January 23, 2015

A Bubble Means Price Increases For Nothing

It’s Friday desk clearing time for this blogger. “Last week, Lawrence Yun, chief economist for the National Association of Realtors, made an appearance before real estate professionals gathered for a meeting of the Greater Tampa Association of Realtors. He offered plenty of food for thought about the housing market’s condition. ‘The bottom line is that we have encountered some degree of recovery. I think we will continue the recovery over the next two to three years, and then subsequently, the recovery may well change into expansion,’ said Yun. ‘Now, you are just trying to get back to the prior principal in terms of prices. It may take an additional two to three years to get to where it had been in 2005-2006.’”

“Are you in the market to buy a new home? That’s a question many people would have laughed at just a few years ago. But more people are emerging from the housing purgatory created by the Great Recession. A recent report released by the University of Central Florida shows the median home price for a house in Florida peaked in 2006 at around $258,000. The current median home price in the state is $177,000. ‘You don’t need perfect credit,’ said Matthew Wilson, president of the Flagler County Association of Realtors. ‘If there’s a little bit of a hiccup in your credit, the lenders are looking over, you know, looking past some of that.’”

“Lake County’s housing markets ended the year with mixed results as the volume of home sales continue to slow, according to the Lake County Multiple Listing Service. The median price of a Lake County home decreased 18.72 percent from November’s median price of $187,000 to $152,000 in December and was up 0.33 percent from $151,500 recorded in December 2013. Closed escrow sales of homes in Lake County totaled a 53 units in December, according to the MLS. Sales in December were down 3.64 percent from 55 in November and down 31.17 percent from 77 in December 2013. This is the slowest December in more than four years.”

“According to California Association of Realtor’s newest housing market indicator measuring sales-to-list price ratio, multiple bid offers for properties has waned, and properties are again generally selling below the list price. ‘2014 saw a return to a near normal housing market, with sales moving at a moderate pace and home price appreciation growing at more sustainable levels,’ said C.A.R. Chief Economist Leslie Appleton-Young. ‘Home prices have stabilized over the past year, which is positive news for buyers who have been putting off their home search until prices leveled off.’”

“Sharply declining oil prices in the past few months are taking a toll on home building in West Texas, the chairman of the nation’s largest home builder said. Donald R. Horton, who founded D.R. Horton in 1991, said banks in Midland-Odessa have ‘backed off’ the small home-building companies there. But in other Texas cities where the economy also relies heavily on the oil industry, he said, the impact hasn’t been as great. Horton said his company and one other firm are now the only ones building homes in Midland-Odessa. ‘Has the number of buyers slowed down there? Yes. But the builders have slowed way down,’ he said. ‘I can tell you, so far in Houston, we haven’t seen any issues.’”

“Low oil prices are having an effect on the economy in the province and the drop below 50 bucks a barrel could also be having an effect on Calgary’s condo market. Compared to the same time last year, sales are down by a third, the number of units listed has nearly doubled and the average price is down almost nine percent. Anna Husted, says for her it’s the right time to buy. ‘I’m feeling really excited about being a first time home buyer and getting my first condo so it’s just kind of coincidence that I’ve been buying at this time with the falling oil prices and the rise in listings, I guess, so it’s a good thing for me, because there’s lots of places on the market and prices are down,’ said Husted.”

“Gilson Porto began his career as a real estate agent seven years ago when Brazil’s property market was booming due to increasing wages and easier credit. But starting in 2013, business began to slow along with the country’s economy. ‘A few years ago people would come into this office and ready to buy. Now they just come to ask prices, to look around. Those willing to lower their prices are getting to sell their property, but those who are not flexible are really not doing business,’ Porto said.”

“When real estate prices were rising steeply, there were fears of a bubble in the making. But analysts said this recent gradual devaluation suggested that is not the case. The market was heated because for the first time many Brazilians had the means to buy property, experts said. ‘We don’t have a bubble. A bubble means a lot of increases in prices for nothing. You had real reasons for the expansion of the prices in Brazil. After this, we have to reduce, to put the prices in their correct level as a matter of fact,’ finance professor Fabio Gallo said.”

“Precisely the same factors that plunged Ireland into its housing crisis last decade are now in play in New Zealand and could spark a big correction, says a leading Auckland fund manager. Milford Asset Management executive director Brian Gaynor said house prices might come down ‘10, 15, 20 or even 25 per cent’ and he cited the former Celtic Tiger as a warning. ‘The first thing is the role of the media,’ he said. ‘House prices are one of the sensations. The media played a huge role in Ireland in record prices - the best suburbs to buy, highlighting people who had bought and three months later made huge gains of 20 or 25 per cent or more. It’s a mirror image of the same thing here. It has a huge influence because we do have this massive herd instinct.’”

“The head of Europe’s bailout fund, Klaus Regling, said cheap money and the country’s lust for property allowed a ‘blind spot’ to develop into a financial meltdown. Mr Regling said these factors were ‘ominous’ for a country that never experienced a property crash. The German economist, who carried out an investigation into the Irish financial crisis, said it was ’striking’ how many people had invested in property. ‘Unfortunately, it’s hard not to overstate the impact of this cultural attitude,’ he said. ‘Property acquisition, as a topic, was almost a national obsession, though not something we could easily quantify in hard data.’”

“He added: ‘The buyers all presumed the price of property could only go up … People bought apartments for their children who were still in school because they thought once they got out of school, university and start a job they would not be able to afford a house.’”

“Trinity College Professor Philip Lane told the inquiry the construction boom ‘obscured the underlying deterioration in fundamentals’ needed to properly run a banking system. Prof Lane said recessions in other countries prior to the worldwide credit crunch had been relatively brief. He said this led to a situation where bankers misperceived the collective risk. Prof Lane said that when bankers are making the same decisions ‘you get a systemic problem.’”

“William White, former chief economist to the Bank for International Settlements - the bank of central banks - and currently an advisor to German Chancellor Angela Merkel, said the global elastic has been stretched even further than it was in 2008 on the eve of the Great Recession. The excesses have reached almost every corner of the globe. ‘We are holding a tiger by the tail,’ he said. ‘Sovereign bond yields haven’t been so low since the ‘Black Plague’: how much more bang can you get for your buck?’ he told The Telegraph before the World Economic Forum in Davos. ‘QE is not going to help at all.’”

“Under his guidance, the BIS annual reports over the three years before the Lehman crisis were a rising crescendo of alarm calls at a time when other global watchdogs were asleep. His legendary report in June 2008 openly discussed whether the world was on the cusp of events that might prove as dangerous and intractable as the Great Depression, as it indeed it was. The authorities kept having to push rates lower with the trough of each cycle, building up ever greater imbalances, in an ineluctable descent to the ‘zero bound,’ where monetary levers stop working properly.”

“He deplores the rush to QE as an ‘unthinking fashion.’ Those who argue that the US and the UK are growing faster than Europe because they carried out QE early are confusing ‘correlation with causality.’ ‘The Anglo-Saxon pioneers have yet to pay the price. There are serious side-effects building up and we don’t know what will happen when they try to reverse what they have done.’ The painful irony is that central banks may have brought about exactly what they most feared by trying to keep growth buoyant at all costs, he argues, and not allowing productivity gains to drive down prices gently as occurred in episodes of the 19th century. ‘They have created so much debt that they may have turned a good deflation into a bad deflation after all.’”

Bits Bucket for January 23, 2015

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