The Housing Bubble

While we’re discussing terminology:

‘The yield on the U.S. 10-year treasury note hovers around 2.3%, a figure that seems incredibly low until it’s compared to European rates. Germany’s is just under 1% and in Sweden, the yield is around 0.18%. Japan’s 10-year yield clocks in at 0.44%. In Switzerland, the 2-year treasury yield is actually negative at -0.148%.’

“We have never had this kind of interest rate structure upon which is superimposed a federally sponsored rise in asset prices,” says Jim Grant, editor of “Grant’s Interest Rate Observer.”

‘He argues deflation ought to be natural in a world where technology makes goods cheaper and easier to produce and if something becomes less expensive to create, the price of the good should also become less expensive. “The central bankers have been almost unanimous in declining to acknowledge that fact,” says Grant. “They say they must restore some measure of inflation and want prices to rise by 2% a year or more.”

‘Grant doesn’t believe we’re using the term deflation correctly. He categorizes it as a crisis of debt. It’s important to distinguish between a credit crisis and a decline in cost due to technological progress, he says. “It’s called ‘everyday low prices’ and Walmart has seemed to made a good business out of it.”

‘Suppressing these interest rates can cause future cash flows to become inflated and asset prices to become higher than they might otherwise be. “Central bank policy has served to inflate [assets] but we don’t call it inflation, we call it a bull market,” says Grant.’

‘Grant believes that distorted interest rates distort production and that when rates do eventually go up “you’re looking at some recalibration of asset values,” certainly not a bull market.’

But it wasn’t the loss of oil jobs and companies that resulted in the mass bankruptcy of banks and S&L’s. It was the real estate mania that took the Texas economy into depression ??

Ben…Weren’t you in Houston during this period of time ??

“Lot’s of bets were placed on an artificial price and that is playing out.”

Let’s take a look at that as it relates to artificial housing prices. We have;

-Resale housing prices 250% higher than long term trend

-Mortgage delinquency rates elevated 500%-700% above trend

Too many acted and executed on the fraudulent pricing on housing and this is the end result.

Given the circumstances, if you have a SFR and you believe it’s going to do something besides make you poor, you’re in for the ride of your life.

Excellent article, Ben.

“Dr. Doom” Roubini acknowledges that we’re in the mother of all asset bubbles (thank you, Fed) but thinks it won’t burst until 2016. I guess that means a lot of can-kicking and manageable black swans for 2015.

http://www.businessinsider.com/roubini-the-mother-of-all-asset-bubbles-will-burst-in-2016-2014-12

Speaking of derivatives, I wonder when the counterparties on the hedged shale oil prices are going to start feeling real pain, and how much they can absorb before they face ruinous losses.

Here’s something to consider; while the central banks are pushing buttons and pulling levers, the real economy is lurching from one distortion to the other, looking for equilibrium where it doesn’t exist.

‘After the last six years, most in the housing industry have learned that “a little bit of showing beats a whole lot of telling.” The early prediction for 2015 by David Crowe, chief economist for the National Association of Home Builders, is for national housing starts to increase a hefty 26 percent. Mark Zandi, chief economist at Moody’s Analytics, forecasts a whopping 56-percent improvement.’

‘These predictions need to be put into some perspective. Last year, the housing forecast was a strong 23.1-percent increase, with most Wall Street banks in agreement within a percent or two. The increase through September was less than 6 percent, with far less home-price appreciation.’

‘Given Lake County’s continued glut of foreclosures, huge increases in impact fees and continued headwinds in home prices, the forecast should be in the single digits at best.’

‘Consider for a moment what would happen if, after years of incorrect forecasts, housing starts did increase by 26 percent, or even 56 percent. First and foremost, good luck finding the skilled workers and the unskilled laborers to get the job done. The booming energy sector is siphoning many workers that would otherwise gravitate toward construction.’

‘It is safe to assume that if a housing boom were to occur it would probably be fueled primarily through the energy sector and large-scale projects like the Keystone Pipeline. Jobs would be delayed by months because of labor shortages.’

‘Where is the material going to come from? In 2013, with just a modest increase in housing starts, many products (such as windows) went to lead times of two and three months. Even today, special-order projects can take months to secure. Just ask people in the electrical lighting industry. Because of the Great Recession, cash remains king and investments in the supply chain and inventories are in woeful condition.’

‘Trucking would go from horrible to terrible. This year, with housing starts well below historic norms, the availability of trucks and drivers has been dismal — especially in Florida. New government regulations and medical rules for truck drivers are eviscerating the trucking industry. Loads of materials, which normally ship within days, are running weeks behind schedule.’

‘The labor and supply issues are seven years in the making because of the Great Recession. It will take years to put the supply chain back in place to cope with a housing boom. But don’t worry too much about a local housing boom. Between the lack of a national housing policy and Lake County’s proposed impact fees, I’ll believe it when I see it.’

Don Magruder is the CEO of Ro-Mac Lumber & Supply, Inc.

‘By the time Wang Xia had borrowed enough money to usefully invest in China’s construction-driven resources boom, in 2012, real estate and resource prices had been surging for eight years.’

‘Her outpost town of Shenmu, in the shadows of the western reaches of the Great Wall, had become known as “China’s Kuwait” for the 50 billion tonnes of coal reserves buried beneath its loess sands. As many as one in every 100 of Shenmu’s 400,000 residents had each amassed assets worth more than one 100 million yuan ($19 million), according to one study. The local construction, finance and coal barons were reportedly writing multi-million IOU’s on scraps of paper, flipping mining tenements as if they were shares and lining brand new six-lane streets with their Lamborghinis, Bentleys and Ferraris.’

‘Wang, a 55-year-old mother-of-two, gathered one million yuan from banks and family members and entrusted it to a luxury car dealer, who promised interest returns more than 10 times bank rates while comforting her with the “security” of a showroom filled with gleaming BMWs, Audis and Land Rovers. “They told me, ‘we are car traders and will never collapse - if one day we don’t have money, you can take our cars’,” says Wang.’

‘Six months later the showroom cars all disappeared, and so too did her private bankers. “I wake up in the middle of the night, my hair has gone all grey,” says Wang.’

‘This week, in Canberra, it was Treasurer Joe Hockey looking decidedly grey, as he fought with his Prime Minister and the Senate to inject some budget rectitude before the full force of China’s construction slowdown hits. Prime Minister Tony Abbott - who came to power with relentless attacks on the Rudd and Gillard government’s failure to balance the budget - told reporters that the end of history’s greatest resources boom was really just a short term blip. “I accept the terms of trade are declining but these are cyclical factors, they are not structural factors,” he said.’

‘Those who watch the internal dynamics of the Chinese economy more closely, however, sense a severe case of denial.’

‘But the Chinese GDP slowdown masks a much greater impact on the commodities prices which underwrite the Australian economy and particularly the budget. Wednesday’s national accounts showed Australia has just endured an “income recession”, with national income falling in the two quarters up until September. And that was before the prices of iron ore, coal and oil (which is linked to LNG pricing) really fell through the floor, reaching new lows this week.’

‘The Reserve Bank, like everybody else, is groping in the dark for clues on how China’s notoriously complex and opaque political-economy will evolve from here. To this end, the bank has invited one of China’s foremost economists, Yu Yongding, to spend a month with the team of nine specialist China watchers that it has been nurturing since the Global Financial Crisis. Professor Yu, formerly a member of the monetary policy committee of the People’s Bank of China, says the slowdown in GDP growth is a “necessary cost” of transitioning from resource-intensive construction towards a more sustainable growth and economic model based on services and consumption.’

“The good news is that the real estate bubble has been contained,” says Yu, noting that China’s addiction to real estate construction was more extreme than any significant nation in history, with the possible exception of Spain before the bursting of its bubble. “China is still a poor country in per capita terms and yet home ownership has surpassed 90 per cent. There are so many luxury hotels, skyscrapers and magnificent government buildings - I call it madness.”

‘The slumping price of iron ore is making it tougher to sell a home in western Labrador. The region is still feeling the impact of the closure of Wabush Mines and recent layoffs at the Iron Ore Company of Canada.’

‘Lois Milley, a real estate agent in the area, said that back in 2010 when the iron ore operation was in full swing, the region was experiencing a big boom. She said that it was an incredible time to sell a house in the area. “Things were pretty hot and heavy for a while,” she said. “You could list a house and sell it within days.”

‘However, she said now things have changed, but she doesn’t see doom and gloom in the region’s future. “The market has softened most definitely. That’s to be expected anyway,” she said.’

‘Milley said she expects the housing market to bounce back once the price of iron ore steadies out.’

‘Hundreds of mining jobs expected to be slashed at Mount Gibson’

‘Growth in house and apartment building decelerated in November, amid a decline in new orders, the report said. But home building will need to re-accelerate in coming months, if it’s going to help offset the slowdown in mining construction.’

“Perceptions regarding Australia’s short-term economic outlook have dampened recently and this result will hardly buoy the prevailing mood,” HIA chief economist Harley Dale said. “The rate of expansion in detached house and apartment building activity slowed in November. It will be disappointing if the rate of expansion in these components fails to re-accelerate in coming months given new home construction is the key domestic sector with promise of healthy activity in 2015.”

‘The slower pace of home building activity has also been reflected in official figures, including building approvals and Wednesday’s weak GDP figures, Ai Group chief economist Julie Toth said. “These data really underscore the fragile and sporadic nature of the current recovery in residential housing activity, especially as we move into the end of year shutdown period for much of the industry,” she said.’

Here’s another little derivative of a mania no one saw coming in the 80’s. Texans, especially north Texans, had taken to buying condos and houses in Colorado for skiing, etc. When the bottom fell out, Colorado saw a bust because the Texans no longer had the money to go up there or had to sell or walk away from their Colorado “investments”. I wonder if the Canadians buying up Arizona houses, or the Chinese crawling all over California might find themselves in a similar situation?

‘When Linda Vida sold her house in the Oakland hills this summer, she was hoping for a buyer who would live there, put kids in the local schools and “give back or participate in the community,” she says.’

‘However, “as is very typical these days, a woman from China paid all cash for the house, and is not going to live in it but is going to rent it out for a while,” said Vida, who moved to Colorado. The buyer, a professor in Shanghai, paid $1.022 million, $27,000 over the asking price, for the home on Bay Forest Drive. “In the end, she was the strongest buyer because she didn’t want to negotiate over nickel-and-dime things,” Vida said.’

‘Although the Bay Area has always attracted foreign home buyers, anecdotal evidence suggests that their numbers are growing, creating even more competition in areas where demand has far outstripped the supply of new homes. The boom is partly because of globalization, but mostly a result of the tremendous buildup of wealth in developing countries, especially China, which had 2.4 million millionaires in 2013, up 60 percent from the year before, according to the Boston Consulting Group.’

“Maybe 20 percent of the deals in San Francisco and the Peninsula are cash overseas buyers,” said Allen Ching, president of the San Francisco/Peninsula chapter of the Asian Real Estate Association of America. “I can only see that increasing.”

‘DeLeon Realty of Palo Alto also created a division to market in Asia. “We hired someone who grew up in China to promote our listings to the Chinese community,” says founder Ken DeLeon. His firm bought a 14-seat Mercedes bus to take Asian buyers on tours of Peninsula homes for sale. It’s not unusual for foreign buyers to take a one-week home-buying trip to the Bay Area. Some purchase sight unseen. Lota De Castro, an agent with Paragon Real Estate Group in San Francisco, said she closed on a King Street studio with a buyer in Singapore who “transacted the business by e-mails and phone calls and (has) not physically seen the unit.”

‘Some foreign buyers see houses not as a place to live, but as investments outside their home countries. “They look at real estate as an asset class,” says Jeffrey Needham, a senior vice president in San Francisco with HSBC, a global bank. About 60 percent of foreign buyers paid cash, compared with one-third of domestic buyers, according to the 2014 Association of Realtors survey.’

‘In the short term, foreign buying “may raise prices a little bit,” said Ken Rosen, chair of the Fisher Center for Real Estate and Urban Economics at UC Berkeley. But over the longer term, “it also may encourage some supply.”

“Russia has abandoned the troubled South Stream project and will now be building its replacement with Turkey. This monumental decision signals that Ankara has made its choice to reject Euro-Atlanticsm and embrace Eurasian integration.”

“In what may possibly be the biggest move towards multipolarity thus far,..Turkey, has done away with its former Euro-Atlantic ambitions. A year ago, none of this would have been foreseeable, but the absolute failure of the US’ Mideast policy and the EU’s energy one made this stunning reversal possible in under a year. Turkey is still anticipated to have some privileged relations with the West, but the entire nature of the relationship has forever changed as the country officially engages in pragmatic multipolarity.”

“Turkey’s leadership made a major move by sealing such a colossal deal with Russia in such a sensitive political environment, and the old friendship can never be restored…The reverberations are truly global.” (“Cold Turkey: Ankara Buckles Against Western Pressure, Turns to Russia”, Sputnik News)

“Putin said that Russia is ready to build a new pipeline to meet Turkey’s growing gas demand, which may include a special hub on the Turkish-Greek border for customers in southern Europe.”

“For now, the supply of Russian gas to Turkey will be raised by 3 billion cubic meters via the already operating Blue Stream pipeline…Moscow will also reduce the gas price for Turkish customers by 6 percent from January 1, 2015, Putin said.”

“We are ready to further reduce gas prices along with the implementation of our joint large-scale projects,” he added.” (“Putin: Russia forced to withdraw from S. Stream project due to EU stance”, RT)

http://www.counterpunch.org/2014/12/05/talking-turkey/

“Comments that various OPEC members are ready to ‘accept’ $70 oil seem eerily out of touch. Valuations for service companies already reflect that and lower prices ahead. Our conclusion is the same as the Saudis, lower prices are ahead, $60 is becoming much more realistic.”

It’s good that their expectations are so flexible, as oil has already dropped to $65 since this article was penned with no indication a bottom has been reached.

Interview
Why Beijing’s Troubles Could Get a Lot Worse
Bank rate cuts and anticorruption campaign are unlikely to stave off woes, says Anne Stevenson-Yang.
By Jonathan R. Laing
December 5, 2014

Few foreigners know China as intimately as Anne Stevenson-Yang does. She has spent the bulk of her professional life there since first arriving in 1985, working as a journalist, magazine publisher, and software executive, with stints in between heading up the U.S. Information Technology office and the China operations of the U.S.-China Business Council. She’s now research director of J Capital, an outfit that works for foreign investors in China doing fundamental research on local companies and tracking macroeconomic developments.

Among other things, J Capital conducts trips for hedge fund managers, U.S. corporate executives, and bankers all over the Middle Kingdom, relying on Stevenson-Yang’s roster of government officials, Communist Party leaders, financiers, small- business operators, and ordinary citizens to take the pulse of economic and political developments.

An American, Stevenson-Yang, 56, is fluent in Mandarin, although her husband, a former People’s Liberation Army intelligence officer, and their two adult children sometimes mock her accent. For Stevenson-Yang, who toted Chairman Mao Zedong’s Little Red Book in high school, her years in China have given her a skeptical view of the nation’s miraculous growth. Her disenchantment arises from the stark inequality of wealth and opportunity, the thuggishness of the Communist elite, and the amount of chicanery and accounting fraud engaged in by Chinese companies and government organs. Read on to find out why she thinks that China has entered the early stages of slowing expansion, severe credit problems, and potential instability.

Barron’s: Investors seem far more concerned about Europe’s sinking into economic despond than slowing growth in China. Are they whistling past the graveyard?

Stevenson-Yang: I think so. China, for all its talk about economic reform, is in big trouble. The old model of relying on export growth and heavy investment to power the economy isn’t working anymore.

Sure, the nation has been hugely successful over recent decades in providing its people with literacy, a decent life, basic health care, shelter, and safe cities. But starting in 2008, China sought to counter global recession with huge amounts of ill-advised investment in redundant industrial capacity and vanity infrastructure projects—you know, airports with no commercial flights, highways to nowhere, and stadiums with no teams. The country is now submerged by the tsunami of bad debt that begets further unhealthy credit growth to service this debt. The recent lowering of benchmark deposit rates by the People’s Bank of China won’t accomplish much because it won’t offer more income to households. It also gave China’s biggest banks the discretion to raise their deposit rates back up to old levels, which would give them a competitive advantage

How bad can the situation be when the Chinese economy grew by 7.3% in the latest quarter?

People are crazy if they believe any government statistics, which, of course, are largely fabricated. In China, the Heisenberg uncertainty principle of physics holds sway, whereby the mere observation of economic numbers changes their behavior. For a time we started to look at numbers like electric-power production and freight traffic to get a line on actual economic growth because no one believed the gross- domestic-product figures. It didn’t take long for Beijing to figure this out and start doctoring those numbers, too.
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