May 26, 2014

Crisis Noninterruptus

Readers suggested a topic on what happens next. “1. How will whatever comes next compare to 2008? 2. How do we get rich Lahde-style off this thing?”

A reply, “We don’t know, but we have the prototype under a microscope. To paraphrase the Amish; expect the best, prepare for the worst. Consider that this will just be the second step in a flight of stairs. One thing we know is that tens of millions have been washed out of the mania and will not participate in the next stage.”

The Sun Sentinel. “During the first quarter, 68 percent of Broward County homebuyers paid cash, up from 47 percent in the first quarter of 2013, according to RealtyTrac Inc. And that number was higher than the year before, when cash accounted for 42 percent of sales in Broward. Investor Lex Levinrad said there’s ‘an absolute feeding frenzy’ among cash buyers looking for deals. He heads a club for real estate investors, and buys 15 to 20 homes a month in Palm Beach, Broward and other nearby counties.”

“Cash buyers are coming from Europe, Brazil and Russia, he said. A hedge fund contacted him recently about buying 350 houses in Palm Beach and Broward counties over the next 18 months. ‘If they have cash to invest, people feel like they will miss the boat if they don’t buy now,’ Levinrad said.”

The Tribune. “President Obama is going to make me rich. That’s because the Obama administration, which has done everything in the government’s power to hamper economic growth, just loosened lending standards so that people with poor credit can buy homes. Why not? It worked out well for some people the last time the government loosened lending standards.”

“See, back in 2002 or so, just as the housing bubble was forming, I was about to buy a townhouse for $165,000. I had the money. The owner was eager to sell. But my Midwestern cautiousness gave me cold feet and I backed out of the deal. If only I had known that government stupidity was about to cause the value of the joint to soar over the next five years.”

“The insanity of that time caused the townhouse I didn’t buy for $165,000 to soar to $525,000 in 2007 — before falling to about half that value following the collapse. I won’t miss out on a deal like that again. This time, I’ll ride the boom to its peak and sell just before the inevitable market correction!”

The Santa Cruz Sentinel. “The late, lamented housing bubble was inflated by a huge influx of borrowers who could not meet traditional standards for mortgage loans. These traditional standards included down payments of 20 percent as a safeguard against property values falling below loan values and borrower incomes of at least three times principal, interest, tax and insurance payments to insure buyers could afford their houses.”

“The influx of non-traditional borrowers was driven by Congressional quotas imposed on mortgage guarantors Fannie Mae and Freddie Mac. In 1992, 30 percent of Fannie/Freddie-backed mortgages had to be issued to borrowers with below-median incomes. By 2007, 55 percent of mortgages had to be issued to borrowers below the median with 27 percent issued to those in the lowest 20 percent of incomes. As private, profit-driven enterprises, it is no surprise that Fannie and Freddie chose to pump up their volume by relaxing their standards.”

“Did the government see the error of its ways and return to traditional lending standards? It did not. The Federal Housing Administration picked up where Fannie and Freddie left off with minimal down payment requirements. Low down payments, low interest rates and low prices stabilized the housing market. Prices finally turned higher in 2012. Now, with higher interest rates and higher prices making housing less affordable, prices appear to be stalling and may even be declining.”

“Will the government resist the temptation to loosen today’s standards? Stop making sense. Under the leadership of newly installed director Mel Watt, Fannie and Freddie plan to re-open the spigots to ‘help’ more borrowers enter the market. Specifically, Fannie and Freddie will not reduce the size of loans eligible for insurance, will shelve plans to increase guarantee fees and will again accept 100 percent of the risk on most new sub-standard loans.”

“Of course, we’ve been down this road before with disastrous consequences for the economy as a whole and underqualified borrowers in particular. As Ed DeMarco, Mr. Watt’s less feel-good predecessor, warned in a speech last week, ‘Do not confuse weakening underwriting standards and underpricing risk with helping people or promoting market efficiency.’”

The Durango Herald. “The ‘official’ dates of the U.S. financial crisis were 2007-08. Since then, we’ve had a few additional crises, in particular, the Euro crisis. But overall, the global financial crisis seems to have been contained. But I’m not so sure. Contained it might be, but the effects are long-lived.”

“For example, the Federal Reserve often discusses weakness in the labor markets, particularly as the Fed Chairwoman Janet Yellen is a prominent labor economist. And the federal officials often discuss weaknesses in housing markets. In January 2009, the Fed began an aggressive policy of loading the economy with easy money – quantitative easing – and continues to do so. The largest European economies and Japan followed suit, more or less, later that year.”

“And yet, the U.S. economy is still about 4 percent below where it should or could be. Herein lies the heart of the ongoing crisis. The Fed has done all it can to pump up the economy. The Fed’s balance sheet has gone wild and has been since the early days of the crisis. Housing remains anemic – this scares the federal government. New regulations put in place after the most recent housing bubble burst to prevent a three-peat are being relaxed. It’s déjà vu all over again.”

“For better or worse, I tend to think a little worse, the U.S. economy has become overly dependent on real estate markets as an engine for growth. But it does so for a couple of reasons. First, is the obvious impact on the real economy. You need wood, plaster, bricks, microwave ovens, etc. to make a house. There is a direct impact. Second, gains in real estate prices increase wealth and spur consumption via the ‘wealth effect.’”

“But neither of these comes without a cost. Investing resources in housing means other sectors are losing out. Wealth effects could be driven by speculation – just ask a Los Angeleno. But speculative gains could just as easily, and quickly, turn to losses. So, the standard relationship between financial markets and the real economy seems to have been severed. Crisis noninterruptus.”

Bits Bucket for May 26, 2014

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