August 20, 2017

The Goal Is To Inflate Asset Prices

A weekend topic starting with MarketWatch by Caroline Baum. “It wasn’t long ago that the Federal Reserve resorted to the word ‘conundrum’ to explain the inexplicable. For example, as the Fed raised its benchmark rate from 1% in 2004 to 5.25% in 2006, long-term interest rates barely budged. Former Fed Chairman Alan Greenspan decided it was a conundrum, given that the short-term rate, current and expected, is a key determinant of the long-term rate. Greenspan’s successor, Ben Bernanke, took a stab at the conundrum, blaming a ‘global savings glut’ for the stability of long-term rates during the 2004-2006 tightening cycle.”

“Conundrums are a thing of the past. Nowadays, Fed Chairwoman Janet Yellen has an explanation — an excuse, really — for almost anything, from the atypical behavior of asset prices to inconsistencies in economic relationships. Every month, it’s something else. Maybe the answer lies within. The tendency to dismiss consistently soft inflation readings must be contagious because private-sector economists have taken the bait. In the post mortems on the July consumer price index, released on Friday, one economist attributed the 0.1% increase to ‘volatile’ hotel rates. (Why is the volatility always to the downside?) Another referred to the biggest decline in two decades in lodging away from home (-4.2%) as an ‘anomaly.’ The excuses — and synonyms — are wearing thin.”

“When the Fed expands its balance sheet through asset purchases, it has no control over where that newly created money will go: toward the purchase of goods and services; or into financial assets, such as stocks, junk bonds or housing. Because asset prices aren’t part of official inflation measures, and because identifying an asset bubble is beyond their scope, central bankers eschew using monetary policy to respond to them.”

“Of course, every bubble exhibits unique characteristics and features newfangled instruments (think collateralized debt obligations and CDO-squareds). But they all have a few things in common, as William White, the former head of the BIS’ Monetary and Economic Department says: leverage, speculation and declining credit standards. If the goal of monetary policy, as described by Bernanke, is to inflate asset prices, it might behoove the Fed to explore an antidote for moderating them. Asset bubbles, when they burst, can be destabilizing. Ergo, central bankers should care about asset bubbles and explore ways to lean into them in order to minimize the lasting consequences a crash can impose on the real economy.”

From the Seattle PI in Washington. “In Seattle, the housing market is a topic of conversation that almost can’t be avoided. For several years, real estate prices and rents have been rising fast. Bidding wars and tales of being pushed out as rents soar have become the norm. Issues of equity and access to housing aside, fears have cropped up in some circles that the market — which has been hot across the nation — might be headed for another correction like that of the Great Recession. In other words, some have worried that it’s a bubble.”

“Such rumors are definitely circulating, and becoming easier to believe, especially after looking at median prices that increased 18.6 percent year over year in King County, according to the Northwest Multiple Listing Service’s (NWMLS) latest monthly report. That 18.6 percent represents a jump of more than $100,000 — to a median price of $658,000 — from July 2016 to July 2017.”

“Some level of ‘market correction’ is likely to come, said George Moorhead, one of NWMLS’s directors and a broker at Bentley Properties. He did have some concerns about practices making it easier to buy a home for those with low credit scores or existing debt.”

The Union Tribune in California. “Virtually every Californian can attest to the increased cost of living we have seen in recent years. Since 2000, the median rent in the San Diego region has spiked by 36 percent. However, the median household income for renters has risen just 4 percent. Our lowest-income earners spend nearly 70 percent of their income on housing.”

“The problem on its surface is supply-and-demand economics: We’re simply not building enough housing. What is being built is disproportionately for high-income residents. In fact, we’re meeting 128 percent of the demand for luxury housing but only 18 percent of the demand for middle-income housing and 22 percent for low-income. This is the real problem.”

The American Statesman in Texas. “Austin-area home sales and prices continued on their upward trend in July, with both showing increases over the same month last year, the Austin Board of Realtors said. Within the city of Austin, sales declined 2.5 percent year-over-year, with 832 sales, while the median price rose 7.2 percent, to $369,900. On the supply side, housing inventory levels posted strong gains last month, increasing to 3.2 months of supply, the board said. Despite the increase, the market remains undersupplied, said Brandy Guthrie, the board’s president.”

“Guthrie said strong homebuilding activity, particularly in Williamson and Hays counties, is boosting inventories. ‘In years past, the high demand of the summer selling season has further constrained inventory levels and further pushed up home prices,’ Guthrie said. ‘This year has been different, with steady gains in sales volume as well as listings and inventory throughout the summer. During a month when housing inventory should reach its lowest point of the year, housing inventory across the Central Texas region is at its highest point since fall 2012.’”

The Sun Sentinel in Florida. “Cash deals are by no means dead, but they aren’t dominating the South Florida housing market the way they once did. Sales without mortgages are happening less frequently as investors flee and traditional buyers gain easier access to financing, industry observers say. ‘The market has dramatically shifted,’ said Mike Pappas, president of Keyes Co. in Miami. ‘Cash drove the market in the bottom-feeding and opportunistic times, but today we have a real market with real buyers, and they need mortgages.’”

“In many cases, buyers are wealthy enough that they don’t require mortgages, but they’re choosing to get financing anyway because they can put their money to better use elsewhere, said Stephen B. McWilliam, president of Florida State Realty Group in Fort Lauderdale. ‘You make a lot more when you leverage your money with a mortgage,’ he said.”

From Investment News. “An estimated 7 million to 10 million homes were lost to foreclosure during the housing collapse, and that surge has largely ended. Forclosure filings peaked at 2.87 million in 2010, according to RealtyTrac. They fell to 933,045 in 2016. But the effects of the crisis linger. ‘I do have a couple of clients with little to no equity in their homes, which makes dragging that debt and those payments into retirement a drag on other assets and cash flows,’ said Matt Chancey, an Orlando financial planner.”

“Others say they have clients with real estate investments that still haunt them. Steve Branton, a financial planner with Mosaic Partners in San Franciso, notes that housing prices there have recovered. ‘But I do have clients who bought vacation homes in Nevada which, after the housing collapse, became public or affordable housing. That investment will never recover,’ he said.”

“And others are simply disappointed with the returns from their homes, which is often the largest chunk of Americans’ savings. ‘Most people today don’t understand why their house is worth only slightly more than it was 12 years ago,’ said Ray Ferrara, CEO of ProVise Management Group. ‘The good news is that prices have mostly recovered, but there has really been little appreciation from where prices were at the peak.’”