A report from Reuters. “U.S. home builder confidence rose for a third straight month in August to match its highest level ever as record-low interest rates spur buyer traffic, data showed. But even as home builder confidence surges, more homeowners affected by the crisis have stopped paying their mortgages, a separate report showed. The delinquency rate for residential mortgages rose to 8.2% in the second quarter, up nearly 4 percentage points from the first quarter and the largest quarterly increase on record, according to the Mortgage Bankers Association.”

“Loans backed by the Federal Housing Administration, a program used by many first-time buyers and those with lower incomes, saw their delinquency rate jump to almost 16% – the highest since the survey began more than four decades ago.”

The Olympian in Washington. “After World War II, the U.S. government subsidized home ownership by providing low-interest mortgages through the Federal Housing Administration. ‘The thing about those great FHA loans: because they kept the interest rates low, your mortgage payments were low enough that for many working-class families, it was cheaper to buy a house and pay a mortgage than it was to pay rent, and that is true today,’ said Savvina Chowdhury, a faculty member at The Evergreen State College who teaches feminist economics. ‘Housing is the primary way that American working-class families have been able to build their wealth.’”

The Sentinel Colorado. “Aurora still remains one of the strongest housing markets in the country. ‘I would love to say that it’s people flocking to Aurora, but it’s people flocking to Colorado and Aurora offers the most affordable housing,’ said John Mitchell, of the Aurora Association of Realtors.”

“Aurora lands on RealtyHop’s list of most affordable markets at no. 34, with the average home price at $410,000 and the median income at $58,000.”

The Wall Street Journal. “Homeowners across the country are rushing to refinance at record-low interest rates. Many are finding that lenders have reserved their best rates for buyers. The spread grew even bigger after Fannie Mae and Freddie Mac last week levied a new fee on lenders for most refinancings to shield themselves from potential losses. Michael Menatian, president at Sanborn Mortgage Corp., said a number of clients called him late last week to try to lock in low refinance rates because of the extra fee. Many ended up with rates that weren’t as low as they expected or decided to hold off for now, he said.”

“‘It’s punishing borrowers who could really use this in these difficult, challenging times,’ Mr. Menatian said of the refinancing fee.”

“One of his clients, Kate Fensterstock, a teacher in Rockville, Md., approached him about a cash-out refinancing earlier this month. The rate on offer was 2.625%, which would have allowed her to keep her monthly payment the same and take out cash for home renovations on the three-bedroom she shares with her husband and two teenage sons. Late last week, Mr. Polland informed her that, because of the refi fee, her rate would instead be 2.875%. She is planning to go through with the deal but will take out less cash.”

“‘We’re not going to be able to do all the things we want,’ Mrs. Fensterstock said. ‘It’s really frustrating.’”

The Australian Associated Press. “Builders are warning of a looming housing industry ‘bloodbath’ without billions more dollars in government grants. Master Builders Australia is predicting a 27 per cent plunge in home building activity and 17 per cent slump in commercial construction this financial year. The industry body fears thousands of businesses will soon go bust without significant government stimulus. ‘Our industry is facing a bloodbath, there is simply no other way to describe it,’ MBA chief executive Denita Wawn said.”

“Labor’s housing spokesman Jason Clare said the figures were proof the housing industry was about to go off a cliff. ‘Instead of putting a guard rail at the top of the cliff, the Morrison government has put a mattress at the bottom,’ Mr Clare said. ‘Unless the government takes action, the only thing a lot of tradies will be building in the next few months is a longer line outside Centrelink.’”

From Cameron Murray, a research fellow at the Henry Halloran Trust at Sydney University and Josh-Ryan Collins is Head of Finance and Macroeconomics at the Institute of Innovation and Public Purpose. “Real home prices across Australia have climbed 150 per cent since 2000, while real wages have climbed by less than a third. what we are seeing is something different — a growing divergence between rents and the price of housing as a financial asset that’s increasing much more quickly.”

“In a working paper published today by the University of Sydney and the University College London Institute for Innovation and Public Purpose, we argue ‘rentierisation’ best describes the increasing use of housing to extract land rents, in the form of capital gains on property and rents from tenants — a process in which Australia is well advanced.”

“The graph shows the rise in home prices has been driven by rising land values rather than construction costs, which have grown at a rate closer to general price inflation. It’s tempting to ascribe the take-off in home prices to low interest rates. Low rates enable households to take out larger mortgages relative to their incomes. But rates were also low in the 1960s (close to rates in the 2010s, when home prices were soaring) and didn’t much push up prices then.”

“Low rates appear to be a necessary, but not a sufficient, condition for soaring prices. Among the other things that seem to be needed are increased access to finance, declining public involvement in housing, and tax breaks that reflect the political power of owners.”

“The return to land in the form of capital growth has climbed from around 3.5 per cent of gross domestic product before 1960 to 16.7 per cent of GDP since 2000. It has become so high as to rival and at times dominate wages as a source of household income.”

“More credit flowing in to a finite supply of land generates a feedback cycle as rising prices and collateral values stimulates more lending and higher prices. In Australia, mortgage lending grew from just under 20 per cent of GDP in 1990 to more than 80 per cent today. By way of comparison, business lending climbed 35 per cent to 40 per cent.”

“The investor share of new mortgage lending has grown from 10 per cent in the early 1990s to 40 per cent. Australia’s unusually generous tax concessions for investors helped. They are granted discounts on capital gains tax, while being able to deduct the full costs of operating their properties, (including interest costs) against income from any source. Where the deductions exceed rental income, the process is known as negative gearing.”

From Better Dwelling in Canada. “The head of Canada’s national housing agency isn’t done ruffling feathers. Evan Siddall, the CEO of Canada Mortgage and Housing Corporation (CMHC), a state-owned mortgage insurer, fired back at critics this morning. After his confidential email was leaked last week, some members of the real estate industry took to calling his statements ‘irresponsible.’ The CMHC agency responded by drawing a parallel between the US housing industry before the Great Recession. He then added, ‘vested interests are strongest right before the fall.’”

“Earlier today, the CMHC head returned fire at the real estate industry’s attempt to make him seem anti-ownership. Specifically, he was referencing the industry’s attempt to skew a letter he wrote to lenders last week. In the confidential letter, he asks lenders to curb their riskiest first-time homebuyers for now. That’s all the industry felt the need to leak.”

“Notably absent from the letter was almost a page of reasons supporting his concern. In the portion absent, he outlined why first-time buyers and the economy had a lot to lose. Despite this, the industry is proceeding, knowing borrowers have more to lose than the industry. He said this resembles the scenario explained in Reckless Endangerment, making it the first direct government comparison to the US housing crisis in over almost a decade.”

“Reckless Endangerment is an investigation into how watchdogs tasked with protecting homebuyers, actually exploited them. The book alleges the US central bank colluded with regulators, and lenders to pump home prices higher. Through a series of stimulus measures at the wrong time, they all made out like bandits. In the process, all of these organizations fostered a ‘see no bubble’ mentality.”

“In other words, they focused on dismissing the US housing bubble. Despite knowing it was risky, everyone in the chain realized they made more money by finding reasons why it wasn’t risky. It worked, until it hit such a high level, that it didn’t. Then it caused irreparable damage to cities like New York, and Los Angeles. You know, places where prices only go up.”

“During periods of robust real estate sales, mortgage stimulus isn’t required. You don’t want a single segment of the economy to run too hot, especially if you’ve been leaning on that segment for growth. Unfortunately, we’re seeing the industry assure buyers this is an optimal time to buy. All with the Bank of Canada’s support, during a period of market activity that resembles the downturn of the real estate cycle. Reckless Endangerment sure seems like an appropriate reference to me.”

The Globe and Mail. “David Rosenberg’s first day of work as an economist was Oct. 19, 1987 – Black Monday, when stock markets plummeted 23 per cent. The crash had a firming effect on the then-27-year-old Bank of Nova Scotia employee (especially as half his department was shortly let go). It taught him always to have a Plan B (and a Plan C), to be as up-to-the-moment as possible, and to stick to the data and resist the herd. He took time out last week to speak to The Globe and Mail’s Ian Brown about divining the financial future.”

“We had very poor preparation and overextended balance sheets. We just love to pat ourselves on the back in Canada over what a great national balance sheet we had, because we only focused on the federal government. But the provinces, I’d say outside of British Columbia, are up to their eyeballs in debt. Corporations are much the same; the private sector in Canada is massively overextended. The Bank of Canada, every single year in its reviews, would talk about how overextended Canadian consumers were, over 60 per cent of GDP. And yet we go into a pandemic with record low savings rates, and record high debt loads.”

“When you really think about it, society is hanging on by a thread. And the thread is called massive government deficits. We’re hanging on here because the government is borrowing record amounts of money that’s been largely financed from the central banks to pay people not to work. It’s necessary, but that’s really where the story is. There’s no way you can live with this situation. The glue holding the system together is the fact that unskilled, uneducated people laid off from their jobs were deemed to be non-essential. We learned how much of the economy turns out to be non-essential.”

“The government decided who was going to stay open and who was going to be locked down. So a bar, non-essential. Restaurant, non-essential. Movie theatre, non-essential. There were some parts of the production sector that were essential. The medical sector, some stores. It was really quite subjective. I never realized so much of the economy was non-essential. And that’s because we really built an economy that has hinged on conspicuous consumption. And I would say it’s probably even more acute in the United States.”

“And we’ve just scratched the surface of what this recession is looking like. And it has been muted, because the government has doled out so much money, the way they measure income in the national accounts is actually running stronger now than it was before COVID appeared. Look at the United States, because we have up-to-date numbers. In the United States, personal income is up 12 per cent so far this year, even though wages and salaries are down 17 per cent.”

“How is income up 12 per cent? Because government transfers to the personal sector have ballooned 230 per cent. It’s no different in Canada. The government is creating income by borrowing money and transferring it to the personal sector. Will the cupboard ever get bare? What if it does?”

“Keep in mind here: FDR [Franklin Delano Roosevelt], in the Great Depression, never ran a deficit in the 1930s of over 7½ per cent of GDP. Even the Democrats that started the New Deal knew when to say enough was enough. The deficit in the United States is going to be over 20 per cent of GDP this year. And this is with a Republican President. So that’s why I say it’s a castle built on sand.”

“There are some lessons here: about being prepared for the next pandemic from a health perspective, about just-in-time inventories and having stockpiles on hand, about the risks of maybe having too globalized an economy.”