The Housing Bubble

Euro area unemployment rate at 11.9%
EU27 at 10.8%
The euro area
(EA17) seasonally-adjusted
unemployment rate was 11.9% in January 2013, up from 11.8% in
December 2012. The EU27 unemployment rate was 10.8%, up from 10.7% in the previous month. In both zones,
rates have risen markedly compared with January 2012, when they were 10.8% and 10.1% respectively. These figures are published by
Eurostat, the statistical office of the European Union. Eurostat estimates that 26.217 million men and women in the EU27, of whom 18.998 million were in the euro area, were unemployed in January 2013. Compared with December 2012, the number of persons unemployed increased by 222 000 in the EU27 and by 201 000 in the
euro area. Compared with January 2012, unemployment rose by
1.890 million in the EU27 and by 1.909 million in the euro area.
Among the Member States, the lowest unemployment rates were recorded in Austria(4.9%),Germany and Luxembourg(both 5.3%)
and the Netherlands(6.0%), and the highest in Greece(27.0% in November 2012),Spain(26.2%) and Portugal(17.6%).
Compared with a year ago, the unemployment rate in
creased in nineteen Member States, fell in seven and
remained stable in Denmark. The largest decreases were observed in
Estonia(11.1% to 9.9% between December 2011 and December 2012),
Latvia(15.5% to 14.4% between the fourth quarters of 2011 and 2012),
Romania(7.4% to 6.6%) and the United Kingdom(8.3% to 7.7% between November 2011 and November 2012). The highest increases were registered in Greece(20.8% to 27.0% between November 2011 and November 2012), Cyprus(9.9% to 14.7%), Portugal(14.7% to 17.6%) and
Spain(23.6% to 26.2%)

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/3-01032013-BP/EN/3-01032013-BP-EN.PDF

Still inflation is down to 1.8%in the Euro zone.

Steve Bell on David Cameron and the EU plan to tax bankers’ bonuses - cartoon

http://www.guardian.co.uk/commentisfree/cartoon/2013/feb/28/steve-bell-bankers-bonuses-cartoon

Is now the time to buy U.S. stocks, before the boom prices you out forever?

U.S. Stocks Erase Losses as Data Offset Spending Cuts
By Sarah Pringle & Corinne Gretler - Mar 1, 2013 7:45 AM PT

U.S. stocks erased losses, after an early decline in the Standard & Poor’s 500 Index, as better- than-estimated data on consumer confidence and manufacturing tempered impending federal spending cuts.

The S&P 500 slipped less than 0.1 percent to 1,514.47 at 10:43 a.m. in New York, after declining as much as 0.9 percent earlier. The Dow Jones Industrial Average rose 5.45 points, or less than 0.1 percent, to 14,059.94. Trading in S&P 500 companies was in line with the 30-day average at this time of day.

“Many market observers have been expecting that the budget cuts will take effect,” said Andreas Nigg, head of equity and commodity strategy at Vontobel Asset Management in Zurich. “It appears that the U.S. economy has enough momentum, but a weakening macro backdrop just at the point when sequestration starts would be cause for concern.”
…

Two part question”
1)What would houses cost WITHOUT the mortgage interest tax deduction?
How much of a premium have people been “pricing in” historically?
2)What is the real social benefit (if any) of the deduction?

Despite Aid, Borrowers Still Face Foreclosure

(and despite the title, this is about the banks and the settlement with them as loan servicers/owner, not the borrowers)

http://www.nytimes.com/2013/02/22/business/homeowners-still-face-foreclosure-despite-billions-in-aid.html?pagewanted=all

Tease:

Just under 71,000 borrowers, or 13 percent of the total borrowers helped so far, received assistance on their primary mortgage, which has been the main source of defaults and foreclosures through the housing crisis. But more than 170,000 homeowners received assistance on their second mortgage, which typically is a home equity line of credit that borrowers can tap for cash.
…
While the second lien deal often does not help borrowers, it does benefit the banks, according to Mark Ladov, a lawyer at the Brennan Center for Justice at New York University School of Law. When a house is sold at foreclosure, there is typically no money to pay the second mortgage anyway. Routinely, the holder of the second loan gets nothing. Under the terms of the settlement, though, the banks receive credit for forgiving the second mortgage even though they most likely would not have gotten any money for it.

High & Low Finance
Easing U.S., Slowly, Out of Home Financing By FLOYD NORRIS
Published: February 28, 2013

http://www.nytimes.com/2013/03/01/business/report-lays-out-plan-to-reduce-government-role-in-home-financing.html?ref=business&pagewanted=all

Sorry, this needs the whole article. I don’t usually do this, but NYT is behind a firewall, so here it is:

Can the American mortgage market ever function again without Uncle Sam guaranteeing that lenders will be repaid?

It is amazing just how few people think it can.

“For the foreseeable future, there is simply not enough capacity on the balance sheets of U.S. banks to allow a reliance on depository institutions as the sole source of liquidity for the mortgage market,” stated a report on the American housing market this week, issued by a group that was filled with members of the housing establishment.

The panel, which included Frank Keating, the president of the American Bankers Association and a former governor of Oklahoma, does not see that as an indictment of the American banking system, which would much rather trade leveraged derivatives than keep a lot of mortgage loans on its books.

“Given the size of the market and capital constraints on lenders, the secondary market for mortgage-backed securities must continue to play a critical role in providing mortgage liquidity,” added the report, issued by a housing commission formed by the Bipartisan Policy Center, a group that was begun by former Senate majority leaders from both parties. The group thinks investors will not be willing to finance enough mortgages — particularly 30-year fixed-rate loans — without a government guarantee.

The report does an excellent job of analyzing the history of the American housing finance system, as well as looking at the government’s efforts over the years to promote and subsidize rental housing. It calls for changes in those policies as well, aimed at assuring that those with very low incomes “are assured access to housing assistance if they need it.”

But those rental proposals are unlikely to lead to legislation any time soon, said Mel Martinez, one of four co-chairmen of the housing panel. Mr. Martinez, a former Republican senator from Florida and housing secretary under President George W. Bush, said in an interview that any proposal calling for spending government money, as this one does, would face tough sledding in Congress.

But he said it was possible that changes in the housing finance system, which is widely criticized on both sides of the aisle, had a better chance of getting approval.

Certainly, one principle enunciated by the panel will get wide support: “The private sector must play a far greater role in bearing housing risk.” But the details show that the panel still thinks sufficient money can be found for housing only if Uncle Sam remains the ultimate guarantor for most home mortgages.

Currently, the government backs about 90 percent of newly issued mortgages, more than ever before. The proportion fell in the years leading up to 2007 as subprime loans proliferated and then soared after that market collapsed.

Since then, the Federal Housing Administration has expanded its role in backing home loans on the low end of the scale. But most mortgages are purchased by either Fannie Mae or Freddie Mac, the government-sponsored enterprises that the government took over after the housing bubble burst.

So-called jumbo mortgages, that is, mortgages too large to qualify for purchase by Fannie or Freddie, account for most of the rest. Some mortgages are put into securitizations that have no government guarantee, but many jumbo mortgages end up being owned by the banks for the long term.

The F.H.A. appears to be more cautious than it used to be. The report notes that last year the average FICO score for an F.H.A. or Department of Veterans Affairs loan was close to 720 on a range of 300 to 850. That is about what the average Fannie Mae and Freddie Mac borrower had in 2001.

The commission, whose other co-chairmen were George J. Mitchell, the former Senate Democratic leader; Christopher S. Bond, a former Republican senator; and Henry Cisneros, who served as housing secretary under President Bill Clinton, wants to preserve the F.H.A., but orient it more to those who need the most help. It would phase out Fannie and Freddie — something that is politically necessary — but replace them with something that sounds sort of similar.

The new organization would be called a “public guarantor.” It would guarantee that investors in mortgage-backed securitizations would not lose money, much as Fannie and Freddie now do. But its responsibility would come after that of a “private credit enhancer,” which sounds like a monoline insurer that would make payments to securitization holders if the underlying mortgages were performing badly. That organization would be regulated by the public guarantor, and only after it goes broke — something that should happen only if housing prices fall more than they did in the recent crisis — would the public guarantor be responsible for making investors whole.

The public guarantor would only guarantee mortgage securitizations, not issue them as Fannie and Freddie do. But it would regulate the issuance. It would collect a guarantee fee, as would the “private credit enhancer,” which the commission says would raise the cost of mortgages to some extent.

In addition, the commission foresees lowering the maximum loan size that the government will guarantee, thus pushing more loans into the genuinely private market. Mr. Martinez said he thought that eventually the F.H.A. would be guaranteeing 10 to 15 percent of new mortgages, and the public guarantor would back another 35 to 45 percent, leaving 40 to 50 percent to be financed exclusively by private capital without any government guarantee.

Back in the 1980s, Mr. Martinez said, something like 75 percent of all loans were made by banks that held on to them. Why can’t we go back to something like that?

There seem to be two reasons. The first is that bank regulators would have to push the banks hard to devote capital in that way. As it happens, the politicians who most dislike government involvement in the mortgage market also don’t like regulation.

The second reason is that banks learned some lessons in the 1980s. When that decade began, there was a group of banks, called thrifts, whose primary purpose was to make long-term, fixed-rate mortgage loans. Such loans left the lender with a lot of interest rate risk. That is because a 30-year mortgage can be repaid at any time. If rates go down, homeowners will refinance. If rates go up, they will not.

When the Federal Reserve Board under Paul Volcker pushed interest rates to high levels that bankers had never thought possible, a lot of banks were left with assets — mortgage loans — paying lower rates of interest than the banks had to pay for deposits. That was a recipe for going broke, and many did. Congress then made it worse by saying the banks could invest in higher-risk assets, while engaging in accounting tricks to mask the fact they were insolvent. The result was that more banks went under, and by the end of the cycle there was no longer a group of banks dedicated to home loans.

Mortgage securitizations found ways to slice up the cash flows from a group of mortgages in ways that persuaded private investors to shoulder the interest rate risk. But the commission says there is not enough private capital willing to take on both the interest rate risk and the credit risk of homeowners defaulting. Hence the public guarantor.

Could Congress get the government out of financing homes for normal, creditworthy borrowers? The answer is that to do so the country would probably have to move away from 30-year fixed-rate mortgages, going instead to adjustable-rate mortgages that would leave homeowners facing higher monthly bills when rates rose.

In the end, we can have a government-dominated mortgage system, with the risks inherent in that — risks that we saw in the need to bail out Fannie and Freddie. Or we can abandon the 30-year fixed-rate mortgage, leaving homeowners at risk when rates rise, as they are in much of the world. But it is hard to see how we can have it both ways.

Is the housing bubble back, or is it over?

Or would it be more accurate to say that, thanks to hair-of-the-dog housing market stimulus measures, it never ended (yet)?

“At the core of every mania is the belief that an asset - physical or financial - which is rapidly increasing in price, will do so indefinitely. And at a “significant” rate. An asset on which one cannot avoid making a profit upon the sale of it.”

With Dutch tulip bulbs, or stocks, once this belief takes hold widely in a large enough number of people, a mania forms.

At the core of a mania, is this magical asset.

Is the housing bubble a mania? If so, how is the housing bubble similar to, and different from, previous manias?

Has there ever been an asset which is believed never to go down in price, which has not sparked a mania? An asset which simply has a steady, high level of demand?

What about an asset which meets a physical need, like shelter? Other mania assets, like tulip bulbs or stocks, are not necessities.

While I don’t wish this coming denouement on anyone, there’s a part of me that thinks it’s high time America, the country, gets a taste of its own medicine. The United States of America has been inflicting itself on the rest of the planet throughout my entire lifetime, always justifying its uncivilized activities as “promoting liberty and freedom” or “making the world safe for democracy” or some such vague sloganeering to cover its rapacious greed.

It has derided the voices of conscience as “commies”, “peaceniks”, and most recently,”liberals” (as if that were somehow a bad thing), and branded those of us with the temerity to call out our government’s thirty-year economic war on the middle class as “unpatriotic”. All while ignoring the philosophical inconsistencies of their professed ideology courtesy of a feckless (if not criminally complicit) mass media.

I gave up playing Cassandra decades ago when I realized where Reaganomics was taking us, but there is truly no excuse for the excess wrought by the turn-of-the-millennial cronyism and war-mongering that ruined our nation and looted our treasury while everyone was distracted by rhetoric and “reality” circuses.

I tell people who “want their country back”, “You wanted your war of revenge, you wanted your cheap crap from China, you wanted quick riches and easy credit. You got it. Now you get to pay for it. Not ‘the government’ and not ’someday’. You. Now.”

Welcome to the new austerity.

Whatever happened to the discussion of limiting the MID?

No sooner than one budget crisis is left unresolved, another one is underway.

New budget crisis begins after Washington fiscal talks fail
By Richard Cowan and Jeff Mason
WASHINGTON | Fri Mar 1, 2013 4:30pm EST

(Reuters) - The U.S. government stumbled headlong on Friday toward wide-ranging spending cuts that threaten to hinder the economic recovery, after President Barack Obama and congressional leaders failed to find an alternative budget plan.

Put in place during a bout of deficit-reduction fever in 2011, the automatic cuts can only be halted by agreement between Congress and the White House.

A deal proved elusive in talks at the White House on Friday as expected, meaning that government agencies will now begin to hack a total of $85 billion from their budgets between Saturday and October 1.

Democrats predict the cuts, known as “sequestration,” could soon cause air traffic delays, furloughs for hundreds of thousands of federal employees and disruption to education.

While the International Monetary Fund warned that the belt tightening could slow U.S. economic growth by at least 0.5 of a percentage point this year, that is not a huge drag on an economy that is picking up steam.

Obama was resigned to government budgets shrinking.

“Even with these cuts in place, folks all across this country will work hard to make sure that we keep the recovery going, but Washington sure isn’t making it easy,” he said after meeting Republican and Democratic congressional leaders.

At the heart of Washington’s persistent fiscal crises is disagreement over how to slash the budget deficit and the $16 trillion national debt, bloated over the years by wars in Iraq and Afghanistan and government stimulus for the ailing economy.
…

Druckenmiller Sees Storm Worse Than ’08 as Seniors Steal
By Katherine Burton - Mar 1, 2013 12:39 PM PT

Stan Druckenmiller, one of the best- performing hedge fund managers of the past three decades, has a warning for the youth of America: Don’t let your grandparents steal your money.

Druckenmiller, 59, said the mushrooming costs of Social Security, Medicare and Medicaid, with unfunded liabilities as high as $211 trillion, will bankrupt the nation’s youth and pose a much greater danger than the country’s $16 trillion of debt currently being debated in Congress.

“While everybody is focusing on the here and now, there’s a much, much bigger storm that’s about to hit,” Druckenmiller said in an hour-long interview with Stephanie Ruhle on Bloomberg Television’s Market Makers. “I am not against seniors. What I am against is current seniors stealing from future seniors.”

Druckenmiller said unsustainable spending will eventually result in a crisis worse than the financial meltdown of 2008, when $29 trillion was erased from global equity markets. What’s particularly troubling, he said, is that government expenditures related to programs for the elderly rocketed in the past two decades, even before the first baby boomers, those born in 1946, started turning 65.
…

Now that Wall Street has shrugged off the sequester as a non-event, and Obama has dialed back the fearmongering rhetoric related to the impact of the sequester, will Obama accept the Republican offer that would allow him to reapportion the cuts as he sees fit, rather than continue to let the cuts continue on a pretty indiscriminate basis?

Other than playing politics at the expense of the more deserving programs (and to the benefit of the less deserving programs), what would be his basis for NOT accepting the offer?

Did Mayor Michael Bloomberg really say this recently?:

When it comes to the United States federal government, people do seem willing to lend us an infinite amount of money.

whats up with this

“At the moment it’s a seller’s market again,” said David Fogg, a real estate agent in Burbank, CA. “Very low inventory, very low interest rates, almost no bank inventory of homes, it’s crazy out there. Every good property I’ve listed this year has brought 10-50 offers and sales prices 10-20 percent over comps. Cash is King.”

Nearly one third of all existing home sales in January were paid for in cash, and not just by investors, who are making up a shrinking share of the market. Fierce competition is forcing buyers to use every advantage, given that so many are going after so little.

In California’s San Fernando Valley there are usually over 9,000 homes for sale this time of year, according to real estate agent Billy Wynn. Today there are just over 1,400.

“Realtors are getting so many offers they are taking the homes off the market and not accepting additional offers before any offer is even accepted,” said Wynn. “This is real estate bubble 2.0 on steroids.”

It is a puzzling situation, given all the warnings of a tsunami of so-called “shadow inventory” that was supposed to be flooding the market right now. As it stands, fewer distressed properties are coming to the market.