Monday, February 17, 2014

How Healthy Is the US RE Market?

The strength of the RE market should not be measured by price appreciation, or the number of new and existing home sales. It should be measured by the support of underlying fundamentals and whether they can help to withstand economic cycles without policy makers having to go hog wild just to avoid a total collapse.

How healthy is the RE market today?

The Subprime Majority.   Recently, I came across a report by the Corporation for Enterprise Development (CFED) titled Assets and Opportunity Scorecard.  Some of their findings are quite interesting.  According to the CFED Scorecard, 56% of all consumers have sub-prime credit.  Sub-prime is "earned". A consumer has to miss a few payments, or default on a loan or two to earn that status.  These 56% cannot, or should not, be taking on more debt, especially a large debt like a mortgage.  They may also be struggling with a mortgage that they should not have taken out in the first place.  
Liquid Asset Poor.  CFED found that 44% of households in America are Liquid Asset Poor, defined as having saved less than three months of expenses.  As one would expect, 78% of the lowest income households are asset poor, but 25% of middle class ($56k to $91k) households also have less than three months of expenses saved.  Pertaining to real estate, the report suggests that there are little savings to buy and a small cushion for changes, such as job loss.
Income Inequality.  The Center for Household Financial Stability of the St. Louis Fed recently released a study titled Inequality, the Great Recession, and Slow Recovery.  Skip the 43 pages of academic mumbo jumbo and you will find half a dozen of very simple and informative charts, such as the two below.   I will leave the inequality debate to others.  With regard to a real estate stress test, it appears that households are not exactly well prepared to weather even minor economic setbacks. 

debt-income ratios
Debt-income ratios by income groups – click to enlarge.

Net-worth-to-disposable income
Net worth to disposable income by net worth groups – click to enlarge.

The Federal Reserve is Spent.  QE1, 2 and 3 all involved the purchase of agency MBS.  In January 2014, the FOMC announced that it will decrease debt purchases by another $10 billion, from the original $85 billion to $65 billion per month, $30 billion of which is supposed to be for agency MBS.  That appears to be all talk.  For the first 6 weeks of 2014, the Fed has already purchased $74.7 billion, or $54 billion per month.  They are not only continuing the QE3 purchases, they are still replenishing the prepaid holdings from QE1 and QE2.  Mortgage rates are not responding anymore.  Though somewhat stabilized, the current rate (30yr) is still a full percent above the low recorded before QE3 (see the table below from Mortgage News Daily).  

latest rates

Mortgage rates from MND's daily survey – click to enlarge.

Furthermore, Fed members are only kidding themselves if they think they can ever tighten monetary policy.  The national debt is at $17.3 trillion and growing at about $700 billion this year.  The cost of financing this debt, per the Treasury, was $415.7 billion in 2013, crudely estimated at an average rate of about 2.5%.  At the moment, the 3 months bill is at less than 0.2% interest, while the 10 year note is only at 2.75%.  If the cost of financing this debt were to increase by just 1%, it would cost the Treasury $173 billion more a year.  There is no way that the dovish Fed chair Yellen would even dream of doing that.
Therefore, the risk of monetary policy is not whether the Fed will tighten, but rather what it can do to repeat a 2008 style bailout. In other words, the Fed as a safety net is full of holes that re big enough for an elephant to pass through.
Exhausted Government Intervention.  The FHFA just announced that HARP has reached the three million mark.  We are no closer to reforming Freddie and Fannie than when they were put under conservatorship over five years ago.  Numerous State and Local Governments have deployed their own foreclosure prevention laws and ordinances.  The Consumer Finance Protection Bureau has created a mountain of bureaucratic red tape, adding compliance costs to the mortgage industry while providing questionable benefits to the consumer.  The  FHA is now pushing for lending to borrowers with credit scores as low as 580  only one year after major financial catastrophes such as foreclosure.
In conclusion, the reason I remain bearish on real estate is that when the noise is filtered out, the market has only survived by means of an unprecedented amount of intervention.  This dependency is not only unhealthy, its stimulating effect is now fading.  If real estate prices cease to appreciate, the market will suffer, same as it did when the sub-prime bubble burst in 2006/2007.  The Fed has already gone all in and there is little left it can do.  Washington can always create a new set of laws to further erode private property rights as we knew them.  Ironically, price appreciation is also not the answer, as it will just widen the income equality gap, turning would-be home owners into rent slaves of Wall Street's fat cats.  It may be best for the market to freeze for an extended period and let consumers catch their breath.

Jim Grant: "Gold Is Nature's Bitcoin"

Having previously explained how "the Fed has its thumb and fingers on the scales of finance," and why it will end badly; Jim Grant takes today's testimony from Janet Yellen to task in this brief (but fun-filled) clip.
While the new Fed chair spoke at length, Grant notes she did not explain how "the Fed continues in this unprecedented exercise in price control," and in less than 30-seconds, the always eloquent founder of the Interest Rate Observer 'translates' her Fed speak into reality -
"What we mean to do is continue to nationalize the yield curve... and we would like to enlist the stock market in a program of wealth creation for the security holders of America."
The Fed has manipulated interest rates for 100 years but Grant adds, "never - until now - has it manipulated the stock market as if it were a lever of public policy."
His discussion ranges from the bubble in Biotech to holding Gold (which he describes as "nature's bitcoin") because it is "the reciprocal of faith in Central Banks."

Spend 135 seconds of your life to listen to this... way more informative than watching Bode Miller flop again (or Shaun White)...

Hold on tight were in for quite a bumpy ride.

Most Australians are completely ignorant as to what happens in the rest of the world because they consider it to be "irrelevant" to their daily mundane banal lives, however the truth is that the massive economic problems that currently sweeping across Europe, Asia and South America are going to be affecting every Australian very soon. Sadly, most of the big news organizations in Oz seem to be more concerned about "the Block, State of Origin, AFL and the X Factor than about the horrible financial nightmare that is gripping emerging markets all over the planet. after a brief period of relative calm, we are seeing signs again of global financial instability that are unlike anything that we have witnessed since the financial crisis of 2008. the problems arent just isolated to a few countries. This time is truly a global phenomenon.
over the past few years, the US Fed and along with other global central banks have inflated unprecedented financial bubble with reckless money printing. this "hot money" poured into emerging markets all over the world. now that the Fed has begun "tapering" quantitative easing, investors are and those who pay attention and beginning to panic and taking this as a sign that the party is ending. Money is being pulled out of emerging markets all over the globe at a staggering pace and this is creating a tremendous amount of financial instability as people looking to hedghe their savings in Cryptocurriencies and precious metals, hence the wild swings in the likes of Bitcoin, Gold and silver. etc.
The Muthar of all Shit loads is about to hit the fan globally we are in for an economic Meltdown that will make the GFC of 2008 pale into insignificance. signs that the global economic crisis has started and at the point of No Return.

#1 The unemployment rate in Greece last week has hit a brand new record high of 28%

#2 youth unemployment rate in Greece last week has hit a brand new record high of 64.1%.

#3 the percentage of bad loans underwater and bankruptcies in Italy is at an alltime record high.

#4 Italian industrial output declined again in December, and the Italian government is on the verge of collapse.

#5 The number of jobseekers in France has risen for 30 of the last 32 months, and at this point it has climbed to a new all-time record high in the countries history.

#6 The total number of business failures in France in 2013 was even higher than in any year during the last financial crisis.

#7 It is being projected that housing prices in Spain will fall another 15 to 20 percent as their economic depression deepens.

#8 The economic and political turmoil in Turkey is spinning out of control. The government has resorted to blasting protesters with rubber bullets and pepperspray in a desperate attempt to restore order.

#9 It is being estimated that the inflation rate in Argentina is now over 40 percent, and the peso is absolutely collapsing.

#10 Gangs of armed bandits are roaming the streets in Venezuela as the economic chaos in that troubled nation continues to escalate.

#11 China appears to be starting its deleveraging. the deflationary effects of this are going to be felt all over the planet far worse the the GFC of 2008. China's Xi Jinping has cast the die,the most powerful Chinese leader since Mao Zedong aims to prick China's $24 trillion credit bubble soon.
#12 I posted this and shared it with you last week,a significant debt default by a coal company in China and their 2nd largest bank.
#13 Japan's Nikkei stock index has already fallen by 14 percent so far in 2014. That is a massive decline in just a month and a half.
#14 Ukraine continues to fall apart financially... The worsening political and economic circumstances in Ukraine has prompted the Fitch Ratings agency to downgrade Ukrainian debt from B to a pre–default level CCC. This is lower than Greece, and Fitch warns of future financial instability.
#15 The unemployment rate in Australia has risen to the highest level in more than 10 years.
#16 The central bank of India is in a panic over the way that Federal Reserve tapering is effecting their financial system as India economy Meltdown..
#17 The effects of Federal Reserve tapering are also being felt in Thailand... In the wake of the US Federal Reserve tapering, emerging economies with deteriorating macroeconomic figures or visible political instability are being punished by skittish markets. Thailand is drifting towards both these tendencies.
#18 One of Ghana's most prominent economists says that the economy of Ghana will crash by June 2014.
#19 Yet another Power heavy weight banker has mysteriously died during the prime years of his life. That makes five "suspicious banker deaths" in just the past two weeks alone.
#20 The behavior of the U.S. stock market continues to parallel the behavior of the U.S. stock market in 1929. The US has $18 Trillion in debt, increasing at around $1 Trillion pa. plus about $100 Trillion in unfunded liabilities and $270 Trillion in toxic derivatives still floating around out there. That debt can never be repaid and the unfunded liabilities can never be delivered. The US is BROKE. The Gold is long gone and that which remains is leveraged paper, hypothecated, re-hypothecated many times over.

Yes, things don't look good right now, but it is important to keep in mind that this is just the beginning.

This is just the leading edge of the next great financial storm.
The next two years (2014 and 2015) are going to represent a major "turning point" for the global economy. By the end of 2015, things are going to look far different than they do today.

None of the problems that caused the last financial crisis have been fixed. Global debt levels have grown by 30 percent since the last financial crisis, and the too big to fail banks in the United States leverage are 37 percent larger than they were back then and their behavior has become even more reckless than before.

As a result, we are going to get to go through another "2008-style crisis", it is obvious that the next wave is going to be FAR worse than the previous one.

So hold on tight and get ready. We are going to be in for quite a bumpy ride.

At any rate who gives a rats ass about Oz manufacturing or mining being in decline. Australians can get rich by flipping houses to each other (and the odd clueless Immigrant). There's no housing bubble in Oz - I know this cause the man from the RBA said it, along with every Sydney property owning economist. But most important of all, Michael Yardney (Australia's greatest ever property expert) said it.