May 17, 2015

This Kind Of Synchronized Boom Has Never Happened

A weekend topic on the state of the housing bubble. The Denver Channel in Colorado. “Flowers, letters and other gifts are no longer just for dating. These days, first-time home buyers are courting Denver metro homeowners in hopes of competing in a real estate market that’s gone over the top. According to real estate brokerage firm Redfin, Denver’s real estate market had its sixth straight month of price growth, rising nearly 17 percent in April, and the average home sold in just five days. It’s no surprise to real estate agent Karen Mistrot. ‘Everything from buyers leaving flowers for sellers after they’ve looked at the house, and leaving nice notes in the house telling them how much they like it before submitting an offer,’ said Mistrot.”

The Star Tribune in Minnesota. “Home buyers in the Twin Cities are facing a vexing situation: There are thousands of more listings compared with a year ago, but the number of options is shrinking. And higher home prices have made many would-be sellers hit the pause button in hopes that prices will rise even more, creating the kind of price-speculation that led to inventory shortages shortly before the latest housing crash.’

“Sarah and Jordan Wein began shopping in December for their first house. It took several months and 50 to 60 showings before finding anything worth an offer and that didn’t already have a buyer. The first house they bid on sold for nearly $30,000 more than the list price. The second time around they found a house in the Como Park neighborhood that was priced in the mid $200,000s. They didn’t waste a minute before making an offer. ‘We had to make a ­decision really quickly,’ said Sarah Wein.”

From “From Cincinnati’s urban neighborhoods to Northern Kentucky suburbs, competition is hot for prime properties. Art Reed, president of the Northern Kentucky Association of Realtors, said he’s looking for a house for his son in Fort Thomas and it’s tough even for him because properties are scooped up quickly. ‘When something really good comes out, they (other buyers) are watching as hard as we are,’ Reed said. ‘They’re starting to see there’s a real value to jumping on it right away.’”

“Cincinnati’s housing market was the local economy’s hardest hit sector during the recession, said Janet Harrah, senior director of the Center for Economic Analysis and Development at Northern Kentucky University. Its recovery has been slower than expected as the region suffered from foreclosures and families suffered losses of employment, income and investments. But Harrah said that doesn’t mean people should be rooting for a return to overvalued prices and sales levels of the mid-2000s. ‘Those values … weren’t fully sustainable to begin with,’ she said.”

From MarketWatch. “Strategists at Citigroup, led by London-based Robert Buckland, have come out with a note breaking down how bubbles form and what might be looking a bit bubbly at the moment. Past bubbles have centered around ‘new paradigms’, such as the transformative impact of the Internet. A potential theme this time around could center on the idea of ’secular stagnation,’ a condition in which growth, inflation and interest rate are persistently low. Ample liquidity is also a prerequisite for bubbles. This time around, there is no shortage thanks to aggressive easing by global central banks.”

“Other components include a ‘demand/supply’ imbalance as demand for a new investment idea—such as tulip bulbs in the 17th century—outstrips supply, the strategists write. Since the financial crisis, security issuance has fallen while central banks have stepped up purchases, making for net issuance of zero. With demand for financial assets on the rise, it’s no surprise prices are rising and inflating potential bubbles, they said.”

“Then there is business and career risk, the strategists noted, recalling a client who described a bubble as ’something I get fired for not owning.’”

The Wall Street Journal. “Janet Yellen’s comment that stock prices are ‘quite high’ hardly captures the frothiness in U.S. financial markets. The Federal Reserve chair’s admission also stopped short of acknowledging the role of free money in inflating the price of stocks—as well as the price of bonds, houses and every other financial asset. At Morgan Stanley Investment Management, we have analyzed data going back two centuries and found that until the past decade no major central bank had ever before set short-term interest rates at zero, even in periods of deflation.”

“The Fed’s defenders quibble that houses are less pricey than in the bubble of 2007, or that stocks are less pricey than in 2000, which misses the difference this time around. In the past 50 years, valuations of U.S. stock prices have been higher than they are now for less than 10% of the time, and similar figures hold for bonds and houses. This kind of synchronized boom has never happened, not even before the last two major meltdowns. My research team’s composite valuation for the three major financial assets in America—stocks, bonds and houses—is currently well above levels reached during the bubbles of 2000 and 2007.”

“The Fed now leads a culture of central bankers who see their job as reducing unemployment and stabilizing prices for consumer goods only, come what may in the markets.”

The New Zealand Herald. “The latest Reserve Bank Financial Stability Report concludes that New Zealand’s financial system is sound and operating effectively. However it identifies three main risks: Soaring house prices - house prices are overvalued on several measures, particularly in Auckland, and individual debt is high relative to income. Dairy industry debt - financial stress in the dairy sector could rise markedly if low global milk prices persist beyond the current season. Loose global financial conditions - global interest rates remain extremely low and have encouraged investment in riskier assets. The Reserve Bank believes the ‘current benign [global] market conditions could unwind in a disorderly fashion, affecting the cost and availability of offshore funding for New Zealand banks.’”

“The Financial Stability Report, which is published every six months, is the fifth consecutive document to identify soaring house prices and mortgage debt as the main risk to the country’s financial system.”

The Nelson Mail in New Zealand. “There was a nice picture of Nick Smith in the Nelson Mail this week. A young Auckland couple have just moved to our region and purchased a house. Good news story, because good news stories on the first-home housing front are few and far between. ‘Young couple actually buy house’ - it’s depressing that it’s so newsworthy.”

“Initially the headline had something about ‘affordable housing’ in it, but by the time I re-clicked, the headline had changed to ‘Sky-high Property Prices in Auckland Draw People to Nelson.’ I’m pleased the change was made. The word ‘affordable’ like the word ‘bubble’, is a contentious one. ‘Affordable’ to someone living in Auckland doesn’t mean affordable to someone in Nelson.”

“The cost of housing needs to be addressed. We spend too much on it. Either that or we don’t on average earn enough. People should be able to buy an entry level house without mortgaging the next 30 years of their life away and crossing their fingers and toes and hoping nothing financially adverse happens to them – like, heaven forbid, interest rates go up or their employment changes. It’s been this way for over a decade.”

“I must have read a dozen or more stories in the last week from these groups telling us there isn’t a housing bubble in Auckland. I might not know much about the housing industry but I know a vested interest when it repeatedly slaps me in the face. Unfortunately according to the government there hasn’t really been a problem either – at least not one they would have us believe they can do much about. In the meantime, the latest pecuniary list shows our current crop of MP’s haven’t been slow to invest in the property market themselves.”

“If property ownership of our MPs is anything to go by, it would appear everyone in New Zealand owns an Auckland investment property. According to Winston Peters; ‘This is not to criticise any of the investments that MP’s might have taken but it sure explains their prejudice against taking the right steps to flatten out the Auckland housing market…’”

“Underpinning the debate on housing is an absurd lack of information gathered from buyers. How much is rampant speculation fuelling the market? How big a part do overseas buyers play in the market? How big a part will Auckland buyers play in the Nelson market? Anecdote won’t cut it. In refusing to gather useful information the government is being wilfully negligent.”

“Speaking of the unrealistic value of land and the debt levels required to get your hands on it - the Reserve Bank says 37% of dairy farmers had negative cash flow given the current forecast payout. At least one farm consultant says half of dairy farmers are going backwards and are going to be in real financial trouble. Rockstar economy my arse.”

Bits Bucket for May 17, 2015

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