May 20, 2017

More Of An Intended Feature Than A Flaw

A report from the New York Times by Robert Shiller. “There is still no consensus on why the last housing boom and bust happened. That is troubling, because that violent housing cycle helped to produce the Great Recession and financial crisis of 2007 to 2009. But the explanations for what happened in housing are not, I think, to be found in the conventional data favored by economists but rather in sociologically important narratives — like tales of getting rich through ‘flipping’ houses and shares of initial public offerings — that constitute the shifting mentality of the era. Consider the data for a moment. It shows us that extreme changes took place but doesn’t tell us why.”

“Real home prices rose 75 percent from February 1997 to December 2005, according to the S&P/Case-Shiller National Home Price Index, corrected for inflation by the Consumer Price Index. And then, from 2005 to 2012, real prices reversed course, falling to just 12 percent above their 1997 level. In the years since 2012, they have climbed 29 percent, about halfway back to their 2005 peak. This is a roller coaster in national home prices — it has been even scarier in some more volatile cities — yet we have no clarity on why it happened.”

“One thing is clear: The prevalent narratives of 1997 to 2005 did not include the concept of a housing bubble, not at first. A computer search using ProQuest or Google Ngrams shows that the phrase ‘housing bubble’ was hardly used until 2005, the end of the boom. Instead, during the 1997 to 2005 boom there were multitudes of narratives about smart investors who were bold enough to take a position in the market. To single out one strand, recall the stories of flippers who would buy a house, fix it up, and resell it within months at a huge profit.”

“This generated buzz. When renters and speculators flipped their purchase contracts at a big profit, sometimes using borrowed money for down payments to flip multiple units without actually even closing on the condos, it was thrilling. It seemed that anyone with energy and initiative could get rich doing this. These narratives are still potent and could easily spur further spirals in the housing market.”

The Sun Sentinel in Florida. “In the head-spinning world of ultra-luxury real estate, slapping a price tag on a mansion sometimes is less about market value than it is about what one agent calls ‘crazy math.’ Singer Celine Dion reportedly sold her Jupiter Island digs for close to the $38.5 million asking price — but the home originally was listed in 2013 for $72.5 million. Farther down the coast, oceanfront mega mansions in Manalapan and Hillsboro Beach once for sale at more than $150 million each have been pulled off the market in recent weeks.”

“The two listings had drawn skepticism from real estate agents, who said the eye-popping prices are more appropriate for the bright lights of New York or the majestic foothills of California than South Florida. ‘Owners, developers and agents have been overpricing uber-luxury properties in South Florida for as long as I can remember,’ said Jack McCabe, a housing analyst in Deerfield Beach. ‘Sometimes I think people are pulling these numbers out of dark places. Chances are, these listing prices are never going to fly.’”

From Bloomberg on Canada. “Canadian government officials delivered a vote of confidence in the country’s housing sector and banking system, telling lawmakers that Vancouver and Toronto’s real estate markets are supported by fundamentals that leave risks well-contained. The core message from the officials was Canada’s market was stable and, despite some risks, policy makers’ measures are taking effect.”

“‘We don’t think there’s any systemic risk across the country,’ said Phil King, a director at the economic and fiscal policy branch at Finance Canada. ‘There are specific pockets of concern, which seem to have ameliorated somewhat in the very-near term but we’re keeping a very close eye on those.’ Vancouver and Toronto have ‘very, very strong fundamentals’ supporting prices including immigration, strong job creation, strong income gains and high wealth, he said.”

The Globe and Mail in Canada. “After holding on to their rapidly appreciating asset for so long, some sellers in the Greater Toronto Area appear to be rushing headlong to cash in. Buyers who lamented that there were so few listings now seem incapacitated by the amount of choice. ‘I think they’re overwhelmed – there are so many houses to look at,’ says Toronto real estate agent Davelle Morrison. ‘No matter what neighbourhood they want to be in, there are so many houses to look at.’”

“In another harbinger of change, Ms. Morrison has also started receiving phone calls that are strange to her ears: Listing agents are pleading for her to bring her house hunting clients to their properties. Ms. Morrison recently listed a duplex for sale in the posh enclave of Moore Park. It’s the kind of property that appeals to both investors and those who want to live in half of the house while renting out the rest. ‘No agents booked showings,’ she says.”

“Ms. Morrison listed a duplex for sale in downtown Toronto with an asking price of $1.26-million. When it didn’t sell within days, buyers began to wonder what’s wrong with the house. They were interested in the location and the property, she says, but they became wary when there wasn’t a bidding frenzy. ‘How often do you get houses that are walking distance to the St. Lawrence Market?’ she says in disbelief.”

“She recently generated a new round of showings when she cut the asking price to $1.199-million. Sellers, she believes, figure the time is right to take some profits after a stunning run-up in prices over several years. But some sellers have waited too long, she believes. Those who might have received eight offers earlier in the year may now get only two. ‘Some of the sellers are greedy and they just want more and more and more,’ she says. ‘We’re in a new market now – you can’t expect the moon.’”

From Tropic Now in Australia. “The current state of Cairns real estate is confounding the public and the data is at odds with the anecdotal evidence. Tourism, investment and economic confidence are all on the rise but median house prices remain decidedly flat, and that’s despite our enviable level of housing affordability relative to capital city markets. To confuse matters even further, a disconnect is developing between the median house price and the top end of the market, which is flying high.”

“Gone are the rollercoaster days of the past 20 years. Today, we’re seeing a much steadier, more sustainable growth pattern. In an attempt to cut a clear path through various reports and statistics, Tropic looks back at where the local real estate market has come from before we look ahead, to get a handle on where it’s all going over the next few years. Those who were here at the time call them the ‘golden years,’ a champagne period of extraordinary growth that fuelled prosperity in the Tropical North for a decade leading up to the Global Financial Crisis of 2007-08.”

“Buoyed by out-of-town investors grabbing residential property bargains, price rises were running at between 10 and 30 per cent in different areas of Cairns from 2000 to 2004. The market was so lucrative back then that some local real estate agents were able to retire years before the rest of us are meant to. Agents of a certain vintage remember the days of selling a $60,000 Queenslander near the Esplanade or Cairns North one year and $400,000 just five or so years later.”

The Los Angeles Daily News. “Total household debt reached $12.73 trillion as of March 31, eclipsing the previous record of $12.68 trillion set during the third quarter of 2008, the Federal Reserve Bank of New York revealed. Among the major debt categories, mortgage balances accounted for $8.63 trillion, followed by $1.34 trillion in student loan debt, $1.17 trillion in auto loan debt, $764 billion in credit card balances and $456 billion in home equity lines of credit.”

“While the debt bubbles began to reinflate after the aftermath of the Great Recession, the composition of that debt has changed, with mortgage debt making up a smaller share and debt from auto loans, and especially student loans, much higher. Among a selection of 11 states, including the most populous states, California had the highest debt balance per capita of $68,460, nearly 44 percent higher than the national average of $47,650. In fact, as further evidence of California’s high housing prices and affordability problems, the state’s mortgage debt alone surpassed the total debt national average (and the total debt of all other states presented except New Jersey), with a per capita burden of $53,250.”

“This expansion in debt ‘is more of an intended feature than a flaw of the Fed’s monetary policy since the housing bubble popped,’ Mises Institute fellow Jonathan Newman maintained in a post after the New York Fed’s previous quarterly report. ‘Expansionary monetary policy can only replace bubbles with new bubbles. Malinvestments are not totally liquidated, but shift from one sector to another. Consumer debt is not directly paid off, but transferred from one type to another. The redirection is mostly guided by new government interference in markets.’”

“The easy money and credit expansion party can only last so long, as we rudely discovered just a decade ago. With the increase in household debt, people pouring money into stocks that are at record highs and the national debt now up to about $20 trillion, it seems we still haven’t learned this lesson.”