The Housing Bubble

A weekend topic starting with some comments from the past week. “Of course, this effort to broadly reflate house prices is no big secret (mostly - the Federal Reserve transcripts below from 2009 were released in 2015). And when all the central banks are playing from the same playbook, one sees a certain amount of synchronicity.”

“Ben Bernanke Has an Impressive Passive-Aggressive Streak, and Other Things We Learned in the New Fed Transcripts - MARCH 4, 2015 - New York Times.”

“As the Fed weighed strategies for arresting the economic tailspin in March 2009, including the collapsing housing market, Elizabeth Duke, a member of the board of governors, offered a colorful way of thinking of their task.”

“‘I’d like to start with the story of an elderly wealthy gentleman who had taken a young bride and begun to spend money like crazy,’ Ms. Duke said. ‘His friends got very concerned that he was going to go through his entire fortune, and they elected one of their number to go and talk to him about it. He said: ‘Sam, we’re really concerned. We want to make sure that you know that you can’t buy love.’ Sam said: ‘I know you can’t buy love, but if you spend enough money, you can buy something that looks so close you can hardly tell the difference.’”

“What does this have to do with housing? She continued: ‘So I think if we spent enough money, got enough of a hit right now, it would look like a floor on house prices, and we might have something every bit as good as a floor on house prices.’”

One added this, “Look no further than actions taken by the Fed after releasing their White Paper on Housing in early 2012 for the explanation of how housing so quickly became similarly overvalued to where it was in the runup to the 2007-2009 financial collapse.”

“Fed’s push on housing crosses a line, critics say. February 21, 2012.”

“Senior Federal Reserve officials are injecting themselves into a noisy debate over how to solve the housing crisis, drawing criticism from some lawmakers who say the Fed has no business straying from its traditional role as the U.S. central bank. Amid complaints that the Fed has encroached on Congress’s territory, Chairman Ben S. Bernanke has tried to allay concerns on Capitol Hill over the past few weeks, in the latest flap in a broader debate about the Fed’s proper role in the economy.”

“The latest commotion follows the Fed’s release last month of a report analyzing housing policy, which central bank officials say is closely related to their efforts to reinvigorate the economy. The report suggested that additional federal efforts to help homeowners could be worthwhile, even at taxpayer expense. Democrats have seized on the ‘white paper’ as ammunition in arguing for billions of dollars in new federal relief for beleaguered borrowers. Some Republicans have accused the Fed, which generally avoids addressing policy questions before Congress, of potentially compromising the central bank’s independence.”

“‘It appears the Fed may have overstepped their bounds in recommending fiscal policy actions,’ said Michael Feroli, chief U.S. economist at J.P. Morgan Chase. ‘It does get a little bit into dangerous territory.’”

“After Rep. Scott Garrett (R-N.J.) complained this month that the Fed had crossed a line, Bernanke said publicly that he was sorry if the lawmaker thought that the white paper intruded on a congressional debate. And after Sen. Orrin G. Hatch (R-Utah) released a letter he sent to the Fed, warning it ‘to refrain from providing any hint of activism,’ Bernanke called him to explain the central bank’s actions.”

“Some Fed officials, in particular New York Fed chief William Dudley, have advocated a variety of new efforts to aid homeowners. Many of the white paper’s ideas to help the housing market echo Obama administration proposals, such as helping homeowners refinance into more affordable mortgages and selling foreclosed buildings for use as rental properties.”

From the Mankato Free Press. “Hang onto your hats. That’s the message from Hans Olsen, the global head of investment strategy for investment banking firm Stifel. One thing Olsen says sets this time apart from all other past cycles, is that it has and will be driven largely by what the Federal Reserve Central Bank did during and after the Great Recession. ‘You’re living through a historic time. This is an extraordinary experiment in banking that’s never been seen.’”

“Patrick Baker, of Greater Mankato Growth, said Olsen’s comments reinforced things he hears from local businesses. ‘Especially the inflation piece and the interest rate piece. We’ve had a long run of low interest rates and particularly in the housing sector that’s really helped some of our market rate housing come on line. What I hear from local developers is that a 1 percent rise in the interest rate can affect the ability of a project to go or not,’ Baker said.”

“Noting the previous ‘tech bubble’ and ‘housing bubble’ that led to big ups and then downs, Olsen said the current cycle might be called the ‘great adventures in central banking’ bubble. How it all turns out in a few years will depend on a variety of things.”

From Max Rangeley, manager of The Cobden Centre. “This week, the first Annual Summit on Economic Freedom will take place in the European parliament. I will have the pleasure of debating with the director of IMF Europe, Jeff Franks, on the topic of ‘Central Banks: The Solution or the Problem?’ From 2008 onwards, central banks have generally been regarded as the heroes that saved the day from the volatile and dangerous free market, but an interesting counter-narrative has developed: monetary policy has increased inequality, distorted markets, and – perhaps most importantly – created an even larger global debt bubble than that of 2008.”

“Bureaucratic price setting has a staggeringly high failure rate. We are not surprised when Venezuela has food shortages resulting from the government setting prices – we should also not be surprised when central banks setting interest rates lower than they would be in a free market results in a $230 trillion global debt bubble.”

“When the bubble bursts, it will be important that people understand that the crash is not some act of God, random event, ‘animal spirits,’ or innate feature of financial markets, but rather a consequence of having interest rates set by central banks which has created a global debt super-bubble. The only way to prevent this is to have interest rates set by the market rather than central bankers.”

From Tobias Peter, a senior research analyst at the American Enterprise Institute’s Center on Housing Markets and Finance. “Just 11 years after the last housing bubble burst, the United States is in the midst of yet another boom — both caused by errant federal housing policy and inflated by regulatory malpractice.”

“For decades, Congress has mandated any number of credit-easing policies because they appear to make buying a home more affordable at seemingly no cost. But, as the last housing bust proved, there is no free lunch. These mandates result in unsustainable price increases and price volatility by increasing demand when supply is constrained. This same process is being repeated today. But the cost is anything but free as these mandates make housing less affordable and promote instability.”

“Regulators enforce these mandates by requiring agencies like the government-sponsored enterprises Fannie Mae and Freddie Mac to loosen credit standards in order to garner more business with higher risk borrowers. Credit easing was quickly capitalized into higher — not more affordable — home prices. The added buying power merely allowed lower-income buyers to inflate the price boom, at the expense of a greater debt burden and higher risk. Since the marginal buyer determines not only price levels, but also the degree of volatility in the market, the result was financial instability.”

“In the current boom, regulators are repeating these same mistakes. Take, for example, the Consumer Financial Protection Bureau’s ability-to-repay rule, which emerged in response to the financial crisis. This rule established the ‘qualified mortgage,’ a type of loan created to ensure that potential buyers can afford their mortgage. Even though a QM cannot have risky features such as balloon payments or an interest-only period and caps the debt-to-income ratio at 43%, it has crucial flaws.”

“There are no minimums placed on credit scores, no maximums placed on loan-to-value ratios and no limits on risk layering, which is when low credit scores are combined with high LTVs, a 30-year amortization term and high DTIs. QM is all but safe. During the last financial crisis, there were widespread defaults among loans that would meet the qualified-mortgage standard today.”

“To make matters worse, the consumer bureau has allowed Fannie and Freddie and the FHA to exceed the qualified-mortgage debt-to-income limit to further expand the pool of eligible borrowers. While this decision was applauded by industry lobbying groups for the housing industry, it made QM loans even riskier.”

“The GSEs are also being forced by the Federal Housing Finance Agency to compete with the Federal Housing Administration for high-risk borrowers. In December 2014, the GSEs, at the behest of the housing finance agency, started to originate loans with as little as 3% down — something the FHFA had told them to stop doing under previous leadership. More recently, the housing finance agency pushed the enterprises to increase their DTI limit to 50%, further away from the original QM standard.”

“An even earlier jolt to lending came from monetary policy. In late 2012, the Federal Reserve announced its third round of quantitative easing and started to purchase $85 billion per month in long-term U.S. Treasury securities and agency mortgage-backed securities. A key aim of this program was to jump-start the housing sector through lower mortgage rates. Unfortunately, that’s just around the time the housing market flipped from being a buyer’s market to a seller’s market. The housing market remains a seller’s market today.”

“As a consequence of market conditions and credit easing, home prices started to rise rapidly. Since their trough in 2012, home prices have risen at an annual average rate of 5.5%, far more rapidly than incomes or inflation. At the lower end of the market, where leverage has been expanded the most, prices have recently risen at twice that rate.”

“But as the earlier boom has shown, everything that goes up must come down. The further prices deviate from market fundamentals, the more painful the eventual price correction will be for homeowners. Regulators have again endangered the long-term health of the entire housing market.”

From the Idaho Statesman. “The latest Treasure Valley home-sales report offers fabulous news for home sellers and more discouraging news for buyers, especially people who had hoped to buy but now cannot afford to. A month after home prices set records in Ada and Canyon counties, they did it again in March. The median price of the 848 single-family homes sold in Ada County was $308,950, up $11,450, or 4.2 percent, from the month before, according to the Intermountain MLS. In Canyon County, the median was $211,945, an increase of $15,955, or 8.1 percent.”

“In the past year, prices have climbed nearly 24 percent in Ada County and 21 percent in Canyon. As usual, new homes cost more than used. The Ada County median price was $345,870. That was actually a decrease from February’s, $362,587. Canyon’s new-house median is $244,900, up $21,925, or 9.8 percent.”

“Used homes were traditionally more plentiful than new, but not now. The number of used Ada County homes on the market in the first quarter was one-third lower than in 2017, said Breanna Vanstrom, CEO of Boise Regional Realtors. ‘What we’re seeing is very low inventory driving up the prices,’ Vanstrom said. ‘We’re truly in a supply-and-demand situation.’”

From the Herald Tribune. “The Sarasota-Manatee area recorded 467 foreclosure filings during the January-March period, with one in every 880 homes in some form of distress, according to ATTOM Data Solutions. ‘Less than half of all active foreclosures are now tied to loans originated during the last housing bubble, one of several data milestones in this report showing that the U.S. housing market has mostly cleared out the backlog of bad loans that triggered the housing and financial crisis nearly a decade ago,’ said Daren Blomquist, senior vice president at ATTOM.”

“‘Meanwhile, we are beginning to see early signs that some post-recession loan vintages are defaulting at a slightly elevated rate, a sign that some loosening of lending standards has occurred in recent years. Consequently, foreclosure starts are trending higher compared to a year ago in an increasing number of local markets — some of which are a bit surprising given the overall strength of housing in those markets,’ he said.”

“Sarasota-Manatee ranked 126th out of the 219 largest U.S. metro markets for foreclosure activity in the first quarter. Florida’s finished 11th with a foreclosure filing on one in every 599 homes. The average time to close a foreclosure in Florida was third longest at 1,247 days, according to the ATTOM report.”

From DNS News. “Mobile homes aren’t a sector of the housing market we often examine here at DS News, but a recent study tracking delinquencies among mobile-home loans could signal the build-up of troubling trends. Are increasing mobile home delinquencies the ‘canary in the coal mine’ that foreshadows larger problems impending for the housing market and for the broader economy?”

“According to research cited by UBS, a global financial services firm, mobile-home loan delinquencies are up 2 percent year-over-year. Moreover, the 30-day-plus delinquency rate has reached nearly 5 percent, which puts it at the highest level since 2005. Mobile-home 30-day-plus delinquencies, however, began an upward climb around Q3 2016.”

“It remains to be seen whether the increase in mobile-home loan delinquencies will translate to increased delinquencies on other types of home loans, especially among lower- and middle-income families. In their statement, UBS says, ‘We believe weakness in these two groups will drive higher credit losses at some stage over the next few years—particularly in credit card, installment, and student loans—with macroeconomic inflection from job growth to job loss as a likely catalyst.’”