August 23, 2015

It’s Not Just A History Lesson

A weekend topic on interest rates and the housing bubble. MetroNews from Canada. “In July, the Bank of Canada lowered its overnight lending rate from 0.75 per cent to 0.50 per cent. The major banks soon followed suit, resulting in increased sales activity in the GTA. The Canada Mortgage and Housing Corporation recently released a quarterly supplement entitled Housing Now Canada. Despite Toronto’s red-hot real estate market, the report has an ominous message about overvaluation. It warns that the rise in prices has not been matched by growth in personal income.”

“Toronto real estate analyst Brian Persaud says that although the market has been hot, we haven’t really seen runaway condo prices, not like the case with single-family homes. ‘The average price of a condo downtown was $460,000 last month. And it was $440,000 this time last year. I mean, that’s not nuts.’ Condo prices rise for various reasons. Easy access to mortgages is certainly fuelling the market, especially since the interest rate drop.”

“‘It’s no secret that the amount of money being lent out is higher than it’s ever been,’ says Persaud, who is also a real estate agent.”

“Persaud points to examples of the explosive growth in single-family housing prices in the GTA, like High Park properties doubling in price to $2 million. And we’re starting to see it in the 905. ‘I’ve been seeing price increases from the fall in Durham. Houses were going between $370,000 to $380,000 and now they’re in the fives (hundred thousands). In Whitby. Can you believe that?’”

The Denver Magazine in Colorado. “The past few years have seen the local real estate scene flirting with coastal-type price increases. Bidding wars are still occurring, particularly in that mid-$300,000 range. (To wit, yours truly just refinanced a condo near downtown Denver whose appraisal showed that its value has increased by almost one-third in only 18 months, a spike that’s absurd and unsustainable, but sure did make for a pleasant closing.)”

From “We’re on Month 3 for the continuing rise of existing-home sales, according to a report by the National Association of Realtors®. But here’s a surprising tidbit. Two months ago we wrote that ‘first-time home buyers helped push home sales in May to their highest level since May 2009,’ but Thursday’s report says that low inventory, and those soaring prices, ‘are likely to blame for sales to first-time buyers falling to their lowest share since January.’”

“You’re more likely to buy a home, it seems, if you already have one. ‘Current homeowners are using their increasing housing equity towards the down payment on their next purchase,’ said Lawrence Yun, NAR chief economist.”

The Los Angeles Daily News in California. “Rising home prices across California have eroded affordability to the point that only seven counties have housing that a family earning the median income can afford to buy, according to a study. The analysis of second-quarter home prices and income levels in 32 counties by the California Association of Realtors found that 25 counties have housing stock priced out of the reach of families earning the median income.”

“Home prices have been rising around the state for several years and some markets have approached or matched their pre-recession highs. ‘It’s pretty shocking,’ said association chief economist Leslie Appleton-Young. ‘I think that the big risk is with the millennials in California. Where are they going to live? There are some that have parents that can help them with the down payment. They are the lucky ones. But the others are on their own,’ Appleton-Yound said.”

“In the second quarter of 2015, the statewide median price of $446,980 was nearly 50 percent higher than what a California household with the median income could qualify for, the analysis said. In Los Angeles, where the median income was $54,510, a family earning that amount could afford a home costing $275,530. But the median-priced home here was 58 percent higher at $436,010.”

“Households in San Francisco earning the median income of $75,910 were only able to afford a home costing $383,670, a difference of $863,900 or 225 percent. That’s compared with the actual second-quarter median home price of $1.2 million. And during the second quarter, just 10 percent of families could afford a median-priced home costing $1.35 million and they would need to earn a minimum annual income of $267,780 to qualify for the loan.”

The Orange County Register. “What would it have taken for the Federal Reserve to prevent the housing debacle of the last decade? Apparently, 8 percentage points of increases in the key short-term interest rates the Fed controls. Oh, and that series of rate hikes would have had to start way back in 2002. That’s the conclusion of a recent study by researchers at the Federal Reserve Bank of San Francisco.”

“It’s not just a history lesson, as the economy struggles again with steep housing costs. Please don’t forget, the last time the nation got housing policy wrong – just a decade ago – the nation plunged into its darkest economic period since the Great Depression. The San Francisco researchers noted this rate-hike solution is too simple. Early rate hikes by the Fed might have signaled a warning about asset bubbles in general. Plus, the initial rate hikes might have cooled housing to the point where house hunters weren’t in a buying frenzy and real estate’s overvaluation wasn’t a huge problem. So the full 8 percent hike might never happened.”

“Perhaps more problematic was the notion that this intense level of rate hikes would have cooled the economy, probably into a recession. That broad dip in the national business climate could have further tempered real estate’s upswing. ‘Slowing down a boom in house prices is likely to require a considerable increase in interest rates, probably by an amount that would be widely at odds with the dual mandate of full employment and price stability. Moreover, the Fed would need a crystal ball to foretell house price booms. In restraining asset prices, while the power of interest rate policy is uncontestable, its wisdom is debatable.’”

“Of course, the Fed would have had to see a problem to act at all, if not accordingly. Take the last real estate mess as an example: In December 2004, with housing bubble talk heating up, researchers at the Federal Reserve Bank of New York issued a report that noted a 36 percent rise in after-inflation U.S. home prices since 1995 was double what had been seen in two previous real estate run-ups.”

“But, the report concluded: ‘We argue that market fundamentals are sufficiently strong to explain the recent path of home prices and support our view that a bubble does not exist.’”

“Even at the state level, where this research revealed evidence of excessive price run-ups on each coast, the researchers would not sound any alarms. ‘Volatility at the state level is the result of changing fundamentals rather than regional bubbles,’ the 2004 New York Fed report said. ‘Nevertheless, weaker fundamentals have caused home price declines in those areas with inelastic supply. If the past is any guide, however, that phenomenon is unlikely to plunge the U.S. economy into a recession.’”

“That kind of thinking probably lead then-Fed boss Alan Greenspan – the reigning ‘maestro’ of the economy at the time – to go to Congress 10 years ago and say he saw only tiny bubbles. ‘Although a ‘bubble’ in home prices for the nation as a whole does not appear likely, there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels,’ his prepared testimony said. ‘The U.S. economy has weathered such episodes before.’”

Bits Bucket for August 23, 2015

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