February 7, 2014

Bubbles Like Rapidly Poured Soda

It’s Friday desk clearing time for this blogger. “In New Jersey, foreclosure filings — which include default notices, scheduled auctions and bank repossessions — rose 44 percent last year, RealtyTrac said. Atlantic County was up 45 percent, Cumberland County 38 percent and Cape May County 20 percent. Michael Kadas needed nearly five years to get anything more than a nibble on his five-bedroom home in a Northfield cul-de-sac. The past six months brought something new — offers to buy. But bids have been much lower than the $379,000 asking price for the property. ‘We’re finding we’ve been up against a lot of foreclosures,’ said Kadas. ‘That’s been hurting us. We’re not upside down, but we’re trying to compete with all these bank-owned (properties).’”

“A recent study from the Woodstock Institute shows there are more than 11,700 ‘zombie properties,’ or unresolved foreclosures, in the area, including 5,800 in Chicago. Researchers found 60 percent of foreclosures filed from 2008 to 2009 remained unsold by 2012. ‘There is a lot of talk about the housing market coming back, but the truth is it’s not coming back everywhere,’ said Katie Buitrago, senior policy associate at the Woodstock Institute.”

“Come tax time, JPMorgan Chase will be able to write off the $1.5 billion in debt relief it must give homeowners to satisfy the terms of a recent settlement. But the homeowners who receive the help will have to treat it as taxable income, resulting in whopping tax bills for many families. ‘I’m in a hole here — I’m trying to work my way out,’ said Eric Heil, who said a divorce and reduced income were forcing him to sell the house he has owned for 18 years in Parma, Ohio. ‘And the government’s going to say you have to pay taxes on it?’”

“Another property report shows there is a slowdown in the market, with houses taking longer to sell. Westpac chief economist Dominick Stephens said the market was slowly moving away from being a sellers’ market. ‘The nub of this report is that the inventory of unsold properties continues to gradually rise and that, to me, indicates that the housing market is continuing to gradually slow,’ Mr Stephens said. Two things were contributing to that - the Reserve Bank had imposed restrictions on low-deposit lending and interest rates were expected to rise from next month.”

“‘I think that that message has gotten through wide and far across New Zealand, so most people are now convinced of that and, again, higher interest rates is probably something that’s just put a bit of doubt into people’s minds about the future of the housing market in New Zealand,’ Mr Stephens said.”

“The median overall Cash-over-valuation (COV) premiums dipped by another S$2,000 last month to S$3,000, a report by the Singapore Real Estate Exchange showed, matching the level in June 2009, when global markets were still recovering from the shock of the Lehman-led crisis. Even choice estates such as Bishan and Marine Parade had deals transacted last month at zero or negative COVs. Mr Ku Swee Yong, CEO of property agency Century 21, said: ‘The wider implication is more on sentiment, the feel-good factor, because even though a 10-year-old flat would have doubled in value, there is a higher risk that the owner will take in a smaller profit now. So this may prevent him from investing in another property or lead him to decide not to sell the flat,’ said Mr Ku.”

“Experts affirmed that the property market is frozen. They also said that it is now the right time for foreign investors to invest in Vietnam’s real estate, when the market cools and domestic investors have no more money to develop their projects. However, foreign investors have not flocked to Vietnam to buy the ongoing projects as predicted. ‘The real estate market has bottomed out. The high end market segment remains frozen, while the investments won’t bring immediate profits. All these factors explain why foreign investors do not come to Vietnam,’ said Dang Hung Vo, a well-known property expert in Vietnam.”

“In the past five years, Chinese banks have created lending close to $15 trillion. China’s 4 trillion economic stimulus plan in 2008 during the global financial crisis has started to see economic bubbles like rapidly poured soda. Ren Zhongdao, financial analyst: ‘The real estate bubble is very obvious. The financial system such as the shadow banking has accumulated more than 30 trillion of wealth, equivalent to half of GDP. What does it mean? That means half of the wealth created by the people are bubbles.’”

“No. No. No. There is no shortage of housing. In fact, there is too much of it – if you’re the affluent middle class. It is the poor who are being cheated in Pakistan. Only one per cent of housing is within their reach. ‘There is no shortage of land or money,’ clarifies Tasneem Siddiqui, whose policy brief on Pakistan’s urbanisation has just been released by the Woodrow Wilson Center. It’s just that 68% of Pakistan – the sanitation workers, teachers, electricians, who earn between Rs8,000 and Rs30,000 – are so far down the food chain that they can’t dream of owning a house.”

“In Pakistan, the rich buy land as investment but keep it vacant, a form of speculation. At one time, 300,000 plots were vacant in Sindh alone while 40% of the population was living in katchi abadis. ‘The government is foolish, careless and stupid,’ he says. ‘People have to live somewhere.’”

“Robert C. Hockett, former Resident Consultant for the Federal Reserve Board, international finance expert and professor of Law at Cornell University, discusses how Janet Yellen will usher in a new era of a proactive Fed. Hockett says: ‘Dr. Yellen is the first Fed Chair in modern memory who is on the record – and has indeed long been on the record – in maintaining that the central bank can and should spot asset price bubbles while they are in the making, and that it can and should act to pre-empt them. This vision – that of a ‘proactive,’ or ‘macroprudential’ Fed – might seem unsurprising to lay persons, but in fact it has been missing from mainstream central bank theory and practice for over 30 years. Chair Yellen has long seen that this was a mistake, and her now taking the reins at the Fed is significant above all on that account.’”

“Let’s review exactly what Ms. Yellen had to say about our housing market in 2005 in a speech entitled Housing Bubbles and Monetary Policy: ‘In the U.S. as a whole, the share of residential investment in GDP is now at its highest level in decades, and this sector has been a key source of strength in the current expansion. The question for policy is: will this source of strength reverse course and become instead a source of weakness? Put more bluntly: Is there a house-price ‘bubble’ that might deflate, and if so, what would that mean for the nation’s economy? What, if anything, should policy do beforehand?’

“‘How…should monetary policy react to unusually high prices of houses—or of other assets, for that matter? The debate lies in determining when, if ever, policy should be focused on deflating the asset price bubble itself. In my view, it makes sense to organize one’s thinking around three consecutive questions. First, if the bubble were to deflate on its own, would the effect on the economy be exceedingly large? Second, is it unlikely that the Fed could mitigate the consequences? Third, is monetary policy the best tool to use to deflate a house-price bubble? My answers to these questions in the shortest possible form are, ‘no,’ ‘no,’ and ‘no.’”

“One, two, three strikes, she’s out.”

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