Tuesday, August 21, 2012

Today's links

1--Volatility's Great Moderation, IFR

2--Where has the retail investor gone, Wa Post   3--Still Looking for a Housing Bottom, Michael Olenick, naked capitalism "Must read"

4--Top Marginal tax rates: 1916-2011, chart, naked capitalism

5--South American bloc adopts resolution on UK threats to Ecuador, RT
6--Consumer Debt and the Economic Recovery, FRBSF

A key ingredient of an economic recovery is a pickup in household spending supported by increased consumer debt. As the current economic recovery has struggled to take hold, household debt levels have grown little. Some evidence indicates that households adjusted debt in line with house price movements in their local markets. However, the data show that consumer debt cutbacks were largest among households that defaulted on mortgages or had lower credit scores, suggesting that household borrowing also was restricted by tight aggregate credit supply.


Consumer debt fell substantially during the recent recession and recovery. The extent of deleveraging in consumer nonmortgage debt differs by households in different markets in a way that is consistent with the idea that highly indebted households seek to reduce debt loads when house prices fall substantially. However, the most important differences do not appear to depend on geography, that is, differences in past house price appreciation. Rather they appear to depend on the type of borrower. Within a county, borrowers who defaulted on mortgages tended to experience much larger reductions in nonmortgage debt than borrowers who stayed current on mortgages. Borrowers with low credit scores experienced larger reductions in nonmortgage debt than borrowers with high credit scores. These results suggest that tighter credit conditions also are probably restricting the flow of credit to consumers. Moreover, these changes in credit supply appear to be working at an aggregate rather than a regional level (see Williams 2012). The early signs of recovery in the housing market are certainly welcome. But this analysis suggests that households are still facing credit supply headwinds.

7--Epic Stock Rally Finding Few Fans, WSJ

8--Globalization and the Income Slowdown, NY Times

9--Corporate Earnings & Revenues Destined to Disappoint in Q3 & Q4, Trimtabs

Many bullish Wall Street analysts seem to be expecting decent second half earnings and revenue growth for the stock market as whole and that is their justification for current stock prices. I say there is no way earnings per share and revenues will grow in aggregate over the second half of this year. I do not include financial stocks in this accounting. That’s because big bank stocks’ earnings per share are based upon the same myth that the current stock market valuation is based upon, and that is the Bernanke Put. The Bernanke put says the Fed will print enough money to buy existing loans, and then everyone lives happily ever after.

The reason earnings growth has to disappoint is apparent to me when I step back and look at our chart tracking wage and salary growth rate compared with the stock market for the past eight years....the three month moving average of wage and salary growth on our blog chart was negative for all of 2009 and turned positive in early 2010. At same time, stock prices soared starting in March 2009, ultimately peaking at just about double the March 2009 lows. As a result of the market boom and plunging interest rates, companies were able to sell lots of new shares as well as bonds and in the process added record cash to their balance sheets

 in 2011 wage and salary growth had dropped from 6% at the April peak, to below 4% in October and then to under 3.3% by January 2012. Since then January wage and salary growth has trended lower. Currently wage and salary growth is hovering over 3% year over year. What is even worse that 3% is before inflation. My guess is that real inflation now that oil prices are surging is at least 3%. That means that after inflation there is no growth in final demand. So with no increase in demand, where will earnings growth come from?
10--Are Stocks Climbing A Wall Of Worry?, Big Picture
11--China's housing market heats up again, sober look
12--Ex-Morgan Stanley Analyst Forms Firm to Buy Rental Homes, Businessweek

13--Foreclosures Draw Private Equity as U.S. Sells Homes, Bloomberg

The Federal Housing Finance Agency, which oversees Fannie Mae (FNMA) and Freddie Mac, plans to complete initial transactions in the first quarter of this year, offering some of the 180,000 foreclosed homes in their inventory to private operators as rental properties, Corinne Russell, a spokeswoman, said in a telephone interview.

Public-Private Partnerships

The Federal Housing Administration, which also will participate in the rental program, had 32,170 real-estate owned homes seized from borrowers, also known as REOs, as of Dec. 31, according to spokesman Lemar Wooley.

Possible aspects of the program include public-private partnerships to share the risk and profits, “seller financing” guaranteed by the government and rent-to-own opportunities for tenants, according to a November memo. ...

1 Trillion Liquidations

About 7.5 million homes with a current market value of $1 trillion will be liquidated through foreclosures or other distressed sales by 2016, according to an Oct. 27 report by Chang. That will add to the estimated 20 million single-family homes already operated as rentals, which have yielded annual returns averaging 8.1 percent since 1990, Chang’s report said.

Rentals can produce cash flows, known as a capitalization rate or cap rate, that reduce losses more than reselling foreclosed homes at a time of weak demand, the Federal Reserve report said.

“Preliminary estimates suggest that about two-fifths of Fannie Mae’s REO inventory would have a cap rate above 8 percent -- sufficiently high to indicate renting the property might deliver a better loss recovery than selling the property,” the Fed paper said....

GTIS, which has $2 billion of assets, expects to hold its homes about five years, waiting for housing prices to recover before selling, Shapiro said. If housing prices don’t rebound, GTIS can exit by forming a real estate investment trust with shares sold to investors attracted by the rental income, similar to REITS for multifamily, industrial or office properties, he said.

“Single family dwarfs any of those asset classes,” Shapiro said. “When you think about the number of homes that are going to be rented and institutionally owned, they’re going to become its own asset class.”

14--Fannie Mae Partners Seek Bulk Buys in Cities Headed for Recovery, businessweek

Given the mixed-quality portfolios that the agencies currently hold, an important feature will be for the government to provide the joint ventures access to reasonable but conservative leverage,” he said. “Investors will be able to offer higher upfront prices for the homes if attractive financing is available, which in turn will act as a stabilizer for the market as a whole.”...

Fannie Mae had 122,616 real estate owned homes, or REOs, as of Sept. 30. A minority of the properties will be offered in bulk to investors, while most will go to buyers who will live in them, said Andrew Wilson, a spokesman for agency.

15--Why Homeownership Is Stalling Even As Home Sales Improve, US News

An influx of investors buying up properties actually drives down the homeownership rate, because the homeownership rate is calculated by dividing the number of households that are owner-occupied by the total number of occupied households. Investors generally purchase a property, but then rent to another household, which doesn't make them owner-occupiers. That reduces the "owner-occupiers" in the equation, which ultimately means the homeownership rate takes a hit.

The latest estimates from the National Association of Realtors showed that investors accounted for about 19 percent of home purchases in June, up from 17 percent in May, but housing experts and industry observers believe that number could shoot higher as government foreclosure-to-rental programs take off.

Overall, most experts expect the homeownership rate to continue to fall in coming years—down to 64 percent according to some estimates—as the fallout of the foreclosure crisis continues to work through the system and rental demand remains elevated.

16--Mortgage woes rise, loan safe

Nationwide, delinquencies increased from 6.9 percent to 7.3 percent over the same period.

“Perhaps more important than the small size of the increase, however, is the fact that it reversed the trend of fairly steady drops in delinquencies we have seen over the last year,” said Jay Brinkmann, the Washington, D.C.-based association’s chief economist.

“This is consistent with the slowdown in the economy during the first half of the year and our stubbornly high unemployment rate,” he said.

17--Mortgage Delinquencies in U.S. Rise for First Time in Year, SF Gate



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