A False Basis For Confidence
A reader posted this article. “Shaky Cyprus teeters between Moscow and Brussels, as the latest troubled EU nation hurtles towards a seemingly inevitable financial rescue.”
I replied, “This brings up a topic I’ve been thinking about. When I do searches for the Friday post, I get an idea of what’s going on by the volume of reports in one area or another. Right now, the global bubble situation is producing a lot of press in Australia, Asia, and Canada. And the rolling bubble effect into the US has the NAR rubbing their hands in glee. Hard to say for sure, but something big could be about to happen.”
One said, “Australia’s game is to limit the amount of buildable lots so that there is nothing affordable. America’s game is slowly dribble out a small number of foreclosures so that people are in bidding wars to get them. It really is beginning to feel like the wheels are about to come off. The real question is what will cause a sea change in the current situation? Political elections, global trade slowdowns, or perhaps global instability come to mind over the next several months.”
Another had this, “Between the escalating civil war in Syria as a proxy for war with Iran and the heating up of the old cold war against Russia/China, not to mention the Egypt elections thing and Israel beating the war drums, the Middle East is ready to explode. Then you have the PIIGS of the Eurozone going full retard which doesn’t bode well for China or the US. Bottom line, everyone is scrambling for safety. How do I think this relate to housing? Hard assets.”
And another, “There is definitely some coordinated campaign to blow up housing again. The press reports of bidding wars, the slow drip of inventory, the sudden rise of FHA, and the convenient timing with the NAR’s march on Washington are all indicators that the PTB are putting a floor under prices.”
One asked, “What’s on the international banking system bailout agenda for this weekend? Last weekend saw the bailout of Bankia and the Spanish banking system. This weekend, the world faces the prospect of titanic countervailing effects between the Grexit and a high-level coordinated central bank effort to sterilize its potential effect on the global financial system. Are there any further global financial time bombs on the near-term horizon?”
And finally, “I honestly believe we are only one or two bailouts away from prosperity.”
The Vancouver Sun in Canada. “With the Toronto-Dominion banking group calling for a gradual 15-per-cent drop in Vancouver home prices over the next two to three years, both lenders and homeowners will likely reduce spending. When asked what the implications of this prediction or a drop in prices could be for homeowners, mortgage broker Chris Pughe said ’some people who have used their equity to sustain their lifestyle choices may make the decision to sell because there is nothing else for them to do — a drop in prices could have serious consequences for some of our families.’”
“She also said lenders could make it tougher to qualify for loans if they think the prices are going to fall. ‘We have already seen some changes in Canada Mortgage and Housing Corporation’s policies when they decreased the maximum loan-to-value ratio on a refinance from 90 per cent to 85 per cent.’ Those restrictions were made in 2011 at the same time CMHC dropped the maximum amortization period to 30 years from 35.”
The Globe & Mail in Canada. “A severe downturn in the market would cause significant problems for the government, not only because it would cause economic shock waves but because both Mr. Flaherty and Mr. Carney would inevitably shoulder a large portion of the public blame. The tactics used so successfully to keep the market going in the wake of the financial crisis – namely prodding the banks to lend more by purchasing $69-billion worth of their mortgages and maintaining record-low interest rates – are part of the reason why condo prices in Canadian home prices have reached levels that almost all experts say are unsustainable.”
“‘People are really scared right now,’ said real estate agent and author Brian Persaud. ‘When Flaherty says the condo market is overheated, you get people who have bought [units] walking away within the 10 day cooling off period.’”
Property Observer on Australia. “Negative gearing was used by around 2 million property investors in the last financial year to reduce their tax bill, according to ATO figures. A property is negatively geared when the costs of owning it – interest on the loan, bank charges, maintenance, repairs and capital depreciation – exceed the rental income it produces.”
“Prime Minister Julia Gillard says her government has ruled out removing the tax break. ‘We think that an abolition of negative gearing will cause distortions to the property market that we did not want to see,’ she said.”
Smart Company on Australia. “The current interest rate cutting cycle, which began in November, is not aimed at boosting house prices or ‘re-igniting a boom in borrowing,r says RBA governor Glenn Stevens. Stevens said one thing Australia should not do is ‘try to engineer a return to the boom.’ Stevens said he agreed that there was a need for more confidence in the economy among households and businesses, but said it had to be ‘the right sort of confidence.’”
“‘The kind of confidence based on nothing more than expectations of ever-increasing housing prices, with the associated willingness to continue increasing leverage, on the assumption that this is a sure way to wealth, would not be the right kind. Unfortunately, we have been rather too prone to that misplaced optimism on occasion.’”
“‘You don’t have to be a believer in bubbles to think that a return to sizeable price increases and higher household gearing from still reasonably high current levels would be a risky approach. It would surely be a false basis for confidence. The intended effect of recent policy actions is certainly not to pump up speculative demand for assets. As it happens, our judgement is that the risk of re-igniting a boom in borrowing and prices is not very high, and this was a key consideration in decisions to lower interest rates over the past eight months,’ he said.”
The Newcastle Herald on Australia. “Residex chief executive John Edwards said ‘all the statistics’ pointed to a significant spike in some Hunter suburb prices within the next five years. ‘When statistics tell you something is going to happen, you can bet it will.’”
“Though the national market was declining, double-digit growth in some areas in the Hunter could be considered conservative. ‘Unfortunately, a lot of the time, the last people to realise the potential of an area are sometimes the people living in it,’ Mr Edwards said.’
“Hunter Valley Research Foundation director Simon Deeming disagrees with the predictions of a looming property boom. Mr Deeming said the region’s property market was suffering ‘a nasty hangover from the party’ of the last boom. He said prices were ‘going nowhere fast’ and he struggled to understand the logic behind such large predictions.”
Property Wire on India. “India has been hailed as one of the more interesting emerging property markets in Asia but figures reveal that in one of its major cities, Mumbai, a substantial amount of real estate is unsold. Up to 60% of luxury apartments, both developed and under construction, remain unsold in Mumbai and experts say it is due to surging prices and regulatory uncertainty. The Confederation of Real Estate Developers Association of India (CREDAI) has called for urgent reforms, saying there is too much ‘black money’ in the system and corruption.”
“Of the 3,300 luxury apartments being developed in Mumbai it is estimated that between 55 and 60% are yet to be sold. The Mumbai market saw about 100 luxury apartments sold in 2011/12 tax year compared with about 400 sold in 2007/08 , the peak of the property market. But an oversupply due to developers rushing to cash in in what was perceived as a property boom is now blighting the market.”
The Business Standard on India. “Housing sales dipped by more than half in the first quarter of 2012 in Mumbai and national capital region. The decline in housing sales was the highest in Mumbai at 58%, followed by 57% in Delhi-NCR and by 18% in Bangalore, the third major property market. The data includes housing sales figures for homes sold by the builders and not the secondary market re-sell deals.”
“‘Residential unit absorption numbers in the first quarter in the National Capital Region (NCR) and Mumbai Metropolitan Region (MMR), plunged over 50% due to economic slowdown,’ the research firm said in a statement. ‘Mumbai and Gurgaon have already seen one of the sharpest falls in absorptions, with MMR seeing a drop of 58% and NCR with a drop of 57%. If this trend continues, there could be ‘stage 1’ price correction in the range of 5% to 20%, especially in micro-markets of NCR, MMR and Hyderabad,’ said PropEquity CEO Samir Jasuja.”
“As per the data, the total absorption in NCR has dropped to 15,104 units in the first quarter of 2012 from 35,420 units in the year-ago period. The total supply was 1,07,731 units. In MMR, the total absorption fell in the first quarter of 2012 to 11,473 units from 27,676 units in the corresponding period of last year. The total supply was 89,461 units.”
The Morning Whistle on China. “Ren Zhiqiang, a controversial mainland Chinese real estate tycoon known for his bold predictions on China’s property market, was back to his usual tricks on Sina Weibo recently with his latest thoughts. ‘If [there are] no home policy changes, home prices will rise again next year.’”
“‘Supply can’t meet people’s demand, and the reserve requirement ratio is expected to be lowered three to four times this year. Usually the market defers the effect of monetary policy for about a half year, so home prices probably won’t rise again until March next year.’”
“He also said that the government has made some changes to encourage home supply, and that there may be more policies coming. ‘In China, the commercial property market is only for the rich.’ Ren replied to the question: are homes only sold to the rich? Land for low-cost flats is separately allocated and no land fees imposed on these projects.’”
“However, this does not mean low-cost flats are really cheap, as Lang Xianping, a well known Chinese economist, pointed out, ‘The price of a low-cost flat is 80 percent of a commercial home. Is that really low-cost for the public?’”
“Lang mentioned that people have to draw lots for a chance to buy a low-cost flat. ‘I heard a citizen said the he felt lucky but not happy after getting the chance to buy a low-cost home. That’s ironic, that’s not what low-cost homes should make people feel.’”
‘The tactics used so successfully to keep the market going in the wake of the financial crisis – namely prodding the banks to lend more by purchasing $69-billion worth of their mortgages and maintaining record-low interest rates – are part of the reason why condo prices in Canadian home prices have reached levels that almost all experts say are unsustainable.’
‘The current interest rate cutting cycle, which began in November, is not aimed at boosting house prices or ‘re-igniting a boom in borrowing,r says RBA governor Glenn Stevens. Stevens said one thing Australia should not do is ‘try to engineer a return to the boom.’
Yet they keep on doing it anyway. China, Australia, Canada and the US responded to the problems caused in part by an extended period of easy money with even more easy money. Now that didn’t work, so their response? More easy money! Meanwhile the distortions created by the bubbles haven’t been addressed.
This is how the govts and central banks see it; as long as inflation is low, they can create as much money as they want. What they are missing is that in an economic deflation, this policy makes things worse (see Japan). Either they are fools, or they only care about maintaining power.
‘Talking about Toronto’s condo craze has become something of a sport for residents of Canada’s largest city, where soaring real estate prices and a forest of construction cranes have fed speculation of a real estate bubble. Mr. Daimee spots foreign buyers and sellers by the presence of a power of attorney on condo documents – a sure sign, he said, that foreign buyers are using a local contact to close a deal. In fact, he’s done such deals himself.’
‘The power of attorney approached me directly, saying ‘I have someone to buy in this particular building,’ Mr. Daimee recalled. ‘The owners were in Beijing but the power of attorney was local. They wanted to flip it right away.’
‘John McGrath said while Reserve Bank interest cuts no longer had the effect they used to, given banks’ reluctance to pass on the full amount, the property market was not in a bad state and the best time to buy was when others weren’t. ‘Markets have a herd mentality and following the crowd gives people a much needed sense of security, especially in this time of economic volatility,’ he said. ‘Buyers need to be brave - this is exactly the type of market they will look back on and say, ‘I wish I’d bought in 2012’.’
‘Buyer inquiry was up and there was ‘a lot of cash sitting on the sidelines.’ ‘The market under $1 million in most metro areas is strong,’ Mr McGrath said’
‘New South Wales and Queensland are in the grip of a deepening housing crisis, a report has revealed. Australian for Affordable Housing campaign manager Sarah Toohey said the report was proof the housing system was broken. ‘We hear a lot of talk about falling house prices and a troubled housing market, but in our capital cities, house prices are still eight to nine times average earnings. Indeed the National Housing Supply Council report shows that house prices are at or above pre-GFC levels.’
‘Though sales to international Chinese buyers still represent only a tiny fraction of the overall US market, which recorded $928.2 billion in sales last year, the rapid growth of wealthy Chinese individuals saw a 23.3 percent increase in their property purchases in the U.S. over the last 12 months and an 88 percent increase from just two years ago. Pamela Liebman, CEO of The Corcoran Group, added the rapid growth was due to the high-valued purchases that Chinese were making in the States.’
‘It’s extraordinary,’ she said. ‘Five years ago, we never talked about Chinese buyers. We started noticing them 18 months ago but they have only become much more prevalent in the past year.’
‘Mr Young says he believes interest rates are too high and Canada is an example of a nation, in a similar position to Australia, with a monetary policy creating much lower interest rates. “Canada is a similar resource rich country to us - its cash rate is one percent not 3.5. ‘Banks draw their money from the same well that our banks do, they’re lending out four years fixed at guess what rate? 3.39 percent. When our banks are competing with those banks - they match them - they lend out at that rate as well.’
‘You go to Singapore, Hong Kong, anywhere our banks are they’ll be offering you that rate. You can even borrow from them at that rate bring the money into Australia as Chinese can and Singaporeans can and buy Australian property at that low low rate but if you come into Australia and work in Australia that same bank will say we’ve got to get seven per cent off of you.’
A message to govts and central bankers all over the world: you’ve got a mammoth, interconnected financial mania on your hands. And you are driving us off the cliff with your policies.
Either they are fools, or they only care about maintaining power.
Hmmm…
It could easily be both.
Remember what happened to all the Japanese consortiums who invested in the California real estate market in the mid-80’s?
Everyone was freaking out because Japan was going to own America– why, they even bought Pebble Beach Golf Resort! And the Wilshire Corridor! And now they’re moving in on Minneapolis and inflating prices so fast that we can’t even afford a tract house in Lawndale!
Waaaaaaahaaaa! They’re buying up America!
Also, Rockefeller Center.
“China, Australia, Canada and the US responded to the problems caused in part by an extended period of easy money with even more easy money. Now that didn’t work, so their response? More easy money! Meanwhile the distortions created by the bubbles haven’t been addressed.”
The Fed’s Response to the Financial Crisis: More of the Hair of the Dog That Bit Ya
Posted on October 23, 2008 by WashingtonsBlog
John Riley nails in a single paragraph what the government is doing wrong in responding to the economic crisis:
Riley has summarized in a few words what the Austrian school of economics, Ron Paul, and everyone else with a good head on their shoulders has been saying for a long time. The problem is that too much credit, artificially low interest rates and cheerleading for the binge by Greenspan and company led to massive malinvestments. The only way to get through the financial crisis is to tough it out until the hangover is really over.
…
Has anything changed since the Fall 2008 crash, or is “hair-of-the-dog” still the automatic response to a collapsing credit bubble?
“When the only tool you have is a hammer, every problem looks like a nail.” — Maslow
Our leaders are alcoholics who’ve “got it under control”.
Blue, who keeps electing and re-electing those leaders? Yeah, WE DO. Our leaders can be replaced with real citizens, not just banker goons.
Correctamundo, Better. And yet, all the pols are owned by cororations, many judges are owned by corporations. And the John Roberts is owned lock stockn barrel.
We voters seem to be easily swayed
But, WHY do we need the mass amounts of credit and low interest rates?
There is a fundamental underlying flaw in the economy that caused us to switch from sound banking to insane banking, and that triggered the bubbles. The bubbles remain a symptom, not the underlying root cause of our economic ills.
So we can be distracted from the fact that our jobs have disappeared, and our economic prospects look very bleak. We don’t need jobs if our “assets” keep going up in value…or at least, that’s what they want us to think.
“…backdoor route to debt reduction…”
It doesn’t mention it in this article, but I suspect the backdoor route involves taxpayer-subsidized debt reduction for those in mortgage default. Please feel free to correct the error of this suspicion if you can.
U.S. Agency to Sell Off Loans to Stem Foreclosures
By SHAILA DEWAN
Published: June 8, 2012
In a move intended to prevent foreclosure for thousands of homeowners and shed some seriously delinquent home loans, the Federal Housing Administration will sell off distressed mortgages in bulk, the housing secretary said Friday.
The housing administration aims to sell 5,000 mortgages each quarter beginning in September.
The agency is burdened by more than 700,000 seriously delinquent mortgages, most of which originated from 2007 through 2009. There are restrictions on how deeply those loans can be modified as long as they are backed by the agency.
The housing secretary, Shaun Donovan, has supported debt reduction for certain homeowners who owe more than their homes are worth and helped negotiate the $25 billion national settlement with the nation’s largest banks over foreclosure abuses, which includes homeowner debt relief. Administration-insured loans are technically eligible for debt reduction, but not many are expected to be reduced because banks are more likely to address loans not insured by the agency.
Selling the loans could create a backdoor route to debt reduction. Investors who buy them would have greater leeway to reduce principal or offer rent-to-own plans and other means of making the mortgage affordable, Mr. Donovan said at the Clinton Global Initiative in Chicago.
Homeowners whose loans are sold “might get a call to say, ‘Hey, we’re willing to cut your payment dramatically, or cut the balance on your loan dramatically,’ ” he said. “There are going to be a set of options that might arrive on that doorstep as the best news that homeowner has ever heard.”
….
“…700,000 seriously delinquent mortgages, most of which originated from 2007 through 2009…”
Does anyone know what share of all originations over the 2007-2009 period that 700,000 seriously delinquent share represents? I am thinking that must be a significant fraction of new originations over that period, as there are only on the order of 44 million existing mortgages in the U.S., and I think it is safe to assume that the vast majority of those existed before 2007.
Am I the only individual who finds this 700K figure completely astonishing?
And who is it who would be interested in buying up defaulted mortgages, and why? I would think there would be better investment choices than mortgages in default, as the value of a mortgage is pretty much based on the repayment of the debt: No payment, no value.
What, exactly, will these investors expect to get back from their investments in failed mortgages?
I guess I am the only poster to find it amazing that 700,000 recently securitized FHA mortgages are in default. But seriously: Isn’t this some kind of record for making loans that are doomed from the day the ink begins to dry on the loan documents? I fail to see the advantage to Uncle Sam to putting so many of his citizens behind the financial eight ball.
And where is Romney, son of a former HUD Secretary, on this issue? I find his silence on housing policy matters quite disturbing. In case he gets elected, is he destined to be another NAR puppet?
CIBT said: “Isn’t this some kind of record for making loans that are doomed from the day the ink begins to dry on the loan documents?”
Nope. As documented by Bethany McLean in “All the Devils are Here”, this sort of doomed-as-written lending was pretty well known years ago, once the securitizers and such stopped being so willfully blind to the problem and actually LOOKED at them. They were finding these things were very well along in 2007. But because we bailed it all out with free government cheese (yum, yum! oh wait, that’s not for ME), the scumbag financiers just kept DOING IT. Into 2008, when the crash became full public knowledge. Into 2009, well after when the public supposedly knew. And it just kept going.
Today, the financiers are still letting lousy lending happen, since all price-support efforts count, as loans are written on properties that are still too high of a price. This is the only scam, er business they know how to do, so it’s all they do.
Really, read Bethany’s book. There are others out there, but it seems hers is comprehensive, due to the others being written from the perspective of Goldman Sachs, the U.S. Treasury, etc.
This is more of the FIRE sector’s ability to privatize the profits and socialize the losses. Fortunately, the profits are shared with politicians, which ultimately allows the system to continue.
“China, Australia, Canada and the US responded to the problems caused in part by an extended period of easy money with even more easy money. Now that didn’t work, so their response? More easy money!”
It’s the Cult of Growth. It’s all they know. More money. More credit. More commerce. More government. More more more. Unfortunately, the laws of economics are more hard-coded than that, and as the government and all its corporate minions and cronies adopt the impossible policy of infinite growth, the rest of us have to suffer. And our suffering has only really begun. The tax spikes to pay for all of this Keynesianism (sp?) have yet to hit, and when they do, you’re going to find yourself being a government puppet. You’ll pay bills and taxes, and will have nothing left for anything you considered to be “your life”. The more this kills consumerism, the more governments will pith you for puppetry. They know nothing else.
Nothing will be done that’s stable. Every option chosen will introduce more instability. Sadly, few will realize this… largely because Humans are really just dumb animals with a thin veneer of technical intelligence. Apes with computers. It’s getting to the point that I don’t WANT us to survive. Evolutionarily speaking, we don’t deserve it.
It is the trade imbalances.
Over and over again, throughout the history of man, we have learned that trade imbalances lead to excess debt and eventual economic collapse.
But somehow, in the 1960s and 1970s we convinced ourselves we were smarter. Heck, we can just go off hard currencies to fiat, and suddenly trade imbalances simply wouldn’t matter.
The we got the Reagan revolution in 1980 where we no longer saw imbalances as irrelevant. We embraced them as the glorious, exalted, only path to true prosperity for all.
Only by ensuring the pleebs had access to unlimited amounts of cheap debt, to borrow into existence the mass amounts of fiat money needed to fund the trade imbalances, could we lift everyone up to untold fortunes of wealth and prosperity.
While that is working out marvelously well for a few, for the majority, it simply means a mass amount of unplayable debt. The system is eventually doomed to collapse.
“Over and over again, throughout the history of man, we have learned that trade imbalances lead to excess debt and eventual economic collapse.”
References, please?
Or do you expect us to just take your word for it, as usual?
Over and over and over protectionism has proven to be a complete failure. And yet here we are with people sure that THIS TIME it’ll work.
They know that we’re in a mania. All this phony economic activity masks deep political and ideological failure. For now. I think this particular verion of democracy is over once everything pops for good.
As India & China economies slow I would expect their real estate prices to get hammered going forward.
Right now there seems to be a lot of money sloshing around for some favored few.
I read a lot of articles on these two these days. On top of the usual bubble signs, one thing stands out; corruption, lots of it.
“They keep on doing it……”
Our new worldwide oligarchs went to the same schools, and listen to the same banksters and soothsayers, and have put everyone into the same position. No surprise that they come up with the same answers.
Got Gupta?
And what bothers me is that the corruption in China ripples over to North America in the form of a revived bubble, and that no significant political figure has the courage to even mention it. Presuming we’re able to look back on this in 20 years, my suspicion is that recent leaders will be remembered as the equivalent of the pre-WWI Habsburgs, or American presidents in the 1850s, or the line of Spanish royalty that Velasquez painted as fops. In other words, don’t commission a monument.
Good observation. SC
This money, which is sloshing around, has been making its way into US real estate for the past year or so. Methinks it’s going to dry up real soon.
Agustino Fontevecchia, Forbes Staff
Bringing You The Bull And Bear Case From The Markets Desk
6/15/2012 @ 5:38PM
Greek Election: The Eurozone Could Finally Collapse, But Don’t Bet On It
ATHENS, GREECE - JUNE 15
Antonis Samaras, head of New Democracy, addresses a massive crowd in Syntagma Square, Athens on Friday in his last speech before the election - Image credit: Getty Images via @daylife
The point of inflection is near. On Sunday, Greece will hold general elections, where the vote is being seen as a choice for the Greek people between embracing structural reforms to remain within the European Union, or to reject “barbarous” austerity and reinstate the drachma. The risks of the latter are “incalculable” and “potentially enormous,” according to Barclays, which suggests contagion could wreck true havoc throughout the EU and beyond.
It is a peculiar time for global financial markets. Greece, with a GDP that represents less than 2% of the European Union’s GDP, pretty much has the keys that will determine if the single currency will survive this weekend.
After failing to form a government in May, Greece’s main political parties will lock horns in an election that will pit center-right candidate Antonis Samaras, of the traditional New Democracy party, against Alexis Tsipras, head of the far-left Syriza party. The vote is being seen by both markets and the Greek electorate as a choice between furthering the structural program and austerity previous governments had agreed to with the troika (ECB, EU Commission, and IMF), which would guarantee Greek membership in the EMU, or a rejection of that program, ultimately leading to a Eurozone exit and the return of the drachma.
…
Europe
Greece Teeters on Precipice as Rebels Face Old Guard
By Joanna Kakissis on June 16, 2012
The lone German in the crowd of anti-austerity voters was handing out socialist literature. Stefan Kimmerle, a blonde, bespectacled 40-year-old activist, had flown in from London, where he now lives, to cheer on the rising leftist party, Syriza, and its telegenic young leader, Alexis Tsipras. Back in his home country, German leaders have grown so terrified of Tsipras that the German edition of the Financial Times recently published an online editorial in Greek calling the Syriza leader a demagogue and appealing to Greeks to vote instead for the conservative New Democracy party.
Kimmerle says the fuss shows that EU leaders are actually terrified of democracy. “They want Greek politicians who will follow them blindly,” Kimmerle said, as he handed a Socialist newspaper to an elderly couple holding Syriza flags. “They don’t want Greek politicians who will question them.”
It’s a concern that’s resonating with many Greek voters, who go to vote on Sunday in what is shaping up to be the most crucial election in Europe. Public opinion polls show New Democracy and Syriza running neck-and-neck.
Still, many voters are underwhelmed by both. “What Greeks want is a stable government, one that will lead them out of this crisis,” said Manolis Metaxas, a 25-year-old maritime lawyer who attended a recent pro-euro rally in central Athens. “New Democracy is part of the old guard that got the country in this mess. Syriza is offering policies that are vague and have no connection to reality. These are not good choices.”
…
Niall Ferguson on How Europe Could Cost Obama the Election
Jun 11, 2012 1:00 AM EDT
Spain has accepted a big bank bailout, but the Eurostorm isn’t ending anytime soon—and it may come to American shores just in time for the election.
Could Europe cost Barack Obama the presidency? At first sight, that seems like a crazy question. Isn’t November’s election supposed to be decided in key swing states like Florida and Ohio, not foreign countries like Greece and Spain? And don’t left-leaning Europeans love Obama and loathe Republicans?
Sure. But the possibility is now very real that a double-dip recession in Europe could kill off hopes of a sustained recovery in the United States. As the president showed in his anxious press conference last Friday, he well understands the danger emanating from across the pond. Slower growth and higher unemployment can only hurt his chances in an already very tight race with Mitt Romney.
Most Americans are bored or baffled by Europe. Try explaining the latest news about Greek politics or Spanish banks, and their eyelids begin to droop. So, at the end of a four-week road trip round Europe, let me try putting this in familiar American terms.
Imagine that the United States had never ratified the Constitution and was still working with the 1781 Articles of Confederation. Imagine a tiny federal government with almost no revenue. Only the states get to tax and borrow. Now imagine that Nevada has a debt in excess of 150 percent of the state’s gross domestic product. Imagine, too, the beginning of a massive bank run in California. And imagine that unemployment in these states is above 20 percent, with youth unemployment twice as high. Picture riots in Las Vegas and a general strike in Los Angeles.
Now imagine that the only way to deal with these problems is for Nevada and California to go cap in hand to Virginia or Texas—where unemployment today really is half what it is in Nevada. Imagine negotiations between the governors of all 50 states about the terms and conditions of the bailout. Imagine the International Monetary Fund arriving in Sacramento to negotiate an austerity program.
This is pretty much where Europe finds itself today. Whereas the United States, with its federal system, has—almost without discussion—shared the burden of the financial crisis between the states of the Union, Europe has almost none of the institutions that would make that possible.
…
Sometimes I wish we’d have that discussion. Without government reallocating California and Massachusetts tax dollars, what would places like Alaska and the intermountain West be like?
I don’t know, would they get to tax energy leaving the state? They might not spend the money to have pristine interstates that look just like the ones everywhere else, but if they also got rid of the unfunded spending mandates and had full control of their coal and oil and natural gas I suspect they’d be fine.
“I don’t know, would they get to tax energy leaving the state? They might not spend the money to have pristine interstates that look just like the ones everywhere else, but if they also got rid of the unfunded spending mandates and had full control of their coal and oil and natural gas I suspect they’d be fine.”
Bingo! No Medicare/SS tax burden, no Medicaid mandates, no NCLB mandate, and access to their natural resources without the EPA to deal with….they’d be doing more than just fine.
The south would have no welfare from the CA state, and other blue states funneling through to them.
“The south would have no welfare from the CA state, and other blue states funneling through to them.”
Partial list of states (in 2010) that got more money from the feds, than they paid in taxes.
OH
PA
NM
VA
IA
VT
ME
NC
HI
IN
MD
What do all these have in common? They all voted for Obama.
What state notably paid less than it sent in? Eeeeeevil TX.
You were saying something about red states and blue states…..
If you look at the states that send in more vs. those that receive more, there is one common factor. Population density. Big states with lots of open space need more money per capita to keep up with the demands of the federal govt….such as interstates. A 200 mile stretch of interstate in NY state will cost pennies on the dollar per capita compared to the identical 200 mile stretch of the same interstate Wyoming. But Wyoming can’t say, no we will not build this interstate DC, keep your money. So the statistics look skewed as if Wyoming is living on the fat courtesy of NY tax payers.
And then to add insult to injury every time the Federal Govt wants to force Wyoming to do something and has no constitutional ability to do so, they threaten to withhold the highways funds required to do what is mandated.
Agustino Fontevecchia, Forbes Staff
Bringing You The Bull And Bear Case From The Markets Desk
Markets
6/14/2012 @ 6:05PM |3,251 views
Liquidity Bailout From Central Banks If Greek Elections Wreak Market Havoc, Report Says
Alexis Tsipras, the man of the hour in Greece - Image credit: AFP/Getty Images via @daylife
The European rumor mill returned with a vengeance on Thursday, fueling an impressive stock rally during the last hour of trade. Reports surfaced that major central banks stand ready to provide emergency liquidity to stabilize financial markets if the outcome of Sunday’s Greek national election causes “tumultuous trading.”
… jittery markets have been on edge for months, and none of the piecemeal attempts by European policymakers to quell the crisis have helped. Last weekend, the EU announced it was providing Spain up to €100 billion to recapitalize its banks, yet global equities dropped; yields on Spanish 10-year bonds spiked, hitting 7% on Thursday.
Last time around, global central banks didn’t provide liquidity in the face of an actual crunch, rather it was a move to boost morale and market confidence. From a piece I wrote at the time:
U.S. money market funds had been drastically cutting their exposure to the Eurozone, thus sucking it dry of of cheap dollar funding. Now, the situation is different. While those same money market funds have cut their exposure to the Eurozone by 63% since end-May 2011, according to Fitch, they have actually increased it marginally (2%) since the end of March.
This time around, though, the possibility that Greece may leave the Eurozone is very real, much more than before. Tsipras has already made it clear he will not join a coalition government with Greece’s major parties, and he has also very publicly denounced austerity, calling it “barbarous.” A win by Tsipras could definitely throw markets off on Monday.
New York-traded global bank stocks rallied on the news. Citigroup, JPMorgan Chase, Goldman Sachs, and Morgan Stanley all experienced a big pop just after 3 PM on Thursday, as did Deutsche Bank, HSBC, Banco Santander, and Barclays.
Not too long ago, rumors coming out of Europe were the main driver of market action. With the chilling of the European sovereign debt crisis, that effect appeared to have gone away. This latest iteration of the crisis, though, seems to have taken hold once again. Markets are setting themselves up for a new round of global liquidity, but, as with any rumor, the possibility of disappointment looms large.
Abram Brown, Forbes Staff
Markets
6/14/2012 @ 4:36PM
Stocks Rally As Central Banks Reportedly Ready To Inject Cash
Stocks rallied following Reuters’ report on a plan for central banks to stabilize financial markets. (Image credit: Getty Images North America via @daylife)
Stocks climbed higher today, following a report detailing central banks’ plans to stabilize markets after Greece’s parliamentary elections.
Central banks from major economies are prepared to keep money flowing if the elections again roil financial markets and tighten credit. “The central banks are preparing for a coordinated action to provide liquidity,” a senior G20 official familiar with the situation told Reuters.
…
Agustino Fontevecchia, Forbes Staff
Bringing You The Bull And Bear Case From The Markets Desk
Markets
6/14/2012 @ 3:52PM
JPMorgan’s Chief Economist Chan: ECB To Engage In Aggressive Balance Sheet Expansion
Mario Draghi, head of the ECB, will eventually step in en masse - Image credit: AFP/Getty Images via @daylife
UPDATE: Global central banks stand ready to provide emergency liquidity in the aftermath of the Greek elections (scheduled for Sunday) if the outcome “causes tumultuous trading,” according to Reuters. The move could assimilate the coordinated liquidity injection utilized by the ECB, the Fed, and the central banks of Japan, Switzerland, and England last September to ensure dollar liquidity and avert financing problems. Read more about it here.
As markets freak out over the potential breakup of the European Union this weekend, JPMorgan’s chief economist at the private bank, Anthony Chan, isn’t all that worried. While risks are as high as ever, with yields on Spanish 10-years hitting 7% and Greece going into elections, the ECB will eventually step in, aggressively using its balance sheet to support the European economy. Mario Draghi won’t be alone, as Fed Chairman Ben Bernanke and other central bankers will act in tandem to prop up the global economy.
The situation in Europe looks as dire as ever. On Thursday, less than a week after the announced bailout of its banks, Spain is in deep trouble again. Yields on 10-year Spanish bonds hit 6.998%, reaching the outer limits of financing sustainability for the troubled Iberian nation.
At the same time, the political time bomb that is Greece could be about to explode. With national elections set for Sunday, left-wing candidate Alexis Tsipras, of the Syriza party, could cause the Hellenic nation to reject bailout conditions and force his country out of the euro; Tsipras has denied this is his intention.
JPMorgan’s Anthony Chan isn’t scared, though. The chief economist at the private bank told Forbes he expects Europe to muddle through with the help of Mario Draghi and the ECB. Noting that contingency plans and firewalls were being put in place to minimize the effects of a worst-case outcome, Chan noted that “there’s going to be a lot of pain, and until it’s felt people won’t make the tough decisions.”
…
June 15, 2012, 3:41 p.m. EDT
Investors brace for dramatic new stage in Europe
By Barbara Kollmeyer, MarketWatch
MADRID (MarketWatch) — Investors have begun preparing for a dramatic new stage in the European debt crisis ahead of a weekend Greek vote that could help determine the future of the euro zone.
In a sign of the heightened tension, global markets were boosted late in the week on reports that central bankers stand ready to act in the case of a credit crunch following the Greek elections.
Edward Hugh, an independent economist and well-known blogger based in Barcelona, said investors are beginning to make calls as to whether the euro will disintegrate or ultimately be saved. “I think investors are trying to cover themselves both ways,” said Hugh. “If you buy German [credit-default swaps], it’s win-win.”
…
Has anyone stopped to think that maybe the Canadians and Australians have somehow surpassed us Americans in terms of “being better”? They seem to have more prosperous economies, more enlightened liberal attitudes, etc. These things will of course push up house prices.
If their economies are so great, why do they keep cutting rates so it won’t fall apart? Anyway, what you said was also said of Ireland a few years ago, and look what happened there.
Every bubble market has defenders that bend over backward to explain why everyone wants to live there, prices will only go higher (after this little setback), so you better buy now or you’ll miss out. Funny, I hear all this about some US markets again these days.
‘Has anyone stopped to think that maybe the Canadians and Australians have somehow surpassed us Americans in terms of “being better”?’
Sounds like a great rationale to explain why it’s different in Canada and Oz, and why their housing markets aren’t in a bubble.
I suggest that in ten years, we will clearly perceive the folly of this New Era thinking through the lens of the rear-view mirror.
I was being a little tongue-in-cheek about “better than” but I recall talking to people of my parent’s generation (baby boomer) who recalled all of the significant advantages California offered over the rest of the country. When my parents first saw it in the early 1970s, they were impressed with the beautiful supermarkets, booming economy, nice-looking cities, etc. that New England did not seem to have.
Nowadays, I do wonder if Canadian and Australian cities have a lot of advantages compared to American ones. I’ve not yet made it to Australia but several of their cities like Melbourne and Sydney seem to get top scores on quality of life. When I’ve been to Canada, I notice that none of their big cities look anything like Detroit, Memphis, Houston, etc. They seem to look quite clean and well-manicured.
Also, those countries seem generally friendlier to women, gays and lesbians, ethnic minorities, immigrants looking for better opportunities, etc. They seem to have fewer political dysfunctions. They offer universal health care. They also have very low unemployment compared to the rest of the world.
Maybe it helps that they have much lower populations and lots of land! Perhaps they are where America was at 50-100 years ago.
“Maybe it helps that they have much lower populations and lots of land!”
By contrast, America is running out of land…
Forgot my snark tags there. But as someone who frequently flies over Northern California, Oregon and Washington, and who has driven many backroads of California, Nevada and Utah over the past two decades, I can assure you all that we are nowhere near running out of land. In fact, I would estimate that there is sufficient land to build thousands upon thousands of new homes within a ten-mile radius of where we live inside the city limits of San Diego, which is supposedly one of the places where we don’t have any more land to build.
You aren’t a real estate investor, are you DanR?
Even as someone who frequently drives around suburban Maryland, we are nowhere near running out of land. But we are running out of land within commutable distance to jobs. The developer solution is to pack the young professionals into 2-bed condos near transit. And because the young professionals have two high incomes, the developers feel that they can drive a high price for those condos, because everyone is doing it.
My question about Canada is: where are they getting the money for all this new housing? This is an honest question. In America, the mania was sustained — ultimately — only by the implicit government guarantee of Fannie and Freddie. Without that, we wouldn’t have had the securitization.
Do they have this in Canada and Australia? Are they making subprime loans? Do Canadians have 20% down, or are they taking out seconds? Are they telling the FB’s they can refinance later? Is there an Australian version of Wells Fargo buying the paper on the secondary market? Are FB’s liberating their equity for granite countertops? Do these liberal countries have the capacity to pass their own TARP?
But we are running out of land within commutable distance to jobs.
So why don’t the jobs move to where the land is? In my experience so far it’s because the people with the power to decide where the office is going to be can afford the more crowded area and don’t want to live in the sticks or have to commute to the sticks. Seems like an inefficiency that more enlightened management could exploit.
But we are running out of land within commutable distance to jobs.
Until the jobs move or evaporate…. and they will. They always do.
But we are running out of safe, good water. Water is being usurped by powerful corporations that are making public water, privatize. Water is easier to sell to the highest bidders than to the outback where land is plentiful but expensive to install the plumbing. Privatization of our basic right to water.
Carl, they DID move the jobs from town to the sticks, and the city just grew to meet it. Drive along Route 7, or the Dulles Toll Road, 270, 66, Beltway, or god forbid anywhere aroudn Tyson’s Corner. Office sprawl all over the place.
There are a few gov agencies in the sticks — an EPA lab near the VA/WVa border, for example, but for the most part people want to be a quick drive from DC for the occasional meeting.
I think we have a different definition of the sticks, but I understand what you’re saying. I’ve just seen tech companies that could be anywhere insist on putting everyone in a very expensive area because the upper employees that can afford it refuse to live anywhere else.
“Ironic that as the Canadian housing bubble is peaking six years after the American bubble, you call that surpassing the Americans!
Canadian household debt has BTW surpassed American.
Oh no not at all! I am not too into real estate though I have gotten more of a sense of how location plays into things. To be honest, I probably have taken the semi-oil city route lately. While, I lived for many years in California, I now find myself in the Southeastern US making a good deal less of what I was on the path to make in California. Funny thing about the economic collapse intervening in my plans! I grew up in New England and I’ve actually lived in several regions of America. I have a sense of what people with money to spend on housing and what the wealthier people prefer, not that I am overly wealthy myself.
I don’t think buildable land is the end-all-be-all of real estate. The powers-that-be are not stupid enough to just develop all that land and let housing fall dramatically in value. Plus, even in expensive areas, the prices are much lower in the exurbs anyway.
I do think the availability of good jobs, the culture, and various intangible factors like a liberal economy, liberal politics, beautiful weather, presence of trust fund babies and wealthy, etc. play a big role in things. California used to have most of these things, though there are now fewer good jobs and the culture seems less impressive than it was in the past as the rest of the U.S. has played catch-up.
Given that California is running short on such desirable things, what is supporting our housing values at this point?
Well, I no longer live in California or own anything there.
What I did notice on a recent trip to L.A. is that West L.A. seems to very popular with the wealthy, whether from elsewhere or those who made their money in California. I came away realizing that many wealthy people favor certain areas, like San Francisco, West L.A., OC and San Diego and have so much excess money that they can buy homes for themselves and their kids. I can see how with the 1% doing so well, that these areas are less likely to come down.
Silicon Valley appears to do well b/c of the high paying jobs. Much of the rest of the state appears to be struggling and that is where the home prices have fallen the most.
Where I live now, there are far fewer wealthy people. Those in the 1% tend not to aspire to come to this area. The house prices are a lot lower and have not much history of appreciation.
“I can see how with the 1% doing so well, that these areas are less likely to come down.”
You’re either a complete ignoramus or a lying troll — which is it?
I just did a Redfin search on Rancho Palos Verdes — one of the most desirable areas of West LA County. There are 181 homes currently listed on the market — plenty of inventory for a tony area like that, to be sure!
The most expensive listing is the one shown below, and it is way below the crazy prices that nicer areas of California saw before the bubble burst. Nonetheless, I guess the owners missed the memo that the housing market crashed, as they have it listed for around twice the 2002 sale price, which is also around twice the Eppraisal number, and also well over the Zillow price. The current Eppraisal value is below the 2002 sale price.
This also is another one of those weird listings where the Zillow price is about twice the Eppraisal price. Is it possible to somehow bribe Zillow to get them to overstate the value of a home?
Property History for 27 CREST Rd
Date Event Price Appreciation Source
Feb 27, 2012 Listed (Active) $12,950,000 – CRISNet #F12026266
Oct 24, 2002 Sold (Public Records) $6,600,000 2.1%/yr Public Records
Sep 01, 1995 Sold (Public Records) $5,700,000 0.3%/yr Public Records
Nov 14, 1989 Sold (Public Records) $5,600,000 – Public Records
Home Value Estimates for 27 CREST Rd
Low Estimate High
Zillow.com $7,264,356 $11,006,600 $19,371,616
Eppraisal.com $5,105,058 $6,005,950 $6,906,843
Can anyone who thinks they understand why the Zillow range estimate and the Eppraisal range estimate don’t even overlap kindly explain?
My take on this is that the Zestimate is way to high on a listing like this one; after all, it is still twice the 2002 price. Given that U.S. household net worths are back to 1992 levels, at least according to the Federal Reserve survey results, I fail to see how valuations like that one could possibly be plausible. It’s not like California has a shortage of million dollar plus homes for sale compared to the number of qualified buyers at that price level.
Here is another example where the Zestimate is almost twice the Eppraisal estimate, the the two ranges don’t even overlap. One of these two estimates is way out of the ballpark; which is it?
Low Estimate High
Zillow.com $1,277,702 $1,485,700 $2,050,266
Eppraisal.com $659,656 $776,067 $892,477
I’m not sure you’re disproving my point that areas that the 1% are likely to live in are not likely to go down much. There were no shortage of trust fund kids and others in Santa Monica, last I checked. The only way I see those areas going down is if there is a major leg down in the economy that starts to affect them more.
Now with the middle and working class, it’s a different story. Our net worth has imploded and it would take an economic boom or some sort of major additional influx of credit to get houses in less desirable parts of California to start going up. I still am amazed at how expensive tiny poorly maintained homes in non-wealthy areas of California are.
You’re either a complete ignoramus or a lying troll — which is it?
Proving Danr’s point. Some areas are 1% and some definitely are not.
Incomes been down, going down, staying down for middle class.
‘There were no shortage of trust fund kids and others in Santa Monica, last I checked’
http://www.zillow.com/local-info/CA-Santa-Monica-home-value/r_26964/#metric=mt%3D34%26dt%3D1%26tp%3D6%26rt%3D8%26r%3D26964%26el%3D0
It get’s kinda old shooting down this stuff. Over 10% unemployment. Plus look at the 10 year chart and see how much further it is to fall back to historical norms.
I’m no Santa Monica booster by any stretch, but I am not sure this type of place will quickly fall back to historical norms. From what I understand, it historically was a place for retirees that was affordable and not terribly trendy. Then in the 1990s and 2000s, it was “discovered” by the wealthy. The character of the area changed.
More exurban and middle class places in SoCal appear to have fallen closer to historical norms and are more likely to keep falling. These places, which are much more populated than Santa Monica, will feel the headwinds of stubborn unemployment, potentially rising interest rates, etc.
All that means is places like Santa Monica have much further to fall……. and they will fall…. you can count on it.
Selling the loans could create a backdoor route to debt reduction. Investors who buy them would have greater leeway to reduce principal or offer rent-to-own plans and other means of making the mortgage affordable.
Why would an investor buy a loan in default, to begin with? Doesn’t that mean the home owner stopped making payments, which means the loan is basically worthless? And wouldn’t debt reduction reduce the value of the worthless asset still further, by reducing the amount of money that could potentially be recovered in a collection action?
The whole concept of buying defaulting mortgages as investments is completely beyond my grasp. There simply has to be a government subsidy involved, or otherwise the whole idea is ludicrous.
Because you are buying it at pennies on the dollar.
The government loaned $250K at 5% on a house that the fundamentals (price/rent, price/income) said was worth $100K. The market has crashed to $150K for that house. Still above historic norms of price/rent = 100 and price/income = 3, but on a monthly cashflow basis, the 3% interest rates make it pencil out.
Well, if the USA forecloses, they eat $100K loss AND further drive down house prices and demand by turning a previous “owner” into someone with a suck credit score.
So, they sell the $250K loan off for $150K the house is now “worth”. The loss may be booked now, but really the loss already happened when the loan was made with little to now down in an insanely inflated market.
The lender, buying the $250K loan for $150K, can reduce to a $150K principal reduction, and end up with a performing loan with an interest rate at 5%, far above what they could lend for today.
Your discussion seems to completely ignore that the loans in question are in default, which I believe means the borrower stopped making payments. How does reducing principle get that defaulted payment stream to resume, especially if the borrower might be bankrupt, unemployed, or otherwise unable to make any payments?
They aren’t going to sell it for $150K. Not even close.
Please provide one link that suggests that the the loans are going to be sold for anything close to the current market value of the house.
“Because you are buying it at pennies on the dollar.
…
The market has crashed to $150K for that house.”
That explanation does not pencil out.
No payments = no value, unless there are government subsidies attached to the defaulted mortgages.
Hmmmm… Phoenix and many other markets bottom and begin to bubble up again, at the exact same time Canada, India, and China all peak and start to slide?
Coincidence? I don’t think so. I think I have my answer as to where all the inventory went. The global game continues, it just moves from market to market. Run up the prices in the USA and Europe, take the profits and run up Asia and Canada while letting the USA crash. Then take the profits from those new bubbles and go back to the USA. I’m sure the trillion in profits skimmed will be waiting to swoop into Europe in the turmoil that follows the end of the common currency.
Any notion that markets are self regulating should now be clearly a lie for anyone interested in seeing the truth. Unregulated markets are self-destructive because participants make decisions based on short-term micro-economic gain, but markets need to be focused on long-term macro-economic stability.
In short, individuals love bubbles to invest in, but these bubbles are destructive to the economy as a whole.
The real problem is when the regulators are in the financial pockets of the bubble makers.
“Phoenix and many other markets bottom and begin to bubble up again, at the exact same time Canada, India, and China all peak and start to slide?
Coincidence?”
No. Lag effect. Give the slide in Canada, India and China a few months to season, and I expect a dropoff in the foreign all-cash investor demand to show up in the U.S. housing market. Unlike the stock market, the rate of equilibrium adjustment in the housing market is relatively glacial.
‘Phoenix and many other markets bottom and begin to bubble up again’
Yeah, and Toronto ‘bottomed’ in 2008 or so, as did Australia and China a couple years earlier. IMO none of the larger markets have ‘bottomed’.
To revisit a concept we used to talk about here a lot; that the bottom will come when buying a house is generally considered a bad investment. But look at how many have jumped into it recently when the slightest whiff of mania went through the air.
“…when buying a house is generally considered a bad investment.”
I’d put it a little more strongly. When your prospective new neighbors think you’d be crazy to buy in their area, and your mom calls you to advise not to buy, because real estate is too risky, and (for good measure) the local vicinity of where you want to buy a home has recently experienced a large earthquake and a riot, both which made international news stories, it might be time to start looking for a place to buy.
These are the kind of events that give a hint the local real estate market may bottom out over the next five-or-so years:
L.A. Riots - The First 24 Hours After Rodney King Verdict (1992)
Northridge Earthquake | 1994 NEWS COVERAGE
“buying a house is generally considered a bad investment”
I think it is not an absolute judgement, but a relative one. For some, buying a house is a bad investment except when compared with all of the others types of investments. At least you can live in it.
With so many markets being manipulated, what feels safer for us minnows?
“With so many markets being manipulated, what feels safer for us minnows?”
This gets pretty close to the logic which originally fueled the bubble. After all, what could be safer than houses?
“But look at how many have jumped into it recently when the slightest whiff of mania went through the air.”
Pow! There it is.
Ben: “IMO none of the larger markets have ‘bottomed’.”
Could be. Perhaps it is just my isolated ‘hood of Phoenix.
Condos were selling for $30K, 2x the annual income generated by a minimum wage job, well below the traditional 3x target market. That is also 50x-60x monthly rent, well below the traditional 100x rent needed to cash-flow positive.
My middle-class, 1800sqft 3/2 was also selling for $110Km also about 2x annual income of target market and 60-70x monthly rent.
Of course, those condos were off 75% from peak(down from $150K in 2007 to $30K in 2011), and my house is off 60% from peak.
Clearly, national numbers are not nearly as favorable in any of these stats, so you are likely at least “mostly” right on the idea that none have bottomed.