Friday, October 5, 2012

Weekend links

1--Everything you need to know about Canada's housing Bubble, National Post

Canada is seeing a sharp decline in home sales in many markets. In Greater Vancouver residential property sales were down 32.5% from a year ago, and 8.1% lower than the previous month.
Sales were also 41.6% lower than the 10-year average. This decline in demand has been attributed to the the government’s decision to end the availability of a 30-year amortization on government-insured mortgages.
Meanwhile, the latest data from the Canadian Real Estate Association (CREA) shows that national home sales were down 5.8 percent in August, from the previous month, and down 8.9% from a year ago....
Boom in subprime
Canada’s sub-prime mortgage industry is growing and there are $500-billion in high-risk mortgages in the Canadian housing market. That is nearly 50% of the market.
Moreover, the Canada Mortgage and Housing Corporation (CMHC) which insures all mortgages approved by banks, has a legal limit of $600-billion for mortgage insurance, and this limit has already been raised twice since the end of 2007.
“If these high risk mortgages run into problems, the Canadian taxpayers are the ones on the hook for the loss of investment on what could prove to be toxic assets. In addition to the CMHC, the government also insures 90% of the portfolios of Genworth MI Capital and Canada Guarantee. When taking these corporations into account, the Canadian people have over 1T in exposure to insured mortgages.”...
The use of Home Equity Lines of Credit (HELOCs) has been extremely controversial. While banks have backed away from sub-prime mortgages they have been defending HELOCs.
HELOCs have also contributed massively to household debt. And banks have been issuing HELOCs with a loan-to-value ratio as low as 80% i.e. issuing loans to someone who would need to borrow $80,000 for a home worth $100,000.
Regulators are taking a closer look at HELOC’s (remember these helped “inflate” the housing bubble in the U.S.) since they think banks are taking on too much debt....
In an effort to stave off a housing bust Canadian authorities have enacted different measures to cool the housing market.
Mortgage insurance regulation was tightened for the fourth time in July. The The Office of the Superintendent of Financial Institutions Canada (OSFI) also acted to tighten rules for banks that should help bring down home prices in coming quarters.
“The combination of market fatigue, stricter lending guidelines for insured mortgages and a deterioration in housing affordability is helping to put the brakes on housing activity.”
But the country needs increases in interest rates if it wants sustainable growth in the housing market.
Watch for fireworks
6--Monetary Mystification,  Joseph Stiglitz,  Project Syndicate
  Central banks on both sides of the Atlantic took extraordinary monetary-policy measures in September: the long awaited “QE3”..., and the European Central Bank’s announcement that it will purchase unlimited volumes of troubled eurozone members’ government bonds. Markets responded euphorically... Others, especially on the political right, worried that the latest monetary measures would fuel future inflation...
In fact, both the critics’ fears and the optimists’ euphoria are unwarranted..., the stimulus that is needed – on both sides of the Atlantic – is a fiscal stimulus. Monetary policy has proven ineffective, and more of it is unlikely to return the economy to sustainable growth. ...
Of course, marginal effects cannot be ruled out: small changes in long-term interest rates from QE3 may lead to a little more investment; some of the rich will take advantage of temporarily higher stock prices to consume more; and a few homeowners will be able to refinance their mortgages, with lower payments allowing them to boost consumption as well. ...
For both Europe and America, the danger now is that politicians and markets believe that monetary policy can revive the economy. Unfortunately, its main impact at this point is to distract attention from measures that would truly stimulate growth, including an expansionary fiscal policy and financial-sector reforms that boost lending.
7--What does Bloomberg know, that we don't know, Bloomberg

Venezuelan bonds are posting the biggest rally among major developing nations as investors bet that President Hugo Chavez’s tenure will end soon even if he wins the closest election he’s faced in 14 years. 

8--Despite Gains, Many Flee Stock Market, WSJ

Even as stock indexes have doubled in value since the market low in March 2009, investors have yanked a net $138 billion from mutual funds and exchange-traded funds that invest in U.S. stocks, according to the Investment Company Institute, a mutual-fund trade group. Investors over the same period put $1 trillion into bond funds, a traditionally lower yielding but safer investment.
It marks the first time since 1981 that investors have pulled money from U.S.-stock funds for more than a year at a time.
Crumbling confidence in stocks reflects a broader loss of trust in the stock market and in the idea that the prudent investor could expect a comfortable retirement and even a measure of wealth.

9--The Fed is cutting a tree with a hammer: Goldman projects $2trn of additional asset purchases through 2015, sober look
Given that the Fed's current expansionary policy is expected to have only a limited effect on US labor markets, the program may end up being in place for years. That's because slow growth will be met with additional asset purchases that become increasingly less effective over time. Here are some reasons for the program's ineffectiveness as applied to the current environment:

1. It is not clear what impact asset purchases will have on consumer confidence.
2. We've had extraordinarily low interest rates for quite some time now, yet improvements in job growth have been limited.
3. Lowering mortgage rates from 3.5% to 3% is not going to have a significant impact on home affordability or materially reduce consumers' interest expense (see this discussion).
4. Raising bank excess reserves is not going to accelerate credit expansion.
5. Fed's unemployment targets are unrealistic - it's going to be an exercise in "squeezing blood from a stone" (see discussion).
6. US real median household income has basically been unchanged since 1994. The Fed' program is unlikely to improve this metric and could actually impair incomes further by elevating inflation levels.
7. The market "euphoria" effect is fleeting.
10--Rental Market's Big Buyers--Private-Equity Giant Blackstone's $1 Billion Bet on Foreclosed Family Homes, WSJ
People involved in the market estimate that private-equity firms and other investors have raised $6 billion to $8 billion to invest in the sector, as they try to take advantage of prices that have fallen nationwide on average by more than a third. That could buy 40,000 to 80,000 properties, according to a recent report from Keefe Bruyette & Woods.
Of course, success is by no means assured for private-equity firms, especially given their high targets for investment returns in general and their lack of experience with this type of real estate. Used to buying office buildings, shopping centers and other big properties, they may struggle to find economies of scale in managing thousands of individual homes in neighborhoods that were hard-hit by foreclosures, but are showing signs of price stabilization.
Skeptics also have pointed out that bulk sales of repossessed homes are rarer and smaller than many investors had hoped. In many markets, firms are battling small investors at foreclosure auctions on courthouse steps, buying properties one by one, a tedious process. There also is little precedent for selling thousands of homes en masse, something the firms will need to do to cash out.

11--Freddie's Foreclosure Plan Hits Roadblock, WSJ


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