The Housing Bubble

“Debt is bondage.”~ Suze Orman, May 11, 2013″

Debt is bondage for some, freedom for others.

It all depends on which side of the debt you choose to place yourself on.

Realtors® are liars

China is long term toast over the next 10-20 years. But short term of the next couple of years I think they can lie and manipulate enough to keep it going. How long ago was that 60 Minutes article about Ghost Cities run?

Interesting that a house HA builds will be depreciated (deteriorated) to zero in less than 15 years.

For a typical house there will be enough principal paid off in 5-10 years of a 15 year loan to cover the maintenace issues that arise.

Even if you can afford a 10 year mortgage you’d probably get a higher interest rate than 15 years. Something to consider.

Yeah, about ten years ago.

I agree with Combo, last time was worse. The mania was broader. This time it isn’t your average shoeshine joe blow thinking they’ll get rich. It is a much more crooked or foolish type.

May 28, 2014, 3:00 p.m. EDT
Get ready for a major market move
By John Nyaradi

As VIX, the CBOE S&P 500 Volatility Index, plumbs new lows, many market observers are preparing for a major market move.

Many investors rely on the Chicago Board Options Exchange Volatility Index to keep an eye on stock-market volatility. As the VIX continues to sink closer to its historic low of 9.39, many commentators are now discussing the VIX as a “complacency index.” As the VIX falls, it signals increasing levels of investor complacency. Because economist Hyman Minsky taught us that periods of high volatility follow periods of low volatility, many investors are beginning to worry that a “Minsky moment” could be lurking around the next corner that would send volatility higher, increase the risk premium for holding stocks and cause prices to sink.

On Friday, May 23, the VIX ended the session at the day’s low of 11.36. The increased focus on investor complacency, which followed the highly publicized interview with hedge-fund manager David Tepper, has not reduced investor complacency.

In fact, the opposite has taken place, despite Tepper’s statement that: “I am nervous. I think it’s nervous time.” Although the S&P 500 climbed 0.42% to a record-high close on Friday at 1,900.53, the trading volume was thin — at a pre-holiday level of 1.419 billion S&P 500 shares. Unfortunately, the S&P trading volume has not been much better on the other days when it has advanced. Furthermore, a review of the S&P chart will reveal that Friday’s advance was the third point of a triple-top, which included April 2 and May 13.
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I’ve generally been of the opinion that there won’t be a public market crash because there was a lot of cash on the sidelines buying on dips, and a lot of worried pundits talking about the next crash (we haven’t had the massive enthusiasm). My belief is that there won’t be another crash until there are far fewer public calls for a stock market crash (thus increasing complacency, and lots more money comes off the sidelines and moves into the market). There is still a lot of cash out there that would move the market if it joined the party.

In any event, just recently, there have been two respected pundits who have come out more bullish (or at least less “doomsdayish”).

Gartman just started singing a different song. This from a CNBC yesterday:

“Having called for a correction, I have been abundantly wrong,” Gartman said. A correction is typically defined as a market downturn of 10 percent or more. “I am probably going to be wrong continuing to expect one. It’s best to err on the side of remaining quietly bullish,” he said.

Jeremy Grantham’s Q1 newsletter basically said that he thinks there is a greater than 50% chance the S&P goes over 2,250 over the next 12-18 months…but then, watch the hell out…

From his letter:

“…I believe it probably (i.e., over 50%) will not end for at least a year or two and probably not before it reaches a level in excess of 2,250 on the S&P 500.”

AND (before you think I’m in the “it never rains” club), his parting comment:

“I am not saying that this time is different (attention Edward Chancellor). I am sure it will end badly. But given this regime of the Federal Reserve and given the levels of excess at other market peaks, I think it would be different to end this bull market just yet.”

The steady drumbeat of “crash callers” may be quieting/slowing down enough to get the blow-off the top move up, followed by another crash.

Watch this space…the next 12-24 months could be a bigtime roller coaster in public markets.

Have you calculated the yearly cost of depreciation on your shanty yet?

Google is your daily horoscope. Got the nest but no little oxlings? Get a pet!

I think Google has achieved sentience. It knows much more than you think.

even without kidz, you’ll still need that diaper genie because you’ll be p00ping your pants when the reality of your incalculable losses starts to sink in

GDP is down but the S&P500 just hit a new record high, so it’s all good, really.

Former NFL great Roger Staubach didn’t became wealthy being a renter.

Roger Staubach is the wealthiest football player worth$600 million dollars.

1. Roger Staubach — $600 Million

What is a Roger Staubach, and why is it worth so much money? A Roger Staubach is a former NFL quarterback (to the shock of absolutely no one) who was good at football, leading the Cowboys to a pair of Super Bowl victories, winning an MVP, and being a six-time Pro Bowler. Staubach, who worked as a real estate broker during the off seasons, because “I was 27 and we had three children,” the mogul told Forbes. “If I got hurt, I knew I had a family to provide for, and it was not crazy money in the NFL then.”

Shortly after his 1979 retirement, Staubach began expanding his real estate company. It grew so large and so successful that Staubach was able to sell the company to Jones Lang Lasalle in 2008 for $640 million dollars. According to Forbes, Staubach had only owned 12 percent of the company when he sold it, having given out equity to his employees as the company grew. So, in addition to being the richest NFL athlete ever, he’s also a pretty nice dude.

http://wallstcheatsheet.com/sports/the-7-wealthiest-nfl-players-of-all-time.html/8/?ref=OB

The inventory of SFH rentals seems to be low in Phx right now.

From Wikipedia this is what a real recovery looks like:

According to a 1996 study by William A. Niskanen and Stephen Moore,[37] on 8 of the 10 key economic variables examined, the American economy performed better during the Reagan years than during the pre- and post-Reagan years. Real median family income grew by $4,000 during the Reagan period after experiencing no growth in the pre-Reagan years; it experienced a loss of almost $1,500 in the post-Reagan years. Interest rates, inflation, and unemployment fell faster under Reagan than they did immediately before or after his presidency.

BTW, this story explains that the shale oil play is far from widely profitable. There is very little room for any drop in oil prices unless we open up Alaska and the coasts to drilling:
http://www.rigzone.com/news/oil_gas/a/133303/US_Shale_Debt_Increases_as_Drillers_Push_to_Maintain_Gains/

Permagrowth ended eight years ago.

http://www.advisorperspectives.com/dshort/updates/DOT-Miles-Driven.php

Bill might as well add Death panels too……

http://sanfrancisco.cbslocal.com/2014/05/28/health-insurance-provider-denies-cancer-treatment-premium-mri-scan-tumor-sonoma-county-man-battling-cancer-denied-coverage-by-anthem-blue-cross-after-paying-100k-in-premiums/

Who cares? As long as the stock market is up (puke), then all is well.

Awash in Liquidity, Part I: Why Interest Rates Are Falling
By Robert Barone
May 27, 2014 1:03 pm
And why, in the short-term, increased market volatility will result.

Despite a generally stronger economic outlook for the US economy, interest rates in May moved significantly lower, as if expectations were for an oncoming recession. This has confounded many macroeconomists. In this first installment of a two-part series, I will discuss why interest rates are now falling, and why, in the short-term, increased market volatility will result. In the second installment, I discuss the implications of the Fed’s future use of non-traditional and unproven policy tools with which it is experimenting, and how existing policies have exacerbated the income gap.

Falling Interest Rates

At the beginning of 2014, the US 10-year Treasury yield was 3.0%. As I write this in late May, they are near 2.5%, a huge move in any man’s bond market. There are several reasons for this, all of them revolving around policy and central bank activities.

Evolving Fed Policy: The Janet Yellen Fed has now made it clear that interest rates will stay low for a longer period of time than the markets had anticipated, especially after her initial faux pas in suggesting a six-month time frame for rates to rise after the taper had ended. Markets adjust to this kind of anticipation rather rapidly. Furthermore, this Fed appears to be interjecting social issues into its policies, especially having to do with the unemployment rate. The latest is some policy sensitivity to “disadvantaged” workers (the long-term unemployed, and those working part-time for economic reasons). If the issue is structural (e.g., lack of employable skills), then monetary policy is powerless to help, and relying on these indicators as proof of slack in the labor market may result in a monetary policy that does more harm than good. There is also an unconfirmed rumor in the blogosphere involving former Fed chair Ben Bernanke. Most of the time, such rumors aren’t worth talking about, but this one is quite interesting. In a private meeting, the former chair is rumored to have said that the Fed funds rate is unlikely to reach its 4% long-term “neutral” state in his lifetime. Mr. Bernanke is 60 years old, so the implication is that rates will remain abnormally low for at least the next 20-25 years. Let’s take such rumored remarks with a grain of salt — this is the same person who assured us that the sub-prime meltdown had been “contained.”

The Fed’s Backroom Operations: In March, one of the world’s major holders of US Treasury securities dumped $100 billion onto the markets (Russia is the usual suspect). One would expect interest rates to rise to accommodate such a large and sudden increase in supply; but there was none. Strangely, the central bank of Belgium ended up with $100 billion of such securities on its balance sheet. That particular central bank cannot print money, as it is part of the European Union ( EU) where only the European Central Bank (ECB) can print. So, it had to borrow funds to buy such bonds. No banker in his/her right mind would do this without a guarantee; so it is rumored that the Fed made a low- or no-interest rate loan. In effect, this then became a no-brainer: a matched term where the borrower pays 0% but gets 2.5% in return. (The losers are the US taxpayers to the tune of about $2.5 billion per year.) This transaction also created 100 billion of new dollars (which occurs whenever the Fed increases the assets (loans) on its balance sheet). If this is anywhere near the truth, along with its regular QE program, the Fed created about $150 billion of new money in March, which the markets have had to absorb. In addition, the US federal deficit is shrinking, so even with tapering, the Fed is still purchasing the lion’s share of newly issued US Treasury debt, thus limiting supply to a market that is clearly awash in liquidity.
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Awash in Liquidity, Part 2: The Long-Term Consequences of Falling Interest Rates
By Robert Barone
May 28, 2014 9:30 am
There are going to be unintended effects that we can’t yet discern, but there are some issues that we already know about.

In the first installment of this two-part series (Awash in Liquidity, Part I: Why Interest Rates Are Falling), I discussed how the world has come to be knee-deep in liquidity. As a consequence, interest rates, as seen through US 10-year Treasury yields, have surprised most pundits. Since the start of 2014, rates have fallen significantly with the 10-year falling from 3.00% to 2.50% (as of late May). There are clearly going to be unintended consequences that we can’t yet discern, but there are some issues that we already know about.

Tool-less Fed

The first concern is that, over the last five years, the Fed has destroyed the tools it has used for the last 100 years to carry out monetary policy. Reserves in the banking system are now 34 times the level that is “required.” So, raising reserve requirements doesn’t appear to be viable. Selling assets from its balance sheet (open market operations) to reduce reserves would require an undoing of about $2.6 trillion before bank reserves would become an effective tool to control bank lending or the growth of the money supply. And, the Fed as the “lender of last resort” simply doesn’t make sense in a world awash in liquidity.

The creation of the Fed in 1913 was in answer to the need for there to be a liquidity provider or lender of last resort after several severe financial panics culminating in the Panic of 1907. The Fed was created in 1913 to be available to liquefy eligible collateral during periods of financial stress, and, of course, the Fed would charge those banks an interest rate (the “discount rate”) for doing so. And, in the financial crisis of 2009, the Fed did exactly this, by liquefying bank assets (taking them as collateral against a loan or line of credit) that no other private party would buy. In today’s world, because the Fed has created more than $2.6 trillion over the past five years, it would be hard to fathom the need for more liquidity. Money is cheap, and clearly almost any large institution can get it, even those with junk ratings. (Note, however, that regulatory considerations have limited small businesses and consumers access to this pool of money through traditional banking channels — perhaps partially explaining the sub-par economic recovery.)

Experimental Tools

So, how does the Fed unwind all of this? How does it actually raise interest rates when the appropriate time comes? Today, it doesn’t appear that the Fed actually knows exactly what it is going to do, nor can it model, with any precision, what the impacts will be of some new tools with which it is currently experimenting.

Here are two such non-traditional experimental tools: 1) The Fed now pays .25% on bank reserves. If it thought that the economy was heating up and wanted to discourage bank lending, it would have to raise the rate it pays on such reserves. 2) A variant of this has the Fed entering the “reverse repo” market with non-bank financial institutions, like hedge funds or money market funds. Through reverse repos, the Fed gives one of these funds collateral from its swollen balance sheet in exchange for some of the cash that this non-banks fund holds. At the end of the contract period, the trade is reversed. The Fed gets back its collateral, and the hedge fund or money fund gets back its cash plus interest (i.e., the hedge or money fund has become the “lender”).

Think about this! Both the payment of interest on bank reserves and the payment of interest to the money or hedge fund is just the opposite of what the original Fed legislation of 100 years ago contemplated. Instead of the market paying the Fed interest for the Fed to provide liquidity, the Fed is now paying interest to the market in order to reduce the tons of liquidity the Fed created over the past five years. One thing is for sure: There are bound to be unintended consequences of the use of the experimental tools.
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Up and Down Wall Street
What’s Wrong with This Picture?
Plunging bond yields, depressed VIX and record stock indexes don’t fit—until you factor in the Fed.
By Randall W. Forsyth
May 29, 2014 7:24 a.m. ET

Two aspects of the current investment landscape have befuddled the best and brightest this year: the steady decline in bond yields and the collapse of volatility. Could the two be opposite sides of the same coin?

Amid much head-scratching, the yield of the benchmark 10-year U.S. Treasury note fell to 2.43%, down 60 basis point (0.6 percentage point) from year-end and the lowest since June 2013. Meanwhile, the VIX — the CBOE Volatility Index on Standard & Poor’s 500 index options — was in the very subdued, mid-11 range.

The proverbial visitor from Mars would be puzzled. Virtually every economist and strategist thought bond yields had nowhere to go but up given improving employment and inflation lifting off the floor. Meanwhile, the VIX — the so-called fear gauge — ought to be higher given concerns from geopolitics (Ukraine) to the global economy (sputtering U.S. growth, European deflation, Abenomics not delivering in Japan, and concerns over China’s property bubble.)

But the Martian would be wrong, or only partially. There is indeed a world of worry. And that would suggest some insurance would be worthwhile. But what sort of insurance?

Options are insurance policies; even the terminology is the same. You pay a premium on a contract that pays off should a certain event occur, whether a security rises above or falls below a set price, or an accident takes place. The higher the risk of that happening, the higher the premium paid.

Investors evidently are unwilling to pay up for protection from options. After all, if nothing bad happens, the cost of the option is lost. Similarly, the cost of flood insurance is lost if there is a drought. So, if the forecast is for no rain, the price of this option falls.

Moreover, options are a wasting asset; that is, they run only for a specified span of time. If they don’t pay off before expiration, they wind up worthless.

Government bonds, meanwhile, provide a sort of protection against losses on other, riskier assets. If calamity strikes, bonds rise in price, which offsets the decline in stocks and higher-risk bonds. But there’s a key difference.

Time takes a toll on options prices; they inevitably approach zero if they don’t move into the money, that is, have an economic value.

Bonds have a longer life, up to 30 years for Treasuries. And if held to maturity, they end up paying their face value of par, or 100 cents on the dollar.

The terminology here again is telling. Options expire while bonds mature.

So, which has been the better hedge against uncertainty? If worse doesn’t come to worse, options, which protect against losses on risk assets, go to zero. Bonds, for whatever reason, have been an appreciating asset.

Which would you rather own for protection? What goes down in price — put options? Or what goes up — Treasury securities?

The economic rationale for the relentless bid for Treasuries is ambiguous, at best, given the signals from other markets.

The S&P 500 ended Wednesday just a hair below the record set the previous day. The Dow Jones Industrial Average also hovers near its record while the economically sensitive Dow Transportation Average set another new mark Wednesday. Rising prices for Treasury securities seem out of sync with strong Dow Transports.

How to make sense of it? Hypotheses proliferate, from U.S. bonds’ following the descent in yields abroad, including those of obligations of governments in the European periphery whose creditworthiness is derived from their being part of the Eurozone. Concerns about EU elections in which populists decisively turned thumbs down to a united Europe seem to have evaporated. The notion that Spain offers just 35 basis points for 10-year bonds over the U.S. Treasury beggars credulity.

There is another aspect, that the Fed will continue to buy bonds. In this week’s Barron’s interview, MacroMavens’ Stephanie Pomboy contends the U.S. central bank will be forced to relent and “taper the taper;” that is reverse course and stop slowing its purchases of Treasury and agency mortgage-backed securities.

Bureaucrats hate to have to admit to an error and flip-flop. But the Fed may have found a way to keep buying bonds without admitting it. And only a bond geek would get the gambit.

In a speech last week, New York Fed President William Dudley suggested the central bank should continue to reinvest interest and principal payments even after the Fed started to lift its short-term policy rate target. Currently that’s the federal funds rate, the interest banks charge each other for overnight loans.

But with some $3 trillion in excess bank reserves sloshing around, the fed funds rate has lost its relevance. The Fed will more likely raise short-term rates by boosting what it pays on excess reserves and through its reverse-repurchase-agreements. The latter basically is a facility through which banks and other institutions park money at the Fed, where it’s effectively out of circulation, and thus tightens money-market conditions.

In the old days, the Fed could accomplish the same thing simply by selling some of its securities, which would drain liquidity from the banking system. The Fed would rather use tools that would (in theory) raise short-term interest rates while causing the minimum disruption to the bond market.

Letting one’s imagination run wild, one can see a scenario in which the Fed would rather not sell bonds and shrink its assets to effect a monetary tightening. There is a cost, however. Paying 1% on $3 trillion in excess would cost the Fed $30 billion. In past cycles, the Fed never had to pay anything on its liabilities.

How to make that up? By maintaining a big balance sheet, which would help to generate interest income. One way to keep it growing is to continue to reinvest interest and principal payments.
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But if wages are to low to buy the widgets that are created through higher productivity, the prices of those widgets, in a free market, will have to fall to meet wages.

Technology increases efficiency, which makes the product cheaper.

Those pesky environmentalists sure cause more damage then they are worth. blocking the Alaskan pipeline for years, gave OPEC its power

Blocking cutting down old growth trees in CA when Pacific lumber aka Maxxam had the legal right to do so for over 100 years bankrupting the company putting 10,000+ people with high paying jobs out of work…

I could have sworn that most places had restrictions on diesel fuel.

When it comes to returns of any sort, anything over 5% is gravy. And unlikely to be sustained for very long.

How is this a national news story that needs to be repeated every day when I am trying to wake up?

Doesn’t the anger induced help you to wake up?

This kind of BS isn’t limited to the GSEs.

HUD (a taxpayer supported enterprise) entered into an agreement with the USPS (another taxpayer supported enterprise) to get detailed information about addresses where mail isn’t collected…as a proxy for where there are vacant housing units.

My understanding is that they have, by zip code, the percentage of addresses where mail isn’t collected.

IMHO, this would be pretty useful information.

The catch…if you are a taxpayer, you can’t see the data.

However, if you are a non-profit (ie. you don’t pay taxes), you can get access to the data.

Crater

If the 1st derivative goes negative, I hope you have an escape algorithm!

“Second derivative going negative in Tucson!”

Hehe, that inflection point is a fother mucker. Rather than blaming high prices for depreciated shacks in chit neighborhoods the MSM blames the weather. We need “mo credik” to get the flim-flam buyers back in the game. Man-up, ‘Merica!

Please add 2 billion years to that. According to astronomers.

Those guys sure blew the prediction of a spectacular shooting star display a week ago.

Money velocity seems to be, uh, slanting down just a wee bit …

http://research.stlouisfed.org/fred2/series/M2V/