December 6, 2015

The Markings Of A Bubble

A weekend topic on the state of the housing bubble. The San Mateo Daily Journal in California, “As the weather has cooled, so has the local real estate market, as reports show there are more homes on the market selling for less money than months prior. The average home sale price across San Mateo County hit $1.56 million in October, marking a bit of a slump from the peak annual sales price of about $1.66 million in June, and there are currently about 100 more homes for sale than when the market was hotter and tighter, according to a report from the San Mateo County Association of Realtors, or SAMCAR. ‘It has cooled down a little bit, not a whole lot, compared to what we had in the spring when it was completely insane’ said Chuck Gillooley, a Realtor in San Carlos with Dwell Realtors.”

“Gillooley said he is seeing a hesitation among buyers which did not exist previously, perhaps attributable to a potential deceleration in an economy that has been on a tear for years. ‘Part of it is that the overall economy is starting to slow itself down,’ he said.”

The Columbus Business Journal in Ohio. “New upscale apartments are popping up around Columbus seemingly every other week. That makes sense, says Harvard University researcher Chris Herbert, as developers try to keep pace with growing demand for urban living from millennials and empty nesters. But while the increased supply is justified, the apartment market may be due for a correction in valuations, according to the managing director of Harvard’s Joint Center for Housing Studies. Rental households are growing and rents have risen at nearly twice the pace of inflation, even as home ownership rates are declining across all age groups.”

“‘The rental market is going gangbusters – the fastest pace the country has ever seen,’ Herbert told me. ‘Unlike single-family (housing), which is still 5 (percent) to 10 percent off previous peaks, multifamily prices are above the previous peak. In New York the cap rates are at historic lows– in my mind that does have the markings of a bubble. I don’t know about supply, but in terms of valuations.’”

From MarketWatch. “In May 2013, then-Federal Reserve President Ben Bernanke sparked a furor by pointing out the inevitable. The central bank would start buying fewer bonds as part of its economic stimulus program, and then consider raising rates. The ensuing ‘taper tantrum’ roiled bond markets — and housing. The 10-year Treasury spiked 140 basis points over the following months. Mortgage rates followed, and home sales and mortgage applications plunged.”

“While most economists – and Fed officials – believe the overall economy is strong enough to weather a small interest rate rise, there’s still some concern about specific sectors, like housing.”

“Joan Rogers, a real estate agent in Portland, Oregon, is a bit more wary. In her local market, the dearth of available homes can’t keep up with surging demand, driving prices sky-high. Portland surpassed its bubble-era price high in August, according to S&P/Case-Shiller, and prices in September were 10% higher than a year ago.”

“That’s hardest for the most vulnerable buyers, Rogers said, especially first-timers, and even small rate rises will make homeownership that much harder for those who are already stretching. ‘The more purchasing power we take away from people who don’t have it, the harder it’s going to be for them,’ Rogers said. ‘2016 is going to be a really difficult year for the first-time buyer.’”

From Yahoo Finance. “Bethany McLean is a contributing editor at Vanity Fair and bestselling author. Her recent book is ‘Shaky Ground: The Strange Saga of the U.S. Mortgage Giants,’ published by Columbia Global Reports. ‘As you may have seen, the Campaign for Accountability (CFA), a D.C. watchdog group, has called for an SEC and ethics investigation of Sen. Bob Corker (R-TN) for insider trading. There’s also an interesting nexus between Corker’s campaign finance manager and a program that is a favored child of the real estate industry. The so-called EB-5 visa program was started some 20 years to enable foreigners who wanted to start businesses in the United States to get lawful permanent residence here as long as they invest a minimum of $500,000 to $1 million, and create jobs for U.S. workers.”

“This has morphed into a convenient source of cheap capital for the real estate industry (one industry publication calls it a ‘vital capital source’). But a key part of it, which allows foreign investors to pool their capital into things like real estate projects, was due to expire this fall, and at least some are desperate to hang onto it. The ICSC has held panels about how to use EB-5 funds. The Real Estate Roundtable, which has highlighted ‘the urgent need to reauthorize the EB-5 investment program by December 11, 2015,’ and also describes itself as a ‘founding member’ of a ‘broad-based EB-5 coalition that seeks to reform and reauthorize the program.’”

“But do these senators want to kill the program? Actually, no. Grassley and ranking member Sen. Patrick J. Leahy (D-VT.) are now pushing a reauthorization bill that would reform, but preserve, the key part of the program. The Washington Post wrote in an editorial that ‘even if it were reformed…the EB-5 would still be a bad idea. It’s corporate welfare, enabling certain businesses to attract capital more cheaply than others based on a government-conferred sweetener — namely, a visa.’”

From The Hill. “Housing finance reform has stalled. Perhaps it would be jumpstarted by being honest about Fannie Mae and Freddie Mac (FMFM): they are SIFIs. SIFIs, for the uninitiated, are Systemically Important Financial Institutions – effectively those financial entities that are Too Big To Fail (TBTF). SIFIs are designated by the Financial Stability Oversight Council (FSOC) and are subject to a much more stringent supervisory oversight regime characterized by greater capital and liquidity requirements. But thus far FMFM have dodged the FSOC designation as TBTF that would make them SIFIs. That is wrong; and there is a lot more to it than Four Letter Financial Acronyms (FLFAs).”

“The ‘no bailout needed’ argument is part of a larger effort to encourage Treasury to recapitalize Fannie and Freddie and release them from conservatorship. The ‘recap and release’ idea has already been dismissed by Treasury. But even more fundamentally, it is premised on the notion that things can just go back to the way they were before the crisis.”

“Under Dodd-Frank, they cannot. Fannie Mae and Freddie Mac are SIFIs no matter how the FSOC looks at them. As institutions, they are very large, highly leveraged financial institutions with monoline risk exposures to the mortgage market. Size was apparently the initial criteria for designation that inappropriately swept insurance companies into the SIFI net. It should apply to the housing GSEs as well. Alternatively, history has shown clearly that their activities and products are a financial time bomb that would and should merit designation.”

“Fannie Mae and Freddie Mac were SIFIs in 2007. They are SIFIs right now. They would be SIFIs the moment they exited from conservatorship. Accordingly, there is simply no way that housing finance can go back to its pre-crisis form, and proponents of this dream should stop blocking progress on building a new platform for housing finance in the United States.”

Bits Bucket for December 6, 2015

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