February 16, 2014

A Bubble Interrupted?

Readers suggested a topic on the bubble question. “Is the final Housing Bubble correction underway now?”

A reply, “There are many people on this blog who believe we are entering another housing bust and a big drop in values. I submit we are simply still cleaning up the 2007 bust. There are always bumps in the road to busts and recoveries. The stats you see and quote today about increases in foreclosures, drops in prices, etc. Is likely a reverse dead cat bounce. The exuberance gain speed rapidly last year and simply had to slow down. The helium balloon bounced off the ceiling, if you will. The sky is not falling, market normalcy is returning and we will continue with the recovery off the deep bottom. There are signs everywhere of an improving economy.”

One said, “If we were where we are right now without any Fed intervention and FASB 157 I might believe you. As it is I do not believe you. I believe it’s a house of cards.”

I added, “I said long ago that it didn’t matter much if one views what’s going on as the same bubble or a new one. But I can see now that at this phase, understanding the difference of the two scenarios will be important. I have maintained it’s the same bubble. Prices never fell enough, or for long enough. Greed was not extinguished as it should have been, evidenced by how quickly market participants jumped back into speculation in housing.”

“How did this happen? We all know the answer; governments and central banks made huge interventions in markets and money supplies. It was a bubble interrupted. What we are told is that the current situation is not like 2000-pick your year. It can’t be another bubble because it doesn’t look like that time period. But if it’s the same bubble, what we should expect is an unraveling of the manipulations that interrupted the bubble and prevented it from running its course. IMO that more accurately describes what is happening now.”

One had this, “I see a few things: 1) Heavy government and central bank intervention, continuing to this day. 2) Large investor interest in housing. They’re not in it because all of a sudden they wanted to become landlords, because that’s just such a lucrative business. Right? I think they got in it to chase big returns, buying up assets from the government on the cheap (the public was barred in large measure) to sell for a higher price later on.”

“3) Eventually, as has happened in Britain, more people will be opposed to rising house prices. With the government and central bank heavily influencing much of this, I see then changes which will allow lower prices. On the other hand, politicians love their property taxes. 4) However TBTF banks have gotten yet bigger.”

“I see the FIRE sector more tightly consolidating control of politicians. Bottom line: The market is artificially being held up as of right now. The PTB are thinking, ‘We can hold this market as long as it takes.’ Can they? It’s unclear to me.”

And finally, “I say we are not in ‘normal’ range. The dip in 2008 was a dimple on a really big credit expansion lasting decades. The ‘trendline’ does not start in 2004. The Fed is pumping 1$Tr a year (that we know about) into the pig. With leverage (there is essentially no reserve requirement) what that adds to the money supply is probably $100Tr. There is good reason that desperate measures are taken to avoid any defaults anywhere in the world. A $Billion default would take $100Billion out of the system. It is too fragile.”

“The ‘tallest building in the world’ index is sky high. There are over 20 of these beasts finished in just the past 4 or 5 years. They are all but one outside the US. All places that would still be in the 15th century were it not for US consumer debt based spending. Last big crash it was just the Empire State Building.”

From CNBC. “It may seem like we’re still in the early innings of the housing recovery, but five years have already passed since the Obama administration launched its housing bailout. Now, the Home Affordable Modification Program is expiring. The program has come under fire for its high default rate. As of Dec. 31, 894,410 borrowers were still in active modifications. More than 306,000 redefaulted on the loans, according to a report last summer from the Special Inspector General of the Troubled Asset Relief Program.”

“Come this fall, about 30,000 borrowers will see their rates bump up 1 full percentage point. Their rates will then rise each year until they reach the current market rate, which now stands at 4.5 percent but is expected to rise over the next few years as hundreds of thousands more loans start to reset. ‘If we see this leading to much more hardship than we expect right now for homeowners, we’re going to be dynamic in our policy response. We’re not going to get behind the curve on this,’ said Tim Bowler, assistant Treasury secretary for financial stability.”

“‘This is something that is going to blindside a lot of people,’ said Bankrate.com’s Greg McBride, who initially argued that Treasury was just kicking the can down the road on the housing crisis. ‘This was ‘extend and pretend,’ no question about it. This was never designed to be something that solves the problems.’”

From Greenville Online. “Foreclosures rose sharply in the Greenville-Mauldin-Easley metropolitan area last month. South Carolina also had a 11 percent year-over-year increase in foreclosure starts after eight consecutive months of decreased foreclosure starts. It may be but a one month jump, said RealtyTrac VP Daren Blomquist, but it is cause for concern because the pattern was seen in other markets around the country.”

“Places like Florida saw a 39 percent jump in scheduled foreclosure auctions. New Jersey also saw a 39 percent increase in foreclosure auctions, which was its highest level since 2010. The increase in California was 57 percent. ‘There are certainly some markets that are still experiencing some pretty significant increases in different phases of foreclosure activity,’ he said.”

“It appears lenders are pushing through another batch of delayed foreclosures across the country that will be hitting the market, Blomquist said. ‘Everybody was talking about shadow inventory a couple of years ago, with the concern about these properties being delayed by lengthy foreclosure procedures that finally would come to and hit the market,’ Blomquist said. ‘I think what we’re seeing now is that there actually was some shadow inventory and it’s taking longer to come through and hit the market than maybe people expected,’ he said.”

Bits Bucket for February 16, 2014

Post off-topic ideas, links, and Craigslist finds here.