January 14, 2018

The Cure Is What Caused The Next Crisis

A weekend topic starting with the Citizen Times in North Carolina. “When discussing the West Asheville real estate market, one highly technical term surfaces repeatedly. ‘Oh yeah, it’s insane — it is,’ Delias Thompson said with a laugh, standing in front of the home she recently built with her partner. Thompson noted that several nearby homes, which are about the same size as their 1,100-square-foot home, old for prices much higher. ‘We’re lucky, because when we bought, I think we probably totaled $225,000 (for the land and house).’”

“Kyle Henry, Aaron Palmer and Tyler San Souci have a duplex nearly finished on State Street, on a small lot that cost $80,000, with each 1,100-square-foot unit selling for $279,000. If they hadn’t divided the lot for two homes, they would’ve had to build a house at least in the $450,000 range to recoup the land investment, Palmer said. Even though the land market is extremely tight in West Asheville, he thinks some buildable lots remain, as well as opportunities to rehab and sell existing older homes.”

“That all adds up to prices continuing to rise. ‘People always talk about a bubble and how everything is going to get softer, but I’m under the belief that as long as you have supply and demand, as long as there’s less inventory and there’s more people who want to be in this area, there’s always going to be that demand that’s pushing and driving the market up,’ Palmer said. ‘So I don’t see it slowing down over the next year or two.’”

“A bidding war would be just fine by another State Street resident, Johnny Harrin. Harrin grew up in the house his father built in the early 1960s, moved away when he got married and then moved back in 2002. Now it’s got a for sale sign out front. He bought the two adjacent lots after moving back, and they’re included, although he’s having problems with the city wanting him to not build within 30 feet of a creek on the empty lots. He’s torn about selling, in part because the house, now three bedrooms and two baths on two levels, was paid for more than 30 years ago. His dad paid about $3,500 for it when it was built as a two-bedroom, one-bath.”

“‘We’re going to see what we can get out of it,’ Harrin said, adding that a real estate agent told him to put it on the market at $499,000.”

The Coeur d’Alene Press in Idaho. “Matthew Gardner popped the thought that we’re in a housing bubble. ‘Just because some markets are overvalued there doesn’t have to be a bubble,’ Gardner, Windermere Real Estate’s chief economist, told nearly 200 Windermere Coeur d’Alene Realty employees.”

“Gardner cited multiple current market conditions, including high credit quality, borrowers not defaulting, good debt-to-equity ratios and slight mortgage rate increases to perhaps 4.4 percent, to dispel the thought that the economy has entered a housing bubble. Gardner predicts the economy will expand 2.5 percent in 2018, but foresees a slowdown in 2020.”

“Gardner said skyrocketing home prices in other areas such as California — the median sales price in San Francisco is $1.18 million — will continue to drive people to North Idaho. ‘We are cheap,’ he said.”

From Florida Today. “As we go through our second ‘housing bubble’ in this century, many are throwing the 2006-2011 crash histories down the memory hole. Let us hope local government does not follow suit. For example, in 2005 the Brevard County School Board, stung by the failure of their 2003 sales tax efforts, went all in on a plan to borrow over $800 million for capital improvements. The source of funds was to be the grossly inflating value of housing and real estate.”

“The school board’s taxable value estimates in April 2005 — just four months shy of our August 2005 peak median house value of $248,000 — had taxable values increasing by 10 percent annually for the next five years. Despite arguments in 2005 school population would flounder if median house price hit over $350,000, and in 2006 in the face of obvious falling values, the school board borrowed hundreds of millions of dollars.”

“This extravaganza led to the crash and burn spectacle a few years later. Windfall bubble revenues had not been put into reserves or capital but had either been leveraged for debt or used to increase operating expenses. Where the local governments had been given reports and charts of the market as it was collapsing, all was ignored. By the fall of 2007 foreclosure filings were exceeding sales, and did so for many more years.”

“The manipulator of the artificial market creating multiple asset bubbles in stocks, housing, and crypto-currencies is the Federal Reserve, with more than eight years of zero-interest policy. We’re on the cusp of 2005 prices, and the rental market has followed suit. I believe in 2005 landlords were shocked at the rapidly accelerating prices and failed to raise rents accordingly. This time they are raising rates rapidly and many landlords, determined not to miss their second shot at bubble prices, are selling their rentals.”

“I would never claim pricing in any economic bubble is not reflective of market values. Indeed it is. The problem is the underlying sound pricing economics have fallen prey to the intense belief prices will relentlessly surge. Prices do not just double in a few years due to demand unless demand skyrockets and supply is constricted. There are roughly 250,000 housing units and 580,000 people in Brevard. Housing is being built, not destroyed, and the population is not growing rapidly.”

“There is the oft-repeated phrase of ‘It’s different this time,’ but the only difference is in length and magnitude, not final resting point. There is no such thing as a perpetual bubble.”

From Bloomberg. “Back in November, former Fed chief Janet Yellen described the current low level of inflation as a ‘mystery.’ With QE having multiplied the amount of fiat money issued by central banks in just a few years, it’s fair to wonder: How come it didn’t trigger much higher levels of inflation than what we now see? The more fundamental answer is that QE resulted in a wealth increase for the richest, who consume relatively little of their revenue, while the middle class and the neediest largely failed to reap any benefit.”

“There are many problems with this, from growing inequality to pressures on social cohesion. But one that has received too little attention up to now is the prospect that we are heading toward a growing asset bubble that will result in a pronounced crash.”

“In the U.S., the top 10 percent of households hold over 70 percent of net wealth; the same is true, to a lesser extent, in the rest of the Western world. The wealthiest consume the lowest portion of their income, especially when the gains are exceptional rather than recurring, as with QE. As for the middle class, its income has been capped for decades by cheap foreign imports and an automation wave, none of which were changed by a monetary phenomenon like QE. As a result, only a small fraction of the newly created wealth found its way into consumption, and when it did, it was limited to luxury goods and real estate through higher rent.”

“Meanwhile, central bankers are still using inflation as a measure to gauge how much more QE they should proceed with. Journalist Ambrose Evans-Pritchard put the challenge now in the starkest possible terms, as a threat not simply to the recovery but to democracy: ‘The central banks themselves entered into a Faustian Pact from the mid-Nineties onwards, falsely thinking it safe to drive real interest rates ever lower with each cycle, until they became ensnared in what the Bank for International Settlements calls a policy ‘debt trap’. This has gone on so long, and pushed debt ratios so high, that the system is now inherently fragile. The incentive to let bubbles run their course has become ever greater.’”

From News.com.au. “They are calling it the ‘everything bubble’. All around the world assets have been rising with a beautiful synchronicity. Australia has seen east coast house prices go crazy. We are not alone. A simple home can cost well over a million dollars now in cities across New Zealand, Canada, Sweden and San Francisco.”

“The everything bubble goes beyond share markets and homes. The global bond market is worth around $80 trillion, 10 times more than all the land and buildings in Australia put together. It has soared to record highs over the past two decades before showing curious signs of weakness in the last year or so, that have been intensifying over the last week.”

“The Australian stock market may look like it’s not part of the everything bubble — after all, it is still below its 2007 peak. But when you delve into technology stocks you can find valuations that seem blown out of all proportion. For example Getswift, a company with revenue in the last 12 months of $600,000 — comparable to your local pizza shop — but valued at $585 million. (Getswift claims it has a deal with Amazon.)”

“This everything bubble is so strong it even conjured into existence a whole new class of assets and made them worth billions — cryptocurrencies. Bitcoin is up 226 per cent per cent in the past two months alone. That looks puny compared to ethereum, which is up 397 per cent.”

“But if you have an everything bubble, you need to look at the trend behind the trend. Cast your mind back a few years and you may recall the expression ‘quantitative easing’. This is where central banks pumped money into the economy to try to help us recover from the global financial crisis. It happened in the US, Japan and Europe. The problem with loose monetary policy is that while it is supposed to make people do productive things like start a new company, it has a side effect of making them buy assets at crazy prices. If the everything bubble pops, it may turn out that the cure for the global financial crisis is what caused the next crisis.”