June 20, 2014

The Problem Is Central Bankers Are Happy To Oblige

It’s Friday desk clearing time for this blogger. “A year ago, the housing market looked like it was finally recovering. But then home sales fizzled. A big part of why housing remains so stunted is that there are more than 2 million ‘missing households’ in the U.S. ‘We would love to buy a house right now, but we just don’t have anything saved currently,’ says 26-year-old Marissa Szabo. Szabo is ready to settle down and move in with her boyfriend. ‘Some places were asking for first [and] last [month's rent], security [deposit], a broker’s fee for our Realtor and a broker’s fee for the landlord who hired one too. So that’s five months’ rent right upfront,’ Szabo says. ‘That was the straw that broke the camel’s back. And we both just sat down and said, ‘All right, are we willing to take all our money and light it on fire?’”

“So, like other millennials, they turned to their friends and family. Szabo and her boyfriend have decided to move in with her mother. ‘She doesn’t want rent or anything like that. We’ll help with utilities and we’ll do some repairs around the house for her,’ Szabo says.”

“Last year was a good year for industries that depend on the building and selling of houses in the Treasure Valley. But with sales flattening in the first four months of 2014, Valley housing experts wonder what will happen next. Ada County has a 20-month supply of newly built homes between $120,000 and $159,000 at the current sales pace, says Jere Webb, associate broker at Downs Realty in Eagle. Canyon County has a nine-month supply. Inventories of seven months or more can’t sustain current construction, Webb says.”

“‘Those builders should really look at these numbers carefully and realize they are heading into dangerous waters,’ he says. ‘Right now, there’s a realization on the part of many agents that there are storm clouds looming.’”

“Springtime, usually the housing market’s busiest time of year, came and went in lackluster fashion in metro Phoenix. For homebuilders, however, it was essentially non-existent, and probably won’t get much better this year. ‘Sales were horrible, they are still horrible, and with summer here and traffic counts already falling, the 2014 outlook is not appealing to those that make their living selling new homes,’ Jim Belfiore said in his monthly report.”

“New-home sales Valleywide dropped by more than 12 percent year-over-year in April, pushing prices down slightly, a direct result of home builders increasing incentives out of desperation to get buyers to pull the trigger, Belfiore said. Late last month, Moody’s Analytics said it had overstated its 2013 population growth estimate for the Valley by a whopping 37 percent. Moody’s also slashed its 2014 estimate by 40 percent, or 45,800 people. ‘If correct, sales may be down because nearly 88,000 fewer people migrated to Phoenix in a two-year period than were believed to be in the process of moving here,’ Belfiore said.”

“House prices have surged 15.2 per cent since the interest rate cut in November 2011, on Australian Bureau of Statistics data, and now sit at record highs. Morgan Stanley property analyst Lou Pirenc argues the oversupply of new apartments in 2014 will also have an effect on house prices in inner city areas. During the past year, 81,000 apartments have been approved nationwide. This is almost twice the long-term average of 44,600.”

“Buyers are also in a stronger position that last month, said RP Rismark analyst Tim Lawless. ‘The level of discounting has risen slightly indicating that buyers have a slightly better position when negotiating on the contact price,’ he said. First home buyers will be hoping that these predictions bring a change of fortune, with many now exiting the market altogether as the properties they want move beyond reach. ‘There is an extremely low number of first home buyers active in the housing market currently.’”

“A giant poster on a 40-storey building overlooking a Dubai highway, proclaimed ‘Keep calm. There’s no bubble.’ That may have been true at the time, but the risks are rising. A leap in bank lending to the construction industry indicates financial institutions have resumed pouring money into real estate projects in the last few months. ‘Such a huge increase in lending is simply not consistent with economic order and stable asset prices. The time for policy action is now, before bubbles really get going, not when they are already in place,’ said Simon Williams, HSBC’s chief economist for the region.”

“A Dubai banker, declining to be named under briefing rules, noted increased risk-taking in funding to developers by local banks: ‘Some banks are offering 100 per cent financing deals to firms on a selective basis. That’s not very sustainable.’”

“The housing market is not showing any signs of shaking off its current slump. Between March and April, the prices of flats and terraced houses in Finland went down by 0.9 per cent, reveal the latest statistics compiled by Statistics Finland. In sparsely populated areas and industrial towns with ailing economies, job losses are reflected in the property market as weak demand and dropping house prices. Buyers also expect more for their money. Heikki Loikkanen, an emeritus professor of urban economics at the University of Helsinki, fears that the housing market may soon become unstable unless the economy takes a turn for the better.”

“‘I’m surpried prices haven’t gone down more. If the financial situation does not improve, housing production does not pick up and the unemployment rate goes up, house prices will come under pressure,’ explains Loikkanen.”

“‘The risk of a further build-up of imbalances on the Swiss mortgage and real estate markets persists,’ the Zurich-based Swiss National Bank said in its annual financial stability report. ‘Given the persistence of the low interest rate environment, banks and authorities should remain alert and take the necessary steps to keep risks for financial stability in check. Efforts should now be directed towards preparing regulatory measures that could be implemented swiftly should momentum pick up again on the mortgage and residential real estate markets,’ the SNB said. These could include steps ‘that give banks stronger incentives to pursue a more cautious mortgage lending policy,’ it said.”

“Li Yaozhi, general manager for one of the biggest brokerages in China, told reporters in Shenzhen that developers owe Centaline more than HK$3 billion ($387million) in commissions. Shi Hongrui, managing director of Shanghai-based Hanyu Property, told the Oriental Morning post that developers owe the brokerage 120 million yuan ($19.5 million) in commissions, accounting for 30 percent of its revenue last year. ‘Some big developers don’t pay us cash at all and give us apartments as commission.’ Shi told the Shanghai-based newspaper.”

“REO sale eclipsed new home sales during the first quarter of 2014 in the Coachella Valley,reports show. Only two cities showed more new home sales than REO, or real estate owned, closings from January through March. Indio had the largest margin: 61 new home sales against 16 REO sales. Palm Desert came in second, with 20 new home sales, only three more than REO sales. The year-over-year increase has become a three-month pattern across California, said Daren Blomquist, VP of RealtyTrac.”

“‘It’s an increase after two years of decreasing activity, and that’s what we’ve been expecting, Blomquist said. ‘We do believe that there’s shadow inventory in California, that the banks have been holding back from foreclosing on.’”

“Concern about inequality and egregious greed is shared by the high priests of the financial system, it seems. The governor of the Bank of England, Mark Carney, warned in a recent speech that for markets to sustain their legitimacy they need to be not only effective but fair. ‘Within societies, virtually without exception, inequality of outcomes both within and across generations has demonstrably increased,’ he said. ‘Bankers made enormous sums in the run-up to the crisis and were often well compensated after it hit. In turn, taxpayers picked up the tab for their failures. That unjust sharing of risk and reward contributed directly to inequality but - more importantly - has had a corrosive effect on the broader social fabric of which finance is part and on which it relies.’”

“The Federal Reserve and others have worked hard for reputations as independent, professional and trustworthy. The problem is that central bankers are happy to oblige. Instead of pressing governments to fix the issues themselves, the Draghi’s, Carney’s and Bernanke’s of the world have been printing and launching experimental programs. They’re being asked to monitor banks, housing, markets and the entire financial system. They being asked to look for bubbles. Some are being asked to manage reserves with central banks now investing in risky assets like stocks. This is a grave error.”

“Sure, they might have a bit more success than politicians but very few central bankers and zero central banking institutions saw the crisis coming. Most of them still didn’t anticipate a recession in the days before Lehman collapsed. This bubble is in central bank power. One day there will be another crisis that central banks didn’t see and can’t control. When it goes bad they’ll be blamed and chastised by the same politicians who empowered them.”

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