Tuesday, February 5, 2013

Today's links

1---Subprime ABS Securitizations Are Back As Absolute Worst Of The Credit Bubble Returns, zero hedge

The $604 million issue from consumer lender Springleaf Financial, the former American General Finance, will bundle together about $662 million of loans secured by assets such as cars, boats, furniture and jewelry into ABS, according to a term sheet. Some loans have no collateral....
The 190,627 loans in the Springleaf deal have an average FICO credit score of 602, in line with many subprime auto ABS. But the average coupon of 25% on Springleaf's personal loans is above that on even "deep subprime" auto loans, probably because there is no collateral for 10% of the issue, an analyst said...
By some measures, the quality of personal loans is similar to those subprime auto loans that have been drawing increased concern from investors. Demand for ABS and competition from new, private equity-backed lenders are causing standards to ease from the tight conditions that followed the financial crisis
2----Jack Lew; Union Buster, Salon

3---Definition of 'Bubble, investopedia'
1. An economic cycle characterized by rapid expansion followed by a contraction.

2. A surge in equity prices, often more than warranted by the fundamentals and usually in a particular sector, followed by a drastic drop in prices as a massive selloff occurs.

3. A theory that security prices rise above their true value and will continue to do so until prices go into freefall and the bubble bursts.

4---No, there probably isn’t a bond bubble, WA Post

The simplest reason to be skeptical of the bond bubble story? A bubble means that people are buying an asset at ever-rising prices for speculative reasons, not for the fundamental value of the asset but because they are assuming somebody else will buy it at a higher price. I see no evidence of this behavior by buyers of Treasury bonds. ...

The economists at the Fed and most private forecasting firms believe that as long as there is so much slack in the economy — unemployed workers, idle factories, empty office buildings — inflation isn’t much of a risk. But if they’re wrong, prices could indeed start jumping, and the value of bonds would fall. And note that this also connects to the path of short-term rates; a world in which inflation suddenly spikes to 5 percent is also a world in which the Fed is hiking short-term interest rates more than it expects to do now

5---Out of Sync’ Housing Market in Norway Prompts FSA Warning, Bloomberg

Near record-low interest rates in the world’s fourth-richest nation per capita, falling unemployment and wage growth have pushed private debt levels to an all-time high in Norway. Western Europe’s largest petroleum exporter has withstood the euro area’s debt crisis thanks to its oil wealth, helping realhome prices surge almost 30 percent since 2008. Property values, adjusted for inflation, have almost doubled in the past decade.
“Even if a major housing collapse is not yet inevitable we believe that it should be a matter of great urgency for the Norwegian authorities to seek to cool their housing market soon, to reduce risks that the housing market becomes even more overextended,” said Tina Mortensen, a London-based analyst at Citigroup Inc., said today in a note to clients...

House prices rose an annual 8.5 percent in January, while private debt levels will grow to more than 200 percent of disposable incomes in 2013, according to central bank estimates.
6---Will the reflating housing bubble also burst?, ochousing

Many have named a U.S. housing recovery as a bright spot in a so-called broader domestic economic recovery.

And data seems to support this analysis, despite a slowdown in sales momentum at the end of the year. Existing home sales in December were up 12.8% from the same time in 2011, with the total number of sales in 2012 rising to the highest level in five years, according to the National Association of Realtors. Meanwhile, the annual price for existing homes also jumped to the highest level since 2005, with the median price of a home up 11.5% in December from the same period in 2011.
But David Stockman, former director of the Office of Management and Budget in the Reagan Administration sees little to get excited about.

He tells The Daily Ticker, “I would say we have a housing bubble…again.”
Stockman argues a combination of artificially low interest rates and speculation are to blame, not unlike the last boom and bust cycle in real estate.

We don’t have a real organic sustainable recovery because in a world of medicated money by the central bank, things aren’t what they appear to be,” Stockman argues...

“It’s happening in the most speculative sub-prime markets, where massive amounts of ‘fast money’ is rolling in to buy, to rent, on a speculative basis for a quick trade,” he contends. “And as soon as they conclude prices have moved enough, they’ll be gone as fast as they came.”...

By ‘fast money’, Stockman is referring to professional investors like hedge funds and private equity firms. To his point, global investment firm Blackstone (BX) has spent more that $2.5 billion on 16,000 homes to manage as rentals, according to Bloomberg. It’s now the country’s largest investor in single-family homes to manage as rentals, with properties in nine markets. And Blackstone is joined by others like Colony Capital LLC and Two Harbors Investment Corp. (SBY) in trying to turn this market into a new institutional asset class, Bloomberg reports.
That’s a lot of future liquidations….
Stockman argues the problem in housing is the two forces needed for a recovery, first-time buyers and trade-up buyers, are missing.
7--Hire Irving Fisher, VOX
“…in the great booms and depressions, each of the above named factors (over production, underconsumption, over capacity, price dislocation, over confidence, over investment, over saving etc.) has played a subordinate role as compared with two dominant factors, namely, over indebtedness to start with and deflation following soon after;… where any of the other factors do become conspicuous, they are often merely effects or symptoms of these two.” (Irving Fisher, 1933, p. 341)
Economists read the literature about the Great Depression with deep intellectual curiosity and savour in particular the still ongoing debate about its causes and remedies. Keynesians argue that price and wage rigidities and a failure of aggregate demand were the main culprits for the biggest economic catastrophe recorded in modern history. Monetarists posit that the main culprit was a terrible mistake on the part of the monetary authority, because it allowed the supply of money to contract. The new generation of Neoclassical economists argue that serious policy mistakes on the “real side” of the economy, such as the deployment of major trade barriers, turned a cyclical downturn into the Great Depression, and that issues of price rigidities, demand failures, credit, or monetary policy are at best of second-order importance.
In a seminal 1933 article, Mr. Irving Fisher offered a very different and innovative view. He focused on the meltdown of financial markets, the devastating effects of a downward spiral connecting the deflation of assets and goods prices, the process of deleveraging by households and firms, and contraction of economic activity.
Until about eighteen months ago, this was just one more of many unsettled economic questions that academic economists love to dwell on, largely because we don’t have a lot of data on Great Depressions to test our theories and because intellectual arrogance prevented us from taking seriously 1990s meltdowns in emerging markets and the Nordic countries as harbingers of what could happen to the US. Today, as we go through the catastrophic process of Fisher’s debt-deflation mechanism, there is no doubt that Fisher was right and the rest are just stories. If anything, we are left wishing prices were rigid!
But declaring a winner in the Great Depression debate is unimportant. The critical issue is to use the diagnosis that Fisher offered in his article – and what we have learned about debt deflations since then – to guide policy making. In this climate of hiring gurus for an ever-growing number of “top” economist posts in the US government, I would be very happy if we could just hire Irving Fisher! 
Whether Japan’s debt is “excessive” can be debated, but it certainly does not have an excessive interest burden. Its interest burden is currently around 1.0 percent of GDP. It would be even lower if the interest paid to the central bank, and refunded to Japan’s treasury, were subtracted.

This low burden is possible because the interest rate on Japan’s debt is extremely low, with short-term debt getting near zero interest and long-term interest rates hovering near 1.0 percent. Samuelson wrongly imagines that the government would face a disaster if interest rates rose. In fact, it would be able to buy up its long-term debt at huge discounts and quickly reduce its debt to GDP ratio
(Bond prices move inversely to interest rates, so if interest rates on 10-year treasury bonds rose to 3 percent, Japan’s central bank could buy them back for around half of their current price. There would be no real reason to do this, but it would placate the sort of ignorant people who tend to dominate economic policy debates and get obsessed about debt to GDP ratios.)

It is undoubtedly true that Japan, like all countries, has serious structural problems. The real issue is whether these would be more easily addressed in an economy that is growing at a healthy pace or whether structural reform is somehow advanced by stagnation and high unemployment. The latter view has been tested extensively in the last five years throughout the euro zone, the U.K., and perhaps now in the United States. Thus far it has been shown wrong everywhere.

9---Deficit Already Way Down, smirking chimp

The deficit is already shrinking dramatically as a percentage of GDP. The deficit is already down 25% since Bush’s 2009 budget in relation to the economy. The deficit is already falling faster than at any time since after World War II.
We don’t even have a debt crisis. We have a jobs crisis. But the threats and hostage-taking are about cutting government — the things We, the People do to make our lives better.  

10---The Causes of a Housing Market Bubble, investopedia

The price of housing, like the price of any good or service in a free market, is driven by supply and demand. When demand increases and/or supply decreases, prices go up. In the absence of a natural disaster that might decrease the supply of housing, prices rise because demand trends outpace current supply trends. Just as important is that the supply of housing is slow to react to increases in demand because it takes a long time to build a house, and in highly developed areas there simply isn't any more land to build on. So, if there is a sudden or prolonged increase in demand, prices are sure to rise. (To learn more about supply and demand, see Economics Basics and Stock Basics: What Causes Stock Prices To Change.  

11---US control is diminishing, but it still thinks it owns the world, Noam Chomsky, Guardian

The United States has long assumed the right to use violence to achieve its aims, but it is now less able to implement its policies
Australian homebuilders are resorting to discounts, gift cards and help with mortgage payments to lure reticent buyers.
Stockland (SGP), Australia’s biggest residential developer, is giving rebates and gift cards of as much as A$30,000 ($31,300) in Victoria, Queensland and New South Wales states. Devine Ltd. (DVN) is matching deposits in South Australia and taking over mortgage payments for as long as a year in Melbourne. Peet Ltd. (PPC) has been offering discounts of as much as A$50,000 in Western Australia, Queensland and Victoria

The discounts this time ’round are bigger than we’ve seen before because the response we’ve seen to rate cuts has been far more muted,” said Stuart Cartledge, managing director of Melbourne-based Phoenix Portfolios, part-owned by Cromwell Property Group. (CMW) “Affordability based on mortgage costs has improved, but people are worried about losing their jobs. House buyer confidence isn’t there.”

Negative Surprises

Developers, including Stockland and Peet, have said they’re facing the worst housing market conditions in 20 years and expect little change in 2013. Stockland, Mirvac Group (MGR) and Australand Property Group (ALZ) may report “negative earnings surprises” in the fiscal year ending in June, John Kim, Sydney- based head of Australian property research at CLSA Asia-Pacific Markets, said in a report Jan. 29. Kim expects Stockland’s shares to underperform peers, while he gives an outperform rating to Australand and Mirvac. Both benefit from non- residential revenue sources.
Sales of new homes fell to 5,875 in December, compared with 6,287 a year earlier, figures from the Housing Industry Association show. The number of loans to build or buy new homes fell to a seasonally adjusted 7,189 in November, from the previous high of 10,457 in October 2009, according to the Australian Bureau of Statistics.

13----Homes Sell in Two Weeks With Low Supply for Spring Buyers, Bloomberg

14----FHA to hike premiums on mortgages, CNN

Government-insured mortgages are about to get more expensive.
The Federal Housing Administration, which is the largest insurer of low-down payment mortgages, announced Wednesday that it will raise premiums by 10 basis points, or 0.1%, on most of the new mortgages it insures.
A borrower opting for a 30-year, fixed-rate mortgage who puts 5% or more down will now pay an annual insurance premium of 1.3% of their outstanding balance. And s
 There’s ampleevidence that securitization led mortgage lenders to take more risk, thereby contributing to a large increase in mortgage delinquencies during the financial crisis. In this post, I discuss evidence from a recent researchstudy I undertook with Vitaly Bord suggesting that securitization also led to riskier corporate lending. We show that during the boom years of securitization, corporate loans that banks securitized at loan origination underperformed similar, unsecuritized loans originated by the same banks. Additionally, we report evidence suggesting that the performance gap reflects looser underwriting standards applied by banks to loans they securitize. ...
Our evidence that securitization led to riskier corporate lending is in line with similar findings unveiled by studies of the effects of securitization on mortgage lending. Taken together, these studies confirm an important downside of securitization.omeone who puts less than 5% down will pay a premium of 1.35%.

15---Irving Fisher--Debt-deflation--wikipedia

Following the stock market crash of 1929, and in light of the ensuing Great Depression, Fisher developed a theory of economic crises called debt-deflation, which attributed the crises to the bursting of a credit bubble. According to Fisher, the bursting of the credit bubble unleashes a series of effects that have serious negative impact on the real economy:
  1. Debt liquidation and distress selling.
  2. Contraction of the money supply as bank loans are paid off.
  3. A fall in the level of asset prices.
  4. A still greater fall in the net worth of businesses, precipitating bankruptcies.
  5. A fall in profits.
  6. A reduction in output, in trade and in employment.
  7. Pessimism and loss of confidence.
  8. Hoarding of money.
  9. A fall in nominal interest rates and a rise in deflation-adjusted interest rates.
This theory was largely ignored in favor of Keynesian economics, in part because of the damage to Fisher's reputation caused by his public optimism about the stock market, just prior to the crash. Debt-deflation has experienced a revival of mainstream interest since the 1980s, and particularly with the Late-2000s recession. Steve Keen's Debt-Reset Theory predicted the 2008 recession by incorporating some of Fisher's work on debt deflation. Debt deflation is now the major theory with which Fisher's name is associated.

16---Reflections on the Current Belief That Housing Will Come Roaring Back, naked capitalism

17--Shiller Says Housing Still Is ‘Somewhat Risky Investment’, WSJ

That is the one-word answer given by Yale University professor and noted housing and markets expert Robert J. Shiller when asked to describe the current state of the U.S. housing market.
“It’s going up in the short run. What it will do in the longer run is hard to say. Maybe it will go down,” Mr. Shiller said in an interview on the sidelines of the World Economic Forum annual meeting in Davos, Switzerland.

Housing is still a “somewhat risky investment,” said Mr. Shiller.

Asked if his view is more pessimistic than others who see housing prices and sales rebounding after a late-2000s collapse that ignited the financial crisis, Mr. Shiller responded that those who study housing closely don’t have extremely rosy views.

“Experts do not seem to think, any of them, that we are going back to the same boom,” he said. There might be “cheap talk” that housing is “off to the races again,” but people “who think about it seriously doubt it,” Mr. Shiller said.

The Yale professor said U.S. housing is morphing into two distinct markets, with more activity in so-called multifamily housing (apartment buildings) than in single-family homes. Rentals are increasing, he said, as a result of lifestyle changes and the still-tough standards for prospective home buyers to get mortgage loans.

We will still have the model of single-family, mainly suburban homes (“that is kind of an American anomaly”), but it won’t be as big a factor in the future, Mr. Shiller predicted

18---Gloomy mood on Syria at Munich Security Conference, Business Recorder

19---Much of last year's gains in existing home sales was driven by investor demand for foreclosures and other distressed properties. Millions of dollars, largely in cash, from private equity, flowed into the market, pushing supplies down dramatically and even causing bidding wars in some of the previously hardest hit markets. That pushed prices up in the double-digit range, but critics caution that this is not a real organic recovery in the overall market. These existing sales numbers as well as a disappointing read last week on sales of newly built homes are bolstering that warning.
20--14 Reasons to Rise Up - For Jobs, and Against More Spending Cuts, smirking chimp

21---Its different here, greater fool

Meanwhile in mouldy Vancouver, fear and loathing reign. Prices are falling and, as a result, sales are imploding. It so not cool buying a house when nobody else wants it, either. In case you missed it, last night the real estate board used the cover of darkness to announce January sales tumbled 14.3% from the same period a year earlier, making it the second-worst showing in 12 years. Detached home sales fall 18% and the sales-to-listings ratio overall is an embarrassing 10%.

Prices are also plopping. Even the local board’s hopped-up Frankenumber is down 6%, while detached homes are off by double digits. Sales are now 19% below the ten-year average. And listings have slipped a little from December, but remain above year-ago levels. Says the head realtor: “When a home seller isn’t receiving the kind of offers they want, there comes a point when they decide to either lower the price or remove the home from the market. Right now, it seems many home sellers are opting for the latter.”

Big mistake. After all, the average detached house still sells for about $1.1 million in a city of a mere 2.1 million people where families earn an average of $83,300. And it was human emotion – a surfeit of greed, laced with the fear of ‘buy now or buy never’ – that created what is absolutely, undeniably, irrefutably, a mama of a gasbag.

22----The sting, greater fool

And the real estate recoil has just begun. The newest numbers from Toronto’s forest of condo towers are just dreadful.
  • In the last three months of 2012 sales of new units crashed 47%, from the same period a year earlier.
  • There are now 18,366 brand new, never-lived-in, unsold condos for sale.
  • At the same time, 207 new projects containing 56,866 more units are currently under construction.
Supply is overwhelming demand, sales are falling off a cliff and inventory is stockpiling. How is this not a formula for lower prices in the months ahead?
In fact, it’s already happening as thousands of formerly virginal, first-time sellers meet Mr. Market. A year ago there were 216,000 existing condos in the GTA and now there are 11,000 more. But sales are falling – by a significant 26%. That means more supply yet less demand, and prices are already cracking, down 3% in the last four months.


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