Central Bank Policies Are Wholly Responsible
It’s Friday desk clearing time for this blogger. “The narrative in the mainstream media and from popular think tank organizations over the last several months is that San Francisco is dramatically ‘underproducing’ housing and that this is the reason for The City’s growing unaffordability. Here are some facts: San Francisco is currently experiencing its highest level of housing production since the 1960s’ Urban Renewal. Thousands more units are currently midconstruction, or have been approved and are simply waiting for developers to start construction. The truly important question is: Who can afford those homes?”
“Those who claim we are simply ‘underbuilding’ housing are off the mark. Though our current totals of housing production are at a historical high point, we are effectively overbuilding expensive market-rate housing in proportion to affordable homes for low-, moderate- and middle-income San Franciscans.”
“Manhattan home prices surged to a record in the fourth quarter, propelled by closings of luxury deals in new developments that were agreed to years ago. ‘This represents just how robust and, for lack of a better word, insane the sales market was circa 2013 and 2014,’ Jonathan Miller, president of Miller Samuel, said in an interview. ‘That strong demand was somewhat off the books — it wasn’t yet recorded.’”
“An analysis by StreetEasy last month showed resale prices for Manhattan’s most expensive homes have been declining since February as high-end inventory piles up. With all the new high-end development, luxury buyers now have more options so there’s ‘less urgency to buy this very minute,’ said Chief Executive Officer Pamela Liebman of Corcoran. ‘We’re seeing them taking their time and really being selective as to where they’re willing to put this enormous amount of money. There’s a lot of competition and it will be harder to push prices this year than it has for the past several years.’”
“Looking back over the last three years, 2014 was a revolutionary year in Watford City, making its stamp in western North Dakota history forever. In one year, from 2013 to 2014, the number of building permits issued increased by almost 100 percent! In 2013, the City of Watford City issued 263 building permits. And in 2014, the city issued 513 permits. ‘2014 was a historic year of construction,’ stated Watford City Mayor Brent Sanford. ‘More units were built in 2014 than were in existence prior to 2014.’”
“The City of Jacksonville is facing a problem it isn’t quite sure how to handle: hundreds of properties are currently either vacant or occupied by abandoned homes. ‘We have this huge number of in effect unused properties and a huge number of people that need affordable housing, how do we connect those two. Because that’s a significant issue that we need to resolve,’ City Councilman Bill Gulliford said at a committee meeting.”
“Drive through the neighborhoods of Ohio. You will observe thousands of vacant homes devoid of a generation of aspiring young homeowners. All across America, this story repeats itself. Millions of habitable homes sit unoccupied. Last year, more than 57,000 homes sat vacant in my congressional district alone. Just in October 2015, there were more than 5,300 homes in my home state of Ohio that remained on the market for nine months or longer. Those homes have a combined value of $1.9 billion. These under-invested assets represent a vast, untapped source of wealth creation for families and our nation.”
“Annual statistics show the number of houses for sale in Edmonton remained high, and so did the price tags. Ron Hewitt buys, renovates, and sells homes. The duplex he bought and renovated last year has been on the market since September. It still hasn’t sold. ‘When we were working on this place, we just thought that things were going really well,’ he said. ‘We were quite confident this was going to sell, and that hasn’t happened. So, of course, it’s very frustrating.’”
“iPads, rent-free periods and vouchers are being used as incentives to attract renters as lessors struggle to fill their investment properties in Brisbane. A two-bedroom apartment in Kangaroo Point, listed at $399 has offered a $300 Coles Myer gift card to the prospective tenant, an incentive Ray White South Brisbane rental manager Amy Hindes said stemmed from the supply of rental properties outweighing demand. ‘It’s the market - you just have to look around and see all the cranes - the amount of units in the area now,’ she said.”
“Ms Hindes said incentives were usually offered if the lessor decided not to lower the rental price. ‘We can suggest different ideas on how to rent the property. If they don’t want to reduce the price they can offer other incentives,’ she said.”
“Housing prices in Gurgaon fell by about 25% during last year but it was not sufficient to boost demand, according to property consultant JLL. The consultant noted that the past couple of years have been tough for Gurgaon’s real estate market. The primary reason for this scenario has been a slowing economy over the years, as well as sky-rocketing prices. Buyers were waiting for prices to fall, while investors who bought properties in the previous boom cycle of 2009-10 did not want to commit more money with no clear returns.”
“Overall, NCR has witnessed country’s highest unsold inventory figures at almost 1,70,000 units, of which around 22,000 units are in Gurgaon. With the liquidity crisis brought on by high unsold inventories, JLL said that the developers began offering freebies, discounts and all kinds of schemes to lure buyers. ‘While Gurgaon’s realty market favoured developers in the period 2010-12, it is now clearly a buyers’ market. Nevertheless, most buyers still see this market’s prices as unattractive,’ said JLL India CEO Ashwinder Raj Singh.”
“As China’s stock market crashes again, sparking fear in global financial markets, experts are speculating on whether the turmoil will inflate or prick Vancouver’s housing bubble. Faced with its own housing bubble and a rapidly slowing economy, China started aggressively devaluing its currency last summer. If local incomes can no longer afford Vancouver homes, it suggests that market turmoil in China should be impactful to local home prices, one way or the other.”
“Some business insiders and money managers who have been prescient about the current events in China predict the flood of Chinese money to Vancouver may have peaked in 2015, and could reverse. Seth Daniels, managing partner for the Boston hedge fund JKD Capital, advises against Canadian real estate to help his clients manage the risk of their homes plummeting in value. After China’s markets bounced last fall, Daniels correctly predicted a fresh currency devaluation and market crisis in China in 2016.”
“Daniels told The Province that as Chinese asset values are destroyed in a market rout there will simply be less money to send abroad. At the same time, the Chinese government is anticipating the reaction to its currency devaluations and clamping down on capital flight. Daniels added that luxury housing markets boosted by Chinese money, such as Hong Kong and Sydney, are already softening, and the same is expected in Vancouver.”
“A former citizen of China who works in a Vancouver import-export business predicted China’s early-2016 yuan devaluation to a Province reporter. The man, who did not want to be named, said he has done import deals with one of the big-name B.C. suspects on China’s Operation SkyNet anti-corruption list. The Vancouver importer said the feeling in his line of work is that the flow of big money from China to Vancouver has already occurred, and the stream will slow in 2016.”
“Billionaire financier George Soros is warning of an impending financial markets crisis as investors around the world were roiled by turmoil in China trade for the second time this week. Marc Ostwald, a strategist at ADM Investor Services, believes that Soros’ comments — alongside a gloomy report Wednesday from the World Bank — only serve to cast a ‘long shadow’ over global markets.”
“‘It should be noted that the current turmoil distinguishes itself from 2008, when reckless lending, willful blindness to a mountain of credit sector risks and feckless and irresponsible regulation and supervision of markets were the causes of the crash, given that central bank policies have been encouraged and been wholly responsible for the current protracted bout of gross capital misallocation,’ he said.”
“……Last year, more than 57,000 homes sat vacant in my congressional district alone….”.
OMG, 57,000 homes, Xs 335 congressional districts = 20,000,000 homes.
Could HA be right? We only need to find 5,000,000 more vacant, foreclosed and abandoned homes!
…oh, and we have to accept what is happening in Ohio is also happening in places where people actually want to live.
‘Could HA be right?’
If he was you’d have a lot of crow to eat wouldn’t you?
‘An AM New York report published in July detailed a related phenomenon—before a home can be formally possessed by a bank, it must wind through a foreclosure process that is, in New York, notoriously lengthy. A house that is abandoned by its owner and awaiting repossession is called a “zombie house.”
‘According to Realtytrac data, the city saw an overall 28% increase in the number of zombie houses between January 2014 and May 2015. Kings County had the most zombie houses as of last May, at 1,050. Queens County came in second with 905 zombie homes.’
‘New York State’s foreclosure process can take up to three years, and in the meantime, these houses tend to decay. Once banks take possession, the state of disrepair is already significant.’
‘In an effort to address bank-owned and zombie houses together, New York Democrats Jeff Klein and Diane Savino have suggested a two-part package of laws. The first, in conjunction with Attorney General Eric Schneiderman’s Abandoned Property Neighborhood Relief Act, would require mortgage lenders to keep track of and maintain abandoned houses in a formal registry.’
‘The second would require banks and loan service companies to maintain abandoned homes as soon as they are discovered to be abandoned, rather than waiting until foreclosure proceedings have been completed.’
‘In May, 11 banks, mortgage lenders, and credit unions across the state agreed to adopt “best practices” to maintain homes during the foreclosure process. “A gentlemen’s agreement between lending institutions and New York State to maintain properties… will not go far enough to rid New York of this blight,” the study authors retorted. “Under no duty or penalty of law, this issue will remain unresolved.”
I don’t mind eating a little crow. I believe in a varied and balanced diet! That is why I love the HBB!
What I do not like is the often repeated misrepresentations by HA with no supporting data. I think it has been easily and repeatedly shown HA is WAY off base with his “25,000,000 vacant abandoned” Zombie houses! If he had supporting evidence, he would provide it. He does not.
The Housing market has been recovering and getting healthier since 2011…5 years now, yet the HA doom and gloom persists. He gets the crow today.
Sure, the market will likely turn down again sometime in the next few years, maybe even this year, but sometimes it does well to look up, look around and observe that things are well balanced ave been recovering nicely these last few years.
It’s been posted, linked and discussed over and over again. You simply hide from it.
Eat up Jingle_Fraud. Eat up.
Your double-standard is showing again. You have yet to post a link on this. And your own numbers have ranged from 4M to 60M, so don’t try to give us some bullcarp about having data to back up that wildly-varying number.
It’s been posted over and over my friend. You have a beef with the data.
25 million excess empty and defaulted houses and with another 35 million just beginning to empty as boomer die off is a reality.
It can be confusing Red, discussing California, China and the USA. Consider that these discussions may have bled into each other in your recollection.
I’ve been following the blog for years and have yet to see a single link to any data backing up HA’s numbers. Yet he immediately demands a link anytime somebody else says something he doesn’t like.
Saying that the link has already been posted is more of the same bullcarp from him. He can’t even gin up one single Movoto or Zillow link either, and that’s saying something.
Hell …… Its been posted on your realtor-funded blog my friend.
Again you lie HA. No realtor funding is involved. Just an engineer (who sat in the cublicle next to me at work ten years ago) with an interest in both the market and data analysis.
And there are no such numbers reported on his website - I have followed it since its debut in 2005.
Which accounts for your bizarre denials here on the HBB.
There’s no such thing as “eating a little crow.” Any crow dinner inherently requires the diner to eat alot.
The resident expert on crow would he AbqDan if he ever showed….
I suspect Dan is one of our angry Trump trolls posting under a new name. He’ll enjoy another heaping helping of crow if Trump doesn’t beat Hillary.
“Attorney General Eric Schneiderman’s Abandoned Property Neighborhood Relief Act”
There is a have your cake and eat it too fantasy. Banks don’t want the house and NY doesn’t want the foreclosure to go through quickly. So, rather than fix the problem, let’s just say we’ll put lipstick on it and then don’t.
Per Realty Trac, zombie foreclosures and homes that have been repossessed but not yet sold, represent approximately 3% of the vacant homes in the country.
In other words, if you snapped your fingers and put all the zombie foreclosures and vacant homes held by banks on the market immediately, it would increase supply of vacant homes by about 3%.
Yawn.
That said, NY and NJ have 8%+ of their vacant homes stuck in the foreclosure process (their zombies). In those states, releasing the zombies onto the market would add a fair bit of additional supply.
However, the statistics go down quickly from there…in NV, the number is less than 3%, and they are the third highest.
http://www.realtytrac.com/news/foreclosure-trends/realtytrac-q3-2015-u-s-zombie-foreclosure-and-vacant-property-report/
And the millions defaulted on and not yet foreclosed will not be ignored.
Houses are sitting in default for at least six years in NY without foreclosure action.
10 years in CA.
‘zombie foreclosures and homes that have been repossessed but not yet sold’
Bzzz,wrong answer.
‘A house that is abandoned by its owner and awaiting repossession is called a “zombie house.”
Or the 20,000 in Las Vegas that have been occupied by squatters. Now why would so many houses just sit there when Blackstone was paying over asking just a couple of years ago? I’m starting to think Mel Watts is letting it sit because he wants prices to go up. Who owns the notes on those houses? Could they be part of the trillions the central bank spent on MBS? And why aren’t they building any affordable apartments? Do they want rents to go up and pressure people into buying a house? All these government actions seem lopsidedly in favor of higher prices. By golly we did just see a former Fed guy admit they ran up prices of assets for the “wealth effect”. And of course that’s exactly what Bernanke said he was trying to do years ago.
Wait a minute; they also said they were foaming the runway for the banks. Pretty straightforward really. The next question is, can the government set housing prices ever higher? I have my doubts. And if houses stop going up in price, what will all those underwater borrowers do? What will those airbnb guys do and Blackstone and other flippers?
I know the distinction between Zombie Foreclosures and REO. That is why I used the word “AND”.
Realty Trac includes both in their 3% estimate.
Zombie foreclosures AND homes that have been repossessed and not sold (two different categories).
The quote from the article I posted a link to:
“Vacant residential properties in the foreclosure process accounted for 1.3 percent of all vacant U.S. residential properties, with bank-owned homes (REO) accounting for another 1.9 percent of all vacant 1 properties as of the end of the third quarter.”
1.3% PLUS 1.9% = 3.2%, or approximately 3%.
My point is simply that these categories of homes don’t represent enough housing to alleviate the kind of housing shortages that people are reporting. This is especially the case since there is a disproportionate number of these kinds of homes are concentrated in NY and NJ.
With 25 million excess empty and defaulted houses, 4.4 million of which are in California, there is no housing shortage
“Report Methodology
For this report RealtyTrac matched its public property record database of nearly 85 million single family homes, condos, duplexes, triplexes and quadraplexes against monthly updated address-level data from U.S. Postal Service flagging properties as vacant if no one is picking up the mail at the property (vacancy does not include homeowners who are forwarding mail to a different mailing address).”
What about all of the people and corporate entities who own multiple properties? They don’t receive mail at all of them, so of course these wouldn’t be flagged as ‘vacant.’
And anyone who left a property they were living in is probably having their mail forwarded.
If the property is owned by a large investor, but no one lives there, there will still be junk mail that will pile up, and the property would be registered as vacant.
Over time, mail forwarding stops…in other words, it’s a temporary service offered by the USPS. So, while the mail is being forwarded, yes, the homes won’t count. But once that forwarding service stops, the homes (if still vacant) will count toward their vacancy count.
You didn’t address her point.
Try again.
“Those homes have a combined value of $1.9 billion. These under-invested assets represent a vast, untapped source of wealth creation for families and our nation.”
Fine, give it to screwed younger generations for nothing, because that is what they can afford.
And make sure their property tax assessment reflects the transaction value.
“…oh, and we have to accept what is happening in Ohio is also happening in places where people actually want to live.”
Isn’t this sort of the problem, that people, especially young people, would rather be futureless hangers-on than thrive somewhere other than NYC or the Bay Area?
I agree with you, but have to say with respect to the original comment that many of my college classmates were from Ohio. Looking at those who I’ve kept up with, all of them now live elsewhere. Some live in other Midwestern states.
“At the end of last year, nearly 17 million homes sat vacant in the United States”
It’s probably no coincidence that the data released on the Census website shows 17.4 million vacant homes at the end of Q3.
Which includes the following categories:
For Rent and for sale (not held off the market, but trying to get back into the market): 6.0MM
Held off the market (second homes of about 3.3MM, and “Other”, which includes foreclosures, renovations, being prepared for sale, possible condemnation, etc. of about 3.8MM)
Seasonal of 4.3MM
The 9th congressional district in Ohio has a double digit unemployment rate…they probably have more vacant homes than typical.
4.4 million excess, empty and defaulted in houses in CA alone not to mention millions held back because of foreclosure moratoriums in the other 49 states.
It’s a bit much to hide a house let alone 25 million excess empty and defaulted houses.
“Census website shows 17.4 million vacant homes”
We have read hundreds of stories here of defaulted houses which are not vacant. Do you think the number could be in the millions?
In fact, the vast majority of defaulted homes are NOT vacant.
But we are talking about the right topics though…homes that are not vacant, but go through the foreclosure process don’t really add supply without also adding demand (the family that gets kicked out needs to find another place to live).
Zombie homes and vacant REO are a special category in that regard. When they come back onto the market, they add supply WITHOUT adding that displaced family to the market. And that is why they would have a greater impact on any particular market.
There are lots of categories of default:
30-days, 60-days, 90+ days, and those that are so late they are in the foreclosure process.
Very frequently homes that are 30-days delinquent will cure their default, less frequently will the 60-day delinquent borrower cure, etc.
With fewer homes underwater the cure rates have been rising across the board, as the “sell to pay off the loan” avenue has been open to more delinquent borrowers.
So, onto your question. Could all these types of defaulted homes be in total “millions”?
Yes.
There are approximately 50 million active mortgages in the US.
Per Black Knight’s Mortgage Monitor, approximately 6.2% of all mortgages are either in some state of delinquency. 4.8% are delinquent, and 1.4% are in the foreclosure process.
These combined are called “non-current” loans. In total, that is about 3 million mortgages, many of which will never be foreclosed.
It is worth noting that people missing payments and some being being foreclosed is always happening…throughout market cycles. “Normally”, approximately 5% of mortgages are non-current at any given time.
So, are “millions of homes in default or foreclosure”? Yes.
Is the number high relative to pre-2005? Yes.
Is the number millions higher than it should be? Not even close. Maybe 500k higher than you would expect otherwise.
AND, the main reason we have not yet reached normal is states like NY and NJ go through a judicial foreclosure process, where it takes years to resolve foreclosures. States like CA, CO, AZ, etc. (non-judicial states) are below 5% already.
25 million excess empty and defaulted houses either occupied or unoccupied is a distinction without a difference.
“Census website shows 17.4 million vacant homes”
Keep in mind that at least 97% of houses in the US are not involved in the mail survey that these numbers are extrapolated from, and that houses never yet officially occupied are not “know addresses”.
“known” in case that isn’t obvious.
Thank you Rental Watch. I appreciate the data. It is important to clearly understand the trends before making business decisions. It is also important to show HA’s blustery nonsensically posted claims have no basis in fact.
Blue, this whole post started from an article written by a US Congresswoman about all the vacant homes in her district.
Wherever she got the data from, it was the same as the Census data…17MM vacant homes nationally. It looks like she got her data from the same place I did…otherwise, it’s a strange coincidence.
Yes, there is extrapolation involved with the Census data, but I’ve yet to see a better estimate.
HA’s rants don’t count, since he never posts the source to his data. At one point in time, he posted data to the Census website, but then realized that it didn’t meet with his narrative, so we are still left wondering if there is a source for his number.
97% extrapolation is more than a little. How would you know if this is good or not?
It is still surprising that you see the 17 million number, which in the last full year posted it is 18 million from the Census, and calculate yourself another 3 million houses in some stage of default. You do not think a number over 20 million empty or in default is anything but laughable.
I actually have a completely different take on the surplus housing situation. There is too much debt and it has to fall in on itself. At the same time there is excessiveness in the majority of houses built during the decades long credit expansion. In my youth we lived four in a <1000 ft2 house, as did my grandparents. I live in a 2000 ft2 house by myself! Also a class A motorhome parked by the garage. The house across the street has 8 people and six dogs. Over Christmas it had more like 12 people. In a crisis, I can go live with my kids or all four of them and their kids can move in with me.
My point is that 250 ft2 per person is just fine, but millions of us have over 1000 ft2 of house per person. The big fat surplus number is in the back rooms of houses that do not show in the Census or bank numbers as being distressed. There is the potential for an amazing compression. Many millions of families are just a few thin checks away from it.
You posted the data my friend. 25 million excess empty and defaulted houses are a reality you can’t escape from.
Your denial of the truth has more to do with the fact you paid double construction costs for a depreciating used house.
Blue, the 17.4MM was the most recent number (they post it quarterly), and that includes homes in default/foreclosure.
In 2000/2001, this number was in the 14MM range.
The last time it was under 10MM was 1986. At that time, there were a total of about 100MM housing units. Today, there are 135MM.
In other words, some level of home vacancy is normal (and that normal level is well over 10MM).
There are always:
Homes on the market for sale (all listings are counted as vacant);
Homes on the market for lease (all these rentals are counted as vacant);
Homes that have been rented or sold, but the new occupants haven’t yet moved in.
Second homes are counted as vacant;
Seasonal homes (only occupied for part of the year) are counted as vacant.
These categories today represent 13.7MM of the 17.4MM.
That leaves about 3.7MM that are held off the market for other reasons (which include, in no particular order):
Foreclosure, Personal/Family Reasons, Preparing to Rent/Sell, Held for Storage of Household Furniture, Needs Repairs, Currently Being Repaired/Renovated, Specific Use Housing, Extended Absence, Abandoned/Possibly to be Demolished/Possibly Condemned
I laugh at the idea that there is 20MM excess homes just sitting around that could be utilized at the drop of a hat. First, the starting point is 17.4MM. Second, a large portion of the 17.4MM vacant housing units are vacant due to normal activity.
This is worth repeating:
It is normal for a house to be empty while being renovated.
It is normal for a house to be empty while listed for sale.
It is normal for a house to be empty while listed for lease.
It is normal for second homes to be empty for a lot of the year.
I completely agree with your last point, that an alternative measure of housing supply would be number of bedrooms, NOT number of addresses. This definitely leads to the potential for people to rent out rooms when necessary, etc. And candidly, that has happened over cycles going back decades as well.
However, today, people are buying larger houses because that’s what they want. It’s a trend that has been going on for decades. And yes, while I, like you, expect people to utilize things like AirBNB to make extra money for their extra bedrooms, every time I bring it up with people I know, they look at me like I have three heads. People will do so when they are desperate, but they won’t do so unless it is their last choice.
I spoke to a guy about this a few years ago, and he recalled this effect (the doubling up effect) of being a major driver of inflation in the 70’s. It truly dues make me wonder if some of that is driving higher rents today.
What is worth repeating is this;
Your denials, backpedalling and gyrations regarding housing crystallize into the fact you’ve been doing some degenerate gambling.
25 MILLION excess, empty and defaulted houses CHECK
Housing demand at 20 year lows and falling CHECK
Housing prices inflated by 250% CHECK
Household formation at multi decade lows CHECK
Rampant housing fraud CHECK
A media corrupted by the housing industry CHECK
Population growth the lowest in US history CHECK
Immigration flat to slightly negative CHECK
What were you saying about housing?
It is normal for a house to be empty while being renovated.
I agree totally, though that is not always the case. We could have a conversation of what a normal level of vacancy is, but that was not the subject. Neither was “normal” levels of default. It was simply what is the level of vacant or in default or in excess, which you posted yourself is over 20 million.
Just as an aside, if the illegal immigrants weren’t to stay, there would be another 5 or 10 million “excess” housing units. No wonder the policies from DC.
There are 435 congressional districts or using the same logic 24.8 MM homes. On and S. Fl has many many empty homes.
Good point. 435 it is.
There are very few foreclosures in my Nor Cal congressional district and the majority I have seen are still occupied.
And how many thousands of empty and defaulted houses are there Jingle_Fraud?
And another “prediction” made over and over; mortgage rates will never go up:
‘Falling government-bond yields are usually good for homeowners in Canada because mortgage rates tend to follow suit. Not this time. Three of Canada’s biggest lenders have raised mortgage rates and more increases are expected as new regulations, a weak economy and higher costs prevent banks from capitalizing on lower borrowing rates in the debt market where they finance their mortgages.’
“When you look at the funding picture, it’s getting more expensive for the banks,” Meny Grauman, a financial analyst at Cormark Securities in Toronto, said by phone Wednesday. “We’ve started to see cracks in credit and we know that’s probably going to continue to intensify. If it continues, the same logic that caused the banks to raise will continue to apply.”
‘Even as speculation mounts the Bank of Canada could return interest rates to a record low this year, homeowners face higher mortgage costs as the banks look to protect their bottom lines in a deteriorating economy. This week, Royal Bank of Canada became the latest lender to raise its mortgage rates, following Toronto-Dominion Bank and Bank of Nova Scotia.’
‘The banks are feeling the pinch with higher borrowing costs as pressures on the economy make them look less credit-worthy. Investors now demand about 129 extra basis points of yield to hold five-year bonds from top-rated Canadian banks compared with government benchmark notes, the biggest premium tracked by Bloomberg data since 2010. That premium was 51 basis points at the end of 2009.’
“Given the Canadian banks are a play on the Canadian economy, a slowdown in the economy can’t really be seen as positive for the banks,” Kris Somers, a Canadian debt analyst at Bank of Montreal, said by phone from Toronto. “Banks are paying more money for debt than they have in the past.”
‘George Osborne today put millions of homeowners on notice for an interest rate rise. The Chancellor warned that Britain had to be “ready” for a rate increase despite global economic threats which sent the FTSE 100 plunging by nearly three per cent this morning, wiping some £40 billion off the value of shares. Sterling also hit a five-and-half year low against the US dollar, close to $1.45.’
‘To prepare for a rise, Mr Osborne pledged action to deal with “asset price bubbles” as figures from the Halifax showed that house prices had soared by up to 22 per cent in parts of London in a year. Ahead of a keynote speech on the economy, the Chancellor emphasised that the US Federal Reserve raised interest rates shortly before Christmas.’
“That was the beginning of the exit if you like from the very, very low interest rates in the so-called ultra-loose monetary policy that was put in place during the crash,” he told BBC radio.’
“George Osborne today put millions of homeowners on notice for an interest rate rise.”
Ouch Number one.
“The Chancellor warned that Britain had to be “ready” for a rate increase despite global economic threats which sent the FTSE 100 plunging by nearly three per cent this morning, wiping some £40 billion off the value of shares.”
“Global economic threats” = Ouch Number TWO.
Ouch Number One will act to increase expenses and Ouch Number Two will act to decrease income.
Add them up, add Ouch One and Ouch Two and you will get to experience some real pain. (Note: Those who experience real pain, real financial pain, become reluctant spenders, not a good thing to have in consumer-based, debt-fueled economies.)
Hence, tighten up and go to cash.
Many of those who did not do all that well during their school days are about to presented with an opportunity to expand their education a wee bit as they get to delve into the true meaning of that most interesting of all financial words which is the word “adjustable”.
Stay tuned.
Certain central bankers seem to be taking the opportunity to reload their bazookas while the sun is still shining, which seems prudent.
why not cut spending instead?
“why not cut spending instead?”
Cutting spending is what is about to occur.
But cutting spending cuts the money flow - the velocity - as represented by this thingy:
https://research.stlouisfed.org/fred2/series/M2V
Velocity as shown in that figure has steadily dropped since the third quarter of 1997, which coincides closely with the start of the largest run up in housing prices in U.S. history, and possibly in international financial history as well. It almost seems like all the money got sucked up into real estate investment!
PB
Do you have a source that tracks velocity of M1 or any other measure?
I just assumed that the velocity of money had dropped to near zero, which is why QE infinity has been in place.
https://research.stlouisfed.org/fred2/categories/32242
FRED is your friend.
M1 velocity appears to be at a four-decade low.
I predict rates will go up. In fact, I shorted Treasuries in 2010……when the 10-year was about 3%! Oooops. I got out in time, but it cost me a little skin.
Still I once more predict the 2.20% 10-yr Treasury will be higher in Jan. 2017! I say 3.0%. I was wrong 5 years ago, but I think I’m right today.
‘Global markets are acutely sensitive to any sign that China might be forced to abandon its defence of the yuan, with conspiracy theories rampant that it is gearing up for currency war in a beggar-thy-neighbour push for export share.’
‘What is worrying is that the central bank has so far failed to stop the yuan sliding despite spending an estimated $140bn last month in the foreign exchange markets. Last month’s switch to the currency basket (CFETS) was a belated move to liberate China from the rising dollar as the US Federal Reserve tightens policy. The view in Beijing is that the yuan is now fairly valued after soaring since mid-2012.’
‘Premier Li Keqiang vowed to keep the basket rate “basically stable”, yet it has been dropping for three weeks. It is now hovering near a 16-month low. The spreads on offshore yuan contracts in Hong Kong have ballooned, a sign that traders are expecting worse to come. The central bank (PBOC) pinned its colours to the mast, insisting that it has the firepower to defeat “speculative forces” and keep the currency stable at a “reasonable equilibrium level”.
‘It said the market gyrations had decoupled from the real economy and that a country running a current account surplus of almost $600bn has no need for a weaker currency. “It is not necessary to stimulate exports and stabilize growth through a competitive devaluation,” it said.’
‘For good measure, the authorities suspended the foreign exchange operations of Standard Chartered and DBS Group Holdings, and cracked down on false invoicing by exporters, effectively invoking police powers to stop money leaking out of the country.’
‘China’s reserves have dwindled from $4 trillion to $3.33 trillion and are no longer far from the $2.6 trillion deemed to be the prudent threshold by the International Monetary Fund, given China’s $1.2 trillion dollar liabilities.’
‘George Magnus, from UBS, said Beijing is trying to reconcile impossible objectives. “They don’t want any tightening. They are trying to keep interbank rates as low as possible,” he said. In economic parlance, it is the Impossible Trinity. No country can have an open capital account, a managed exchange rate and sovereign monetary policy. One must give.’
They seem to be ignoring the $25 Tr credit ponzi that is falling apart. Money wants to leave the country, and it doesn’t want to leave as “Yuan”. China can’t stop this flight without import/export lockdown.
‘Mr Lawless said the impact of soon-to-be increased capital requirements for the major banks on home lending and restrictions on investor loan growth had “substantial” effects on the market. “The level of investor housing finance has slowed quite dramatically,” he observed. “That’s partially due to the change in regulations and the higher mortgage rates that investors are now facing, but we’re also seeing the banks now reclassifying a lot of their investor loans back to owner-occupier.”
‘However, he also said the record disconnect between home price growth and rental growth had finally dawned on investors. “Rental yields have moved through historic lows in 2015 in both Sydney and Melbourne,” he added. “So there’s that natural disincentive for investment as well, due to the fact that capital gains now are slowing down, there’s very little in the way of a rental yield, which means the total return in Sydney and Melbourne isn’t going to be quite as strong as what it has been in the past.”
Boy, these bankers and regulators are pulling out of the easy money thing at just the worst time for the markets. It’s almost like they don’t care about all the stock and house gamblers and are more concerned about themselves.
Sydney Home Prices Have Biggest Quarterly Drop in Four Years
‘Sydney home prices fell for the second-consecutive month and recorded the worst quarter in four years as a regulatory crackdown pushed up mortgage rates and dented affordability amid record prices. This is the first time since May 2013 that Sydney dwelling values have dropped for two straight months.’
‘Prices in Australia’s capital cities have jumped almost 55 percent in the past seven years as mortgage rates dropped to five-decade lows and foreigners, including from China, accelerated their purchases of local homes. The gain was led by Sydney where the median home value has almost doubled since 2008. In another sign of a cooling property market in Australia’s most populous city, Sydney home prices fell 2.3 percent in the quarter ended Dec. 31, making it the weakest performing capital city, CoreLogic said in an e-mailed statement.’
“Throughout 2016, we may see further moderate value declines in Sydney and Melbourne,” Tim Lawless, head of research at CoreLogic, said in the statement.’
‘The trend reversed after banks raised interest rates for landlords for the first time in five years in July and for owner occupiers in November following a regulatory directive to limit growth in investor mortgages to 10 percent a year and increase the capital the lenders hold against mortgages.’
‘Australian investor mortgage growth fell to a 17 month low of 9.1 percent in the 12 months to Nov. 30, Reserve Bank of Australia data showed last week. Growth in lending to landlords has eased and supervisory measures are helping to contain risks that may arise from the housing market, RBA Governor Glenn Stevens said.’
Average house prices drop 7 per cent creating a buyer’s market in Regina
‘It looks as if 2016 is starting out as a buyer’s market for housing in Regina. House sales in Regina dropped by six per cent year-over-year from 2014 to 2015. Supply was at the highest level in over 20 years which caused a drop in prices.’
“Going into 2016, most economic forecasts for the area remain modest at best. Unless there is an unexpected spike in economic and job growth levels, this will continue to temper demand compared to recent years,” Archibald said in a news release. “Supply levels will likely continue at elevated levels as well, at least for the first quarter of the year. This will provide a great deal of choice and options for buyers.”
Huntington Beach, CA Housing Market Craters; Prices Plunge 15% YoY As Excess Housing Inventory Skyrockets
http://www.zillow.com/huntington-beach-ca-92648/home-values/
Denver, CO Housing Prices Crater 18% YoY; Housing Inventory Balloons 126%
http://www.movoto.com/denver-co/market-trends/
Los Angeles, CA Real Estate and Homes for Sale-22,785 properties found
http://www.realtor.com/realestateandhomes-search/Los-Angeles_CA/radius-20?pgsz=15&pos=33.612453,-118.880676,34.45065,-117.766457
Los Angeles, CA Price Reduced Homes for Sale-6,578 properties found
http://www.realtor.com/realestateandhomes-search/Los-Angeles_CA/radius-20/show-price-reduced?pgsz=15&pos=33.612453,-118.880676,34.45065,-117.766457
30% of all LA sellers reduced their price at least once
‘The housing market in North Dakota, especially in the central and western areas of the state, has entered a period of adjustment. Part of it can be tied to the downturn in the oil patch, and partly it was inevitable that the state’s incredible streak in the housing market would slow.’
‘This is no crash. Nancy Deichert, executive director of the Bismarck-Mandan Board of Realtors, calls it “a return to normal.” In the last few years, if you wanted to buy a house you needed to snatch it when it appeared on the market. There wasn’t much of a chance to go house shopping and not much opportunity to dicker on the price. Now, homes stay on the Bismarck-Mandan market for an average of 72 days.’
‘The Bismarck-Mandan apartment market has been reporting an increase in vacancy rates, due in part to new units in the market. The average vacancy rate is 5 percent to 6 percent, according to a survey by the Bismarck-Mandan Apartment Association. Vacancies at newer complexes are around 10 percent because most of those are higher-end apartments, Jeremy Petron of the association told Holdman.’
‘In the oil patch, Watford City is seeing more vacant apartments, it’s taking longer to sell homes in Willisto. The changes in Watford City and Williston aren’t surprising and aren’t dire.’
‘if you wanted to buy a house you needed to snatch it when it appeared on the market’
Oh. I hope they didn’t pay too much.
‘Everyone’s heard the story of the oil boom and its ugly twin, the bust. A sleepy community transformed overnight by a wave of rapid growth. Workers flock to the area, sleeping in RVs, hotels, and cheaply-built apartments. Eventually, there’s a bust, and locals are left with scores of empty buildings and wondering what happened. But does it have to end this way? I went to Watford City, North Dakota, to find out.’
‘Since the latest oil boom began here around 2009, Watford City has grown astronomically. The latest Census estimate from July 2014 puts the population at 4,200, up from 1,300 ten years earlier, but local officials say that’s woefully inaccurate. They guess there are around 12,000 people in town based on the number of people flushing toilets and using electricity. Watford City issued close to 1,700 building permits last year, up from one — yes, one — ten years ago.’
‘That’s worrying to people like Bill Caraher, a professor at University of North Dakota who studies housing in the Bakken oilfield. “Man, I mean driving out the eastern side of Watford City and seeing those hills covered with houses. Oh my gosh, I hope they’re not making a mistake,” he said. “‘Cause we love the people in Watford City. We really want them to be able to manage this and be successful.”
‘Here’s what boom towns like Watford City: overbuilding when times are good, and then getting stuck with tons of debt and abandoned homes when the economy busts. It’s happened so often in North Dakota history, there’s even a term for it — the “too much mistake.”
the “too much mistake.”
‘San Francisco is currently experiencing its highest level of housing production since the 1960s’ Urban Renewal. Thousands more units are currently midconstruction, or have been approved and are simply waiting for developers to start construction…Though our current totals of housing production are at a historical high point, we are effectively overbuilding expensive market-rate housing’
This is the kind of warning sign that people should heed.
High prices drive increased supply.
Too much supply leads to a glut.
Glut results in prices falling.
But Ben - let’s face facts here. There is no way that you can compare a one-trick boom/bust resource extraction town like Watford City (no different than countless tiny haunts all over the Western US) to San Francisco. Even if the Tech 2.0 bubble bursts, there will always be a lot more demand for housing in SFO than in Watford, for a multitude of reasons.
‘there will always be a lot more demand for housing in SFO’
What is SFO? I went to the bay area once. I wouldn’t live there if you gave me a house.
“I went to the bay area once. I wouldn’t live there if you gave me a house.”
My parents grew up on the Peninsula south of SF, and came to that conclusion in 1969. They tried to park at a shopping center, and it was so bad, they decided to move farther north (into Sonoma County).
There are plenty of people who don’t want to live here (for various reasons). But on the whole, it’s still attracting a lot of people.
The SF Bay Area is a very nice place to live,
other than the epic housing price bubble whose implosion will blow everyone’s minds,
and traffic that can eat souls,
also we are due for 7.0 on the Hayward which will be apocalyptic.
Worst of all though the place is crawling with Realtors.
“This is no crash. Nancy Deichert, executive director of the Bismarck-Mandan Board of Realtors, calls it “’a return to normal.’”
“Watford City issued close to 1,700 building permits last year, up from one — yes, one — ten years ago.”
____________________________/
That’s going to be one heck of a return to normal.
‘Since the latest oil boom began here around 2009, Watford City has grown astronomically. The latest Census estimate from July 2014 puts the population at 4,200, up from 1,300 ten years earlier, but local officials say that’s woefully inaccurate. They guess there are around 12,000 people in town based on the number of people flushing toilets and using electricity.’
Goes to show you what Census numbers are worth. Off by a multiple of 3.
Dan? Dan? Bueller?
‘China Finds $3 Trillion Just Doesn’t Pack the Punch It Used To’
‘China’s $3-trillion-plus in foreign currency reserves, the biggest such stockpile in the world, would seem to be a gold-plate insurance policy against the country’s current market chaos, a depreciating currency and torrent of capital leaving the country.’
‘Maybe not, say economists. First off, data point to an alarming burn rate of dollars at the People’s Bank of China. The nation’s stockpile of foreign exchange reserves plunged by $513 billion, or 13.4 percent, in 2015 to $3.33 trillion as the nation’s central bank coped with a weakening yuan and an estimated $843 billion in capital that left China between February and November, the most recent tally available according to data compiled by Bloomberg. ‘
“My greatest worry is the fast depletion of foreign exchange reserves,” said Yu Yongding, a member of China’s monetary policy committee when the currency was revalued in 2005.’
‘True, trillions of dollars under the central bank’s care are thought to be invested in safe liquid securities, including Treasury bonds. The U.S. measure of China’s holdings of Treasuries, the benchmark liquid investment in dollars, stood at $1.25 trillion in October, according to the U.S. Treasury Department, which cautions that the figures may not reflect the true ownership of securities held in a custodial account in a third country.’
‘In China, like some other countries, the exact composition of China’s reserves is a state secret. But analysts worry the currency armory may not be as strong as it looks. That’s because some of the investments may not be liquid or easy to sell. Others may have suffered losses that haven’t been accounted for.’
‘Then there are other liabilities that China needs to cover, such as the nation’s foreign currency debt to finance and manage imports denominated in overseas currencies. When those factors are taken into account, some $2.8 trillion in reserves may already be spoken for just to cover its liabilities, according to Hao Hong, chief China strategist at Bocom International Holdings Co.’
‘The drop in the nation’s foreign reserves over 2015 was the first since 1992, ending a 22-year ascent that began under former top leader Deng Xiaoping in an effort to keep a floor under the tumbling yuan. They fell by $108 billion in December alone.’
“Where is the line in the sand, and what happens when we get there?,” said Charlene Chu, the former Fitch Ratings Ltd. analyst known for her warnings over China’s debt risks and now a partner of Autonomous Research Asia Ltd. “China’s large hoard of foreign reserves gives the country considerable power and influence globally, and I would think they would want to protect that. If there is such a line in the sand, it is very possible we hit it in 2016.”
‘Richard Jerram, the chief economist at the Bank of Singapore, says any fall towards $2 trillion could set alarm bells ringing. “The burn rate has been worrying,” he said. “It’s not about how long it gets to zero, its about how long it gets to about 2, which is what they need.”
‘Turmoil in China’s stock market may be roiling markets around the world, but China’s role in the global economy and global markets is something quite different, according to Gary Shilling, president of an economic and consulting firm that bears his name. “China is really fading from the global scene as a prime mover,” he said.’
‘China now is a lot like Japan was in the 1980s, says Shilling. Its housing bubble has collapsed, a huge run-up in stocks has reversed, and its population is declining. “China won’t disappear, but as far as being the center of attention on the global stage, that is probably over,” says Shilling.’
‘Global markets are just coming to realize that China’s role in the global economy – where it’s still ranked No. 2 – is shrinking, says Shilling, noting in an interview with ThinkAdvisor that China’s ranking mostly reflects high income due to its huge population.’
‘In the meantime, markets are still reacting to revelations that China’s economy is a lot weaker than expected and the emperor really has no clothes, Shilling says.’
‘China’s “glory days of double-digit growth through exports and debt-driven infrastructure spending are over,” Shilling writes in his latest outlook report. “The international shock and awe resulting from globalization and the shift of manufacturing from North America and Europe to China as well as other emerging economies is essentially finished. China is the only major country in modern times that will grow old before she grows rich.”
Way ahead of ya Gary.
China now is a lot like Japan was in the 1980s, says Shilling. Its housing bubble has collapsed, a huge run-up in stocks has reversed, and its population is declining
Sounds like a few other places.
‘Chinese leaders encouraged novice investors to pile into stocks beginning in late 2014. They wanted to raise money for state companies to pay down heavy debt loads and become profit-oriented and competitive. Communist planners also hoped investing would help families save for retirement, easing the pressure on Beijing to pay for pensions and health care.’
‘Those plans went wrong when markets soared faster than Beijing wanted. By May, state media that cheered on higher prices started to mix in appeals for investors to act prudently.’
‘After prices plunged in June, the government banned sales by big shareholders, ordered state companies to buy stock, cut interest rates and canceled initial public offerings. The government has yet to say what its intervention cost, but Goldman Sachs has estimated state entities spent 860 billion-900 billion yuan ($135 billion-$140 billion) to buy shares in June and July.’
I’ll say it again; These “Chinese leaders” are idiots.
And who could forget this, from last year:
“According to a report from the Financial Times, on Sunday, the new graduates of Tsinghua University are set to gather in their smartest attire to celebrate degrees from one of China’s most prestigious institutions, a place that has fostered generations of political leaders. Just after the ceremony starts — according to a written agenda — the graduates must ‘follow the instruction and shout loudly the slogan, ‘revive the A shares, benefit the people; revive the A shares, benefit the people.’”
“So graduates, according to this report, will be chanting a slogan that in order to support the Chinese people, the stock market must move higher. This is how China is sending off its best and brightest into their future careers, chanting in support of a system that is criminalising market behaviour, misallocating resources, showing a complete disregard for fundamentals, and engulfed in short-term thinking.”
http://tinyurl.com/qdtpbru
Ben Jones: I’ll say it again; These “Chinese leaders” are idiots.
What they’re falling prey to is the same thing economic pundits here fall prey to: Not realizing that the financial markets and currency are not merely a video game. That currency represents something real. Namely, it is an allocation of the resources available in the society. The purchase power they obtain through their effort.
When central banks print money, they are re-allocating those resources to people and purposes they see fit.
China is still a communist dictatorship. Its leaders believe they can centrally plan their way to prosperity. All leaders of that tier I believe secretly have that belief. It’s a personality type. Bernanke and Hank Paulson might publicly espouse the belief in the markets being the best way to allocate resources, but when push comes to shove, their actions indicate their true thinking.
‘China now is a lot like Japan was in the 1980s, says Shilling. Its housing bubble has collapsed, a huge run-up in stocks has reversed, and its population is declining. “China won’t disappear, but as far as being the center of attention on the global stage, that is probably over,” says Shilling.’
He’s a decade off, as this started in the 1990s, but he’s catching on.
‘The British Ghost Town in the Middle of China’
‘As you walk down the cobblestoned streets to the village green, you pass Edwardian town homes surrounded by neat privet hedges, and white stucco Victorian terraces nearer to the high street. Here’s a mock-Tudor pub, there’s a fish-and-chip shop. The iconic red phone boxes of the British Isles stand next to quaint corner shops. It’s hard to believe that the whole thing is just 40 minutes from downtown Shanghai. Wait, what?’
‘In early 2001, the Shanghai Planning Commission launched a massive experiment. In the hopes of luring half a million people off the crowded streets of the world’s largest city and gentrifying its unfashionable outskirts, nine new suburban communities were planned. To sweeten the deal of the “One City, Nine Towns” plan, the new ‘burbs were each designed to resemble the cities of some Western nation. Songjiang District, southwest of Shanghai, was going to become “Thames Town.”
‘Two billion yuan (about $330 million) was spent over three years to create Merrie Olde England from scratch out of the rice paddies. No expense was spared: Actual lampposts were imported from Britain. A scale replica of Christ Church, a picturesque Gothic parish church in Bristol, was built on the town square. “Visitors will soon be unable to tell where Europe ends and China begins,” announced the Shanghai Planning Commission, implausibly.’
‘As Songjiang’s “Little Britain” took shape, eight other Epcot-style towns were on the drawing board. Anting would become an efficient, biergarten-filled German suburb designed by no less than Albert Speer! (No, not that guy. His son, who runs an architecture firm in Frankfurt.) Cervantes-style windmills and Spanish tile roofs rose over Fengcheng. Gaoquiao dug the canals of the Netherlands. Feng Jing, the most remote suburb, apparently drew the short straw: It was set aside for Chinese citizens excited to live in “Canadian Maple Town.”
‘Houses sold quickly in Thames Town, but the middle class didn’t come as planned. A real estate bubble in China priced the homes well out of the reach of most Shanghai residents, and most were instead bought as investments or second homes by wealthy Chinese. In fact, most of the international “Nine Towns” were never completed. In Songjiang District’s cozy English village, replica storefronts and pubs have cheerily authentic signage, but nearly all sit empty. Thames Town is a ghost town.’
I’ve never understood why Chinese developers try to re-create carbon copies of Western cities and neighborhoods in China, which has existed as a distinct culture and entity since 2000 B.C. If expats wanted to live in a place that reminded them of home, then it would make sense, but this looks like cultural insecurity to me. Either that, or the builders are bored.
“I’ve never understood why Chinese developers try to re-create carbon copies of Western cities”
Equal parts stupidity and lack of imagination.
“Thames Town”, maybe two parts stupidity.
In the last 50 yrs, the Chinese are known for cheap reproductions, not innovation.
‘Dallas ranks among top 5 housing markets for buyer’s remorse’
‘But it could be worse. In Silicon Valley, the pace of home value appreciation is expected to drop by more than 10 percent, while Tampa’s on track to go down about 8 percent. The previously hot, hot, hot housing market of Denver, meanwhile, is forecast to take an 11-percent plunge in 2016.’
‘The last month in 2015 was active in North Myrtle Beach. The least expensive was a 1,100 sq ft, two bedroom/two bath condo at Possum Trot Road. The most expensive was a 2,300 sq ft, four bedroom, 4 ½ bath single family home in North Beach Plantation. It was a buyer’s market with these properties selling, on the average, for 4% less than the list price.’
‘Reflecting the buyer’s market was a $89,000 discount a purchaser took on a 4 bedroom, 3 ½ bath, 3,600 square foot single family home that originally was listed for $509,000 but sold in December for $420,000.’
‘Looking for an investment, a second or primary home; then the last month in 2015 offered 1282 choices – from a bank-owned 1 bedroom, 1 bath condo in Cherry Grove listed for $33,300 to a $2.99 Million multi-family quad-plex in Crescent Beach. The average price, however, was more affordable at $249,500 and, reflecting the buyers’ market, 483 have been on the market for over 318 day and 830 for 218 days.’
‘If ocean view is your thing, you have 165 choices. $65,000 will get you an efficiency that is in an ocean front building and if you look hard you can see the beach from a semi-interior balcony. A second row town house with an ocean view in Cherry Grove with two bedrooms and 1 and ½ baths is an affordable $139,900, while a similar condo in Prince Resort is only a few dollars more at $143,900. Across the street in Prince Resort II, a two bed/two bath unit goes for $174,900 which the agent says had a gross rental income in 2014 of $25,909. Not bad for a return on investment! And remember all the tax breaks and, it’s yours when its not being rented.’
Glad I never bought a vacation home. Talk about a headache.
Depends on how much you paid for it…. “vacation” or otherwise.
Buy a timeshare instead. Use lots and lots of leverage. Get in now before interest rates move up.
Do it today!
It all depends upon your lifestyle. I know a lot of people that have vacation homes and use them regularly. And with the vacation rental websites and property managers, you can actually make quite a good income off of one.
And they’re all underwater and neck deep in debt on rapidly depreciating houses from which they’ll never recover.
Nonsense. Some of them cash-flow very nicely.
Doubtful my friend. Especially at any price in the last 15 years.
“2016: Oil Limits & The End Of The Debt Supercycle”
http://www.zerohedge.com/news/2016-01-07/2016-oil-limits-end-debt-supercycle
Grossly inflated housing prices and massive excess, empty and defaulted housing inventory are symptoms of the Debt SuperCycle that is now dying resulting in collapsing housing demand and falling housing prices.
Where you suckered into the Debt SuperCycle?
Are today’s activist central banks out of ammo?
BREAKING: Expectations rise for Fed rate hikes after strong jobs report
Mohamed El-Erian: THIS dwarfs worries about China
Matthew J. Belvedere
11 Mins Ago
CNBC.com
Central banks can no longer control volatility: El-Erian
The nosedive in the Chinese stock market and the slowdown in the world’s second-largest economy will certainly be front and center for global investors in the near term, but there’s a more important shift underway, economist Mohamed El-Erian said Friday.
The bigger issue for financial markets is that central banks are running out of ammo, the Allianz chief economic adviser told CNBC. “Markets are realizing that central banks can no longer repress financial volatility. And they are repricing to new volatility paradigm,” he said in a “Squawk Box” interview.
To that end, any shocks to the markets will take longer to reverse themselves, said El-Erian, former Pimco co-CEO. “What we’re going to see is every time something happens in the world it’s going to take longer to restore stability. That’s what we’re seeing with China today.
…
Could El-Erian’s thesis explain why risk asset investors all around the planet have experienced such a miserable 2016 so far?
“‘… given that central bank policies have been encouraged and been wholly responsible for the current protracted bout of gross capital misallocation,’…”
Don’t evil twins Fannie Mae and Freddie Mac get at least a little credit for the massive misallocation of capital into U.S. luxury housing?
Morning Boyz and Girlz:
In re:
“Drive through the neighborhoods of Ohio. You will observe thousands of vacant homes devoid of a generation of aspiring young homeowners. All across America, this story repeats itself. Millions of habitable homes sit unoccupied. Last year, more than 57,000 homes sat vacant in my congressional district alone. Just in October 2015, there were more than 5,300 homes in my home state of Ohio that remained on the market for nine months or longer. Those homes have a combined value of $1.9 billion. These under-invested assets represent a vast, untapped source of wealth creation for families and our nation.”
Comment - Having driven through many parts of OH as my kids went to school there - the entirety of the corridor from Toledo down the 75 to Cincinnati is worse than can be imagined.
Head to a town called Middeltown, OH - there you will find a town in utter decline - steel factory - once the mainstay of the town is shuttered and the condition of housing, infrastructure, stores, businesses etc. - just downright third world by any standard. It is a hole filled with depression and sadness the likes of which is way to much to describe here.
The reason many of those homes have been on the market for 9 months or longer is one simple reason - they can’t be inhabited by any sensible person - rather they need to be bulldozed and the lots cleared.
Head through many parts of IN, KY etc. you will in more rural areas see exactly the same thing. And don’t get me started re: the preponderance of meth lab houses in these rural hollers. Driving through some of these areas that would be the only source of income.
DeKalb County home sales plummet in November
Ben - you are correct - Illinois is well on the way to being OH.
Suggest that maybe you take a look at the I-75 corridor on one of your tours - esp. Finley to Middletown link - utter depression there.
I’ve driven that part of the highway, albeit two decades ago. I thought the area around Dayton was the most discouraging. And rural Indiana is an interesting drive. Some of those towns have only three buildings of any substance: city hall, the church, and the high school basketball arena. I was in French Lick, and unsuccessfully tried to find Larry Bird’s childhood home. I found out later that the locals won’t tell anyone where it is.
I lived in north-central IN (Kokomo) for a couple of years during college and took lots of weekend trips around that part of the country. Compared to where I grew up out west, I was amazed by the small counties - in a 60-mile drive you could easily pass through four counties, each with a county courthouse, county sheriff, county assessor, county morgue, county health department, judges, etc. Soooo much government to have to pay for.
When I got my meager paycheck (as a college co-op student), they had taken out city income taxes, county income taxes, and then state income taxes (none of which I had ever seen in my home state).
With the declining populations in these rural areas, how in the world are all of those tiny county and city governments in any way sustainable? I can’t see it.
Just like in Detroit. Sure they are coming out of bankruptcy, but there is no way, no possible way, that they will ever have enough continuing income as a city in order to come close to maintaining the infrastructure inside of their existing city limits. They are going to have to shrink the city boundaries if they are to survive.
We are literally watching the de-evolution of our country in many ways, and it is a very sad slow-motion train wreck to see. Now if you already live in a prosperous big city near the coasts, what do you care? It’s progress, right? Part of our Jetsonian future, where robots do all of our work for us and everybody lives in hi-rises and flies around in autonomous dronecopters.
Happy Friday!
Population is declining in every state in the country.
If you’re on one of the coasts, or any area with concentrated wealth, it’s a whole different country. I frankly don’t know how any small Midwestern town without a university or state capitol is surviving.
My son enjoys the movie “Wall-E,” where part of the film reveals that humans have decamped a polluted Earth and relocated to a gigantic spaceship where robots indeed do everything. As a consequence everyone is grotesquely obese, floating around on giant moving chaise lounges sipping 60-ounce sodas and being passively entertained. There’s a line between labor-saving convenience and the feeling of achievement when you do something yourself, and we crossed it awhile back.
Must be gettin bad in the Dallas housing market - don’t let the tag line here dissuade you from reading the whole story - Realtors are liars and now drug runners.
http://www.housingwire.com/articles/35974-dallas-real-estate-agent-helps-take-down-mexican-drug-cartel
Robert Shiller: “Don’t Invest In Housing. Housing Depreciates.”
http://www.pragcap.com/robert-shiller-dont-invest-in-housing/
‘A former citizen of China who works in a Vancouver import-export business predicted China’s early-2016 yuan devaluation to a Province reporter. The man, who did not want to be named, said he has done import deals with one of the big-name B.C. suspects on China’s Operation SkyNet anti-corruption list. The Vancouver importer said the feeling in his line of work is that the flow of big money from China to Vancouver has already occurred, and the stream will slow in 2016.’
They took this article down. It also said something about President Xi and a sex scandal. Update; I just found a copy-
http://www.pressreader.com/canada/the-province/20160108/281517930107700/TextView
Suggested weekend topic:
What is the “dry cleaner effect” and how does it operate?
It’s Ben’s analogy, so he can probably provide the best explanation. However, my take on it is that it is all about how fear, greed, and interest rates drive business cycles.
Let’s start with a good economy.
Economy is good, there is overall net profit in the local dry cleaner businesses.
People start new dry cleaners, some of whom borrow money to do so. They add supply to the market and are very optimistic. Hell, business is good!
The over-optimism drives too much more supply in the market even with higher interest rates, they drive down the local prices. Profits for all dry cleaners suffer. Some dry cleaners fail because of debt loads, poor management, high cost (since they are inexperienced and entered relatively late into the market).
Dry cleaners fail. Jobs are lost, optimism turns to pessimism. People start ironing shirts at home. The dry cleaner business sucks.
The best operators with lowest costs and best business skills survive. Interest rates fall to cushion the blow. Eventually, things stop getting worse, and a few people decide to start a dry cleaner business again, because, well geez, the cost of debt is cheap, which dramatically lowers their cost of starting up the operation–and things have stopped getting worse.
These are the true contrarians, and IMHO, might have an ability to survive if they can model their business to work in a market trough.
They start the business, and hire some folks. Unemployment falls, people start feeling better and pessimism turns to optimism. People stop ironing their own shirts, business for the dry cleaners is looking up, which attracts even more dry cleaners. The dry cleaners do well until too much supply is added to the market relative to the demand.
Rinse, repeat.
Overly optimistic attitudes kill a growing economy. Overly pessimistic attitudes form a business cycle bottom.
Reminds me of “The Economic Machine” on YouTube by Ray Dalio…I think I’ll watch it again.
If the dry cleaning infrastructure is in place, which would make the business a turn-key situation, then the lure could be irrestable to those who have deep pockets and stars in their eyes.
I’ve seen this in action, not with a dry cleaning business but with a pizza parlor. The pizza-parlor infrastructure was in place (ovens, refrigerators, furniture, etc) so all one had to do was more-or-less open the door, bring in some supplies (and some customers) and - presto! - you are in business!
But there was something wrong (and wrong and wrong) with the location or something because the pizza place would open, suck out somebody’s bank account, close up, open up again with new management (and a fresh bank account), suck out all the money from the bank account, etc … etc … etc.
I suspect another sort of business would make it in this location but another sort of business wouldn’t be given a shot because the infrastructure for any other business wasn’t in place, only the infrastructure for a pizza parlor was in place hence the easiest path for the opening of a business at this site is a pizza parlor, hence a pizza parlor is what repeatedly gets opened up (and closed down).
So as an anwer to the question “What is the “dry cleaner effect” and how does it operate?” I suspect the dry cleaner effect has a lot to do with ease of entry into a business.
If a business is easy to get into compared to other businesses then you will end up with a lot of businesses that are easy to get into, which means you will be up with a lot of the same types of businesses. If the ease of entry is due to some left-in-place infracture due to somebody else’s failure then the entry into the business will be easy. PLUS if there is some outsider - say a lender - who has a stake in the business having another go because the lender just may have some money tied up in the currently idled infrastructure then the ease of entry may REALLY be made easy, made easy financing wise.
The irony is that we have all been “taken to the dry cleaners”. House debtors to the extreme, but even modest renters during this age of credit expansion.
Renters getting “taken to the dry cleaners” is the precursor to home debtors getting taken.
Bellevue, WA Housing Prices Crater 6% YoY As Housing Inventory Skyrockets
http://www.zillow.com/bellevue-wa-98006/home-values/