The Next Real Estate Bubble Is Already Underway
By JACK McCABE
WE ARE ON THE CUSP OF THE next great real estate boom-bust cycle, the second since the beginning of the millennia. This one could be worse than the bust of last decade that prefaced and caused the Great Recession.
What will we call this cycle? The Greater — or Greatest — Recession?
Six years after the most recent real estate bust began, three years since the supposed end of the Great Recession, residential real estate and stocks are once again becoming the choices du jour of investors big and small.
According to National Association of Realtors data and other indices, housing inventories are down everywhere, while transactions have surged to 2005 boom-time levels. Las Vegas, one of the hardest-hit markets during the bust, saw single-family home prices skyrocket by 37 percent in the last year. Prices have increased by more than 20 percent this year in San Francisco, Phoenix, Tampa, Orlando, South Florida, Sarasota and several other previously hard-hit markets.
The latest Case-Shiller index shows that existing single-family home prices have increased by 14 percent nationwide year over year.
So why this sudden pseudo-surge in prices in Florida, where real estate values crashed 40 percent to 60 percent since 2007? And what really is driving real estate values higher?
Before the boom began in 2002, residential real estate ownership was primarily the domain of the general public and individual investors. Families borrowed from banks and invested savings to own their own shelter, or small investors seeking steady rental cash flow income and the potential for increased profits through escalating market values operated small portfolios.
But since the last decade’s boom and bust, homeownership has radically changed.
As I’ve written in previous columns, hedge funds, private-equity groups, institutional investors and high-net-worth foreign investors have become the dominant buyers of residential real estate in America — significantly in Florida and other so-called sand states. Since the start of 2012, corporations have acquired a staggering 40 percent to more than 50 percent of available inventory in many key marketplaces.
Blackstone Group LP, the largest hedge fund involved in residential property acquisition for rental, already has acquired more than 30,000 homes for $4.5 billion in the last 15 months. In August, the firm announced a $2.7 billion investment in apartment complexes owned by GE Finance. It also has raised an additional $2.5 billion to make loans to smaller residential property operators with an “REO to rental” strategy.
Colony Capital LLC and Apollo Global Management LLC are other multibillion-dollar buyers of residential properties.
Also on an acquisition tear are Vulcan Investment Partners LLC and Delavaco Properties Inc. — funds headquartered in South Florida, although one’s investor’s are primarily Canadian while the other firm is flush with cash from South America. But there are hundreds of other firms with small and large war chests of capital for residential acquisition.
In 2007, the hedge funds and vulture buyers swooped in to scoop up tens of thousands of newly built condominiums in depressed markets in Florida, Arizona, Nevada and California, initially targeting large blocks or entire projects of foreclosed, bank-owned condominiums at bargain-basement prices discounted by 50 to 80 percent. Those properties have now bled into the rental inventory and are primarily occupied by renters.
At the same time, mortgage financing has been difficult if not impossible for average Americans to obtain. Appraisals also have stymied many purchases of existing homes due to stricter regulation and oversight. Even if you’re pre-approved for a mortgage and have the necessary down payment to pay full price for a home of your choice, the private-equity funds will pay whatever it takes and individual owner-occupiers, first-time buyers and veterans lose.
While the hedge funds initially bought lower-priced homes at bargain prices directly from banks or foreclosure auction websites, a paradigm shift has occurred since last year. Funds and high-net-worth investors are now buying Realtor listings. Our research has discovered thousands of sales to funds at 25 percent or more above current market values.
The funds are driving prices higher and artificially escalating values, a trend that in my opinion will continue for the next two to five years. Yet, as of the end of July, Florida still has 341,000 open foreclosure cases in state courts. More than 137,000, or 41 percent, are in Miami-Dade, Broward and Palm Beach counties.
About 550,000 Florida homeowners with a mortgage are 90 days or more delinquent in payments and subject to future foreclosure filing. More than 2,000 of those properties are in South Florida.
Approximately 28 percent of homeowners owe more than the current market value of their property. This ratio was as high as 48 percent in 2011.
Foreclosure and delinquency numbers are pretty much the same as at the end of 2011. Florida is still tops in the nation in foreclosures and distressed properties.
Here’s my prediction of what’s ahead:
Funds, private-equity groups and high-net-worth investors will continue to buy distressed bank- and Realtor-listed Multiple Listing Service properties until price points reach 2006 median levels.
Banks will ease qualifying criteria, not to last decade’s levels but to conservative lending formulas from the 1990s. Adjustable rate mortgages tied to Treasury bill and LIBOR rates will become increasingly prevalent. Mortgage interest rates will skyrocket by 2017. Funds will begin deploying exit strategies, including disposition of assets, a year before the rates head skyward.
Consumers will buy overpriced homes for the next two to five years using ARMs and other newfangled lending programs that increase homebuyers’ monthly costs as rates rise. Inventory will increase as funds move to sell their holdings. Homebuyers will have overpriced properties with increasing payments as inventory balloons and prices begin to decline.
Florida median household income has decreased by 12 percent since 2007.
It’s not the speculative, consumer-greed-driven cycle of the last decade. The drivers are faulty federal government housing policies, failing Federal Reserve policies and corporations’ and hedge funds’ strategy to inflate residential real estate to reap the rewards from last decade’s bust.
But the results will be the same — and could be worse.
There’s money to be made in the next few years. But timing, and knowing when to exit, will be key to developers, lenders and these corporate homeowners. In real estate, when the music stops and you’re left without a chair, you lose … big time.
Jack McCabe, CEO of McCabe Research & Consulting is an independent housing analyst, columnist, author, TV commentator and speaker.
Funds, private-equity groups and high-net-worth investors will continue to buy distressed bank- and Realtor-listed Multiple Listing Service properties until price points reach 2006 median levels.
This is built-in, guaranteed losses. Quite strange this is considering 2006 prices were 350% higher than construction costs(materials, labor and profit).
Of course contractors and constructors are going to compete (easily) and win most of this business.
The fundamental point?
There is already massive amounts of excess empty inventory in every state in the country. More will be added to this by the gross market distortions.
The point is that much as you could point to a sketchy system for securitizing loans as the basis for the last bubble, you can point to a sketchy private equity industry as the basis for the next bubble. The same giant pool of money chasing too small a universe of worthwhile investments is the problem.
Just like 12 years ago, permanently low interest rates and a sluggish economy mean that bubbles get blown up regardless of regulation, hard-won wisdom, and recent painful memories. Playing the bubble game is the only way for most people to get ahead. Devil take the hindmost.
When half the PE industry goes belly-up in 2017 it will take a lot of the rest of us with it.
“The same giant pool of money chasing too small a universe of worthwhile investments is the problem.”
Actually the giant pool of money is far more ginormous now!
Take a look at the photos of the Colorado Front Range flooding if you want a metaphorical picture of the result.
I see that happening here in Sarasota/Bradenton FL. Houses below 200K in my neighborhood are sold in a couple days. I recently had a realtor out to get ideas before I relocate. The house I bought not even a year ago for $112,900 will now be listed at $169,900 and that is a bargain in my area!
This story is being repeated in most communities in southwest FL.
‘This story is being repeated in most communities in southwest FL’
And London, Dublin, Dubai, Berlin, Jakarta, Manila, Beijing, Auckland, Sydney, etc.
Meanwhile, across most of India there is talk of a ‘free fall’ in house prices. Murmurs of a ‘glut’ in Bangkok. Big asking price reductions in Oslo. Inventory is up across the US, especially in California. Things have gotten quiet in Tucson and Phoenix. Las Vegas just saw a spike in foreclosures as did Maryland.
The odd thing as PB pointed out, unemployment is worse in this bubble than the bubble ten years ago.
Hmm. IIRC, the first indication I got about the peak in the last bubble was when Pulte a homes announced price cuts in new neighborhoods in Las Vegas and San Diego. Must have been 2005.
“I recently had a realtor out to get ideas before I relocate. The house I bought not even a year ago for $112,900 will now be listed at $169,900 and that is a bargain in my area!”
So you’re one of the speculators causing this mania? Cool!
Unfortunately no, I am not a speculator, I cannot find work and am being forced to relocate.
So the people that are buying in your area are all retired folks?
Yes many retiree’s, but Colony Capital bought a house on my street several months ago and it remain unkept and empty.
You are smart to price it right…I sold my place in Spring 2007 and thanks to what I learned here knew the pop was imminent and “discounted” it about $10K (about 3% or so), had an solid offer within a week which I accepted…had I been greedy I could have ended up selling for much less
“Six years after the most recent real estate bust began, three years since the supposed end of the Great Recession, residential real estate and stocks are once again becoming the choices du jour of investors big and small.”
Isn’t this the rational choice of sectors in which to invest, so long as the Fed and its supporters stand behind the policy of massively subsidizing residential investment through MBS purchases?
Buy what the Fed buys; sell what the Fed sells.
There was no end to the “great recession”‘ just more do-gooder feel good pap. This economy has been on life support since 2008 and no one wants to step up and render aid!
Comment by Salinasron
2013-09-14 08:01:36
There was no end to the “great recession”‘ just more do-gooder feel good pap. This economy has been on life support since 2008
—————-
The United States Crossed The Rubicon On Its Path To Collapse
I really wanted to go into a rant about how our economy and political system is in a serious state of collapse. The economic numbers released yesterday and this morning are proof that I’m right in my assessment of the economy. The Syrian situation is all the proof we need that our Government knows I’m right (the old attempted “divert the public’s mind from the problems at home”).
http://truthingold.blogspot.com/2013/09/the-united-states-crossed-rubicon-on.html
Nobody wants to render aid because the patient is still refusing aid and frantically looking for their needle and spoon.
Mortgage interest rates will skyrocket by 2017. Funds will begin deploying exit strategies, including disposition of assets, a year before the rates head skyward.
”
good article
Yeah, except he got the timing on the skyrocketing rates wrong by four years. (They already started to skyrocket in early May 2013.)
Is this a Realtor®’s opinion of what constitutes a “good article”? Because it gets basic facts completely wrong. For example, how can interest rates “start” to skyrocket in 2017, given that they have already shot up like a rocket since May 2013?
I suppose details like this don’t matter much to a Realtor®, as they are used to playing fast and loose with the “facts.”
Are u suggesting realtors are liars?
I was trying to put it politely.
How is a realtor qualified to discuss interest rates? Isn’t that left up to a mortgage broker?
That last sentence there is the one to watch like a hawk, if you are among the growing throng of residential real estate gamblers. Be sure to sell your home before the funds start to seriously deploy those exit strategies, or else look forwarded to getting trampled on the rush out the door of the burning theater.
If you abhor gambling, I’d avoid this market with a ten-foot pole.
P.S. One thing McCabe’s piece missed: Rates already started to skyrocket, beginning around May 2, 2013.
Given his professional dependence on a growing real estate bubble, I don’t suppose it would be in McCabe’s business interest to point out that a crash may already be underway.
But since I care much more about getting the story right than talking my book, I feel compelled to restate an important fact: THE SPIKE IN RATES HAS ALREADY STARTED. FUGGETABOUT 2017, AND FOCUS ON RIGHT NOW.
Have I made myself clear, or will this take a few more similar posts to get the idea across?
This is reality, folks. Deal with it as you please.
Mortgage Applications Plunge as Buyers Fear Surging Rates
Wednesday, 11 Sep 2013 07:34 AM
Applications for U.S. home loans plunged as mortgage rates matched their high of the year, with refinancing activity falling to its lowest in more than four years, data from an industry group showed on Wednesday.
The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, sank 13.5 percent in the week ended Sept. 6, after rising 1.3 percent the prior week.
That puts the index at its lowest since November 2008 and the depths of the financial crisis.
…
The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, sank 13.5 percent in the week ended Sept. 6
What’s that sound I hear? Bankster’s profits crumbling?
First off, I am not a Realtor. The last line of my column should have made that abundantly clear.
Secondly, wac a buble says interest rates are already skyrocketing. Poppycock. 30 year fixed rates have risen from 3.5 percent up to 5 percent, and have come down to 4.58 percent currently. When I talk about skyrocket, I mean high single digit to low double digit 30 year rates. We’ll see it by 2017.
Thirdly, mortgage applications have dropped 13.5 percent, but re-finances are down 72 percent. It’s the refis, most of which have already happened anyway, that have plummeted the ratio.
Fourth, if you don’t know who I am or what I do, you obviously haven’t followed the housing market or the housing bubble blog for very long. Perhaps Ben might chime in and inform the uninformed and misinformed.
Regards.
Jack McCabe
Back in early 2005, Jack was telling the media, without qualification or doubt, that the prices in Florida were bonkers and that a disaster was coming. I believe he said about that time that condos were the last to take off and the first to crash. This was just before people started noticing the condo towers had no lights on at night.
He was like Chris Thornberg, except earlier, as Thornberg didn’t become active until he left the Anderson School. Most of the early calls on the bubble came from economists or writers like Bill Fleckenstein. I think Jack may have been the only housing analyst making this case when I started this blog. Which probably didn’t exactly boost his earnings at the time because the industry hated what he was saying.
I didn’t suggest you were a Realtor®; rather I suggested you are professionally dependent on a growing real estate bubble, as the fascination generated by a historic mania boosts demand for analysis.
If this seems to you an unfair statement, I apologize.
“When I talk about skyrocket, I mean high single digit to low double digit 30 year rates. We’ll see it by 2017.”
What in the present state of the economy would lead you to predict this?
One might gain insight by looking at what happened in Japan since its real estate bubble collapsed nearly a quarter a century ago. Its central bank is still pushing on a string today — last I checked their 10-year yield was stuck under 1% with no sign of incipient change on the horizon.
Do you think it is different here in the U.S.? If so, how and why?
It helps make a scenario more convincing if you back it up with economic logic; otherwise it comes off like fortune telling.
Is pushing on a string really that different in Japan than in the U.S.? How? Why?
Man Who Saw 0.5% 10-Year Yield Now Predicts 0.25%: Japan Credit
By Masaki Kondo, Mariko Ishikawa & Yumi Ikeda - Sep 3, 2013 9:50 PM PT
The strategist who predicted Japan’s 10-year bond yield would plunge to 0.5 percent now says it’s likely to reach a record 0.25 percent as a failure to meet economic targets may cost Prime Minister Shinzo Abe his job.
The benchmark Japanese government bond yield may slide to that level in the year starting next April from 0.765 percent today, said Kazuhiko Sano, the chief bond strategist at Tokai Tokyo Securities Co. When the rate was at 0.85 percent in May 2012, he forecast it would reach 0.5 percent this fiscal year, presaging its drop to 0.315 percent on April 5.
Japan’s main stock index has jumped 34 percent this year since Abe came to power on a platform of increased fiscal and monetary stimulus. Even as investors chased higher-yielding assets, an unprecedented bond-buying campaign by the Bank of Japan has capped yields at the lowest in the world.
“We’ll be in a low-yield environment next fiscal year because the economy is bad,” said Tokyo-based Sano, 51, whose company is one of the 23 primary dealers obliged to bid at government bond sales. “Once growth slows, approval ratings for Abe may fall, and it’s possible a change of the administration will occur, while a failure to meet the inflation target may call the effectiveness of the BOJ’s quantitative easing into question.”
Sano, who has been a bond analyst since 1988 and joined Tokai Tokyo from Citigroup Inc. in 2010, predicts yields will slide as the BOJ misses its 2 percent inflation target while a planned April increase in the sales tax curtails spending.
Analyst Outsider
That makes him an outsider among JGB analysts, who see the benchmark yields rising to about 1 percent and holding there throughout fiscal 2014, according to median estimates compiled by Bloomberg.
…
Jack, thank you for contributing to HBB, and for commenting. I have a couple questions:
1. If half these houses are bought for cash, why do mortgage interest rates matter? The comps are set in stone, whether Joe 6 Pack can afford it or not. Joe 6 Pack will just have to suck up and rent.
2. This is related: where is the money for these cash buys coming from???? If it’s solid deep pockets cash, foreign cash, or easy easy Fed funnymoney, then the land grab can continue indefinitely until we serfs are all renting tenement housing circa 1905. If these houses are being speculated with cash-and-refinance-to-buy-another or real money, then Blackstone is in effect just another J6P with a monthly PITI. In that case, watch out below.
3. Concerning your prediction that Joe 6 Pack will buy with ARMs: Who will originate an ARM? If I understand correctly, the Risk Retention rule under Dodd Frank got rid of the 20% down requirement for QRM, but it still requires that banks retain a portion of any “risky” loan. Any ARM is a risky loan according to CFPB. Originators don’t like taking little bites of their reserves to retain the risk; their business model has shifted to unlimited 100% pass-throughs to Fannie with a juicy fee. So why would they originate an ARM for Joe 6 Pack?
4. Even if the ARM’s are originated, where oh where is the secondary market? Fannie/Freddie are still struggling with the circa 2007 paper, but they are a lot pickier on which new paper they buy. And JPMorgan and Wells Fargo will NOT buy mortgages on the secondary market if they can’t sell to the gov tertiary market. So who is going to purchase the loans? It may be all cash all the time for the foreseeable future.
“1. If half these houses are bought for cash, why do mortgage interest rates matter? The comps are set in stone, whether Joe 6 Pack can afford it or not. Joe 6 Pack will just have to suck up and rent.”
Just in case Jack doesn’t have an answer to that, I’d be happy to pinch hit:
Higher rates won’t matter whatsoever, PROVIDED the all-cash investment craze lasts indefinitely.
“The comps are set in stone,…”
Higher rates are a sledge hammer which can easily break stone.
You are neglecting the rather obvious possibility that lots of the cash flowing into real estate investment was raised through low-rate borrowing!
“2. This is related: where is the money for these cash buys coming from????”
Did you consider that lots of the money might be borrowed? If so, watch out below when rates rise.
Even if the money isn’t borrowed, rising rates increase the opportunity costs of real estate investment versus parking the cash in super-safe government debt.
“3. Concerning your prediction that Joe 6 Pack will buy with ARMs: Who will originate an ARM?”
If I were in the mortgage lending biz, I would gladly originate ARMs to wealthy buyers who don’t really need a mortgage but use one to take advantage of the mortgage interest deduction. The beauty of this situation is that deep pockets can enjoy the lower rates that come with an ARM, understanding that they can rapidly pay off some or all of the loan if they decide rates are rising too quickly.
ARMs to the 1% are a win-win for bankers and buyers; not sure what the advantage of making ARM loans to subprime buyers would be in the current lending climate, though.
“4. Even if the ARM’s are originated, where oh where is the secondary market? Fannie/Freddie are still struggling with the circa 2007 paper, but they are a lot pickier on which new paper they buy. And JPMorgan and Wells Fargo will NOT buy mortgages on the secondary market if they can’t sell to the gov tertiary market. So who is going to purchase the loans? It may be all cash all the time for the foreseeable future.”
Why does it matter, so long as the borrower has a legitimate prime credit rating?
If anyone has info on subprime ARMs being made in the current lending environment, please share, as this seems like a recipe for a repeat of the Fall 2008 crash in case ARM lending goes viral and subprime in a rising rate environment.
Just sayin’…
This is related: where is the money for these cash buys coming from???? If it’s solid deep pockets cash, foreign cash, or easy easy Fed funnymoney, then the land grab can continue indefinitely until we serfs are all renting tenement housing circa 1905. ‘
hey you’re smart
Concerning your prediction that Joe 6 Pack will buy with ARMs: Who will originate an ARM?’
Blackstone and it’ s rent to own which Blackstone knows most rent to own fail so they keep the rental and get higher monthly income.
I don’t think interest rates will spike but I think taxes will
parking the cash in super-safe government debt.’
ha that could change and change quite fast and that would raise interest rates !!
“Secondly, wac a buble says interest rates are already skyrocketing. Poppycock. 30 year fixed rates have risen from 3.5 percent up to 5 percent, and have come down to 4.58 percent currently. When I talk about skyrocket, I mean high single digit to low double digit 30 year rates. We’ll see it by 2017.”
However 3.5% to 5.0% is a 43% increase.
“ha that could change and change quite fast and that would raise interest rates !!”
My point was that the higher long-term rates rise, the better bonds look compared to risky investments in stocks, gold and real estate.
“However 3.5% to 5.0% is a 43% increase.”
There it is. And its a 20% decrease in purchase power form “Dumb-Borrwed-Money”.
Look everyone…. stop running and hiding under a rock when it comes to housing demand. It collapsed and it’s not “going up”. Now today, not yesterday, not tomorrow. Cash buyers are like raindrops in the desert.
“However 3.5% to 5.0% is a 43% increase.”
Yep. Convexity is easily overlooked if you don’t understand it.
“Cash buyers are like raindrops in the desert.”
I just posted an article from UT-San Diego which notes that August 2013 home sales and prices are down month-to-month. The article downplays the one-month price decline but makes a very big deal about the 20% year-on-year increase in the median.
The two parts that most grabbed my attention were the mention that the number of sales to all-cash buyers and investors was down, plus the suggestion that a 9.5% drop in home sales from July to August “wasn’t unusual.” I strongly doubt the veracity of the second statement; August is normally part of the red-hot summer sales season, and a 9.5% drop in one month sounds highly significant. To understand why, it might help to express the rate of decline on an annual basis:
((1-0.095)^12-1)*100% = -70%.
TIMBER!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
“Jed Kolko, Chief Economist at Trulia, digs into recent history to reveal how today’s rising rates may be more bark than bite.”
Real estate prostitution leads to endless distortion of financial reality.
Lifestyle
9/11/2013 @ 12:20PM |9,000 views
When Will Rising Mortgage Rates Hurt The Housing Market?
Jed Kolko, Chief Economist at Trulia, digs into recent history to reveal how today’s rising rates may be more bark than bite. Typically, spiking mortgage rates take a big chomp out of refinancing immediately and smaller nibbles out of sales three months later. Longer term, the impact of rising rates is typically offset by stronger economic growth.
Ever since mortgage rates started their steep climb in early May, we’ve all been on high alert, watching how higher rates will affect the housing market. For a would-be buyer calculating the mortgage payment on their dream home, the effects are obvious: the increase in the 30-year fixed rate from 3.59% in early May to 4.73% at the end of August (according to the Mortgage Bankers’ Association, or MBA) means a 15% increase in the monthly payment on a $200,000 mortgage. That should deter homebuyers and reduce mortgage applications, sales, and prices, right? In theory, yes, but of course the real world is much more complicated. Mortgage rates aren’t rising all on their own: other housing and economic shifts are happening at the same time.
…
Oh my……the Housing Hookers(realtors) are still moral and ethical deficit.
From here on out it’s all up to the all-cash investors from Wall Street, China and Canada to further levitate U.S. housing prices, as mortgage rates are headed skyward with no end in sight, and end-user (traditional owner occupant) demand consequently is toast.
Mortgage Applications Drop As Rates Spike
BY Shanthi Bharatwaj | 09/11/13 - 08:23 AM EDT
NEW YORK (TheStreet) — Mortgage applications are plunging as mortgage interest rates continue to climb.
According to the latest survey by the Mortgage Bankers Association, mortgage applications decreased 13.5% in the week ended Sept.6 from a week earlier, on a seasonally adjusted basis.
The Market Composite Index declined 23% on an unadjusted basis. As has been the case since rates began their rise in May, refinance applications led the decline, plunging 20%. Refinance applications have plummeted 71% from their peak level in May and are at the lowest level since June 2009.
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Improving Housing Outlook May be Reaching Plateau
by Jann Swanson
Sep 9 2013, 10:20AM
Fannie Mae said today that results of its monthly National Housing Survey shows that Americans are aware of and following trends in the housing market. The outlook toward housing growth voiced by survey respondents has generally moved upward since the beginning of the year but now appears to have plateaued, perhaps due to concerns over the potential tapering of the Federal Reserve’s asset purchases.
“The spike in mortgage rates associated with the possibility that the Fed will begin to wind down its asset purchase program later this month has dampened the improving trend in consumer sentiment regarding housing witnessed in our survey since the start of this year,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “The pause in positive momentum is consistent with slowing trends in home purchase contract signings and mortgage applications. Interest rate volatility will likely remain elevated, even after we have more clarity on the pace of the Fed’s tapering, due to concerns over the upcoming budget and debt ceiling debates as well as the crisis in Syria.”
…
“Mortgage rate increase, however slight…”
Is this more propaganda, or mere ignorance about the effect of the rate increase so far this year on a mortgage-financed home buyer’s purchase budget? The same monthly payment would finance around 15% less principal (aka home purchase proceeds) today than it would have in April 2013. Imagine the MSM wailing and gnashing of teeth if the Dow Jones Industrial Average dropped by 15%. I guess it’s different with housing?
Mortgage rate increase, however slight, forces buyers to sidelines
Originally published: August 30, 2013 1:35 PM
Updated: August 31, 2013 11:08 AM
By BLOOMBERG NEWS
Photo credit: AP | A sign for a newly-constructed home advertises a financing rate in Chagrin Falls, Ohio. (Oct. 15, 2009)
Amy and Ted Wilder lost out in the bidding for several Seattle-area homes during the past six months, even with offers well above the asking price. After May’s sudden spike in mortgage rates, the Microsoft consultants put their search on hold.
“We fell in love with a house for about $400,000 and thought we could afford it, and then we discovered it was $300 more a month than what we would have paid in February when we started looking,” Amy Wilder, 42, said. “The mortgage rates just pushed it too far.”
A surge in borrowing costs to a two-year high is starting to cool demand from homebuyers as higher rates combine with surging prices to reduce affordability, according to data released this week. The biggest pinch is being felt in expensive markets such as Seattle and New York, where budgets already were stretched, leading to a more uneven national recovery.
…
The funds strategy is obvious. While interest rates go up buy real estate (inflating the market as you buy). When interest rates stabilize at a higher rate - sell. Then go back to buying cheap bonds and when higher interest rates cripple the economy and rates come down - look like a hero.
The float is adjustable because they will look good.
Trouble is a lot of money will be wasted in fees, etc. Not to mention the rental failure rate possibilities, black rot, etc.
Voodoo investment strategy - eh - gamble ! And they call themselves professionals - -
Who will they sell to, each other?
Yup. And in their spare time they can rent to the plebes for their own amusement.
To Comment by Patrick
The CanUSA is not an island completely capable of steering an economic course for the world anymore. Interest rates will rise not due to a shortage of funds nor the removal of Fed buying, but because international pressures are now distorting our markets (CanUSA) as they prioritize their individual economies. They are big and will have a huge effect on international trade patterns - round two.
The Fed built this box and can do nothing to pull anyone clear. Can you imagine banks lending money today at 5% for 30 years ?
Best to leave it alone and let deflation occur. Jack is right.
Have you ever heard of a recession where the governments do diddly squat to encourage employment ? Like this one.
The Other Patrick
Just realized the other article was by me only a year earlier !
I was travelling in Canada and noticed a strange twist to the economy. Four wheel drive pick up trucks with crew cabs.
If it is sitting in the driveway really close to the house, the owner (some would say master) is off in the oil sands on his 20 day rotation.
If the truck is not at home then it will be near a fishing/hunting favourite spot - with several others - all of whom are at home on their 10 day rest period.
If you see the truck near a grocery store - then the wife is the master and his pays are being deposited into a joint bank account !
If there is a second vehicle in the driveway then it is always an older, smaller, vehicle and is generally parked out of the way of the Four Wheeler.
I also have driven on the Trans Canada highway thru the Rockies on a Friday night. There is a traffic jam of four wheel pick ups headed home to BC that rivals any USA traffic jams in that these guys are serious about getting home.
My point is - he who has a good - great paying - job - is the master.
Thanks, Ben, for posting this real estate propaganda shill piece. Bears have to eat, and it makes it easier for them when you toss large slabs of red meat into their cage.
Mr McCabe asked me to post this. We may not agree on the timing, but the overall viewpoint is similar.
‘The Orbit Grand, a block-size complex designed to have at least 26 floors of elegant apartments, an extensive array of ground-floor stores and abundant parking for the chauffeured cars of residents and shoppers, was supposed to be a diadem of India’s real estate market. Now it is turning into a symbol of the slumping fortunes of property developers and owners in a once-promising emerging economy. Construction of the Orbit Grand has almost completely stalled at the 10th floor, the tower crane at the site seldom moves and the builder has defaulted on its loan.’
‘The real estate market in cities across India is crumbling as the Indian economy slows. The rupee has dropped nearly 20 percent against the dollar since early May, scaring away foreign investors. What has sustained prices so far, and what might prevent more serious losses than those predicted by Mr. Dutt, has been the willingness of developers to hold growing inventories of unsold apartments, shops and offices without offering price discounts. The volume of real estate transactions has slumped in India as developers have refused to offer discounts for fear of starting a market rout.’
“If they drop prices, investors will panic and it will be a self-fulfilling prophecy,” causing further declines in prices, said Siddharth Yog, a co-founder and managing partner of the Xander Group, a large international real estate investment firm started in 2005.’
‘Manish Jain moved his jewelry store last January into retail space at the base of the unfinished Orbit Grand, but has found that customers are more interested in pawning jewelry they already have — and the people doing the pawning are increasingly those wearing suits, not just shirts or saris. “They are going through a tough financial crisis,” he said. “At first, we only saw people from the service class, lower-income people, but now we are seeing business people, too.”
http://www.nytimes.com/2013/09/11/business/global/a-housing-slump-in-india.html?pagewanted=all&_r=2&
Sorry to go a bit rabid on the misstatement of the timing on the interest rate spike. I’ve been reporting on it here since early May (i.e. before the MSM jumped on board), and I have to assume if Mr McCabe occasionally reads here, he may have spotted one or two of my posts on the topic.
Here’s some real shilling:
‘Massachusetts housing inventory: very little available at lower prices’
http://www.wickedlocal.com/watertown/blogs/mobileghmne/x2064495387/Massachusetts-housing-inventory-very-little-available-at-lower-prices#ixzz2eshZ3YMB
Look at the last table:
$2 to $3 million (I’m not sure what town/city or cities this covers) months supply is 112. Over 3 million it’s 52.5 months supply.
I find propaganda which gets all the facts correct, save one glaring omission which lures readers who accept it into making financially deleterious decisions, to be far more insidious.
Caveat emptor!
ECONOMY
Updated September 9, 2013, 7:31 p.m. ET
Mortgage Lenders, Home Buyers Feel Rate Squeeze
Wells Fargo, J.P. Morgan Warn of Slowdown
By ROBIN SIDEL and SHAYNDI RAICE
CONNECT
A rise in interest rates is slamming homeowners’ demand for mortgages, prompting large and midsize banks to cut jobs and warn investors of declining profitability in the home-loan business.
Wells Fargo (WFC -0.17%) & Co., the nation’s largest mortgage company by loan value, on Monday told investors at a conference that it expects mortgage originations to drop nearly 30% in the third quarter to roughly $80 billion, down from $112 billion in the second quarter.
J.P. Morgan Chase (JPM +0.67%) & Co., the largest U.S. bank as measured by assets, said during the conference sponsored by Barclays (BARC.LN -1.41%) PLC that it expects to lose money on its mortgage-origination business in the second half of the year. On Aug. 29, Bank of America Corp., (BAC +0.07%) notified about 2,100 employees that they were being let go largely due to a decline in refinancing activity, said a bank spokesman.
Mortgage originations include loans for home purchases and refinancings.
Rates are rising on investor worries the Federal Reserve soon will take steps toward reducing an $85-billion-a-month bond-buying program designed to help stimulate the economy.
The average rate on a 30-year fixed-rate mortgage stood at 4.73% for the week ended Aug. 30, up from 3.60% at the end of April, according to the Mortgage Bankers Association.
Track the performances of 150 companies as they report and compare their results with analysts’ estimates. Sort by date and industry.
“Rate volatility is the enemy of mortgage banking,” wrote Paul Miller, an analyst at FBR Capital Markets & Co. in a research report published Monday. Given the recent jump in mortgage rates, “we expect third-quarter results to be relatively weak for mortgage-centric companies.”
…
Sorry to go a bit rabid on the misstatement of the timing on the interest rate spike. I’ve been reporting on it here since early May
PB, I got the impression that Jack was referring to an even _more_ significant interest-rate spike.
I don’t intend to the make light of the one occurring since May, which was interesting to watch—and I appreciate you highlighting it here from the start.
But even after that increase, rapid as it may have been, rates are still at a level that we would have called “ridiculously low” a decade ago. I can’t really call what happened “skyrocketing” when they are still at levels we would have called a historical low even four years ago.
“PB, I got the impression that Jack was referring to an even _more_ significant interest-rate spike.”
I hope you are right about that, as the one since early May is one of the largest on record for a 4 1/2 month period.
‘…rates are still at a level that we would have called “ridiculously low” a decade ago.’
What the financial press seems to miss is that where rates were a decade ago is quite irrelevant to the path of home prices. What’s relevant is where rates are now compared to their recent levels.
I liked Jack McCabe’s article.
If anyone really thinks that QE isn’t like driving up a logging trail, with the road a steep drop on either side - -
Eventually you know you will run out of a road and there is no where to turn safely.
Paulsen made me ill with his guest appearances. Tarp funding from the govt for shovel ready was good as it created an economic stimulus.
Tarp for banks did nothing and QE is even worse because their position just hasn’t changed from 2008. Paulsen forgot the adage “nothing focuses the mind better than -”
Although I compliment him on decision making and the ability to get Congress to act on them.
Sort of like a real estate person saying buy it now - -
I was just giving him a hard time over not commenting on the rate increase since early May 2013.
After a little data mining, I acknowledge that rate volatility was far more extreme in the early 1980s than in the more recent past (even the big spike so far this year).
However, I have a hard time imagining what could happen between now and 2017 that would drive rates up to 10% or more; it took twenty years last time (from the early 1960s through early 1980s) for rates to move from comparable levels to current up to over 10%; what could possibly make it happen so much faster this go-round?
what could possibly make it happen so much faster this go-round?”
run away inflation ?
“run away inflation ?”
That was the story in the 1976-1980 period, back when there were LOTS of union contracts with built-in cost of living adjustments and a lot fewer retirees than today dependent on fixed-income pensions.
It really is different this time! If the Fed creates lots of inflation, then lots of retirees are going to get wiped out (same thing happened in the 1970s, but the problem would be lots bigger this time).
The real problem with QE has been it’s artificial support of bubble prices.
It has not let them adjust to reality yet, in comparison to wages, despite their awful beating.
If interest rates go up fast, the Fed will take a terrible beating, and interest rates will zoom because the Fed wouldn’t even be able to spell QE anymore.
Then stagflation. Ugh, how could the Fed make such mistakes.
IMHO, the only way interest rate will rise if the treasuries auction does not garner enough interest (no pun intended) from the foreign buyers like China, saudi etc. Thus the yield on the long rate bond will need to go up.
Then the question is: can QE go on indefinitely? It can… until housing runs out of GFs. Put another way, there is over-capacity in almost everything here and in China. The only demand is for replacement goods, including cars.
What has sustained prices so far, and what might prevent more serious losses than those predicted by Mr. Dutt, has been the willingness of developers to hold growing inventories of unsold apartments, shops and offices without offering price discounts. The volume of real estate transactions has slumped in India as developers have refused to offer discounts for fear of starting a market rout.’
That sounds a lot like what I remember from late 2006 through 2007 here…
The number of 2006-2008 references I see in financial news articles seems to be increasing these days as quickly as housing prices.
With the rupee down 20% does it makes 20% cheaper for those companies with a decent sized work force in India? I mean, a real boost to the bottom line?
It could be a start of several things:
a) more companies could increase their off-shoring, resulting
b) in weak employment for new grads of STEM here in the US
c) decrease in wages in real terms in the US for professions such as engineering, accounting, general law etc.
‘It could be a start of several things’
I was reading some Indian newspapers this week, and they were full of stuff like this. Sort of like being on the Titanic, seeing the iceberg and remarking on how useful life boats will be. If my understanding of this bubble is correct, India is about to have a serious financial disruption.
“If my understanding of this bubble is correct, India is about to have a serious financial disruption.”
I’m 100% on board with that prediction. BRICs were made to crumble.
Note that this could spell serious trouble ahead for gold investors, as Indians are a key source of fundamental support for gold prices.
13 September 2013
Last updated at 03:26 ET
India’s economy panel cuts growth forecast sharply
The Indian prime minister’s economic advisory council has lowered the growth outlook for the current financial year.
It now expects the economy to expand by 5.3% this year, down from its earlier projection of 6.4% growth.
The new growth outlook is in line with the projections of the central bank and many other economists.
The council also warned that keeping the fiscal deficit within the budget target of 4.8% of gross domestic product (GDP) “could be a challenge”.
In its latest economic outlook, the council said that the fiscal deficit during the first four months of the current financial year had already reached 62.8% of the budgetary provision for the full year.
…
Car makers struggle in poor year for India’s economy
8 hours ago
It has been a bad year for India’s economy, and its car makers have not escaped the fallout.
Consumers are short of cash, sales have sunk for the first time in 10 years and the cost of imported raw materials has gone up because of the weak rupee.
Now there are rumblings in the industry that the government should be doing more to help.
Yogita Limaye finds out what will it take to get the country’s carmakers back on the road.
…
Yeah, the lower currency should have some positive side effects. But it will take a while to filter through. Meanwhile interest rates will have to be raised to protect the currency, making the RE downturn worse. I expect the usual; developer defaults, lender defaults, cascading defaults. Lots of unemployment and all that goes with that. Houses should be cheaper!
“Yeah, the lower currency should have some positive side effects.”
Like more affordable gold prices, for instance? Because even if fundamental gold demand remains the same, a collapse in the Rupee translates into a higher exchange-rate-adjusted gold price, and hence less quantity demanded (and purchased) by Indian households.
This should make it less expensive for U.S. investors to accumulate physical going forward.
Can we expect a Indian spring where the Indian lucky ducks start a revolution?
From PB’s link on the cars, I suppose the newly minted middle class have bought all the cars they could. Interest rates going up over there could curb the real estate prices. If the cash in the cash economy dries up, the central bank cannot open the liquidity spigot since the currency will fall further… inflation will go up. What a mess!
“Funds, private-equity groups and high-net-worth investors will continue to buy distressed bank- and Realtor-listed Multiple Listing Service properties until price points reach 2006 median levels.”
We’ve already seen these buyers dial back the purchases (including American Homes 4 Rent). This prediction may be true with high net worth investors, but funds and PE groups won’t continue to buy all they way back up.
‘The lack of hotel options in Silver Lake has for years made it difficult for out-of-towners to explore what is widely considered the hippest neighborhood in Los Angeles and possibly all of America. But that doesn’t mean tourists aren’t visiting. The popularization of online vacation rental marketplaces such as Airbnb, VRBO and Homeaway has led residents to rent out their own homes to guests for a night, weekend or longer, giving rise to a cottage industry of cottage rentals. On a given night, more than 200 such rentals are open for business.’
‘But as trendy as the services have become, some community members have grown concerned and fed up over what they consider to be visitors’ disrespect for the neighborhood and are pursuing a ban against these rental services.’
‘Others said they felt the issue was about a right of ownership and privacy. “It’s my home and I’ll do with it what I want,” said Hope Arnold in an interview later, who rents out a room in her Silver Lake house through Airbnb. “There were complaints about people smoking and drinking and partying too late, and I say, you know what? That’s not illegal.”
‘Arnold, who owns a bar in Korea Town, said she was facing foreclosure when she decided to start renting out her house last November.’
‘Instead, she restructured her home to accommodate visitors, put many of her belongings in storage and posted her own bedroom online for $76 on weeknights, $86 on weekends, and an extra $20 for two occupants. When people rent the room, she said, she sleeps in the den.’
‘With this supplemental income, Arnold said she was able to keep her home until she received a recent loan modification. Additionally, she said, with the additional income, she has been able to put more money into her own property too, painting the outside and making other cosmetic repairs, in effect raising her property value and those around her.
“I just can’t see any negatives at all. You’re going to get a bad seed every now and then in life,” she said. “I own a small bar. I get bad employees sometimes. I fire them. Same thing with a short term renter, you get a bad one and you kick them out.”
http://www.losfelizledger.com/2013/08/real-estate-short-term-rentals-have-some-locals-on-a-short-fuse/
“Banks will ease qualifying criteria, not to last decade’s levels but to conservative lending formulas from the 1990s. Adjustable rate mortgages tied to Treasury bill and LIBOR rates will become increasingly prevalent.”
I don’t think we’ll get to the madness (overall) of home prices in 2005-2007 if you don’t loosen credit standards to the same crazy level of 2005-2007.
“…if you don’t loosen credit standards to the same crazy level of 2005-2007.”
So much of what happens from here depends on the extremes to which hair-of-the-dog hangover cures will be pushed.
Well my old lyin’ friend Rental Watch…. think of it this way……
Current asking prices of resale housing are already at the massively inflated levels of 2004. By 2004, housing prices had doubled then some.
So in this case, housing is already massively inflated…. regardless of what year/price point.
“So much of what happens from here depends on the extremes to which hair-of-the-dog hangover cures will be pushed.”
I think this is exactly right.
These people are fine tuning a thermostat to just the right level of comfort, they are opening and closing barn doors.
Good: Rising home prices.
Better: Home prices increasing faster than they were in 2006-2007.
Do you detect the pattern here?
P.S. Does owning three cars and zero houses imply that I am a Millenial?
Washington & Wall Street: Has the Fed’s ‘Quantitative Easing’ Failed?
by Christopher Whalen
4 Sep 2013
Are we seeing the peak of US home prices in 2013? Last week the Case-Shiller 20 city index of US home prices was up over 12% year-over year through of June, one of the best results seen this year. But as we have discussed in Washington & Wall Street previously, the indications for the future are decidedly mixed. The fact of a still weak housing sector has big implications of the US economy and begs the question as to whether the Fed’s zero interest rate policies have failed.
On the positive side, Lender Processing Services (NYSE:LPS) reports that while mortgage loan origination volume had slowed slightly from May to June, overall activity remains relatively strong. According to LPS Data & Analytics Senior Vice President Herb Blecher, mortgage loan prepayment activity (historically a good indicator of mortgage refinances) is still largely driving origination volume, as has been the case for some time now.
But refinancing existing loans is not the same as home purchases, especially the first time home buyers who are crucial to sustaining housing prices. Last week, the mortgage application index maintained by the Mortgage Bankers Association was down 2.5% vs. a year ago. The index has been falling pretty steadily for weeks due to falling mortgage refinance volumes and tepid home purchases.
The MBA noted last week: “The refinance share of mortgage activity decreased to 60 percent of total applications from 61 percent the previous week, which is the lowest share observed since April 2011.” As one of my younger colleagues in the media said in response: “Millennials are not buying houses, they are buying cars. Nobody my age has the money to buy a home. A car is the major capital purchase for my generation.”
With the volume of mortgage refinance transactions falling and new home purchases growing at far lower rates, the sharp drop in total mortgage lending volume predicted by the MBA comes into sharper focus. As we’ve noted in this column before, the MBA expects total mortgage lending in the US to go from $1.6 trillion this year to just $1.1 trillion in 2014, a 31% decrease.
The fact of lower lending volumes and a still large component of the market comprised of investors suggest that home prices may be nearing a peak in 2013. Without the additional upward push from investors of all stripes, it is doubtful that the visible increase in home prices captured by national averages like Case Shiller would be up half as much as the numbers reported in the media.
…
We should be proud to own zero houses and have no debt. That means people like us are unAmerican, we did not drink the kook-aid.
“kook-aid”
Added.
“Blackstone Group LP, the largest hedge fund involved in residential property acquisition for rental, already has acquired more than 30,000 homes for $4.5 billion in the last 15 months. In August, the firm announced a $2.7 billion investment in apartment complexes owned by GE Finance. It also has raised an additional $2.5 billion to make loans to smaller residential property operators with an “REO to rental” strategy.”
Blackstone Group
From Wikipedia, the free encyclopedia
Blackstone also ventured into other businesses, most notably investment management. In 1987 Blackstone entered into a 50–50 partnership with the founders of BlackRock, Larry Fink and Ralph Schlosstein. The two founders, who had previously run the mortgage-backed securities divisions at First Boston and Lehman Brothers Kuhn Loeb, respectively, initially joined Blackstone to manage an investment fund and provide advice to financial institutions.
After subprime mortgage crisis, Blackstone Group LP has bought more than $5.5 billion single-family homes for rent and then sell when the prices rise.[18]
Founding and early history[edit source | editbeta]The Blackstone Group was founded in 1985 by Peter G. Peterson and Stephen A. Schwarzman with $400,000 in seed capital.[29][30] The founders named their firm Blackstone, which was a cryptogram derived from the names of the two founders (Schwarzman and Peterson): Schwarz is German for black; Peter, or Petra in Greek, means stone or rock.[31] The two founders had previously worked together at Lehman Brothers, Kuhn, Loeb Inc. At Lehman, Schwarzman served as head of Lehman Brothers’ global mergers and acquisitions business.
Prominent investment banker Roger C. Altman, another Lehman veteran, left his position as a managing director of Shearson Lehman Brothers to join Peterson and Schwarzman at Blackstone in 1987. In 1992 after playing a role in the firm’s growth, Altman would leave Blackstone to join the Clinton Administration as Deputy Treasury Secretary. After leaving politics in 1996, Altman would found a boutique investment banking and private equity firm, Evercore Partners.[32][33
Blackstone Group - Wikipedia, the free encyclopedia
http://en.wikipedia.org/wiki/Blackstone_Group - 207k -
How long from now until Blackstone dumps, leaving the all-cash foreign investor brigade holding the bag?
Interest rates heading up suggest it may be close to fecal time!
What makes you think Blackstone will be able to dump?
No reason to think they are that agile. Maybe they can find another PE house to buy their portfolio, but I doubt it.
“Prominent investment banker Roger C. Altman, another Lehman veteran, left his position as a managing director of Shearson Lehman Brothers to join Peterson and Schwarzman at Blackstone in 1987. In 1992 after playing a role in the firm’s growth, Altman would leave Blackstone to join the Clinton Administration as Deputy Treasury Secretary. After leaving politics in 1996, Altman would found a boutique investment banking and private equity firm, Evercore Partners”
Bilderberg Group Exposed
Added by Aaron on January 5, 2013
Here’s the list of attendees in the 2011 meeting
USA
Altman, Roger C., Chairman, Evercore Partners Inc.
Bilderberg Group Exposed - A New World Society
http://anewworldsociety.ning.com/notes/Bilderberg_Group_Exposed - 68k
Battle on over plan to seize mortgages
Kathleen Pender
Updated 12:21 pm, Saturday, July 21, 2012
Battle lines drawn
Mortgage Resolution was started last year by Gluckstern, a former money manager whose past credits include working for Warren Buffett, co-owning the New York Islanders hockey team, chairing liberal think tank the Democracy Alliance and raising money for President Obama.
Gluckstern says about 50 people have invested in his company, including former San Francisco mayor and Chronicle contributor Willie Brown and Don Putnam, founder of Grail Partners, a San Francisco investment bank. Phil Angelides, former California treasurer, was the firm’s executive chairman but severed his relationship in January.
The firm is working with investment banks Evercore Partners and Westwood Capital to find investors to front the money cities would need to pay for seized mortgages. The investors would be repaid when the mortgages were refinanced.
Mark Buell, a prominent San Francisco progressive who has held various civic positions, says he was approached about investing but decided against it.
Having worked in redevelopment agencies, “I’m familiar with eminent domain,” he says. “While technically this (new plan) may serve a public purpose, I question whether it is the intended use of eminent domain.”
http://www.sfgate.com/business/networth/article/Battle-on-over-plan-to-seize-mortgages-3725036.php - 116k
Yep, it’s another housing bubble
Tuesday, 10 Sep 2013 | 6:00 AM ET
John Carney | Senior Editor, CNBC.com
On Monday, we got the fourth month of home affordability data coming in below trend, which is a strong confirmation that the housing market is once again in a bubble. (The NAR index is published with a two-month delay, so the latest numbers are for July).
The affordability index measures the household income needed to qualify for a traditional mortgage on a median-priced single family home. So it’s looking at a mortgage with a 20 percent down payment and a monthly payment below 25 percent of income at the currently effective rate on conventional mortgages.
When the index is at 100, that means that a household earning the median income has exactly the amount it needs to qualify for a conventional mortgage on a median-priced home. When it is above 100, it signals that the median income is higher than needed to qualify for a mortgage. An AI score of 130, for example, would indicate that households earning the median income would have 30 percent more income than needed to qualify.
Rising interest rates and rising home prices put downward pressure on the affordability index, meaning homes are becoming less affordable. Rising incomes put upward pressure on the index, meaning homes are more affordable.
The index has been dropping rapidly since peaking in January at 210.7. We’re now down to 157.8, according to the preliminary numbers released for July on Monday. Home prices have been rising and interest rates climbing, while wages haven’t kept up. That’s how we got to the lowest level of affordability seen since July of 2009.
…
“The affordability index measures the household income needed to qualify for a traditional mortgage on a median-priced single family home. So it’s looking at a mortgage with a 20 percent down payment and a monthly payment below 25 percent of income at the currently effective rate on conventional mortgages.”
Most family’s kids become “expensive teenagers” well before the trumpeted conventional mortgage is even 30% paid-off. The NAR’s affordability index is meaningless number to the actual family.
Scotiabank Says Higher Rates Cure for Any Housing Bubble
By Doug Alexander - Sep 5, 2013 12:26 PM PT
Canadian policy makers should raise interest rates if they fear a housing bubble, rather than imposing more rules on banks, Bank of Nova Scotia (BNS) Chief Executive Officer Richard Waugh said.
“If you really are concerned about a bubble, raise the interest rates,” Waugh told reporters in Toronto today after a luncheon speech to the Empire Club of Canada. “It’s not an underwriting or a credit problem, it’s the fact that interest rates do cause bubbles.”
Canadian housing market data are showing few signs of a hard landing after warnings from economists and policy makers that a collapse may be coming. Home sales in Toronto and Vancouver, the country’s two largest real estate markets, continued their surge in August from a year earlier.
“I do not think there is a bubble, but if you’re really concerned and you’re a policy maker, you know what the right way to do it is: raise interest rates,” Waugh, 65, said.
…
Are Aussie house prices heading for a new bubble?
Jessica Irvine National Economics Editor
News Limited Network
September 15, 2013 12:01AM
BUBBLE, bubble, toil and trouble.
With interest rates at record lows and house prices heading north again, talk has emerged of an impending bubble in house prices.
Investors seeking higher returns than they can get on cash or shares are stepping back into the property market.
Nationally, home prices are up 7 per cent since the market bottomed out in May last year, according to RP Data. This reflects strong growth in Sydney, which suffers from a supply shortage, and Perth where the end of the mining boom has more recently knocked some of the stuffing out of price growth.
Over the past year, home prices are up 7 per cent in Sydney and 9 per cent in Perth, but just 4 per cent in Melbourne, 2.5 per cent in Brisbane, half a per cent in Adelaide and down 1 per cent in Hobart.
But talk of a house price bubble is premature.
…
Why are top economists convinced that stimulating housing is the ticket to economic recovery?
Woodford’s Theories Rooted in Japan Slump Embraced by Bernanke
By Rich Miller - Sep 8, 2013 9:01 PM PT
Bloomberg Markets Magazine
The Federal Reserve is buying mortgage-backed securities and has stated it will keep interest rates low until unemployment falls. The Bank of Canada under Mark Carney likewise made an explicit promise about how long rates would be held down, and Carney is now bringing this practice to the Bank of England. The European Central Bank, led by Mario Draghi, has refined how it communicates its interest-rate intentions.
…
Princeton Thinkers
Ben S. Bernanke, future chairman of the Fed, was there. He had recruited Woodford from the University of Chicago. Paul Krugman, who would go on to win the Nobel prize in 2008 for his research on trade, also was at Princeton. Lars Svensson, later a deputy governor of the Swedish central bank, was a visiting professor. And their big topic of discussion was Japan. Ten years after the bursting of a property-price bubble, the country was mired in deflation. Short-term interest rates had been cut as far as they could go, and the monetary authorities were at a loss about what else to do.
The Princeton professors had plenty of ideas. Bernanke leaned toward having the Bank of Japan gobble up assets as a way of pumping money back into the economy. Woodford was skeptical that would do much. He favored a strategy called forward guidance. He wanted Japan’s central bank to promise to keep interest rates pinned near zero until the country’s economy had fully recovered from its bust and had conquered deflation. The aim of such a communications strategy would be to convince companies and consumers that growth will pick up and prices will stop falling — and induce them to spend rather than hoard cash.
Jackson Hole
At the time, Japanese policy makers paid the American academics little mind. They began a program of quantitative easing in 2001, ramping up slowly and then abandoning it five years later, and they didn’t embrace any forward-guidance principles.
Jump forward to August 2012, to the Fed’s annual ideas confab in Jackson Hole, Wyoming, in the Teton mountains. The focus at this meeting was on this conundrum of what central banks can do when rates have already been cut to nothing, what policy makers call the zero bound — only now Japan was not the sole example.
The Fed had cut rates effectively to zero at the end of 2008, and yet the U.S. recovery from the worst economic trauma since the Great Depression had been discouragingly slow. European central bankers were searching for new policy tools as well, as the region slipped into recession.
Woodford’s Advice
The academic presentation that made the biggest splash at Jackson Hole was Woodford’s. The professor questioned the efficacy of the central bank’s purchases of Treasury securities and suggested that any further buying of assets should be concentrated on mortgage-backed debt, to help the housing market. He also called for a revamp of the Fed’s communications strategy to solidify its commitment to returning the economy to full health.
At its next meeting, in September 2012, the Fed announced it would start to buy $40 billion of mortgage securities per month. In December, policy makers junked their statement that they would keep rates low until the middle of 2015 and instead pledged low rates until certain economic goals are met — the strategy Woodford had articulated. The Fed promised to hold rates at zero at least until unemployment falls to 6.5 percent, as long as inflation isn’t forecast to rise above 2.5 percent.
Gauti Eggertsson, a former New York Fed researcher and occasional co-author with Woodford, says the Columbia professor’s ideas permeate recent central bank actions. “He is probably one of the best-known, most influential economists that noneconomists are not aware of,” says Eggertsson, who’s an associate professor at Brown University.
…
So this tells us what we already know: that the federal chairman (and the fed) does not have any original thoughts on how to fix this mess!
I suppose economics is one subject that is highly incestuous - no outside ideas are entertained.
Why are top economists convinced that stimulating housing is the ticket to economic recovery?
What if that’s all they have left?
Why are top economists convinced that stimulating housing is the ticket to economic recovery?
The fell for the classic logical fallacy: Post hoc ergo propter hoc.
Because housing usually coincided with the earliest phases of a recovery, they concluded that boosting housing would cause a recovery.
My thought exactly. Plus there is apparently some notion of the hair of the dog hangover cure possibly working in the economic policy arena.
Thanks for posting, Jack.
I took my daughter Legoland today. We had to stop in Plant City for a potty break, and I decided to make my way towards Winter Haven on some back roads for a change. I still can’t get over home rural Florida is.
I know… jobs and the beach… I just have a hard time understanding why Pinellas is so freaking expensive.
The Blue Invitation signs (Blackstone) are all over the place here, and plenty of those houses are asking absurd rents and remain vacant. Meanwhile, all of the inventory in my little beach town is gone.
can’t get over “how” rural
“I know… jobs and the beach… I just have a hard time understanding why Pinellas is so freaking expensive.”
+1 I agree.
The deep South’s “po’ folks” are different than California’s poor. A 10-minute drive out of most Florida cities puts you in barefoot pregnant and toothless poacher country.
All very interesting comments. My thoughts;
A housing bubble is in the interest of the Fed. It stimulates the wealth effect, it increases property values, adding to municipal tax revenue coffers (Detroit, and future Detroits?), and when it spills over into new construction, generates jobs/GDP numbers.
Ok, the Keynesian Fed will tell the detractors, who warn of certain death when the bubble bursts, “In the long run we are all dead.”
That said, and an election year coming up right around the corner, what’s there not to like about a bubble, on the part of incumbent pols and Central Bankers?
But, if it took Mom and Pop R/E believers from, say, 2005 until late 2007 to slowly turn the boom psychology to bust, one mind at a time, how long will it take a handful of hot money hedgies, who control tens of thousands of properties, to hit the panic button in the event of even a hint of a liquidity crisis? “He who gets out first” and such?
Hint; HFT Robots, in the aggregate, now process 2 million pricings per second in equity markets. So, it seems to me, the risk here is one on steroids compared to the last rout. I would think all it would take would be for news to get leaked of one 30,000 house owner to be going net seller to smoke this thing. Investors would dump, causing sales to meet redemptions.
But, yes, as someone above stated, where else can all the Fed’s liquidity flow but stocks and houses? Especially now that bonds are considered taboo, and only 1 in 10,000 even know how to buy PM type commodities?
And, what has been fixed since all this began? Other than more efficient means of conveying propaganda?
Am I buying here? No! I’ll keep the old paid for shack.
Way I see it, competing with Hedgies is like swimming with sharks. Minnows are out toothed.
“…adding to municipal tax revenue coffers (Detroit, and future Detroits?)…”
Just a tad late on that front, no?
P.S. 1…2…3… 2BANANA ANTI-UNION/ANTI-OBAMA RANT!!!
Labor leaders meet with Obama officials about Detroit
Todd Spangler, Detroit Free Press 9:25 p.m. EDT
September 13, 2013
Officials in Washington are hoping to help stimulate economic investment and job creation in Detroit.
WASHINGTON — Labor leaders took their turn visiting the White House on Friday to talk about what can and should be done for bankrupt Detroit, while also cautioning the Obama administration that the financial problems experienced in southeastern Michigan may soon be felt in many other metropolitan areas across the U.S.
Calling for a plan that would not only address Detroit’s concerns but also serve as a playbook for future crises, the group — which included the UAW’s Bob King and others — left the hourlong meeting touting few specifics but saying the groundwork was laid for a response that could help address Detroit’s issues by attracting new jobs and development.
“They are very much aware of the problem,” Lee Saunders, president of the American Federation of State, County and Municipal Employees, said after the meeting. “This is not only a Detroit problem. … This is an issue that confronts urban centers across the country.”
…
MORE CHEESE, MORE CHEESE!
The solution will be, like that of all the messiah lovers and statists on this board, more government dollars pumped down the hole. More for education, more for the cities, more for infrastructure, blah, blah blah.
Cut it all. Private public partnerships should be illegal. They are universally full of fraud and graft.
Last lengthy comment just vanished, so I’ll just say this;
If it took years for Mom and Pop RE buyers to turn psychology from euphoria to fear, how long will it take hedgies investors to do the same when MSNBC features a story on some 30,000 house fund turning net seller?
Even if it happened, it wouldn’t be much of a story, if covered at all I bet.
Oops, there it is above. Sorry.
““I do not think there is a bubble, but if you’re really concerned and you’re a policy maker, you know what the right way to do it is: raise interest rates,” Waugh, 65, said.”"
Yeah, Waugh, raising rates does wonders for the interest cost of servicing the national debt , too!
Unreal!
There’s no reason policy makers couldn’t temporarily raise interest rates to pop a bubble (i.e. wipe out the all-cash foreign investor brigade), then collapse them again once the foreign speculators have been hammered out of existence.
Government financing could be optimally timed to exploit the rate spike.
-33
Great post, Jack. I’m not sure on the timing or the increase all the way to double-digits but I otherwise agree and I like the tripwire you’ve set for getting out of real estate (if one is in it).
The Indian rupee comments were great, too, both with respect to gold prices and with respect to how they might raise rates to protect the currency and how it will affect the economy there.
Here’s what I’m getting “boots on the ground” from an Indian company I deal with: “As for the rupee; it is on a roller coaster last week it went as far as 69:1, it would be matter of time before it would be back to 50 bucks!.. it is just a temporary bonus. It is not it will be at this state. “.
So hows sales McAnus?
Oakland dichotomy:
June 2013
In what seems like just a few months, Oakland’s reputation has transformed from a city plagued by violence into a indie darling. The New York Timesrated the city #5 on a list of top cities to visit. Movotonamed Oakland the #1 most exciting city in America. The Huffington Post recently published a list of 10 reasons why Oakland has never been better.
Driven partly by changing perceptions and partly by a tech boom that is pushing people out of San Francisco, Oakland’s real estate market is turning red hot. Real estate website Trulia.com reports that Oakland’s home sales are up 31% from a year ago.
Foy and Weinstein related the story of a modest 2-bedroom house in Montclair that was placed on the market at $575,000 and sold for $925,000. “It hasn’t been like this for 10 years,” said Foy.
http://oaklandlocal.com/2013/06/real-estate-trend-story-due-june-8/
Sept 2013
Although it looks the part, the Ford Crown Victoria isn’t actually a police car, and the man behind the wheel is no cop. He’s one of dozens of private security officers hired by residents across Oakland to supplement - if not replace - a depleted, overwhelmed police force.
As burglaries, home invasions, carjackings and assaults creep into Oakland neighborhoods less accustomed to crime, residents have built fences, armed alarms and installed security cameras.
And now, in greater numbers, they’re hiring private security patrols.
Elizabeth Caprini, general manager of the security company patrolling the neighborhood,VMA Security Group, estimates that her company will be guarding 500 homes across Oakland by November.
http://www.sfgate.com/crime/article/More-in-Oakland-relying-on-private-security-4815336.php
So… should I buy a house soon, or wait until 2018?
I repeat that there is absolutely NO shortage of affordable rental properties in Northern NJ. However, there is a huge shortage of good tenants who have the means and will to pay on time while not destroying the place. I am experiencing absolutely no pressure on rent increase - and I’ve been renting since before the bust.
I bet this is true in most locations where the big money is buying up SFH stock. Good luck to all landlords!
I repeat that there is absolutely NO shortage of affordable rental properties in Northern NJ.
Same here in Tucson.