March 1, 2015

Inflated Prices And Funny Money Spending Patterns

A weekend topic on credit, deflation and the housing bubble. Reuters, “China’s central bank cut interest rates on Saturday, just days before the annual meeting of the country’s parliament, in the latest effort to support the world’s second-largest economy as its momentum slows and deflation risks rise. Globally around 20 central banks have eased policy this year to counter deflationary pressures driven in part by the plunge in oil prices. The surprise interest rate cut in November, followed up by a February reduction in the RRR that poured fresh cash into the financial system, had little apparent effect on business confidence, although the liquidity was welcomed by the stock market.”

“China’s annual consumer inflation hit a five-year low in January while factory deflation worsened, underscoring deepening weakness in the economy. Export and import growth had also tanked in the same month, performing worse than expected. Deflationary cycles, once entrenched, can stall investment for years or even decades, as the case of Japan highlights, and is considered a nightmare scenario by many economists in China.”

The Tribune Live in Pennsylvania. “It’s getting easier for people without much money in the bank to buy a home, triggering concerns that the nation is setting the stage for another housing bust. Edward Pinto, codirector of the American Enterprise Institute’s International Center on Housing Risk, worries the steps are the first onto a slippery slope that leads back to the years before the 2008 financial crisis — the origins of which have been blamed on a housing boom driven by low or no down payments and easy credit.”

“‘The problem with that is the risk of default goes up as the down payment goes down and the FICO score goes down,’ Pinto said, referring to the credit score calculation developed by Fair Isaac Corp. ‘We’ve seen this movie before and how it plays out.’”

“Sam Lombardo, 47, of Mt. Lebanon was pre-approved for a 3.5 percent down-payment loan backed by the Federal Housing Administration and hopes to close on his purchase in Beechview in April. The bartender at Rivers Casino said he could have scraped together 20 percent down for the house, but it would have involved depleting his savings and borrowing against his retirement savings plan. ‘I just figured what I was pre-approved for and what I can afford,’ he said. ‘I don’t want to be house poor. … It does make it nice when these FHA loans only do the 3.5 percent. It makes it more affordable.’”

The Valley News in California. “Those hoping for a jump-start to the valley’s moribund housing market were in for some disappointment in January. Not only were sales down 30 percent from December (865/614), but they were down five percent from last January (649/614), which was the slowest sales month on record for 2014.”

“Rising inventory coupled with weak sales will conspire to keep prices soft for awhile. January’s median price was down four percent from December but managed to stay just one percent ahead of January 2014. January 2014 median was 22 percent ahead of January 2013 but those days of rapid appreciation are gone, at least for now.”

“Distressed sales as a percentage of closed sales jumped five percent in January, up to 15 percent of closed transactions. Indication is that we will see more of this as the year winds on for two reasons – first being that banks have now had a year to get comfortable with, and in compliance with, the so-called Homeowners Bill of Rights ushered in by Attorney General Kamala Harris in 2012. The second reason is that folks who were among the first round of loan modifications are seeing those loans start to re-set this year. If their personal economic circumstances have not improved we will see an increase in short sales and ultimately foreclosures from this market segment as well.”

“Homeowners who had their loans modified to interest only for three years or into an adjustable interest rate are seeing re-sets nearly doubling their monthly mortgage payment while their household income has remained the same (if they’re lucky). Historically nearly 50 percent of modified loans have ended up in default anyway so we’ll see what this new round of re-sets bring us.”

The Lodi News Sentinel in California. “California’s economy has always been boom or bust broken up by occasional stable periods. Starting with the Gold Rush era in the 1850s to California’s aerospace industry surge a century later to today’s tech bonanza, people have rushed to California — mainly Los Angeles and the Bay Area — to make their fortunes and then spend their money as if there were no tomorrow.”

“Now economists are concerned that California’s revival from the subprime mortgage meltdown era that began in 2006 and resulted in homeowners losing billions in equity may be on the verge of collapse. They point to preposterously inflated housing prices and the funny money spending patterns of Silicon Valley’ high tech industries as alarm bells that should be heeded.”

“Harvard- and MIT-educated financial analyst Wade Roush warns that the bubble may be about to burst. Pointing to Facebook — which recently spent $19 billion in cash, stock and restricted stock units to purchase the 5-year-old, $20 million in revenues startup WhatsApp and also laid out an additional $2 billion to buy another startup, Oculus, that hasn’t even introduced its product to the market — conditions are teetering on the edge.”

“To put $19 billion in perspective, Roush notes that the sum is greater than the gross domestic product of Honduras, Jamaica, Iceland, Nicaragua and 80 other nations, exceeds the annual revenues of 355 of the Fortune 500 companies, and equals the net worth of hedge fund multibillionaire George Soros, who’s wealthier than all but 29 people in the world.”

“For wealthy Silicon Valley residents, money is no object — especially when it comes to real estate that’s seen a huge price surge even in the smallest houses, some no bigger than detached garages. One 900-square-foot Palo Alto house with two bedrooms and one bathroom sold recently for $3 million, above the 2014 $1.7 million median price in Palo Alto for homes with less than 1,000 square feet.”

The Australian. “Here is yesterday’s news: - share prices surged to new seven-year highs; housing is booming; wages growth is the lowest on record; interest rates are the lowest ever. And when I say ‘ever,’ I mean just that. Interest rates have never, ever been this low. So to sum up: savers and workers are being crushed; owners of assets are big winners. The reason savers and workers are copping it is that there is an oversupply of everything: labour, money and stuff — savings, liquidity, energy, commodities, goods, services and people.”

“There is a glut of everything, and as a result prices can’t rise and unemployment is stubbornly high, depressing wages (the ABS ‘wage price’ index rose only 2.5 per cent last year, the weakest growth since measurements began in 1998). For central bankers, low inflation and high unemployment depressing wages growth can mean only one thing: insufficient demand. That’s because aggregate demand is the only thing central banks can influence through the price of money. When the only tool you have is a hammer, everything is a nail.”

“It is hoped, consumer and business demand for goods and services will rise, driving up prices and driving down unemployment. But so far, so bad. Earlier this month we learned that retail sales finished 2014 poorly: consumers lack confidence and are not spending. That’s not surprising given low wages growth and uncertainty about government welfare spending. More importantly, businesses are not investing much.”

“Federal Reserve chair Janet Yellen started to prepare markets for the Fed funds rate in the US to rise this year after six years (and counting) at zero or thereabouts. But then she indicated that the Fed is now officially ‘data driven’ — that is, anything could happen, actually. In other words, savers now depend for their livelihoods on whether central banks can get the world’s consumers to start spending and to soak up the glut of everything. It will happen eventually of course — everything always does happen eventually. But for a while, at least, we live in interesting times.”

Bits Bucket for March 1, 2015

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