A weekend topic starting with the Star Tribune in Minnesota. “Why does Duluth have a housing shortage if the population is barely growing? ‘I don’t necessarily accept the narrative that Duluth isn’t growing given all the complex factors,’ said Noah Hobbs, lending director with One Roof Community Housing in Duluth. ‘We need more units in 2021 than we had in 1960,’ even though the city had 20,000 more residents 60 years ago. The record median home sale price set in June, $249,900, dropped to $215,000 last month, according to LSAR data.”
“Affordable housing is in short supply across the country, and the latest report from Harvard’s Joint Center for Housing Studies said current trends make for an uncertain long-term outlook. ‘Falling birthrates, sharply lower immigration and higher-than-expected mortality rates have already left population growth at its lowest level in 100 years,’ the report said.”
The Payson Roundup. “Rim Country real estate remains pedal to the metal, while the rest of the state and nation taps the brakes. Arizona’s rural mountain communities attract retirees and folks from the Valley interested in a mountain cabin. ‘The second home buyer and seller from Maricopa has a much bigger effect (locally),’ said Gary Nelson, the 2021 president elect of the Arizona Association of Realtors. ‘I’ve been a Realtor for over 27 years in Flagstaff … more than 50% of my sales are second homes.’”
The Aspen Daily News in Colorado. “A Saturday afternoon search for two guests to stay in Aspen from Aug. 20-22 on Airbnb netted 13 pages of results — 236 properties. ‘Money flows into residential because there’s very little obstacle there; residential converts to lodging whenever it wants. But something that is zoned as a lodge has a very different set of obstacles that it must overcome to come back to life as a lodge,’ said Michael Miracle, director of community engagement.”
From Denverite in Colorado. “Here’s something else that deserves a deeper look: vacant units, of which there were over 27,000 recorded in the Census. In the meantime, here’s a map of where they were concentrated. Golden triangle, where all those luxury units have been built, had the second-most empty units on the list. The tract with the most was a southern bit of Five Points, where high-rises also continue to grow along Welton Street.”
The Post Independent. “Now comes the Great Meltdown of 2008, aka the The Great Recession, aka the Financial Crisis. We find the same thread connecting the S&L crisis of the mid-’80s and the 2008 crash, and we see that thread dangling out of the isolated incidents of banking booboos, such as the recent Credit Suisse debacle. A surfeit of money on the table just lying there for the taking, drove banks off the bridge in 1985 and 2008.”
“In both cases, an enormous amount of money was rapidly made available, and there was plenty to go around, which created mortgage assets, which triggered a construction frenzy, which resulted in too many houses backing too many mortgages, and the law of supply and demand was, once again, dramatically demonstrated.”
“Nobody had the courage to say that the emperor had no clothes. All, from the mortgage-backed securities people at Bear-Stearns, Lehman Brothers and Merrill Lynch, to the regulators at the FDIC and OCC, mortally feared rocking the boat. So they did the only thing they could do, like dinosaurs waiting for the weather to change. They created more mortgages.”
“I remember the words of a senior exec of a small bank that had bet the farm on one business line: producing a high volume of loans nationwide through a network of loan production offices: ‘The only way out is up.’ Meaning that the source of salvation is more mortgage production, more fee income that could bolster the balance sheet against failure.”
“It worked just like you’d expect if a wildfire was threatening Downriver, Montana, and the boys at the Volunteer FD mistakenly filled up the pumper truck with gasoline instead of water; a lot more bad loans didn’t help a bit.”
Two articles from the Globe and Mail. “The rising tide of policymakers who appear more comfortable with a quicker timeline for tapering and possibly raising the Fed’s benchmark overnight interest rate from its near-zero level could force Powell to act sooner rather than later to keep the core of the committee onside. If so, it would be history repeating. In 2013, Powell and two other would-be dissenters on the Fed board – Elizabeth Duke and Jeremy Stein – worried that markets were beginning to believe the Fed would keep buying bonds forever.”
“While the market recovery appears to have stalled in recent days, money manager Jason Del Vicario doesn’t believe it’s pricing in a slowdown – at least not yet. ‘Investors have now been conditioned to know that, when things slow down, central banks are going to start printing more money,’ Mr. Del Vicario said, which he sees as a ‘dangerous scenario.’”
From News.com.au. “The Australian economy is a simple machine that runs on two motors. The two engines are commodities and household debt. We might call these miners and banks. Or, iron ore and house prices. The machine is fuelled by commodity income derived offshore. This is then leveraged up in global markets via bank borrowing. The debt is channelled into rising house prices that drive consumption.”
“At least, that’s how it used to work. Since the pandemic began, the machine has instead leveraged commodity income via bank borrowing from the Reserve Bank of Australia. The likelihood is that the mining income engine will be shut off throughout 2022. The RBA will therefore need to rev its other engine, the housing market.”
“But how can it do that when interest rates are already at effective zero and prices high? It is possible. Either the RBA will have to cut its cash rate negative. Or, it will have to print more money for the banks offered up on negative yields. The European Central Bank has been doing both of these things for many years. The RBA says it will never do these things. But it always says that. When the master alarm goes off in its economic cockpit and the ominous voice declares ‘pull up terrain,’ it will have no choice.”
The Hong Kong Standard. “In financial markets, is ‘too big to fail’ a more reasonable concept or is ‘too big to control’ more worthy of attention? There is no definite answer because it all depends on timing. In fact, the antecedent of ‘too big to fail’ must be ‘too big to control’ – that is, if there were no ‘too big to control’ enterprises, there would be no ‘too big to fail’ problem. The best example of this can be found in the global financial crisis of 2007-2008.”
“This is the dilemma that regulators now face with the embattled developer China Evergrande. Under these regulations, Evergrande and other indebted developers have to sell assets to reduce their debt. Of course, this action was clearly aimed at preventing the bad debt bubble from further expanding and exploding. Because if the market is not able to bear the load before the blast, it can cause serious systemic risk. But while the new rules are clear and make sense, if every highly indebted developer is forced to reduce debt and sell assets, will the market be able to digest these assets?”
“And while China’s recent reform and rectification drive makes sense, there are many who worry that the continuing monetary easing and explosion of debt in the western world, led by the United States, may lead to a bigger problems in the future. Now this might have prompted China to speed up the pace industry regulation and reform, but if the ‘bomb’ is dismantled too hastily, it could lead to a disaster.”
The Sun Daily. “Most Malaysians cannot afford local housing anymore, which is ironic, given that the nation’s housing supply glut is at an all time high. Between 1990 to 2019, average home prices have increased by 5.6 times, or a 460% capital appreciation. In contrast, real GDP per capita income has grown by only 2.8 times, or 180%. Where in 1990, the price of the average home was equivalent to about 4.7 years of per capita income, today it has nearly doubled to 9.5 years.”
“This is symptomatic of a policy problem that has rippled across the economy, transforming homes into commodities and ‘asset-class investments.’ The problem with the loan moratorium is that payments are merely delayed, not cancelled, which could create a debt overhang in the future. This has the effect of keeping borrowers in debt for longer.”
“According to a media report, many private developers in the country have been artificially inflating house prices stated on the sales and purchase agreement (SPA), which is then used by the banks to determine the size of the mortgage. The real price paid by the purchaser is usually substantially discounted. This forms a powerful incentive for potential homebuyers because this way, they can effectively obtain 100% financing.”
“There is a dark side to this seemingly ‘win-win’ situation: Artificially keeping prices high prevents the market from adjusting to demand-supply dynamics. Under normal circumstances of excess supply, prices would fall to re-establish a new equilibrium. However, this process is distorted in Malaysia, and increasingly puts home ownership out of reach for many people.”
Two reports from Stuff New Zealand. “Sharon Zollner, chief economist at ANZ said a drop in house prices could be on the horizon. ‘The direction of travel for macroprudential thresholds highlights that the Reserve Bank thinks risks are elevated at the moment. Of course, they are, we have never seen house prices go up this fast,’ Zollner said. Zollner said the long period of low interest rates might have lulled many house-buyers into a false sense of security. ‘It would be too simple to think the Reserve Bank has always got your back when it comes to what house prices might do. The central bank are not magicians, and they can’t eliminate risk,’ Zollner said.”
“Reserve Bank governor Adrian Orr feels he has good reason to think a fall in house prices is on the horizon. ‘We’ve had phrases such as ‘irrational exuberance’, talked about,’ he told the select committee. ‘And this is what is happening on a global basis with housing at the moment. The one most common factor when I’m sitting here chatting with central bank governors around the world, which is regular, is the rapid rise in ouse prices – asset prices – globally; both equity prices and house prices. I don’t want to call things bubbles, I don’t know if it’s helpful at all. I would say house prices are above the sustainable level.’”
“But the overall messaging was clear. High house prices are not the Reserve Bank’s fault and the ‘market’ is about to ease the problem a little. Orr dismissed the suggestion the bank had ‘turned on the monetary hose too hard’ last year. ‘I stand by everything we’ve done and I’m incredibly proud of everything we’ve done which has been critically necessary,’ he told MPs.”
“If the monetary policy response to Covid does contribute to some people who timed purchases unluckily losing out in a correction, that was not within the bank’s control, Orr indicated. ‘Some households, more recently, who chose to invest in housing, or buy housing, because of the emotive behaviour we have talked about may find themselves under some financial stress. We cannot operate monetary policy to the suitability of every household,’ he said.”
From NPR. “The average price of American homes, in real terms, is now the highest it’s ever been — even higher than the peak of the housing bubble in 2006, before it crashed 60 percent and bottomed out in 2012. Now that home prices have surpassed the peak that preceded the 2000s housing crash, many people are worried. Are we in another bubble? Or maybe the housing bubble a couple decades ago wasn’t really a bubble? If so, then why was there a crash?”
“A new study by economists Gabriel Chodorow-Reich, Adam M. Guren & Timothy J. McQuade helps to explain the dynamics of our bonkers housing market. It has the perfect title: ‘The 2000s Housing Cycle With 2020 Hindsight.’ Chodorow-Reich and his colleagues see something similar in the boom and bust in America’s housing market between 1997 and 2012. The fundamental value of living in places like San Francisco and New York and Boston and other superstar cities really did change. Tech boomed. Finance boomed. All kinds of other industries boomed. Meanwhile, there wasn’t enough housing supply to accommodate this new demand.”
“‘Those fundamentals made prices rise — but then homebuyers got over-optimistic about that,’ Chodorow-Reich says. And homebuyers getting over-optimistic became a serious problem because of the big role that mortgages play in financing homes. This debt was like strapping a stick of dynamite to price dynamics. When prices started to dip, a bunch of people started owing more on their mortgage than the value of their house. And, together with a broader recession that killed jobs and hurt incomes, that caused a foreclosure explosion.”