Friday, August 10, 2012

Weekend links

“The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks.” – Lord Acton

1--What will bring new for-sale inventory to the housing market?, OC Housing News

With the serious problems facing the housing market including high delinquency rates creating a massive shadow inventory, a weak economy, tepid demand from owner-occupants, excessive consumer debt, a depleted buyer pool due to credit impairment, and artificially low interest rates, it’s a wonder housing prices aren’t still heading straight down. The recent uptick in prices is largely due to a successful attempt by the lending cartel to restrict for-sale inventory on the MLS. Without this inventory restriction, prices would almost certainly be headed lower.

At some point, the shadow inventory of delinquent mortgage squatters will be cleared out. The liquidation will either lower prices or limit appreciation for a long time while these properties are processed. The big question is, when will this liquidation happen? Right now, the banks are in no hurry.

For lenders to be motivated to process their backlog of foreclosures, they need some reason to act. Ordinarily, the cost push of paying for capital would force them liquidate non-performing loans and put that money to productive uses. However, with the federal reserves zero interest rate program to steal from savers and the elderly, banks have no cost of capital. Banks can borrow all they want from depositors or the federal reserve for nothing.

Since the banks have little or no cost of capital, they can sit on their bad loans indefinitely — and they are. Right now, it’s in the best interest of the lending cartel to sit on their bad loans. The lack of inventory on the MLS is causing prices to go up — although it is simultaneously causing sales rates to plummet. Higher resale prices make for better capital recovery on the loans the banks do process. As long as they all agree to continue delaying their foreclosure processing, they all benefit from higher prices. Of course, this is still a cartel arrangement, and as prices rise, each member has a strong incentive to cheat, particularly the weakest members, but right now, the cartel is enjoying great success driving prices higher.

Until the federal reserve raises interest rates, lenders face no cost pressure to liquidate their bad loans. With no pressure to liquidate, lenders will continue to allow squatters free housing in hopes resale prices will continue to rise. So when will the federal reserve finally start to raise interest rates? Well, they said they will leave them at zero through the end of 2014, but it may leave rates along much longer. In fact, it is likely the federal reserve will leave interest rates near zero until house prices regain their peak, and with 3.5% interest rates, that will be much sooner than most think.

The federal reserve cannot raise interest rates as long as so many loanowners are so far underwater. The member banks of the federal reserve hold hundreds of billions of dollars in second mortgages and HELOCs on their books. If house prices don’t rise enough to put collateral value behind these mortgages, the resulting losses upon liquidation will bankrupt our banking system. This really leaves the federal reserve no choice by to push resale prices back up to peak levels as soon as possible by any means necessary

As rising home values bring properties above water, lenders will liquidate, but not before. With no cost push, they can afford to wait. And with the threat of bankruptcy looming if they liquidate too early, they must wait. Based on those circumstances, inventory will likely remain in the shadows for quite some time. Prices will go up, transaction volumes will be way down, and prices will not flatten out until they approach the peak where lenders will finally begin their liquidations.

I guess that makes me bullish. I now believe that perhaps the bottom callers were right. I wish one of them would have identified the reasons I gave above. Perhaps I may have been convinced months ago, but now, based on what I believe the federal reserve and the member banks are going to do, and why they are going to do it, I think we may be at the bottom. So much for the capitulatory liquidation regulators would ordinarily require....

In major metropolitan markets from the mid-Atlantic to the West Coast, the stock of homes listed for purchase is down by sometimes extraordinary amounts — 50 percent or more below year-ago levels in several areas of California, according to industry studies. In Washington, D.C., and its nearby suburbs, listings are down by 28 percent, reports Redfin, a national online realty brokerage. In Los Angeles, available inventory is 49 percent lower than it was last summer, San Diego by 53 percent. In Seattle, listings are off by 41 percent. According to the National Association of Realtors, total houses listed for sale across the country in June were 24 percent lower than a year earlier. The dearth of listings is often more intense in the lower- to mid-price ranges, less so in the upper brackets....

When prices rise above the outstanding loan balances on the properties, lenders will foreclose to get their money back

2--More Abandoned Children as Europe Austerity Wears On, CNBC

As the euro zone debt crisis deepens and austerity measures take their toll across Europe, the number of young children and babies abandoned across the region has increased, according to local charities
3--Is This the End of the Housing Bust? Not So Fast, Says Shiller, WSJ

The home-price rebound, if that’s what it is, doesn’t yet have momentum – which Shiller’s research has found is the most powerful driver of home prices.

Momentum is the tendency for prices to keep moving in the same direction. It exists, but is a relatively weak force, in the stock market. In the housing market, though, it’s proven to be a reliable predictor of where prices will go in the future.

That’s in part because of what Shiller calls “feedback loops.”

4--The downside of low rates, Dr Housing Bubble

I’m not the only one noticing the downside of low interest rates. The data shows that we are now pushing costs in other areas of the economy:...

So net US household interest income is pushing record lows. This is actual money coming out of the pockets of American consumers. One negative aspect being discussed is that this low rate delays retirement for many Americans. Inability to retire with smaller job selection might be a reason for the persistently high unemployment rate for younger Americans (a key future home buying group). Since many older Americans shift to fixed income products as they age, a low rate in effective slashes income (i.e., bonds, CDs, etc). I doubt many retirees are going to be flipping houses as a secondary source of income to Social Security although investments in real estate suggest a chasing of yield.

Nationwide housing prices do look to have reached a bottom and sales are up.  Yet this bottom is largely due to low interest rates allowing households with stagnant incomes to purchase more home (higher price) and the slow methodical leaking out of inventory from banks.  Yet is this really translating to a better overall economy

5--In a Twist, Both Home Prices and Rents Rise, CNBC

Home prices across the nation continued their upswing in June, according to a new report from CoreLogic. Including sales of foreclosures and short sales (selling for less than the value of the mortgage), prices rose 2.5 percent from a year ago. That is not quite as high as the annual increases seen in April and May. With the first half of the year now on the books, analysts are asking if prices can sustain.

"At the halfway point, 2012 is increasingly looking like the year that the residential housing market may have turned the corner," said Anand Nallathambi, president and CEO of CoreLogic. "While first-half gains have given way to second-half declines over the past three years, we see encouraging signs that modest price gains are supportable across the country in the second-half of 2012."

Home price gains will continue to be as much a factor of supply as they are of overall consumer confidence.

6--Bank-owned share of total home sales dips in Seattle by 14% in one year, Seattle Housing Bubble

(Is this a sign of manipulation or what?)
7--REOs Kept Off Market, Skew Recovery Numbers, nuwire investor

Real-estate owned property (REOs) are what banks and real estate experts refer to bank-owned properties that have been repossessed, and a new study shows that a shadow inventory of these properties is being kept off the market to keep home prices from crashes. New estimates published by AOL Real Estate indicate that as many as 90% of these homes are being quietly held as banks and investors wait for the market to improve because releasing them onto the market would destroy home prices and wreck their balance sheets. The problem is that lenders can hold the property on its books at its purchased price, but once it sells the home it is forced to note the loss, and too many of them would bankrupt many banks. For more on this continue reading the following article from TheStreet.   8--Twin Reports Stoke Cautious Optimism for Rebound in the Housing Market, NYT  
In the latest sign that the worst might be over for the battered American housing market, the two government-controlled mortgage finance giants, Fannie Mae and Freddie Mac, this week reported some of their best quarterly results since the real estate collapse.   On Wednesday, Fannie Mae posted second-quarter net income of $5.1 billion. That is up from $2.7 billion in the first quarter of this year and an improvement from a net loss of $2.9 billion in the second quarter of last year. Fannie requested no additional money from the Treasury and said it would pay a $2.9 billion dividend to taxpayers.

On Tuesday, its brother organization, Freddie Mac, announced second-quarter net income of $3 billion, up from $577 million in the first quarter and a net loss of $2.1 billion in the year-ago second quarter. It also requested no additional federal aid and said it would pay a $1.8 billion dividend to the federal government

9--More deterioration in Europe, Sober Look   Periphery nations are becoming increasingly financially isolated, not just from the Eurozone core but from each other. In particular cross-border financial transactions among banks are dwindling...   ECB: - As a further indicator of market segmentation, the Bank for International Settlements (BIS) first quarter data showed that cross-border claims of European banks on EU/IMF programme countries and on Spain and Italy have decreased significantly since 2008. Meanwhile, cross-border claims on Germany rose sharply, reflecting safe haven flows.

The goal of stronger Eurozone integration is becoming ever more elusive as trust among institutions of the various nations evaporates. And it's is not at all clear that a centralized banking regulatory system will help improve the situation.

10--BNP Paribas: Japan's fiscal problems could be reaching a "critical mass", sober look

11--Japan Growth May Slow to Half Previous Pace as Exports Wane, Bloomberg

12--Oil futures tumble on global demand worries, marketwatch

China backed fears its economy may be contracting at a quicker pace as it reported that the country’s trade surplus flattened out in July, while imports rose 4.7%, both falling short of expectations. The news took a dent out of global equities and other commodities as it increased worries about the outlook for the No. 2 global economy.

This followed on Thursday data that showed retail sales and deflation for producer prices, helping drive gains for markets, as it reinforced the view that officials in Beijing will be pushed to ease monetary policy further. European and Asian stocks fell Friday and Wall Street stood poised to follow suit, while the dollar rose as traders grew risk-averse on China growth concerns

13--Spain's downward spiral, Mish

Spain has already started on its downward spiral and there is almost nothing Rajoy or anyone else can do to prevent all parts of the economy – workers, small businesses, large businesses, creditors, depositors, and yes, policymakers – from acting each in their own way to increase the debt burden, increase economic uncertainty, make the balance sheet more fragile, and reduce growth.  These different economic agents by now are simply behaving rationally in response to declining credibility, and unless we expect from them a huge burst of irrational cheer, there is no reason to expect them to change their behavior

All of their actions, of course, reduce credibility further, and as credibility drops it simply reinforces the adverse behavior of all the rationally misbehaving economic agents.  This is the dreaded self-reinforcing loop typical of countries in the nightmare stage of a debt crisis.

We have seen this process many times before in the history of sovereign debt crises, and it is mind-numbingly mechanical.  No matter how well Rajoy implements fiscal austerity (assuming that this is indeed the right thing to do), no matter how many times policymakers plead with markets to give them time to implement reforms, no matter how often the government begs workers and businesses to have more confidence, at this point it is going to be incredibly difficult for Spain to escape from this cycle

The problem is arithmetic, not confidence


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