Increases In Anticipation Of Future Increases
A reader suggested this exchange as a topic. “Could there be a more relevant topic? ‘There has never been two bubbles in the same asset class in a single generation.’ Comment by Ben Jones 2013-11-08: That was Michael Orr, real estate expert at Arizona State University, that said that. It gets down to a serious question, that IMO is answered by, it’s the same bubble. It never went away. Look at how quickly some re-embraced gambling in real estate.”
“Let me ask this; did China have one bubble, or two? Or Canada, or Australia, or New Zealand, or London, or Dubai? You’ll hear lots of people say China has a bubble, but they don’t say, China’s had two bubbles in just a few years.”
From Reuters. “The Bank of England is aiming to create a financial system that can withstand sharp falls in asset prices, not to attempt the near-impossible task of stopping future bubbles, one of its policymakers said on Wednesday. Donald Kohn, who was formerly vice-chairman of the U.S. Federal Reserve and now serves as an external member of the BoE’s Financial Policy Committee, said he would be vigilant towards higher house prices, but did not aim to stop them.”
“‘Our objective is not to iron out all cycles of asset prices or credit,’ he said in a speech to the Oxford Institute for Economic Policy, echoing comments from fellow FPC member Martin Taylor last month. ‘Financial cycles, imbalances and asset bubbles will persist. It is human nature to become overly optimistic and pessimistic, to go through cycles of greed and fear. Herding behavior in markets reinforces this tendency,’ he continued.”
“Kohn said he was keeping a close eye on the housing market, adding that where booms were driven by lending, the FPC would aim to ensure lower peaks and shallower troughs in prices. ‘One particular danger sign would be evidence of a bubble dynamic in prices - that is, increases in prices in anticipation of future increases,’ he said.”
The Business Spectator. “The first obvious characteristic of the Australian market is that there has been an upward trend to Australian house prices since 1955. Is this upward trend the free market at work? Not on your Nellie. For the years from 1955 till 1983, the government’s chief intervention was negative gearing – allegedly for the benefit of landlord and tenant alike, but clearly financially directly favouring landlords – and the market was also slowly adjusting to the opposing force of the gradual removal of rent controls.”
“This makes 1985 a good date to select to compare Australia’s still-officially-denied bubble to undeniable bubbles overseas. While we didn’t blow up as fast, our bubble is now bigger in real terms than Japan’s, dwarfs America’s – though we were on a par until 2006 – and is put in the shade only by the UK and The Netherlands.”
“The other bubbles however are largely the creation of what I dub the ‘Politico-Financial Complex’ – the mixture of electorally-driven politicians and profit-driven banks that has turned out to be a far greater danger to capitalism than the military-industrial complex which exercised Eisenhower’s mind back in the early 1960s. The pen has indeed turned out to be mightier than the sword, but it is the banker’s pen, not the poet’s, that has ruled.”
“That has been the case in every bubble economy, as noted in last week’s post, with the PFC’s signature being the correlation of accelerating mortgage debt with rising house prices. Since 1980, a plethora of schemes has been introduced whose side-effects – whatever were their professed direct aims – included propelling house prices ever higher, as government policy turbocharged the reborn Australian tendency for leveraged speculation.”
“Though existing home owners were the chief beneficiaries of these schemes, their primary aim when introduced was not favouring one social class (home owners) over another (renters), but macroeconomic stimulus. The scheme certainly worked in its primary objective – stimulating the economy. But this was at the expense of its alleged secondary objective, of ‘ensuring that Australian families can gain access to adequate housing at a price they can afford.’ The second (Keating), fourth (Howard) and fifth (Rudd) incarnations of the scheme set off obvious bubbles in house prices, each one building on the legacy of its predecessor.”
“So the second key characteristic of the Australian market is that it’s one where government manipulation rules, rather than mere market forces. While this manipulation was initially aimed at macroeconomic stimulus, it has resulted in entrenched strong class interests in the housing market, with the favoured owners and landlords overwhelmingly more powerful than tenants.”
The man who wrote the Business Spectator piece is Steven Keen. I have a youtube saved somewhere where he made a very good case that the economic model that central bankers are using is flawed. And they keep going back to it, over and over again, which is why we are stuck with this:
‘Our objective is not to iron out all cycles of asset prices or credit…Financial cycles, imbalances and asset bubbles will persist.’
In short, these central bankers are ruining us.
‘Housing affordability fell last quarter in California, reaching the lowest level since 2008, as the housing recovery locked some buyers out. Only 32% of potential homebuyers in the third quarter could reasonably afford a median priced single-family home, the California Assn. of Realtors said Thursday. That’s a sharp drop from 49% in the third quarter last year.’
‘A recent report from Fitch Ratings estimated prices in much of coastal California are more than 20% overvalued based on market fundamentals such as income, employment, population, mortgage rates, housing units and rental values.’
“Most concerning,” the report said, “there is growing evidence that recent gains have been bolstered by an increase in investment sales, both to institutions and local investors.”
‘The sharp price increase raised concerns a bubble was forming in some regions, although the market has cooled recently.’
‘Records continue to tumble in Sydney’s red hot auction market with 747 properties listed for auction last Saturday - the highest number in three years. On Saturday Ben Stewart from CBRE sold $260 million worth of apartments off-the-plan in four hours. “The market under $1.5 million is very strong,” said Mr Stewart.’
‘Australian Property Monitors, Dr Andrew Wilson, said there was one group of Sydneysiders who really needed another cut in rates. ‘In the Sydney context a rate cut is what your first home buyers need,” he said. “They could really use a little bit of improvement in affordability.”
‘Housing affordability fell last quarter in California, reaching the lowest level since 2008, as the housing recovery locked some buyers out. Only 32% of potential homebuyers in the third quarter could reasonably afford a median priced single-family home, the California Assn. of Realtors said Thursday. That’s a sharp drop from 49% in the third quarter last year.’
There’s never been a worse time to buy!
“…as the housing recovery locked some buyers out..”
Oh, so a recovery is where more and more people cannot afford to even buy a house, and those that qualify struggle to make the payments. Got it.
This sort of thinking would suggest that the strongest “recovery” possible would result in nobody affording a house. Sheer brilliance.
If you’re a banker, it sounds pretty sweet.
If you’re a banker, it sounds pretty sweet.
Exactly. “Recovery” = banking recovery. Nothing else matters.
Actually, with no buyers it would not be sweet for bankers. They couldn’t sell the houses they owned, and they wouldn’t be making any loans- a lose-lose situation.
Actually, with no buyers it would not be sweet for bankers.
So if there weren’t enough natural buyers, what would we do? Artificially hold interest rates near zero? Get big investment houses to buy blocks of homes and rent them until “the market comes back”?
“Actually, with no buyers it would not be sweet for bankers.”
Perhaps that explains why Democrats insist the government has to stay involved in the mortgage finance system.
- With no federally-guaranteed mortgages, there would be no end-user demand for coastal California housing at bubble-era prices.
- With no bubble-price demand, home prices would fall back in line with local incomes.
- With prices in line with local incomes, buyers would no longer need to borrow as much, resulting in loss of bank lending business.
- Foreclosure risk, due to leveraging up household balance sheets beyond all reason, would also decline, reducing the chance for banks to collect years and years of thirty-year loan payments, plus get back the collateral from the owner when the loan goes into foreclosure.
- Democrat politicians would lose opportunities to be seen helping foreclosure victims.
- Builders would get to build and sell fewer million-dollar homes.
All told, affordable housing would be a loss to the FIRE sector, which explains why Democrat politicians are working their hardest behind the scenes to maintain a federal government role in the mortgage lending business.
Progressives think the government should maintain a large role in the mortgage market, presumably resembling the one that presaged the 2008 financial collapse.
The Trade November 6, 2013, 12:00 pm
An Argument for Federal Involvement in Housing
By JESSE EISINGER, ProPublica
A home for sale in Moreno Valley, Calif. Congress is debating changes to the mortgage market.Monica Almeida/The New York Times A home for sale in Moreno Valley, Calif. Congress is debating changes to the mortgage market.
Obamacare’s early problems could recast the debate about a mortgage market overhaul.
What does health care have to do with housing prices? A lot, actually.
The stumbles with the Healthcare.gov website and the individual policy cancellations may or may not get resolved soon. But they have served a purpose. They have highlighted the extent to which health care change is a “kludge,” as Paul Krugman recently wrote, a jury-rigged and complicated structure that extends social insurance largely through private sector means, leavened by a passel of government regulations and subsidies.
Obamacare was a concession to the status quo. Many progressives would have preferred a government-run, single-payer plan — Medicare for all — but that was politically impossible. Such a change would have been hugely disruptive, since tens of millions of people would have had to be moved off their policies, and many thousands in the insurance industry would have lost their jobs.
So let’s turn to mortgage market change. Congress is debating what to do about Fannie Mae and Freddie Mac, the government-owned mortgage insurance companies that collapsed during the 2008 financial crisis.
Worried that the government backs too many new mortgages, the Washington consensus has coalesced around a solution that looks a lot like Obamacare. The leading proposals involve getting rid of the Frannies to have private companies create mortgage-backed securities. The government’s role would be to insure some of those mortgage-backed securities, to subsidize the home purchases of the disadvantaged and to regulate mortgage-market players to prevent predatory practices and risk-taking that could lead to taxpayer bailouts. Senators Bob Corker, Republican of Tennessee, and Mark Warner, Democrat of Virginia, have a bill that embodies this harmony.
So what about alternative ideas? There are surprisingly few.
Some conservatives argue for the government to get out of the mortgage market completely. But what passes for the left’s position in Washington is not the opposite of the right’s. The liberal establishment concedes the argument that changes should bring investors back into the housing market and shrink government’s role. They spend their energies pushing to expand and protect housing affordability and access.
The Center for American Progress, a group that has a pipeline to the Democratic mainstream, has played a big role in formulating the current kludge concordance. Even the Center for Responsible Lending, a progressive group dedicated to fighting predatory loans, agrees “with the emerging consensus,” according to a vice president of the group in Senate testimony last month, “that taxpayer risk must be insulated by more private capital.” (The Sandler Foundation, the founding donor of ProPublica, has long been a leading supporter of both organizations.)
What’s almost entirely missing is any unashamedly liberal argument that the government should continue to play a large role in the mortgage market. In fact, it’s taken as a given that too much government involvement is a worrisome thing.
The opposite may well be true: There’s a good argument that preserving the government’s large and active role will make the market safer and more efficient than the overhaul.
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‘the Washington consensus has coalesced around a solution that looks a lot like Obamacare’
Great.
‘It’s popular now to suggest that the staggering incompetence that gave us Obamacare is limited to a flawed website. If only that were true. In truth, Obamacare’s problems merely begin with the website, and will grow much worse assuming Heathcare.gov is ever fixed.’
‘That is so because contrary to its billing as a market-based exchange, it’s nothing of the sort. Healthcare.gov at its core is a wealth redistribution scheme that promises to fail for it ignoring basic economics.’
‘Indeed, basic economics dictates that there’s no such thing as a ‘free good.’ That’s a major problem because Obamacare not only promised healthcare for all, but it promised gold-plated access to healthcare at costs lower than had previously prevailed in the actual marketplace. To put it very plainly, any legislation that promises more of a market good at a below market price is by definition a very expensive lie.’
‘a market good at a below market price’
Sounds like Fannie and Freddie loans
“where he made a very good case that the economic model that central bankers are using is flawed.”
Ben, Mr. Keen seems to have forgotten the reason that Central Banks came into power. It isn’t to fix things economically and the charts that they use aren’t “flawed” if it furthers their “cause” which is to steal everything of value that isn’t nailed down.
I don’t know a lot about Keen. He’s the most adamant challenger to the central banks policy and bubbles in Australia.
There are two debates here. What the central bankers are doing is wrong-headed and creating bubbles. That there shouldn’t be a central bank.
Years ago I was watching Steve Forbes on c-span when he was running for president. He said, ‘if you ask a central banker what constitutes failure, he can’t tell you.’
When even Jesus wrecks up your place of business and drives you out with a whip, you know you’re in a fairly unforgivable profession.
“Donald Kohn, who was formerly vice-chairman of the U.S. Federal Reserve and now serves as an external member of the BoE’s Financial Policy Committee, said he would be vigilant towards higher house prices, but did not aim to stop them.”
If the Yellen nomination doesn’t take wings, perhaps they could fall back on Kohn. As I recall, he sounded the warning to real estate investors before the first wave of bubble collapse post-2006.
Kohn’s philosophy on appropriate central banking policy response to bubbles is covered at length in this March 16, 2006 speech.
What I find most fascinating is that housing bubble denial was at a high water mark around the time he made this speech.
I read it. We can’t spot bubbles, and even if we could we shouldn’t do anything about it. Release the helicopters after it blows up. Basically, central bankers can do no wrong.
Sounds like he is well qualified, in case anything goes haywire with Yellen’s nomination process.
the next bubble will give them another excuse to rescue the economy with printed cash. when are in a cycle of constant bubbles. learn to live with it and profit from it.
These 12 disciples are no less a fraud that the leader. For years I’d listen to Lacker(Richmond) telegraph warnings after every beige book release and it falls flat. Just another way to keep us who are really paying attention satiated.
It’s a scam. From top to bottom and east to west.
‘telegraph warnings after every beige book release’
I agree. They have these “hawks” and “doves” to make the public believe there is some kind of even-handed policy making going on. I’d bet these people sit in their office playing angry birds all day, waiting for the real bosses to tell the what’s going to happen.
Here’s some interesting stuff from the first SFH IPO:
http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=9595853-18681-23860&type=sect&dcn=0001104659-13-082306
9 months ending Sept 30: they’ve got the houses 80% rented. Gross income - $31.5 million. Property operating and maintenance - $8.6 million. Property management - 9.17 million. Advisory management fee - affiliates - $7.6 million. General and administrative - $5.3 million.
Even if they get to 100% occupancy, this thing is a dog. And they are borrowing most of the money to buy the houses.
http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=9595853-28831-33820&type=sect&dcn=0001104659-13-082306
Proceeds from issuance of common stock, net of offering costs - $34.5 million. Proceeds from revolving credit facility - $144.7 million.
Some rental detail:
http://biz.yahoo.com/e/131107/sby10-q.html
“As of September 30, 2013, we owned 5,575 single-family properties, excluding properties held for sale”
This thing is a fee machine for related parties. Property management at just under 30% of revenues? “Advisory Management” at another 25% of revenues? Whoa.
Are such things “customary”? They seem egregious to me.
American Homes 4 Rent had advisory fees initially (stress “initially”), which are, as of the last quarter, $0. Their total “advisory fees over the past 9 months were $6.3MM (less than SBY), and they have 4x the number of homes.
G&A + Property Operating Expenses for leased assets were about $20 million out of $49 million of revenues. Acquisition fees were a total of about $0.5 million.
G&A and Advisory Fees for AMH fell from 66% of revenues in Q1 of this year to 6% the most recent quarter.
If I were guessing, I would say that SBY management is milking the company for all they can, and AMH might actually be trying to build a business.
They’re both failures. They paid too much and now they don’t cash flow.
Just like your shanty.
“If I were guessing, I would say that SBY management is milking the company for all they can and AMH might actually be trying to build a business.”
Or AMH may be doing their best to make the numbers look good:
“G&A and Advisory Fees for AMH fell from 66% fo revenues in Q1 of this year to 6% the most recent quarter.”
The PTB of one company may decide to extract their money via fees and the other may decide to extract their money via a stock pump. Keeping fees down will help with the stock pump, and so will defering expenses - such as maintenence which seems to be what is happening as reported by some articles posted here on this blog over the past several weeks.
I keep revisiting the fact that 45,171,894 shares of AMH have been bought up by the Alaska Permanent Fund Corporation, which in turn gets it money from oil pipeline revenues (which translates to easy money), and hence there is an interest by this party and by the corporate insiders of AMH to keep the stock price up, and one way to keep the price up is to cook the books.
What about the books appear cooked to you?
They have about 13k homes rented. So the big picture items:
$49MM of revenue for the quarter is approximately $1,250 per month in revenue per rented property.
About $20MM of expenses (property specific plus G&A). This is about $500 per month ($6,000 per year) of property specific expenses.
These big picture items don’t seem outlandish to me.
The disclosed “related party transactions” on the other hand at SBY reek of self-dealing.
‘The rental-home bonds sold by Invitation Homes, American Homes’s largest rival, will pay an weighted average coupon of 1.66 percentage points more than the one-month London interbank offered rate, according to data compiled by Bloomberg. A credit facility used by American Homes carries an interest rate of 2.75 percentage points more than Libor, the company said yesterday in an earnings statement. The borrowing benchmark was set today at 0.17 percent.’
The 10 year treasury yielded 2.75% at the end of Friday. Something is wrong with this picture.
“What about the books appear cooked to you?”
The expenses for one. As reported here on this blog the past week or so much of the maintainence on these buy-to-rent houses that needs to be done isn’t being done and the tenants end up with plugged up toilets and such and they can’t get hold of anybody to fix them.
Deferring maintenance doesn’t fix what needs to be fixed but it does push the costs of maintenence forward a bit - pushes them into the next reporting period, the next quarter. And any expenses that can be pushed into the next quarter will make the current quarter appear to be better than what it actually is.
The Grand Distortionist grossly understating carrying costs…. Imagine that.
The average age of AMH’s portfolio is 11 years. Do you think that has anything to do with the maintenance costs?
If you don’t think $500 per month is reasonable, what would you consider reasonable?
I agree that the low interest rates are an highly unusual. I saw where a public homebuilder just borrowed money for 0.5% (must have been a floating rate, but remarkable none-the-less).
“The average age of AMH’s portfolio is 11 years. Do you think that has anything to do with the maintenance costs?”
Maintenance costs might actually be more due to the substandard materials and systems being used now. Water heaters don’t last, HVAC systems don’t last, dishwashers don’t last, etc., etc.
Try $1000/month….. month after month after month.
Homebuilder pockets drilling rights beneath thousands of Tampa Bay homes
http://www.tampabay.com/news/business/realestate/homebuilder-pockets-drilling-rights-beneath-thousands-of-tampa-bay-homes/2151468
I love the Business Spectator piece, which beautifully weaves together many of the themes we have exhaustively covered here through the years.
Regarding this point:
If true, where does Oz go from here? Can their bubble keep growing to the sky forever, or does it eventually return to the hard ground below?
is this a bearish cart? dude
http://finance.yahoo.com/q/bc?s=ARR&t=1y&l=on&z=l&q=l&c=
Speech
Chairman Ben S. Bernanke
At the Fourteenth Jacques Polak Annual Research Conference, Washington, D.C.
November 8, 2013
The Crisis as a Classic Financial Panic
I am very pleased to participate in this event in honor of Stanley Fischer. Stan was my teacher in graduate school, and he has been both a role model and a frequent adviser ever since. An expert on financial crises, Stan has written prolifically on the subject and has also served on the front lines, so to speak–notably, in his role as the first deputy managing director of the International Monetary Fund during the emerging market crises of the 1990s. Stan also helped to fight hyperinflation in Israel in the 1980s and, as the governor of that nation’s central bank, deftly managed monetary policy to mitigate the effects of the recent crisis on the Israeli economy. Subsequently, as Israeli housing prices ran upward, Stan became an advocate and early adopter of macroprudential policies to preserve financial stability.
Stan frequently counseled his students to take a historical perspective, which is good advice in general, but particularly helpful for understanding financial crises, which have been around a very long time. Indeed, as I have noted elsewhere, I think the recent global crisis is best understood as a classic financial panic transposed into the novel institutional context of the 21st century financial system.1 An appreciation of the parallels between recent and historical events greatly influenced how I and many of my colleagues around the world responded to the crisis.
Besides being the fifth anniversary of the most intense phase of the recent crisis, this year also marks the centennial of the founding of the Federal Reserve.2 It’s particularly appropriate to recall, therefore, that the Federal Reserve was itself created in response to a severe financial panic, the Panic of 1907. This panic led to the creation of the National Monetary Commission, whose 1911 report was a major impetus to the Federal Reserve Act, signed into law by President Woodrow Wilson on December 23, 1913. Because the Panic of 1907 fit the archetype of a classic financial panic in many ways, it’s worth discussing its similarities and differences with the recent crisis.3
Like many other financial panics, including the most recent one, the Panic of 1907 took place while the economy was weakening; according to the National Bureau of Economic Research, a recession had begun in May 1907.4 Also, as was characteristic of pre-Federal Reserve panics, money markets were tight when the panic struck in October, reflecting the strong seasonal demand for credit associated with the harvesting and shipment of crops. The immediate trigger of the panic was a failed effort by a group of speculators to corner the stock of the United Copper Company. The main perpetrators of the failed scheme, F. Augustus Heinze and C.F. Morse, had extensive connections with a number of leading financial institutions in New York City. When the news of the failed speculation broke, depositor fears about the health of those institutions led to a series of runs on banks, including a bank at which Heinze served as president. To try to restore confidence, the New York Clearinghouse, a private consortium of banks, reviewed the books of the banks under pressure, declared them solvent, and offered conditional support–one of the conditions being that Heinze and his board step down. These steps were largely successful in stopping runs on the New York banks.
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Ben Bernake’s speech is unbelievably wrong. A financial panic ! Again he is demonstrating (and even says so) that you must understand the past. Yes, like a painter you have to learn how to do portraits before you can adequately do futuristic abstracts.
Mr. Bernake is trying to fix future problems with a sledgehammer from the past.
Instead of molly coddling the banks he should have used his considerable force to get them down to 17 (from 52 !). Wholesale printing would have done it - all at once.
Now he is apparently locked into a corner having already created more fiat than would have been needed if he and the “brains” would have had the insight of a Napoleon.
The boss man where I’m at made it known he does not like gold (he’s the liberal one I tol’ ya about). Down 33% from its all time high.
Beat something while it’s down, laugh at people who give a hand to lift up that something that was down…See what happens.
Cycles. Market cycles.
You have to admit the fundamentals look grim.
The Hindu
Business Line
Gold futures may decline
Gnanasekaar T.
November 10, 2013:
Comex gold futures fell lower on Friday, after a surprisingly strong US labour-market reading re-ignited fears that the Federal Reserve would soon curtail bond purchases. Employers in the US added 204,000 workers last month, the Labour Department said, following a revised 163,000 gain in September that was larger than initially estimated. US gross domestic product grew at a 2.8 per cent annual rate in the third quarter, the quickest pace in a year, after expanding 2.5 per cent in the second quarter. Better-than-expected gross domestic product and payroll growth do, typically, indicate economic strength. Tapering would involve increasing interest rates. Traditionally, rising interest rates leads investors to pull out of gold in search of better yield. This, naturally, sends gold prices lower.
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