November 30, 2014

How Empty And Worthless Is The Power Of Kings

It’s Friday desk clearing time for this blogger. “Kenneth Lewis, who retired as Bank of America Corp.’s CEO after the housing crisis almost toppled the firm, is selling a South Carolina island home for less than it cost 12 years ago. The house is in contract to sell for about $2.5 million, its most recent asking price, according to listing broker Sally Papineau. Lewis, his wife and another couple spent $3 million in 2002, public records show. ‘Unfortunately, we did not get there as much as we would have liked,’ Lewis said by e-mail.”

“The recovery of home prices in Arizona appears to have all but stalled. New figures from the Federal Housing Finance Agency show prices paid for Arizona homes during the third quarter of this year were, on average, seven-tenths of a percent higher than the second quarter. Michael Orr, director of the Center for Real Estate Theory and Practice at the W.P. Carey School of Business at Arizona State University, said virtually all of that occurred very early this year.”

“Potentially more concerning is that Orr does not believe the sales price numbers used to put reports like this together are actually accurate. ‘I think they’re too optimistic because people have been making a lot of concessions to buyers,’ he said. ‘And they don’t show up in the recorded prices.’ Orr said, though, that what happens is the buyer demands the seller pay all of the closing costs, including those normally paid by the buyer. ‘That can be the equivalent of $6,000 or $7,000 that the seller eats,’ he continued. ‘So there’s really more discount going on than is really being recorded.’”

“Orr can speak from personal knowledge. A home he listed at $163,000 sold for $165,000. And that’s the figure that shows up on sales documents. But after Orr paid all the costs, the real selling price is probably closer to $160,000.”

“October sales of Santa Clarita Valley homes increased 2.1 percent over September 2014, bucking the statewide trend of flattened home sale numbers. Median prices cooled, however, dropping 6.7 percent from September and mirroring statewide price dips. Median prices have increased year to year for 27 straight months, the realty group reported. ‘The activity we’re seeking suggests the Santa Clarita housing market is much closer to a normal, healthy market than many other areas of the state,’ said Jim Link, the association’s CEO. ‘The slowdown of price increases shows the market is working.’”

“A glut of available properties has cooled Surrey’s condo market, while demand for single-family homes remains hot. The abundance of condominium developments has depressed condo/apartment prices across the city since last October, which Ray Werger, president of the Fraser Valley Real Estate Board, attributes partly to ‘overbuilding.’”

“Housing prices have fallen, thanks largely to a softening Melbourne market, new data shows. Preliminary results from CoreLogic RP Data show average prices in the mainland state capitals were down by 0.4 per cent in the first 26 days of November, compared with the October average. ‘The soft result can mostly be attributed to a more substantial decline in Melbourne where dwelling values are down 2.1 per cent,’ CoreLogic RP Data research director Tim Lawless said. Meanwhile, housing loans rose 7 per cent over the year to October, compared with 5 per cent growth in the previous year.”

“Apartment rentals in south Mumbai, south Delhi and Gurgaon have fallen by 20-30% in the last one year, according to property consultants. Compounding the problem is a rise in supply of apartments and homes in many locations. In south Delhi, rentals have dropped by up to 50% in areas like Vasant Vihar, Greater Kailash and Shanti Niketan. ‘Owners are finding it difficult to rent out their apartments or homes unless they are willing to reduce their demand,’ said Sunil Kapur of Delhi-based KK Real Estate.”

“Two luxury homes in Singapore are on the market at prices that would mean losses of nearly $3 million each as the local property market continues to weaken. The mortgagee sale of the two units in a luxury Sentosa Cove condominium, at fire-sale prices comes amid signs that banks are forcing more cash-strapped owners to offload property to meet loan shortfalls. But the losses are still less than those suffered from the sale of two other 2,777 sq ft apartments in the project earlier.”

“Mr Tan Tee Khoon, executive director of residential services at Knight Frank Singapore, said defaulting borrowers could have had difficulties selling their properties in the tepid secondary market, while an increased supply of new units in the prime districts means that it is harder to find a tenant. ‘Sentosa’s exclusive location makes it less accessible than homes on the main island and harder to lease now,’ he said. ‘Also, borrowers who default are more likely to have been speculators.’”

“With local cash supplies running low, debtors in Ordos, Inner Mongolia Autonomous Region, are reportedly handing over everything from bottles of wine to entire houses to pay off their creditors. Ordos, once a prosperous city, is now mired in debt thanks to local asset price bubbles, unrealistic government planning and a lack of real economic development. Certain creditors may be reluctant to accept the current situation, but the goods being offered now can help them minimize their losses. With local cash stocks running dry, those who refuse other forms of repayment could be left with nothing.”

“Reiterating his earlier pledges, European Central Bank president Mario Draghi said, ‘We will do what we must to raise inflation and inflation expectations as fast as possible.’ ‘He is clearly outright quantitative easing, buying government bonds directly,’ says Gary Jenkins, chief credit strategist for London–based hedge fund firm LNG Capital. As to how effective this path might be, Jenkins has some doubts, although he believes it is still likely to be deployed. ‘Central banks are like Homer Simpson. They keep touching the hot stove and saying ‘D’oh!’ over and over until someone pulls them away.’”

“The experts got 2014 wrong. The consensus at the beginning of the year was that GDP growth would pick up fairly strongly in developed economies, government bond yields would finally rise and commodity prices would hold steady at elevated levels. Wrong, wrong and wrong. It looks like most economists made a fundamental error. They underestimated the power of one of the great economic forces of the epoch – disinflation.”

“Rather than trying to fight even harder against the metaphorical tide, central bankers could learn from the earliest recorded version of the story of King Canute and the literal tide. The 11th century English monarch attempted to tell the incoming sea what to do, but the waters refused to obey. However, the point of the story is often missed. Henry of Huntingdon, who wrote it down, did not want to chastise Canute or his courtiers for having grandiose notions. He wanted to show that Canute recognised ‘how empty and worthless is the power of kings,’ and that the sea obeyed a higher power.”

“In the same way, demographic trends may well make disinflation too overwhelming to fight. Central bankers, along with politicians, employers and voters, might try to emulate Canute’s response. He ‘leaped backwards’ to keep from getting too wet. The big leap for the authorities is to rethink their horror of gently declining wages and prices. There is actually not that much to be afraid of. Workers, shoppers, companies and investors are not stupid. They can easily adjust to a new but basically stable monetary order.”

“Central bankers aren’t stupid either. When they warn about deflation, for the most part they are actually worried about a different but related problem: the excessive levels of leverage in many economies. Deflation automatically increases the ratio of debt to GDP, while managed inflation gently and helpfully erodes it. After years of wanton debt expansion, the 2 percent inflation rate currently considered optimal by the authorities is too low to really be much assistance. Central bankers and their political bosses will have to figure out ways to deal with debt other than shrinking it by inflating wages and prices. In the meantime, a more realistic and less fearful appraisal of the disinflationary tide would lead to better predictions, more appropriate monetary and fiscal policies – and a healthier economy.”

Bits Bucket for November 30, 2014

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