May 1, 2015

A Bubble That Is Bound To End Badly

It’s Friday desk clearing time for this blogger. “Rather than settle for garages of antique cars or a museum’s worth of paintings, billionaires are increasingly willing to pay $100 million for homes that can serve as showcases for their fortunes, according to an analysis by Christie’s International Real Estate. The luxury housing market has shifted in the past year as the dollar has strengthened. Sales in Manhattan, Los Angeles, San Francisco, London and other global hubs are stabilizing after having rocketed in 2013. There has been a 25 percent drop in Manhattan’s monthly sales pace and a 50 percent drop in Miami Beach, said Kevin Maloney, a developer whose firm, Property Markets Group, works on luxury buildings.”

“Global buyers have become more patient. They are seeking value because their incomes, earned in euros, pesos, reals and other currencies, now buy less in dollars. ‘If I had my druthers, I’d like to see the dollar weaken against other currencies,’ Maloney said.”

“Heading into the peak home-selling season, metro Denver’s housing market remains one of the tightest in the country. Across the western half of the state, however, inventory remains plentiful and buyers still retain the upper hand, especially for more expensive homes and in more rural areas, according to regional market reports from the Colorado Association of Realtors. ‘Our foreclosures have gone way down, but we are still having them and we still have short sales,’ said Ann Hayes, a broker with Keller Williams Colorado West Realty in Grand Junction.”

“Sales of new homes in the Chicago area fell again in the first three months of the year as builders put off new projects, extending a decline that began more than a year ago. The drop was entirely attributable to a 48 percent plunge in sales in the city of Chicago. Sales have fallen simply because developers aren’t building that many homes, said Tracy Cross, principal of Tracy Cross & Associates. ‘If you don’t build it, they won’t come,’ Cross said. He estimates sales would be about 40 percent higher ‘if supply were available,’ but builders remain cautious ‘because of Chicago’s slower economy.’”

“The Inland Southern California housing market, a bastion for bargain home sales when foreclosures peppered the region, has had a lethargic sales pace in 2015, a new Trulia report shows. Two years ago, Trulia labeled the Inland region as the third-hottest market in the nation. Today, it’s been classified as sluggish. The Inland market has slowed because investors and cash buyers who were scooping up distressed property at discount rates have moved to other feeding grounds, he said. ‘Homes are less of a bargain today,’ Trulia housing economist Ralph McLaughlin said.”

“The foreclosure nightmare that haunted U.S. homeowners during and after the Great Recession has loosened its grip considerably in most states. In New Jersey, the bad dream just gets scarier. ‘In my view, the aftermath of the crisis is still with us,’ said Bruce M. Sattin, a lawyer who represents clients fighting foreclosure. ‘While the number of new foreclosure cases spiked after the real estate market crashed in late 2007, there are still cases from back then in the system.’”

“The U.S. Justice Department’s lawsuit against Quicken Loans has caught the attention of lenders everywhere. Kim Harland of Nova Home Lending said her continuing compliance education makes it hard to believe that any lender would do anything outside of the lines. She said most lenders tend to err on conservative side rather than pushing the envelope. Yet, pushing the envelope is exactly what the Department of Justice is accusing Quicken Loans of doing. The suit claims that, from September 2007 through December 2011, Quicken knowingly submitted improperly written mortgages insured by the Federal Housing Administration that resulted in millions of dollars in insurance payouts for default loans triggered by the company’s deficient practices.”

“Canada’s housing market is a bit like an old china teacup right now—it’s pretty from a distance, but there are cracks if you look close enough. Looking particularly precarious is the condominium sector in Toronto and Vancouver, forcing developers to shift their strategies to compensate. Developers are starting to extend ever-more lavish incentives as the number of unsold newly completed units rises. George Athanassakos, a finance professor at Western University’s Richard Ivey School of Business, argues Canada’s housing market is headed for a fall. ‘If you go back in time, there’s not really another period where the housing market [has been] so out of whack,’ he says. ‘Eventually, bubbles burst.’”

“A 1,000 sq m suburban replica of an American McMansion in Beijing that looks on to a rubbish-strewn wasteland, has been put up for sale. A snip at US$8 million — the same list price as Sandy Cay, a resort island in the Bahamas offering views of white sand and real palms. Welcome to the world of Chinese real estate, where a combination of rapid riches and easy credit has fuelled a decade-long boom in local house prices that ended only last year. From a country of almost zero homeownership only 15 years ago, more than 80 per cent of Chinese households now own their own homes.”

“Yet, the price tags and exotic names often jar horribly with reality. Next to Palm Beach is the Merlin Champagne town, a gated community whose only nearby shopping amenities consist of a rundown mall where the main draw is a McDonald’s outlet.”

“Chinese buyers are finding more reasons to turn overseas, including the recent drop in domestic property prices. Net capital outflows from China reached a record US$91 billion in the final quarter of last year, following an outflow of US$56.7 billion in the third quarter. Most offshore transfers are done through underground banks or exporting companies, state-owned enterprises or government departments that have a right to transfer money abroad.”

“‘For smaller amounts, there is the gem and fine-art trade. But for larger amounts, the easiest way is to leverage a government department or state enterprise with a foreign-exchange quota — I have good connections and can provide that service to clients who want to purchase property overseas,’ said an agent at Luxury Property Showcase who asked not to be identified.”

“By the middle of 2015, it has become clear that all is not well in the land of China. Now the signs are increasing China will soon engage in its own form of quantitative easing, in what could be seen as a sign of panic. China needs to do QE when official growth is still above 7 percent? For many experts, this is a confirmation that underneath the surface, China is facing huge problems.”

“‘This is the nonsense of the Chinese miracle economy. The very fact we are discussing the People’s Bank of China [PBOC] doing QE shows how off the boil the economy has become. The whole China dynamic has shifted,’ says Fraser Howie, author of Red Capitalism.”

“The Survey and Research Center for China Household Finance estimates that more than one in five homes in China’s urban areas is vacant. ‘The loans behind the local government debt are loans to buildings that are empty, not generating cash flows. They are loans to buildings that are unproductive,’ says Richard Vague, managing partner at Gabriel Partners. ‘If you are a banker, having extra cash doesn’t do you any good. I’m not going to be surprised at all if it goes to unproductive purposes. Because frankly they ran out of productive things to spend the money on. All that’s left is speculation.’”

“Here’s an astonishing statistic; more than 30pc of all government debt in the eurozone around €2 trillion of securities in total is trading on a negative interest rate. It’s a bubble that is bound to end badly. With the advent of European Central Bank quantitative easing, what began four months ago when 10-year Swiss yields turned negative for the first time has snowballed into a veritable avalanche of negative rates across European government bond markets. In the hunt for apparently ’safe assets,’ investors have thrown caution to the wind, and collectively determined to pay governments for the privilege of lending to them.”

“On a country by country basis, the statistics are even more startling. According to investment bank Jefferies, some 70pc of all German bunds now trade on a negative yield. In France, it’s 50pc, and even in Spain, which was widely thought insolvent only a few years ago, it’s 17pc. It marks a scarcely believable turnaround on the situation at the height of the eurozone crisis just a little while back, when some European bond markets traded on yields that reflected the very real possibility of default.”

“What makes today’s negative interest rate environment so worrying is this; to the extent that demand is growing at all in the world economy, it seems again to be almost entirely dependent on rising levels of debt. The financial crisis was meant to have exploded the credit bubble once and for all, but there’s very little sign of it. Rising public indebtedness has taken over where households and companies left off. And in terms of wider credit expansion, emerging markets have simply replaced Western ones. The wake-up call of the financial crisis has gone largely unheeded.”

“One by one, all the major central banks have joined the money printing party. Anything to keep the show on the road. It’s what Chris Watling of the consultancy Longview Economics has termed the ‘philosophy of demand at any cost.’ A crisis caused by too much debt has been fought with even more of the stuff.”

“The flip side of the cheap money story is soaring asset prices. Eventually, there will be a massive correction, in which creditors will suffer sickening losses. Nobody can tell you when that moment will arrive. We live in an ‘extend and pretend’ world in which economies pathetically fight between themselves for any scraps of demand. One burst of money printing is met by another in an ultimately futile, zero-sum game of competitive currency devaluation. Both Keynsian and monetary economics seem to be in some kind of end game. What comes next is anyone’s guess.”

Bits Bucket for May 1, 2015

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