April 18, 2014

History Repeats, First As Tragedy And Then As Farce

It’s Friday desk clearing time for this blogger. “Katrine and Stephen Campbell were up against stiff competition from 10 other bidders for the Reading home they wanted to buy. So, instead of making a specific offer, they promised to top whatever turned out to be the high bid by an additional $5,000. The increasingly popular tactic, known as an escalation clause, worked. The Campbells bought the four-bedroom house late last year for $597,000 — or $18,000 above the original list price, including the extra $5,000. ‘We must have looked at 50 places before making a bid on a house,’ said Katrine Campbell. ‘We made only one offer — and we got it.’”

“‘It sounds a little risky to me,’ said Peter Ruffini, president of the Massachusetts Association of Realtors. ‘It sounds sort of like issuing a blank check to sellers.’”

“A pattern of low inventory and rising prices has taken hold in the San Francisco Bay Area and Southern California real estate markets, DataQuick reported. A still-shaky economy and job uncertainty are preventing many homeowners from selling and moving up, said Stuart Gabriel, director of the Ziman Center for Real Estate at UCLA. Others are holding on to homes in the hope that prices will continue to appreciate as they did in last decade’s housing boom, the economist said. ‘Whether those bets will come through or not remains an open question,’ he said.”

“Ilkley MP Kris Hopkins has clashed with a fellow minister after welcoming the latest hike in house prices. The Housing Minister raised eyebrows after suggesting rising property prices were a ‘good thing,’ telling an interviewer: ‘I bought a house and I expect the value to rise.’”

“But Vince Cable, the Liberal Democrat Business Secretary, warned that home ownership was now ‘unaffordable’ to people on middle incomes. Mr Cable said: ‘A family on an average income is nowhere near able to afford a house at the average price.’ In the mid-1990s, the average house price was three times average earnings, Mr Cable added – but that ratio now stood at about 5.5.”

“Prime Minister John Key has agreed with Housing Minister Nick Smith that Auckland home owners should expect flatter house price inflation for some time as the house price to income multiple measure of affordability improves from a multiple of around seven now to the Government’s new target of around four. Key rejected the idea that the improvement in affordability could come through a fall in prices.”

“To get that multiple back to four would imply house prices remaining flat in Auckland for 19 years with average annual wages growth of 3%, as is currently the case. Or it would imply house prices dropping 43% for the multiple to be rectified, or a combination of both. ‘It’s unlikely there’ll be falling prices. In my view what you’re likely to see is a flattening out of those increases. The Government’s view is a modest increase in house prices makes sense. Rapidly escalating prices are not good for anyone,’ Key told his weekly post-cabinet news conference.”

“China’s latest message about the property market is simple and aimed at the man on the street: The home you’ve bought isn’t a one-way bet. Deal with it. That message has been pumped out through China’s state broadcaster as part of Beijing’s efforts to curb people’s enthusiasm for homes as an investment tool. One segment featured a woman in Shenmu county, who told CCTV that she earned more than 100,000 yuan from flipping two apartments in 2009 and 2010. Times are harder now, though, and she’s working as a taxi driver while struggling to pay her 3,463 yuan monthly mortgage for an apartment she bought 2011.”

“Originally she’d hoped to flip it at a higher price, but a credit crunch and oversupply of apartments has pinpricked her dream. CCTV said she hasn’t been able to pay for the past four months. ‘(The bank) sends me a text message every day,’ she said.”

“One resident in Changzhou who recently purchased her first apartment but has seen prices of neighboring units tumble nearly 20% told China Real Time. Ms. Wu was among those protesting outside of a showroom displaying models of property for sale in Changzhou last month. ‘There seems to be no way to get my money back. What can I do? I just blame it on my bad luck,’ she said.”

“For the second month in a row, the median single-family home sales price was down in February, according to Arizona State University’s W.P. Carey School of Business. However, according to the report’s author, Michael Orr, there is no reason to panic. ‘This is not a crash or anything like that,’ Orr said. ‘It’s a mild change, so people don’t need to panic. It’s more of a gentle easing off of the buying pressure that was unusually strong.’”

“Sales reports suggest that Loudoun County is coming out of a sluggish market that began with the government shutdown last year and chilled with cold weather throughout the first quarter of 2014. The conditions created an unusually high inventory. ‘We had a few really tough months, because of the weather. Inventory tripled in three weeks,’ said Beckwith Bolle, principal broker at Carter Braxton Preferred Properties in Leesburg.”

“RealtyTrac’s update on foreclosure numbers across the country show foreclosure auctions in Delaware rose 49 percent in the first few months of the year. Matthew Heckles, director of policy and planning at the Delaware State Housing Authority, says a spike is not exactly a surprise. He points out that authorities knew there was a backlog of foreclosures. ‘You know the water is in the sink, but if you’re under the drain none of it is getting through until you unplug the sink,’ said Heckles. ‘Because of the default rate staying constant and the foreclosure filings dropping in 2012, we knew there was a backlog. And eventually they would hit the streets and hit the courts.’”

“Orlando Regional Realtor Association Chairman Zola Szerences, said bank-owned home sales are expected to rise because of an uptick in foreclosure auctions during recent months. ‘In March, the number of foreclosures available for purchase was 125 percent more than in March 2013,’ he said. ‘For buyers who have struggled to find a suitable home within Orlando’s tight inventory and who have been worn down by competition and bidding wars, foreclosures represent a new avenue of opportunity.’”

“Janet Yellen, the new head of the Federal Reserve, gave her first big speech on monetary policy, and, in some ways, a fine address it was. But what was most striking to me was that she didn’t even discuss the financial markets and the overriding need to avoid another damaging speculative bubble. Indeed, Yellen didn’t use the B-word at all. Given that her immediate predecessors, Alan Greenspan and Ben Bernanke, will be remembered for, among other things, their roles in inflating the bubbles in the stock market and the housing market, that was a pretty remarkable omission.”

“Instead, she couched her remarks in terms of the old-fashioned inflation-unemployment trade-off, which is precisely the conceptual framework that encouraged Greenspan and Bernanke to shrug off what was happening in the financial and housing markets. The potential problem is that it sends a signal to participants in the financial markets that they don’t have to worry about interest-rate rises, so they can take advantage of cheap credit to leverage up and take more risks.”

“The issue is what’s going to happen over the next few years. The longer the Fed keeps interest rates at ultra-low levels and promises not to raise them rapidly, the greater the danger of history repeating itself. Two things that we know about bubbles are that, once they get going, they are self-reinforcing, and that they place central bankers in a bind. For as long as the bubble lasts, the economy looks great, and policy makers have an incentive to let it proceed. This is what happened to Greenspan and Bernanke.”

“If the U.S. economy were to experience a third bubble in twenty years, we would be confirming Marx’s famous statement, in ‘The Eighteenth Brumaire of Louis Napoleon,’ that history repeats itself, first as tragedy and then as farce. The Fed chair doesn’t want that written on her tombstone.”

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