May 29, 2015

A Recipe For Asset-Price Bubbles

It’s Friday desk clearing time for this blogger. “Is another housing price bubble looming? The question is being asked with increasing frequency and also with great anxiety. Many of those commenting on the question, however, don’t understand what a price bubble is. It is not a marked rise in prices. Sharp price increases are common, and pose no threat to the stability of the economy. If a rise in price immediately stimulates an increase in supply, any bubble will quickly disappear. Housing meets that condition because the stock of houses is large relative to new construction.”

“My view is that we are a long way from another house price bubble. Home buyers, lenders, investors and regulators now understand that a nationwide decline in house prices is possible. It will probably take another generation to forget what we learned. Furthermore, even if the lesson was forgotten tomorrow, changes that have occurred in the housing finance system would make it very difficult if not impossible for the system to support a bubble. I don’t expect to see another one in my lifetime.”

“Real estate agent Barry Sulpor said he’s seeing increased demand in the beach cities of the South Bay — an area that never really saw a slowdown like other Southern California communities. A three-bedroom town home in El Segundo recently had 14 offers, he said. It’s about to close escrow for $810,000 — $41,000 over the asking price, Sulpor said. The ‘open house was standing room only,’ he said.”

“Agent Carey Chenoski said her client recently sold a three-bedroom house in San Bernardino to a couple for $15,000 over asking price. That, she said, probably wouldn’t have happened last year. ‘It’s actually pretty strong,’ the Beaumont resident said. ‘On my street, three houses closed in the last week or so.’”

“Something spurred a surge in home buying in Lawrence, according to the latest figures from the Lawrence Board of Realtors. The median selling price of newly constructed homes is up significantly. It checks in at $337,495, which is a 10 percent increase from a year ago. At the end of 2011, the median selling price for a newly built home was $245,000. We’ve seen an increase of 37 percent in median price in less than four years. Back in 2011, the gap between the median selling price of an existing home and a new home was about 45 percent. Thus far in 2015, the gap is about 110 percent. As I’ve been known to say when my key no longer works in my home lock: I don’t know exactly what this means, but it seems significant.”

“Single-family and condominium sales are up across a broad swath of Connecticut, particularly among first-time buyers, lenders and Realtors say. Michael Sheahan, retail lending manager for Chelsea Groton, said its first-quarter volume of purchase and refinance mortgages is running ahead of the comparable period in 2014. ‘We are excited about the level of purchase transactions transpiring to date, including first-time homebuyer and home construction projects,’ Sheahan said.”

“The mortgage industry, too, is showing sensitivity to the plight of Millennials and other potential homebuyers saddled with student-loan debt. According to Sheahan, at least one private mortgage insurer is offering to medical- and dental-school graduates a mortgage insurance product that enables them to qualify for a mortgage despite their student debt. Lenders typically require private mortgage insurance on loans with less than a 20 percent downpayment.”

“Mortgage broker David Ford thinks he has found the right way to describe the Lower Mainland’s market for single-family homes. ‘Detached housing is BANANAS. It’s real estate pandemonium,’ he writes in his latest newsletter. The default rate for mortgages in Canada is less than one per cent, Ford says, noting that buyers are being assisted by revenue from basement suites and laneway unit rentals, which can increase monthly income by $1,800 or more.”

“He is looking to purchase a one-bedroom condo in downtown Vancouver, with a budget of $450,000. He has no qualms about taking on a $400,000 mortgage to do it. As long as people hang on to their investment for a while, he says, they will be fine because land in Vancouver has always appreciated.”

“With the latest effort by Sweden to cool its housing market postponed by a court, concerns are escalating that political stagnation, a faulty institutional set-up and high household debt risks sending the triple A economy into a tailspin. A move to force homeowners to pay down the principal of their mortgages — what many economists say is the very least needed to avoid a housing bubble — was postponed after a court in April said the Swedish Financial Supervisory Authority lacked a legal mandate.”

“The market is so frenzied that buyers in Stockholm often bid by text messages to brokers before they even inspect homes. There are fears households have grown accustomed to ultra-low interest rates. In a recent survey more than half of the respondents said it would be a big or fairly big problem if housing costs in Sweden rose by 50 percent. ‘The housing market in this country is dysfunctional and households are borrowing more and more and more,’ Stefan Ingves, the Governor of Sweden’s central bank. ‘This is one of those places in the world where the indecision bias has figured prominently and we are still seriously heading in the wrong direction.’”

“Frenzied construction by developers hoping to tap the real estate potential of the Iskandar region is ironically leading to a glut that is depressing property value in the southern economic development corridor. Worryingly for the primarily China-based developers is that most of these projects are already in progress even as demand is tapering off. One such developer, Country Garden, has 45 condominium towers with a combined total of 9,500 units set to come online in 2017, but has received bookings for less than a third some two years after construction began in 2013.”

“Aside from the obvious glut, other factors depressing sales in the region are the prices that have ballooned to levels comparable to the national capital of Kuala Lumpur and property controls that limit foreigners to buying property priced at no less than RM1 million. According to data by Asean Confidential, the effects on property value growth in Iskandar is already palpable. Going into 2012, it began climbing steadily to eventually outstrip the national average, before peaking at 25 per cent in annual appreciation. But it began falling almost immediately, plunging to 10 per cent last year, less than a percentage point over the rest of the country.”

“Some mining workers have gone from the high life to homelessness, from six-figure salaries to sleeping in cars, as the state’s resources industry is savaged by job cuts. OzHelp, a not-for-profit group specialising in suicide prevention and wellbeing in the mining industry, said the ‘wholesale slaughter’ of mining jobs had left some sacked workers unable to afford a roof over their head.”

“Nicole Ashby, head of the support and training service FIFO Families, said many axed workers were struggling to find new jobs and those who were still employed feared the next round of cuts. ‘One family was made redundant at Christmas, the husband still can’t get work,’ she said. ‘He’s defaulted on his mortgage, he’s been out of work for four to five months and they’re stressed out of their brains.’”

“Federal Reserve Bank of St. Louis President James Bullard warned that keeping interest rates near zero risks inflating asset-price bubbles, saying officials should raise borrowing costs this year as the economy improves. A prolonged accommodative stance is a ‘recipe for asset-price bubbles and a lot of mischief to happen,’ Bullard said in a Bloomberg Radio interview. ‘Asset price bubbles have been a devastating feature for the U.S. economy in the last 15 years.’”

“‘We need to get going once we have the opportunity to get going,’ Bullard said. ‘The economy is getting back to normal, but policy is still on an emergency setting.’”

“Books on the crisis typically fall into two categories. The first off the presses were the journalistic accounts. Later came the more thought-through academic analyses. Easy Money falls somewhere between these two categories. As the title suggests, Vivek Kaul zeroes in on the all-too-familiar culprit of the crisis - the access to easy money - and lays the blame for it firmly at the door of the central banks. He repeats the accusation that the United States Federal Reserve under Alan Greenspan left interest rates too low for too long after the dotcom bubble burst at the start of this century, which, inevitably perhaps, created a bubble in the real estate sector.”

“The chapter ‘Print Money, Buy Tomato Ketchup’ highlights the inherent contradiction of the current policy stance. As astute observers have also pointed out, policymakers are essentially trying to engineer a consumption boom to get economies out of the current problem, believing it’s a problem of aggregate demand, while it was excess debt-laden consumption that landed them there in the first place.”

“Professor Rajan and Luigi Zingales succinctly sum it up: ‘The way out of the crisis cannot be still more borrowing and spending, especially if the spending does not build lasting assets that will help future generations pay off the debts they will be saddled with.’”

Bits Bucket for May 29, 2015

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