June 24, 2013

A Recovery Predicated On Reigniting Bubbles

Some housing bubble news from Wall Street and Washington. FX Street, “In its annual report, the Bank for International Settlements is urging central banks to weigh the risks associated with delaying their QE exit strategy. They argue that ‘there is a limit to what central banks can do, and there is a need for the involvement of other sectors and a shift to structural economic and financial reforms.’ Up to now, ‘kicking the can’ down the road has effectively been about borrowing time. In hindsight, people will be asking if the time was well spent?”

‘Policy makers have only so far been able to postpone the inevitable. The low interest rate environment coupled with various ‘unconventional policies’ has only made it easier for the ‘private sector to postpone deleveraging and government to finance deficits and delay reforms.’”

From Reuters. “Through the dark days of the financial crisis, and the grey days of the halting recovery that have followed, investors have always been able to count on backing from two sources - Ben Bernanke and Beijing. They have provided stimulus, mainly by pumping funds into the U.S. and Chinese economies in various ways, when other pillars of support had become unreliable. That helps to explain why global financial markets took such a beating last week when both signaled that they are getting tired of being leant on so heavily.”

“The big problem is that there isn’t much precedent for normalizing an economy that has been artificially supported for so long with low interest rates and a massive injection of funds through bond buying. The risk is that rising interest rates and a decline in the value of stocks and bonds starts to feed into the real economy as consumers and companies cut back spending. That could stall the housing market recovery and reduce expectations for retail sales and capital investment, which would quickly feed into lower corporate earnings growth and weaker job creation.”

“To be sure, on housing and the economy, Bernanke was hopeful last week - saying that people ‘expect house prices to continue to rise’ - and stressing that when interest rates rise for the right reasons, including optimism about the economy, it is ‘a good thing.’”

From CNBC. “The People’s Bank of China (PBOC) triggered the latest sell-off after it in effect told participants in the Chinese banking system that they would be left to their own devices in handling an apparent liquidity crisis. As Breakout co-host Matt Nesto says in the attached video the concerns bedeviling the Chinese economy should be familiar to U.S. investors. ‘There are banks over there reporting a quadrupling in their non-performing loan ratios and that’s why their hand-braking on the lending between each other.’”

“The perception is that the global central bankers may be losing their grip over the system; a prospect that makes sitting out the volatility increasingly appealing. As one Wall Street wag put it earlier this morning,’we’re going to need bigger sidelines.’”

From MoneyNews. “Federal Reserve Chairman Ben Bernanke is a confused man, says Michael Pento, president of Pento Portfolio Strategies. ‘So in the beginning of 2013, which was not even six months ago, the man thinks that inflation is way too low, and the economy is way too weak and that QE4 needs to be launched five years after the first QE was inaugurated,’ says Pento. But now, Bernanke ‘puts out a timeline for reversing QE,’ Pento says. ‘The man is either 100 percent focused on his legacy, or he’s actually starting to fear this $3.5 trillion Fed balance sheet and says what we’ve done to this point — taking it from $800 billion to $3.5 trillion — hasn’t worked, and we have to stop.’”

“The economic recovery has been ‘predicated on reigniting bubbles that had once popped,’ Pento says.”

Here Is The City. “Ben Bernanke might as well have tried to reason with a roomful of toddlers on a sugar high. At Wednesday’s Federal Reserve press conference last week, he explained, in the moderate tones of a parenting manual, his plans to gently withdraw the markets’ comfort blanket. They responded with a full-blown tantrum.”

“If the markets get ahead of themselves, selling off bonds too aggressively and pushing up yields, that would drive up borrowing costs across the economy – including the cheap mortgages that have been key to the housing revival – and choke off the recovery before it can get under way. But there will be an ever-present risk of the markets over-reacting: like toddlers, they don’t deal in nuance.”

The San Francisco Business Times. “Wells Fargo CEO John Stumpf shared an optimistic outlook on housing with CNBC this week, saying that it’s important any changes to the government’s role in financing housing not be rushed. ‘We can’t kill the golden goose,’ Stumpf said.”

“The man overseeing the bank that makes one in three U.S. mortgages jumped headlong into one of the economy’s greatest debates: Will housing prices continue rising? ‘Housing prices will continue going up,’ he predicted. ‘This is a bargain.’”

“Stumpf tried to put in perspective how millennials view the housing market and mortgage rates vs. older generations with painful memories of much higher rates. ‘If you were born after 1980, you think 4 percent is a normal rate,’ he said.”

From The Street. “According to the latest Campbell/Inside Mortgage Finance HousingPulse Tracking Survey, investor share of home purchases dropped from 22% in April to 20% in May based on a three-month moving average — the sharpest drop in investor activity in three years. The Investor Traffic Index, an indicator of future home purchase activity, was also down for three months in a row ending in May.”

The Standard. “The local home market turned sluggish over the weekend after Federal Reserve chairman Ben Bernanke said the US central bank could wind down its stimulus program later this year. Bernanke’s comments also prompted the government to warn of further downside risk to the property sector. Financial Secretary John Tsang Chun-wah blogged yesterday that the SAR is likely to see large-scale capital outflow.”

“He urged the public to pay attention to the downside risk in the local home market and consider one’s affordability when interest rates rise. ‘By then, interest rates in Hong Kong may be raised even before the US,’ Tsang stressed.”

“Only 16 homes changed hands at 10 major housing estates over the weekend, down from 22 a week back, said Centaline Property Agency. Home viewings also dropped. Among the major estates, four - Taikoo Shing, Kornhill, Whampoa Gardens and Caribbean Coast - saw no deals. Most of the apartments that were sold carried relatively cheaper prices, including those at Kingswood Villas in Tin Shui Wai. A 705-square foot unit at Mei Foo Sun Chuen was sold for HK$6.43 million after its price was slashed by HK$570,000 - down 8 percent from the market average.”

“The buyer of a 1,330-sq-ft unit at Provident Centre in North Point lowered his offer price by HK$1.2 million to HK$16.8 million. Despite the bearish sentiment, Kerry Properties (0683) is launching Bayview in To Kwa Wan this week. The first batch of 50 flats at the 175-unit project was priced at an average of HK$15,589 per sellable square foot.”

From CNBC. “”Corey Alhawat, a mortgage banker at Cardinal Financial in New Jersey, says his bank will provide a FHA loan to a client with a minimum credit score of 640. He says he’s seen other lenders who will do a FHA loan, with a 3.5 percent down payment, for someone with a score as low at 580. ‘If we have even a slight reversal [in home prices], we’re going to be stuck in a much worse position than what happened five years ago,’ Alhawat said.”

Metrowest Daily News. “With all of the positive news reports about the improving housing market, you wouldn’t expect that we’re on the verge of another housing bubble, but that may, in fact, be the case. As with the stock and bond markets, there is a disconnect between the real world and the housing market. As Fitch Rating put it, ‘Demand is artificially high … and supply is artificially low.’”

“Russian minister Grigory Potemkin created a fake village to impress Empress Catherine II during her visit to Crimea, giving us the term ‘Potemkin’ to mean an illusion; reality propped up to look bigger and better than it really is. Today’s housing market is likewise affected by Fed actions, but it’s a Potemkin village in reverse. While the Potemkin village gave us houses that weren’t there, today’s housing market has rallied based on buyers not seeing houses that are there.”

“There are plenty of homes available, including many that are vacant because of foreclosure. They’re just not on the market right now.”

“Many people are still out of work or are earning less than they did before the housing bubble burst. Based on current income and recent increases in housing prices, Zerohedge found that median new home prices are at an all-time high and homes are more unaffordable than they have ever been.”

“The federal government has done everything it can in recent years to make housing more affordable for Americans who can’t afford their own homes. Ironically, as a result of the latest government programs, housing is becoming so expensive, fewer and fewer Americans can afford to own a home. With a lack of qualified buyers, and the potential for increasing supply and rising interest rates, another housing bubble may be on the horizon.”

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Comment by Housing Analyst
2013-06-24 10:02:47

“To be sure, on housing and the economy, Bernanke was hopeful last week - saying that people ‘expect house prices to continue to rise’

I’m not sure where this “expection” comes from considering houses are depreciating assets.

Comment by AmazingRuss
2013-06-24 16:21:57

The house fairy is expected to put a wad of bills under the pillows of good little homeowners.

Comment by Ben Jones
2013-06-24 10:51:17

‘He says he’s seen other lenders who will do a FHA loan, with a 3.5 percent down payment, for someone with a score as low at 580. ‘If we have even a slight reversal [in home prices], we’re going to be stuck in a much worse position than what happened five years ago’


Comment by perkonkrusts
2013-06-24 11:03:58

I don’t understand that guy’s quote.

Five years ago, what happened was much more than a “slight reversal” in home prices, so it seems to me that a current “slight reversal” would be better than last time, not worse. He can’t mean it will be worse this time because of low credit scores, during the previous bubble credit wasn’t even a question. At least this time the down payment is 3.5%, last time it was zero.

Comment by Ben Jones
2013-06-24 11:21:47

‘He can’t mean it will be worse this time because of low credit scores’

Maybe he reads this blog and knows there are a couple dozen housing bubbles that could pop at the same time. Plus, we haven’t dealt with the bust in the first place, just postponed it.

Comment by Beer and Cigar Guy
2013-06-24 11:59:25

Also, what about this theory/observation? It seems like a lot of the current ‘wisdom’ is for investors to pay cash for homes as a safe, store of value. If I’ve parking my cash in RE because it is ’safe’ and RE starts to decrease in value, how long to I continue to bleed precious cash before I sell the RE and divert that cash into something that is increasing (or at least not falling) in value? Since my RE purchased with cash is more fungible (as in, I don’t need a bank’s permission to cut and run) than RE acquired with a loan, it seems the race to the bottom would be MUCH faster than Bubble 1.0.

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Comment by Beer and Cigar Guy
2013-06-24 11:25:37

I about sh!t when I read that one. Yeah, this is gonna end just fine….

Comment by doom
2013-06-24 11:22:42

Near zero rates were of course never going to last, the public always goes in shock and then fundamentals of a market economy and the real world of 5 to 7% interest will evolve again and craziness will go away. What will be the driving force of the future of this country is paying jobs that stay ahead of inflation. The key is the dollar must stay the standard currency of the world may take, never bet against this country their is nothing better on our planet and the world knows it.

China and Japan there heyday is done, this is a chance for America to get back it’s standing as a producer and not a outsource nation and a low paying country of service jobs etc. America was great because we were a leader we are not good as a follower?

Lets pray America is again the gold standard of the World, it is the only chance the world has that a major global depression is averted.

Comment by Ben Jones
2013-06-24 12:03:43

I don’t see how we avoid a global recession or depression. It amazes me that things like this can be said so casually:

‘Stumpf tried to put in perspective how millennials view the housing market and mortgage rates vs. older generations with painful memories of much higher rates. ‘If you were born after 1980, you think 4 percent is a normal rate’

I’m all for ditching globalism, and maybe if China implodes we can pull it off. But the current crop of swine in DC will have to be removed first.

Here’s what I see; they sent in Helicopter Bernanke and he did what he said he would do. And at least a dozen other central banks did the same thing. It not only didn’t work, it made things worse. So what now Bernanke? Oh yeah, he’s about to walk off into the sunset.

Anything positive to get out of this situation, we’re going to have to do it ourselves. Sitting around waiting for some savior to drop out of a think tank is time that could be spent gathering pitchforks. That’s right NSA, I said pitchforks.

Comment by "Uncle Fed, why won't you love ME?"
2013-06-24 12:46:15

Automatic pitchforks?

Comment by rms
2013-06-24 23:53:33

“Automatic pitchforks?”

+1 With high capacity magazines too!

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Comment by Resistor
2013-06-24 15:09:49

“That’s right NSA, I said pitchforks.”

What they heard, was “drone time!”

Comment by AmazingRuss
2013-06-24 16:25:10

Stabby citizen detected in sector 4. Deploy neutralization devices.

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Comment by Ben Jones
2013-06-24 16:59:51

You know, we can joke about it, for now.

‘America was great because we were a leader we are not good as a follower?’

IMO what makes this a good place to live is the freedom. We are treading on thin ice if we know that right now what I type is being recorded. What I said, or any of you, on the phone today too. It’s fine to talk about how great “America” is, but don’t you find it interesting that a guy who lets us know how we are all being spied upon by the government has to flee to China and Russia? That reporters are being targeted for investigating what the government is doing, that the IRS is being used against political groups?

Comment by AmazingRuss
2013-06-24 17:24:12

I think 80% of what made America great had to do with having an unexploited continent to chew through. Plenty of cheap resources, and plenty of room for people that didn’t get along to move away from each other.

As the population grows and the resources shrink, we’re having to deal with problems that people on the other continents have had to deal with for hundreds of years, and we’re flailing around trying to find somebody to blame for our worsening fortunes. I see that as the main driver for all the craziness in government and finance that we’ve been seeing.

Comment by Whac-A-Bubble™
2013-06-24 22:54:41

“…but don’t you find it interesting that a guy who lets us know how we are all being spied upon by the government has to flee to China and Russia?”

If that was really the extent of his offense, then I am having a hard time understanding the ‘Treason’ accusations. Whatever happened to trial by jury, anyway?

Comment by doom
2013-06-25 15:23:57


Comment by Housing Analyst
Comment by Housing Analyst
2013-06-24 11:41:13

Palo Alto, CA Rental Rates Down 8% And Falling


Comment by "Uncle Fed, why won't you love ME?"
2013-06-24 12:11:11

Once again, it is revealed that our vaunted US institutions are not acting of their own accord. The Bank of INTERNATIONAL Settlements made this call to tighten, and I imagine they’ve been calling the shots for quite some time now. When will the United States ever realize that we are better off making our own decisions?

Dear Stock Market: Hurry up and crash already.

Comment by WT Econonmist
2013-06-24 12:57:58

When the housing bubble burst and prices deflated (in most places, not where I live), who would have thought we’d be at the start of a new bubble, what, just seven years after the last one peaked?

Comment by Carl Morris
2013-06-24 16:20:26

It’s just the old one plus a whole bunch of Fed cash.

Comment by Zillow Biggest Loser Contest
2013-06-24 15:51:06

So, way back in the summer of 2008 I started a “Zillow Biggest Loser Contest” for my co-workers and friends who owned houses/condos here in Los Angeles and around the country. We started out with a summer contest, then did monthly contests, and finally crowned the “Biggest Loser” for the year. The way to win, of course, was to have your house fall the most in a given month or year. Oh, what great fun we had as the market crashed! It was funny to see everyone all excited to see if they won the monthly contest. We were all rooting for the prices to fall. (I rooted the hardest as I rent and had refused to take everyone’s advice when I moved to LA from NJ and buy.)

I had a very strict criteria for allowing someone to get into the contest: as soon as they uttered phrases like, “My area in Palmdale, CA is different. My area actually goes up!” Or, “My condo is in Oxnard near the water. My area actually goes up, not down.” Boom! They’re in the contest! (And, yes, those are actual quotes that got both co-workers into the contest and they both won multiple months during the contest.)

Well, it is 2013 now and we have our “Zillow Biggest Winner Contest” going this year as prices RISE. I tell people it is like a roller coaster going up, up, up to the top…then, it goes flying down. I don’t know how long the “Biggest Winner” contest will go on, but I am so looking forward to the next “Zillow Biggest Loser Contest” starting soon! Once it does, I will post monthly results here on the HHB.

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