for this blogger. “The U.S. housing market appears to be cooling off and that’s not a bad thing, according to Zillow CEO Spencer Rascoff. ‘The fact that the housing market is starting to slow down’ means the recovery is sustainable, he says. ‘We had bounced too far off the bottom too quickly and so this slowdown is okay. There were a lot of buyers that were sitting on the sideline waiting for the media to tell people that home values have bottomed. We’ve now declared that.’”

“The student housing market near the University of Minnesota remains stable with historically low vacancy rates, but developers and real estate experts agree its future is a mystery. ‘When you talk to realtors, they’re saying we’re seeing one of the best markets we’ve seen in years,’ said Minneapolis City Assessor Patrick Todd. ‘There’s nothing for me to say, ‘Boy, the market has peaked.’ But Todd says this was the case right before the housing bubble popped in 2005. ‘Everybody knew the market was just on fire,’ he said. ‘But, no one knew: When will we hit that point where one more building is just too many more buildings?’”

“Los Feliz agent Judy Oroshnik said the recent housing market was ‘reminiscent of the bubble in the mid-2000s in our immediate market area’ but noted there’s still a great response on available homes. ‘We’re in a special area being on the East side and not everything is going out over asking price,’ she said. Realtor Brad Keyes admits the market ‘is slowing down a little bit. It takes the seller and buyer a little time to catch up with what’s really going on. Everyone is still thinking real estate is still super, super hot, so people are overpricing homes.’”

“Nine years after spending millions to build their dream home in Franklin Lakes, Kevin and Cheri Schmidt lost it recently to foreclosure. The couple put their house on the market in January 2012. They asked $4.5 million, then cut the price to just under $4 million. But there were no offers. They say the market for luxury homes was dead. ‘Anything over $2 million, that market disappeared,’ Kevin Schmidt said. ‘The $3-, $4-, $5-million market doesn’t exist right now.’”

“Kevin Schmidt thinks the bank believed the couple actually had the money to make their loan payments; he says they didn’t. ‘I don’t think the bank truly believed I didn’t have a million dollars lying around,’ he said. ‘They’d ask, ‘Where’s the money?’”

“Job losses are growing in the real estate sector, the second largest employer in India after agriculture, as poor sales and squeezed cashflows force developers to cut down the workforce. ‘The new recruitments have completely stopped. If the sentiments do not improve in the next four-five months, the situation will worsen to that of the market crash of 2008, where 30% of the work force lost jobs,’ said Lalit Kumar Jain, managing director of Kumar Urban Development Ltd.”

“An Epoch Times reporter on the ground confirmed the results of a recent survey: that a ‘mortgage shortage’ is spreading from first-tier cities like Beijing, Tianjin, Shanghai, Guangzhou, and Shenzhen to second- and third-tier cities. In 17 of the 32 key markets, banks are either slowing down mortgage lending or have stopped altogether. The rate for first time buyer has increased, and the banks’ screening processes for granting loans have become increasingly stricter. In addition, the time it takes to approve the loan has lengthened significantly.”

“‘Almost every reasonable person, including Chinese bankers, thinks there is a bubble in China’s real estate market, and investing in it carries an increasingly high risk,’ wrote Jason Ma, a commentator on China’s economy for the New York-based New Tang Dynasty Television.”

“As stricter home loan rules weaken demand, the volume of HDB flats being sold below their appraisal value has also increased, media reports said. As such, sellers have been forced to adjust their expectations. For instance, Assistant Manager Raymond Koh asked for a cash-over-valuation (COV) of S$20,000 for his second floor five-room flat in Punggol earlier this year. When he found no buyers, Kho lowered his COV to ‘S$10,000, then S$5,000, then zero,’ he said. After which, ‘I started going negative.’ Currently his nine-year-old flat is priced S$20,000 below valuation. ‘Any lower and I might as well continue living here,’ said Kho.”

“I take a detour down Frankie’s road on the way to Sainsbury’s and that’s when I see it: a clipped little tree in a slate-coloured pot. I’ve seen trees like this before. Years ago they spread through Islington like a virulent rash. The moment they started appearing near my old flat in Stoke Newington, I knew it was all over. Shortly afterwards we moved out to the suburbs. Just when I thought I could relax … now they’re here, like harbingers of doom. Because these trees mean property developers.”

“‘What’s going on over there?’ I ask Frankie when she opens the door. ‘Oh, yeah. Guess how much it’s on the market for?’ ‘No. I can’t bear it. Just tell me.’ ‘Six-fifty.’ ‘Piss off.’ Only last year, houses on this road were selling for less than 500k. Frankie bought hers four years ago for 350. I heard a rumour that the average house price in our area has gone up by 40 per cent this year.”

“I glance into the buggy and notice Moe has opened his eyes. I pop his dummy back in and he drifts peacefully off again. It is, I realise with grim satisfaction, the perfect analogy: house prices are nothing but a great big dummy, administered by our great leaders to keep us all quiet. And we are just sucking it up.”

“Last month at an International Monetary Fund conference, former Obama economic advisor Lawrence Summers harshly criticized outgoing Federal Reserve Board Chairman Ben Bernanke for comments he made this summer. Bernanke had raised the possibility of tapering the Fed’s purchase of treasury bonds, which would cause interest rates to rise. With the economy facing a prolonged slump, Summers argued, Bernanke should not even have talked about raising interest rates.”

“Whether deliberately or not, Bernanke’s taper talk stemmed the growth of an incipient housing bubble. Summers obviously believes that Bernanke acted wrongly. So what is Summers’ recipe to prevent the growth of a bubble? If there is no answer to that question, then Summers’ critics have been right to identify him as someone who deliberately promotes bubbles as a way to counter stagnation. Many economists remember that Summers was Treasury Secretary as the stock bubble reached its peak in 2000 and later derided those who raised concerns about the housing bubble.”

“Whatever his past role, if Summers is to preserve his credibility on this issue, he and his defenders must come up with a course of action that would rein in bubbles without sinking the economy.”

“There is no cheaper, quicker route — for politicians or citizens — to instant prosperity than a loan that requires little in the way of capital or commitment. The more voters who take out loans to buy homes in a rising market, the quicker and cheaper their sense of well-bring — and the consumer spending that goes with it.”

“In London last month, many homeowners made more on the increased value of their homes than they will take home as pay in a single year. Meanwhile, in the United States, no party wants to be the one accused of slowing an equally tentative recovery. If consumers start spending and then taking on more debt, if house prices boost their sense of well being, even those with the battle scars of the last crisis can’t be relied upon to stop them.”

“One of the lessons we could have, should have learned from the banking crisis was that it wasn’t just a banking crisis nor even just an economic crisis. It also revealed deep and troubling flaws in our politics. If politicians buy votes with cheap debt and consumers are willing to be bought, no bank in the world will be given a mandate to stop them. What president or prime minister was prepared to tell people — before it was too late — that the good times had to stop, or at least slow down?”

“It’s easy, comfortable and convenient to blame bankers for the woes of the last few years — and they aren’t without blame. But governments and the consumers who vote for them have to recognize that stoking the housing market is not the same as reviving the economy. Rather the opposite: Leaning on house prices to create a sense of illusion of prosperity merely postpones the moment at which we confront the systemic challenges of an economy that hasn’t yet found real growth.”

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