August 2, 2016

An Each Way Bet On Boom And Bust

A report from Bloomberg. “Japanese government bonds’ steepest tumble in more than three years is feeding speculation that central-bank easing is nearing its limits. A four-day rout pushed 10-year yields to within three basis points of turning positive on Tuesday for the first time since March, after Bank of Japan policy makers disappointed investors last week by leaving bond buying and their negative deposit rate unchanged. Pacific Investment Management Co. and former Ministry of Finance official Eisuke Sakakibara both say central bank Governor Haruhiko Kuroda is running out of room to expand stimulus.”

“‘The selling is insane,’ Satoshi Shimamura, head of rates and markets for the investment strategy department of MassMutual Life Insurance in Tokyo, said Tuesday. ‘The market is picturing an end to Kuroda easing. There’s no telling how far this will go.’”

“For some investors and economists, and at least one member of the BOJ’s policy board, this year is reminiscent of 2003, when benchmark yields almost tripled within three months. Known in Japan as ‘The VaR Shock,’ an initial jump in yields triggered a sudden selloff by breaching models banks were using for estimating potential losses, based on the statistical technique of ‘value at risk.’”

“The four-day surge in Japan’s 10-year bond yield brings it in line with Germany’s for the first time since April 2015, when bunds experienced a rout of their own. There are parallels in Japan now, where the BOJ’s record bond purchases have sapped liquidity and hampered the market’s efficiency. The central bank owns more than a third of outstanding debt, the most of any investor class, and volatility has surged this year to the highest level since 1999.”

From CNBC. “Japan’s failure to stimulate much with its latest stimulus serves as a reminder of how few tools global policymakers have left to drive growth. Fiscal and monetary authorities announced more plans over the past few days to spur inflation in hopes of driving broader economic hopes. They were rewarded with a stronger currency, a sea of red in both global equity prices and bond yields, and a market that generally was disappointed that Japanese leaders were not willing to do more to jump-start the long-moribund economy.”

“Japan has tried this literally dozens of times over the past quarter century, most often with the same results — perhaps a momentary bounce in activity that ultimately leads back to the same dreary growth pace. Despite all the stimulus, the economy has grown by barely 1 percent a year. In the U.S., a variety of stimulus packages over the years also have failed to achieve exceptional results. The 2009 spending package of $830 billion, seven years of near-zero interest rates and about $3.7 trillion in money-printing — called quantitative easing — resulted in an economy that has yet to register a calendar-year gain above 3 percent since the financial crisis.”

“The Fed now finds itself with a credibility problem in which investors not only doubt its ability to goose the economy; there are also questions about the veracity of policy statements and forecasting acumen, as well as doubts about whether the central bank will be able to act should an unexpected crisis hit. Some $11.5 trillion in sovereign debt now carries negative interest rates. There are trillions more with yields barely in positive territory or running well below historical averages.”

“The situation with low-yielding debt has gotten so extreme that Fitch Ratings warned Tuesday that a simple normalization of yields to 2011 levels could cause investor losses of $3.8 trillion. The losses would come in the form of principal plunges, as prices fall when rates rise. The low-yielding debt is held almost exclusively by institutional investors, meaning it poses systemic risks.”

“‘After all the QEs, after bond rallies globally, nothing appears to be the antidote to lumbering, low growth both in the U.S. and other developed economies,’ Marilyn Cohen, CEO of boutique money managers Envision Capital Management, told clients. ‘We are looking straight at the Japanification of the U.S.’”

“Cohen’s advice to clients is representative of a growing chorus that believes central bank maneuvers have run their course. ‘Under no circumstances should you listen to the Fed. Cover your ears and maybe hold your nose — this Fed and their Fed speak is so out of touch, so out of tune, that we deem their words white noise,’ she said. ‘In the past the saying, ‘don’t fight the Fed,’ were words to believe in. Not now.’”

From Ian Verrender at ABC News. “In Japan, the central bank on Friday developed a severe case of cold feet, with a decision to not push even further into the monetary policy unknown. It was expected to embrace a new round of radical policy known as Helicopter Money. While it did announce an extra round of stimulus, with a policy to pump even more cash into the economy, it opted not to board the chopper.”

“Helicopter Money is a process where the government rains cash down on the country with direct deposits into citizens’ and company accounts. The idea is that this would be financed by the central bank buying government bonds. That, however, is a policy that ultimately destroys the concept of an independent central bank, as monetary policy is employed to finance government largesse.”

“The fact that it was a close call tells you that not only is it being considered but that the global economy is in serious trouble.”

“After decades of poor performance, Japan has embraced the most radical monetary policies the world has ever witnessed and on a scale that could never have been imagined. It has ramped up its Quantitative Easing program - a euphemism for money printing - to never before seen levels and hacked interest rates to below zero, a policy it swore it would never embrace. On Friday, Bank of Japan governor Haruhiko Kuroda merely tinkered around the edges with some modest extra spending. More importantly, he raised questions about whether the central bank had gone far enough and said it was time to assess the impact of their policies.”

“On Tuesday, our very own central bank gathers to ponder the very same questions. It will be Glenn Stevens last meeting as governor. Pressure is mounting for the Reserve Bank of Australia to apply pressure to the currency, to deflate the Australian dollar in a bid to boost inflation and lift global competitiveness.”

“Having deliberately fired up the already inflated east coast housing market to promote a construction boom, the central bank can ill afford for prices to head further into la la land. Stopping that will require it to restrict lending for housing, a policy it has been reluctant to implement and even more hesitant to enforce.”

“Then there is the point Kuroda made on Friday. Would another cut have any beneficial impact? Would it encourage greater consumption or ignite business investment? The answer is probably no. Australians have the highest household debt in the world and the rate cuts have prompted many to merely pay down their loans quicker. There is nothing wrong with that. But the point is, it comes at the expense of boosting consumption and business turnover.”

“When it comes to business, lower rates have had the perverse effect of inhibiting investment. Shareholders, unable to secure a decent return on bonds or cash, have demanded ever greater dividends from corporations.”

“For more than two years, bonds and stocks have been heading in the same direction. Both have been hitting record highs. It’s an each way bet on boom and bust and it’s unheard of. Something has to give at some stage. Either the global economy will recover, rates will rise and those holding bonds or overpriced real estate will do their shirts. Or stock market investors will wake up one day and discover that central banks have run out of ammunition causing a stampede for the exits. Either way it won’t be pretty.”

A Tendency For A Herd Effect

A report from Bisnow. “Across the country, developers have been racing to deliver new, highly amenitized urban apartment buildings aimed at the growing population of Millennials looking to rent. But some worry this focus on urban living has forced rents up, and the Millennials being targeted for these buildings are unable to afford them. Seven years ago, average rent was less than $1k. Since it’s now that much more expensive to rent an apartment, it follows that young apartment dwellers need to make more than they did in 2009 to keep up with their bills. While median weekly earnings have seen slight growth in the last two years, young people are still making less in real dollars than they were in 2009, and in 2000.”

“During that same time period, construction for apartment buildings has been soaring. The number of construction permits issued has grown every year, with 2016 more than tripling the number of permits issued in 2009. ‘I personally am a little skittish on buildings with extensive amenity packages and dramatically high operating costs,’ DC-based developer and CEO of EagleBank Ron Paul says. ‘Does that out-price a lot of Millennials because they can’t afford these new buildings?’”

The Post and Courier in South Carolina. “In 2014, real estate tracking service Apartment determined that metro Charleston topped the country in planned new apartments, up 8 percent from a year earlier. Now it’s 2016. While comparative numbers aren’t in, ‘the last stat I saw was six months ago, 10,000 units would be coming on board,’ says John Liberatos, owner of development and property management company RentCharleston. ‘Who would have thought we’d have these kinds of numbers in Charleston?’”

“‘It seems to be a lot coming on line,’ says Elaine Worzala, director of the Carter Real Estate Center at the College of Charleston. She feels the boom could be due to the Lowcountry catching the eye of institutional investors. ‘If they overinvest, there’s a tendency for a herd effect.’”

“She acknowledges there’s ‘a little bit (of) overbuilding apartments’ area wide. But Worzala is skeptical about economists purporting that Gen-Ys and Zs prefer the independence of rental properties. She can imagine ‘hipsters’ renting luxury apartments with toddlers and young children in tow. ‘But this thing (in which) 20-somethings stay in apartments until 40, I don’t buy it,’ she says.”

10 News in California. “New apartments are going up in San Diego. So why isn’t the rent going down? Zillow discovered what’s making it more difficult for renters. Since 2014, Zillow found that 64 percent of new apartments were high-end units. Rentals with a median rent of nearly $3,000 a month. Rent of $2,400 is a bit steep for Bush and his family. ‘It’s almost like a mortgage payment,’ said Stephen Bush.”

The Denver Business Journal in Colorado. “So are rents in Denver falling or going up? It depends upon whom you ask. According to apartment rental app Zumper, rents are falling by a lot. According to Zumper, the median price of a one-bedroom rental in Denver fell 3.2 percent in the last month to $1,200. That’s down 4 percent from a year earlier, according to Zumper. At property management software company Yardi Matrix, it’s pointed out that rents are up, but not as much as in the past. ‘Rents in Denver have increased 4.7 percent year-over-year after being in the 8 to 10 percent range for most of the last two years. Demand is still strong in Denver, but supply is growing even faster,’ according to Yardi Matrix’s latest report.”

From Multi-Housing News. “Where are the best and worst markets to be a renter, in terms of price as well as quality of life and other factors? According to a report released this week by WalletHub, an oddly large number of the best places to be a renter are in Arizona: Scottsdale (No. 1), as well as Chandler, Tempe, Gilbert, Peoria, Phoenix and Glendale. The only places in the top 10 not in Arizona are Plano, Texas; Las Vegas; and Tampa.”

The Real Deal. “Equity Residential lowered its revenue projections amid ‘deteriorating’ apartment rental markets in San Francisco and New York, the company said on an earnings call. The firm’s CEO David Neithercut called the amount of new rental supply hitting the market in cities like New York and San Francisco troubling. ‘It’s disrupting us somewhat,’ he said. Despite weakening rents, Neithercut said he has not seen a dip in sales prices for multifamily properties.”

KFYR TV in North Dakota. “Housing vacancies continue to rise and occupancies continue to fall in southwestern North Dakota as the oil slump takes its toll. But agencies say market prices are still not economical for low-wage earners.​ ND Housing Finance Agency Executive Director, Jolene Kline, says what seems like a cheap-to-moderate price is still expensive for some. ‘So your rents may have went from $2,500, to $1,500, to $1,000. A $1,000 is affordable to a lot more people, but it still isn’t affordable to everyone,’ says Kline.”

Headlines Are Starting To Shift

The Marina Times reports from California. “Supply and demand still has the final say, even in San Francisco’s wild real estate market. Early this month, developer Trumark Urban is expected to begin selling a batch of units in its $200 million luxury condominium project, The Pacific, located in Pacific Heights. A walk or drive along Market Street in the Castro shows many new and under-construction condo projects lining the street. SoMa has been home to numerous tall cranes building even more housing units in recent years. In another part of the market, there are potentially tens of thousands of ‘in-law’ units, or accessory dwelling units, that could come onto the market in the near future if a new pact between supervisors Mark Farrell and Aaron Peskin becomes reality and boosts generation of new such units .”

“People who have wondered when all of the new construction would begin to reduce housing prices are finally getting an answer: Now. Currently it is being felt on high-end properties, and even there, it is reflected in longer times before properties are sold and some not-too-dramatic price decreases. But combined with some softness in the high-paying tech market — where hiring has taken a breather over the last year and some venture capitalists have become pickier about shoveling their millions at unprofitable startups — these developments could auger well both for people looking to buy a home here.”

“Local business headlines are starting to shift from stories about the latest eye-popping prices commanded by home sales to tales of a ‘condo glut, with massive supply and dwindling demand’ and ‘market softening, but only for super rich.’”

“What we’ve seen so far this year is a move ‘toward market normalization,’ notes real estate firm Pacific Union. It said that sales continued to be strong, albeit with longer on-sale times ‘especially in the city’s northern neighborhoods and popular Noe Valley. One main reason for this is that many sellers entertained unrealistic expectations and, accordingly, overpriced their homes. Consequently, bidding wars occurred less frequently than in the second quarter of last year, and price reductions became more commonplace.’”

The Tribune. “San Luis Obispo County’s median home price dropped in June from both the month earlier and June 2015. The overall number of home sales rose slightly. Total sales — including new homes, resale single-family homes and condos — were 465 in June, up 4.7 percent from the same month a year ago, when 444 units were sold, according to CoreLogic. The overall median home price dropped 2.9 percent to $500,000 in June, from $515,000 a year earlier.”