September 11, 2018

The Blunders Of Quantitative Easing

A report from CNBC TV 18 in India. “Every second investment report on India sees housing as the most promising sector and yet we see defaults, slowdown in launches and declining sales dominating the industry. On the surface, the problem is, ‘Home prices are not affordable.’ But a more economically correct definition of the current situation would be : ‘At prices that buyers can afford homes, developers are unable to find land that can give developers economic return.’”

“To understand the root cause of a developer’s inability to find appropriate land parcels, one needs to go back to September 11, 2001. After the Twin Towers were felled, the US government feared that crashing consumer confidence could take the slowing economy into a recession. It therefore, adopted the easy money route. But even at low interest rates, there weren’t enough opportunities for investment.”

“Housing, as a result, became the darling of American financial markets. Homebuyers too were happy borrowing as low-interest rates meant buying was cheaper than renting. As soon as banks were able to find a wiling homebuyer, re-financing institutions were more than happy to refinance banks, creating an extremely efficient channel for the flow of newly printed dollars into US real estate.”

“With the US following easy money policy, few nations could follow a tight money policy. Money became easily available across the globe. The Indian government permitting foreign direct investment (FDI) in real estate in 2004, the excess global liquidity also found its way into India.”

“Indian real estate market took the prices of these marquee properties as benchmarks and real estate boom started spreading to smaller cities, towns and villages.”

“A crash in the housing market can cause a bigger emotional trauma than any stock market crash as most homebuyers are leveraged. So in 2008 when the housing market crashed in the US, its government was quick to realise the impending public distress. It pumped in money and saved the day.”

“The Indian market, however, had a different story. In 2008, responding to the US market, the Indian housing market dipped for a while mainly because of liquidity issues with some developers. But a large number of individual investors, who had missed the bus during 2004-08, were waiting to have a piece of estate. These were small investors but larger in numbers.”

“Banks and housing finance companies (HFCs) found them promising customers. So the real estate boom continued for another five years. But by 2013-14, developers had realised that the momentum had slowed. They were now looking at reducing their cost of land in new acquisitions. And this is where Indian land market exhibited its uniqueness. Market inefficiency in land markets came to the fore.”

“The land sale typically involves decision-making by multiple-owners (joint families, trusts, companies, societies, tenants etc.) and due to the psychological phenomenon called ‘Group Think’, rationality does not prevail in such decision-making and the group is unable to accept the market reality (slowdown in sales).”

“The land prices, therefore, do not come down. Moreover, in India, buying of land is seen as a sign of prosperity and selling land is associated with a stigma. Even in distress, few would consider selling land and among them, very few would agree to sell at less than the original purchase price. Thus, developers looking at buying land at discount to earlier prices are hardly able to any crack deal.”

“To make matters worse, during the past 8-10 years, state governments have started to look at housing as a key source of revenue. Circle rates were increased across the country. Service tax and now GST made a further dent into housing sales. Thus, the money left with developers for payment to landlord shrunk significantly. The offer from developers now appears to be a raw deal to landlords.”

“Circle rates and income tax laws further inhibit landlords from selling at lower prices. Market inefficiencies have thus created a big quagmire. Correcting market inefficiencies involve unpopular and difficult decisions; these are neither easy nor quick in a federal democracy like India.”

The Business Report on South Africa. “The average house price growth is likely to be slower than anticipated for this calendar year, with FNB forecasting another year of decline in house prices after taking in account the impact of inflation. John Loos, a household and property sector analyst at FNB, said the consistently negative real house price growth since early-2016 led FirstRand to believe that economic growth rates of 1 percent to 1.5 percent, along with little interest rate stimulus, were not be sufficient to create the level of housing demand that could mop up oversupplies, balance the market and lead to positive real house price growth.”

“Loos added that the longer-run performance of FNB’s repeat sales house price index in real terms was at relatively expensive levels and 91 percent higher than the January 2001 pre-boom index levels despite the significant cumulative ‘post bubble correction.’ The ‘bubble’ refers to the pre-2008 housing bubble. Loos said the ‘post bubble correction’ to date had come in two phases, with the first a sharp decline in real house prices of -21.2 percent from the all-time high in August 2007 to July 2009.”

“He said that there was a period of mild recovery between August 2009 and February 2015, with cumulative real house price growth of 4 percent, but that this mini recovery occurred on the back of massive monetary and fiscal stimulus packages, both globally and locally, that had been aimed at ending the 2008/09 recession and global financial crisis.”

“In South Africa, the Reserve Bank implemented major interest rate cuts at the time, with the prime rate dropping from 15.5 percent in late 2008 to 8.5 percent by mid-2012. Loos said that the global and local stimulus had helped the economy recover moderately and that the stimulus helped economic growth recover to 3.3 percent post the 2008 recession peak. Loos said the rental market was also mired in mediocrity in a weak economy, but there had been a -2 percent decline in FNB’s Price-Rent Ratio Index since the post recession high reached in May 2006, with the index 11.86 percent lower than in January 2008. ”

“However, Loos said the stimulus began to wear off from 2012 and economic growth began a broad stagnation and interest rates started to drop from early 2014 until early 2016. Loos said these events led to the start of the second phase of the post bubble correction, resulting in real house prices to date declining cumulatively by -2.5 percent since February 2015.”

From Ekathimerini on Greece. “We are at the 10th anniversary of the global financial crisis that laid ruin to the Greek economy. The overriding lesson of the global crisis is the persistently weak governance of the global financial system. I count six basic blunders that cost the world trillions of dollars in lost output and years of anguish. Unfortunately, among the worst blunders has been the handling of the Greek crisis, including the recent empty declarations that the crisis is over. If only life were as easy as the fantasies of the politicians and of European Union bureaucrats who routinely checked the boxes.”

“Blunder 1. Excessive liquidity and financial deregulation (pre-2008). At the core of the 2008 financial crisis was a major expansion of credit that greatly outpaced the real economy during the years 2001-2007. With Wall Street’s political power ascendant in the Clinton Administration during 1993-2000, the US government deregulated Wall Street in the late 1990s and the Federal Reserve pumped credits into the deregulated banking system in the early 2000s. The result was a housing bubble and leveraged balance sheets of America’s major financial companies (including commercial banks, investment banks, and insurance companies).”

“Blunder 6. Leaving future growth to quantitative easing rather than public investments. Both the US and Europe cry out for upgraded and updated infrastructure. Genoa’s recent bridge collapse is a tragic manifestation of infrastructure that is woefully inadequate for the 21st century, especially in the era of global warming, with the burdens of rising sea levels, more droughts, more floods and more intense storms. Yet both the US and the EU have continued to pump up the economy through easy credits, which are highly vulnerable to another boom-bust cycle, rather than through long-term infrastructure investments. (Easy credits were the right policy immediately after the Lehman failure, but the growth package should have shifted from easy credits to increased public investments later on.)”

“The macroeconomics profession has also failed. At an analytical level, the two competing schools of macroeconomics, the Keynesians and the neoliberals, both got it wrong. The Keynesians treated the 2008 financial crisis as a crisis of aggregate demand rather than as a financial and structural crisis. The neoliberals (like Weidmann) were far more damaging in their incorrect belief that market forces could quickly overcome the financial crisis and even resolve the overhang of debt.”

“Even worse, the macroeconomics profession generally stood on the sidelines as Greece suffered a persistent and catastrophic collapse of output deeper than the Great Depression. Until today, it has mostly nodded silently as Europe offered Greece one illusory ’solution’ after another.”

Price Cuts And Long List-To-Sell Times

A report from KIRO 7 in Washington. “Buyers and sellers in the Seattle area are feeling the triumph and pain of a cooling real estate market in Western Washington. Numbers released by the Northwest Multiple Listing Service show the number of homes on the market in the area is up 11 percent to 18,580 active listings, the highest it’s been since 2015. But sales are down; in King County, pending sales are down 23 percent and in Pierce County, they’re down 12 percent. The new data also shows a $57,000 decrease in the median price of a home in King County in just three months. In August of 2018, the median price of a King County home was around $669,000. In May of 2018, it was more than $726,000.”

“The cool-down in the sizzling hot real estate market is being felt by Catherine Sabol and her family, whose home in Renton has been on the market for about a month. ‘What were your expectations when [your home] first went on the market?’ KIRO 7 reporter Linzi Sheldon asked.”

“‘We were hoping—to be honest, multiple offers would come in within a two-week period and we would be a quick sale and be able to move on to our new home,’ Sabol said. ‘But that just wasn’t the case this time and it has been a tad bit slower.’”

“‘I think sellers need to be a bit more realistic in terms of how they’re pricing their properties and adjust their expectations,’ John L. Scott real estate agent Nelya Calev said, ‘because I’m still seeing a lot of sellers who will say, ‘Oh no, the market’s hot and hopping.’ Yes, if you price it right.’”

“‘The big thing I see is that competitors are more reasonable with their offers,’ buyer Liat Arama said. ‘So I don’t see those ‘Cash only, no contingencies’ offer competitions as much as I used to see, which is awesome. I think the market is becoming normal, reasonable,’ Arama said. ‘It was crazy; (it) was too hot. And it’s now the way a real estate market should be.’”

“Sobol said she and her family are being realistic and believe with summer vacation over, a buyer is just around the corner. ‘We understand because the market has been changing and there’s a lot going on in our economy right now,’ she said. ‘So we’re open. We know we’ll get there. It’ll just take a little longer.’”

From WTOP on DC. “When talking about D.C.’s hottest housing markets, new H Street, Columbia Heights and Petworth waterfronts usually float to the top. While Upper Northwest sells, overall the ultra high end of D.C.’s housing market has slowed, and multimillion dollar properties are the most likely category to see price cuts and long list-to-sell times.”

“‘A lot of foreign buyers have dried up because their home countries are making it harder for them to divest assets, and also it is more difficult for LLCs to buy because they now have to be named as to who the buyer is,’ Corey Burr, with TTR Sotheby’s International’s Chevy Chase office, told WTOP.”

From Crain’s Chicago Business on Illinois. “A home on Oak Lake Drive in Barrington Hills sold at the end of August for less than its sellers had paid for it a full 16 years earlier, the latest in a series of gloomy data points in the affluent far northwest suburbs. The luxury property market has been weak in many suburbs this year, particularly those that lie far outside Chicago, but nowhere as weak as in the Barrington area, which includes the towns of Barrington, North Barrington, South Barrington and Barrington Hills.”

“‘Everyone’s attention has really shifted toward living in the city, and we’re so far from that,’ said Judy Gibbons, a Jameson Sotheby’s International Realty agent who focuses on the Barrington area.”

“At the end of August, the number of homes sold in the Barrington area was down more than 14 percent from the first eight months of the previous year, according to Midwest Real Estate Data figures posted by the Chicago Association of Realtors, and the median price of homes sold year-to-date was down a little more than ten percent.”

“From Burr Ridge in the southwest suburbs to Lake Bluff at the northern tip of the North Shore, no other place had as negative a combination of indicators. In Lake Forest, which is about as far north as the Barringtons are northwest, sales were up more than five percent and the median price down about four percent in the same period as the Barrington area’s double-barreled droop.”

“The hilly, sometimes bucolic landscape around the Barringtons is peppered with examples of the droop. In South Barrington, a 22,000-square-foot house on Star Line first hit the market in 2015, asking $10 million. The asking price is now $3.75 million. In Barrington Hills, a five-bedroom house with a 14-car garage on five acres on Plum Tree Road has been on and off the market several times since first going up for sale in April 2006. It’s now priced at a little under $1.2 million. In Barrington Hills, a 1920s home on five acres on Merri Oaks Road, whose seller wrote a country song from the perspective of the house, is priced at about $1.2 million, or less than half the 2015 asking price.”

A Sign Sellers Have Had To Adjust Price Expectations

A report from the Spokesman Review in Washington. “After climbing steadily for most of the year, homes sale prices in Spokane County appear to be leveling off. The average price for homes with sales closing in August was $260,800 – nearly unchanged from $259,300 in July, and down from a peak of $268,830 in June, according to the Spokane Association of Realtors. But the same conditions that triggered a $40,000 increase of the average sales price in Spokane County since January are expected to linger into 2019, local agents say.”

“When Diana Humphrey and her husband decided to sell their house and buy a bigger one, the Spokane couple also thought strategically about the market. ‘Houses were going so quick,’ Diana Humphrey said. ‘We got the new listings every morning. By the time we got out to look at them in the evening, about half of the inventory had disappeared.’”

“After about two months of searching, they bought a 1921 Craftsman-style house in the Logan neighborhood. They had noticed the house – priced at $196,000 – had been on the market for a while, which allowed them to negotiate a lower price with the owners. The Humphreys owned two homes – their family home and a rental. The couple waited until they had purchased a new home before putting their rental on the market. ‘We weren’t being forced to move,’ Diana Humphrey said. That took some of the pressure out of house-hunting in a competitive market, she said.”

From Common Wealth Magazine on Massachusetts. “A new report from a Washington-based liberal think tank raises concerns about the proliferation of luxury condominiums in Boston and urges policymakers to identify who all the new owners are and impose new taxes on them. The administration of Boston Mayor Marty Walsh has largely welcomed the jobs and investment associated with the luxury construction. Officials say the strong demand for the new luxury housing is easing pressure on existing units elsewhere in the city and helping to stabilize or drive down rents. The officials also note that luxury housing developers are required to subsidize the creation of affordable housing in the city.”

“The new report from the Institute for Policy Studies, entitled ‘Towering Excess: The perils of the luxury real estate boom for Bostonians,’ paints a much darker picture of the luxury housing boom, suggesting the expensive high-rises are driving up land and housing costs and contributing to the city’s affordable housing crisis. The report describes the luxury high-rises as ‘vertical gated communities’ that contribute to income inequality in Boston and are ‘part of a global hidden wealth infrastructure.’”

“The report says thousands of high-priced luxury units are in the pipeline in Boston. The institute said 35 percent of the units at the 12 buildings are owned by shell corporations or trusts that conceal the identity of the true owner. The report also said 64 percent of the owners do not claim a residential exemption on their property taxes, suggesting their units may not be their full-time residence.”

“Currently, the report said, it is far too easy to conceal the identify of property owners, raising the possibility that some of the owners may be hiding their wealth, dodging taxes, or possibly laundering money. It identified a number of condo purchases in Boston made with cash by shell corporations. ‘It is harder to get a library card at the Boston Public Library than to create an anonymous shell corporation and purchase a luxury real estate unit,’ the report said.”

From Boston 25 News in Massachusetts. “Boston has some of the highest rent prices in the country, but for the first time in nearly a decade, prices are beginning to plateau and fall in East Boston. Real estate broker James Bowen from the ERA Russell Realty Group believes the end of the rising prices is near. ‘There’s a lot of supply hitting the market right now,’ Bowen said.”

“Bowen said the average time a rental is on the market has gone from 60 days to six months, and he has seen prices drop for the first time since the 2007 real estate crash. ‘This is the first season, the summer season, I have seen it reverse almost 10 percent in three months,’ Bowen said. ‘We are done, in my professional opinion, with the rise in multi-family tenements for rent.’”

“Bowen said new luxury apartment buildings are drawing people from the traditional housing stock with deals and amenities. ‘Inside washer and dryer, it has all the amenities,’ Ayan Choudhury from East Boston said. ‘Two-bed, two-bath, it’s cheaper than what I had in the South End.’”

The Mortgage Reports. “It seems like the red-hot housing market might finally be cooling off. According to a new survey, almost half of all homeowners think home buying has gotten less competitive in the last year. Even more think the ever-pricy California and Colorado markets have slowed down. According to the latest Modern Homebuyer Survey from ValueInsured, many homeowners — ‘who are typically more informed and aware of the latest market conditions in their neighborhood’ — think the housing market has turned a corner.”

“Almost half of all those surveyed — 48 percent — have noticed a less competitive home buying market in their area and lighter open house traffic since spring 2017. In Colorado specifically, 56 percent of homeowners think home buying has slowed. Many California and New York homeowner have noticed the same in their states, with 54 percent and 53 percent reporting a slow-down in the area.”

“The survey’s results fall in line with what many experts are predicting: that the housing market will soon shift from the sellers’ favor to the buyers’ — and maybe quicker than expected. According to CNBC, 14 percent of all home listings saw a price cut in June. In half of the country’s biggest metros, home price growth has finally stalled.”

From Curbed Hamptons in New York. “The stunning newly built home at 20 Hook Pond Lane in East Hampton has reduced its asking price after coming on the market in May for $17.5 million. Four months later, the price of this beauty is $14,995,000.”

From Mansion Global on New York. “Manhattan’s luxury housing market saw the best post-Labor Day week in over a decade, according to the weekly Olshan Report. The most expensive unit to find a buyer was a penthouse at the Sterling Mason building in Tribeca, asking $15 million. Developers of the warehouse lofts have chopped $5 million off the price of the unit since it first hit the market in 2013, a sign that sellers have had to adjust the price expectations amid a cooled luxury market.”