September 29, 2015

The Housing Bet May Go Bust

Some housing bubble news from Wall Street and Washington. The Washington Examiner. “The president of the Federal Reserve Bank of San Francisco warned Monday of signs of financial market bubbles in the U.S., saying that the central bank would risk financial instability by keeping rates at zero for too long. ‘I am starting to see signs of imbalances emerge in the form of high asset prices, especially in real estate, and that trips the alert system,’ John Williams said at a speech in Los Angeles, according to text from his office.”

From CNBC. “The $1.2 trillion high-yield debt market could face a double whammy as spreads tighten and investors use the corporate earnings season starting in the second week of October as an excuse to take even more profits. In recent months, select names in other sectors are seeing yields edge higher, like telecom, wireless and semiconductors. ‘Before you know it, it is the entire high-yield market. Earnings growth has been anemic. Leverage is at an all-time high,’ said Steve Antczak, head of U.S. credit strategy at Citigroup.”

“High yield has flourished in the years of low rates and easy Fed policy. ‘Everybody thinks of QE and easy monetary policy and the biggest beneficiary was the equity market. I would argue the biggest beneficiary of the easy monetary policy was the credit market,’ said Michael Contopoulos, head of high-yield strategy at Bank of America Merrill Lynch.”

From Fortune. “A few years ago, houses were suddenly one of Wall Street’s hottest investment ideas. A number of funds popped up to snatch up residential real estate in the wake of the foreclosure crisis. But now, there seems to be a reasonable chance that Wall Street’s housing bet may go bust.”

“Two of the bigger residential real estate investment funds, Sternlicht’s Starwood Waypoint Residential Trust and Colony American Homes, announced they were merging, in part because neither of them were big enough to make it on their own. The terms of the deal should give other housing market investors pause. The merger values Colony at $1.5 billion, or about 50% of what it paid for its 18,000 homes and other assets, minus debt.”

PBS Newshour. “This is the story of two housing markets — one that’s doing quite well and another that’s still treading water. Economics correspondent Paul Solman spoke with Nick Retsinas, who teaches real estate at Harvard Business School, about the second, larger, lower-end market. Strolling around Cambridge, Massachusetts the two discussed how there can be bidding wars in one neighborhood and foreclosure signs in another. In the latter neighborhood, banks have refused to refinance mortgages despite the depreciated values of the homes.”

“Solman: ‘Why is it that banks will not accept an offer from a homeowner at the current market price, and then once the homeowner is out, the bank will sell it on the open market?’ Retsinas: ‘Some investors are very afraid of principal reductions. They’re afraid that there will be bad things happening between owners and related parties that would necessitate the bank taking up a reduction in what was the amount owed.’”

“Retsinas: ‘Because the bank thinks my neighbor is looking at me, saying, ‘Wait a minute, there’s something wrong with this. I’m paying my mortgage every month, even though I owe $300,000 dollars, and my house is only worth $200,000 dollars. Why don’t I stop paying my mortgage, so they’ll accept the lower valuation and save me that balance of $100,000 dollars that I owe them?’ The banks are afraid this will be contagious to other people in similar situations with these underwater mortgages.’”

“Solman: ‘So the foreclosure crisis is not over?’ Retsinas: ‘It’s not over. It’s not at its peak where it was two or three years ago, but in many states, say, Florida and California, you still have a residue of foreclosures that are continuing to fill up that pipe and stuff the pipe so we can’t have the free flowing of markets.’”

From Wealth Daily. “A decade ago, U.S. housing prices were rising by double-digit percentages annually in many places, going into the stratosphere. Things looked shaky in 2006/2007. Many people all of a sudden became aware of the possibility of a housing crash. Still, it exceeded expectations, with prices being cut in half in some parts of the country. In the world of finance and business cycles, this was a very short time ago. It should be fresh in people’s heads, particularly since many people who bought during the height of the bubble are still underwater. You would think it would be a lifetime before we ever saw a bubble like this again, especially in housing.”

“Unfortunately, Silicon Valley didn’t get the memo. San Francisco didn’t either. There was a recent story about a house in San Francisco that is over 100 years old that was built as an earthquake shack to house people who lost their homes in the 1906 earthquake. The house is squeezed between two bigger residences. This house has two bedrooms, one bathroom, and is 756 square feet. It is made of rotting wood, and it looks like it could come down with a good gust of wind.”

“The best part is that it can be all yours for just $350,000. That’s right — this shack is listed for the price that you could practically buy a mansion for in other parts of the country.”

“Prime Minister Stephen Harper recently commented on the housing situation in Canada. We will be thankful in a few years that all of his words are documented, thanks to the Internet. Harper said, ‘I think the housing story is a very positive story in this country. You know, you look around the world where they have seen all these crashes, a lot of them centered around the housing market. In Canada, we have seen home ownership rise to record levels.’”

“Could a politician possibly set himself up any more for a political blunder than Harper just has? This is worse than Bernanke saying there was no housing bubble — Harper is actually cheering the Canadian housing bubble on.”

From CBS News. “Whether the Federal Reserve raises interest rates is a question former Fed Chairman Ben Bernanke is glad HE no longer has to answer. But other questions, Bernanke and his wife, Anna, are happy to discuss. Norah O’Donnell of ‘CBS This Morning’ dropped in on them at their home in Washington.”

“The summer of 2008 saw panic across the globe. Given the Fed’s job to keep the economy stable, it all landed squarely on Bernanke’s desk. ‘If it was the worst in human history,’ asked O’Donnell, ‘why didn’t more experts like you see it coming?’”

“‘Well, we didn’t. We understood part of it. We saw that there were problems in the housing sector. We saw there were developing problems in sub-prime mortgages. What we didn’t see, what I think almost anybody didn’t see, was the vulnerability of the financial system to those factors.’ As an economics professor at Princeton, Bernanke studied the Depression, concluding that, back then, the Fed didn’t do enough. And so with the economy getting ‘messed up’ under Bernanke’s watch, he was acutely aware of the potential devastation. He says the problem was that to save Main Street, he had to bail out Wall Street.”

“This month the financial world was watching to see if the Fed would unleash higher interest rates. The glare fell on current Chair Janet Yellen, who decided to maintain the near-zero rates of the Bernanke years. Ben Bernanke seems perfectly happy to let someone else take the heat. O’Donnell asked, ‘Do you miss being Fed Chair?’ ‘No,’ he replied. ‘I really like being able to look in the newspaper, see a story about some kind of problem, and say, ‘Gee, I hope somebody does something about that!’”

Bits Bucket for September 29, 2015

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