Aug232013
Janet Yellen completely missed the housing bubble
Economists and forecasters are wrong most of the time. The ones that last the longest learn to revise history and make it look like they were right when, in fact, they were dead wrong. Managing perception and reputation is more important that actually being right or wrong.
Many support Janet Yellen for the soon-to-be-vacated post of Chair of the Federal Reserve Board of Governors (Ben Bernanke’s job). They are trying to cast her candidacy in the best light, and in the process, they are revising history to make it look like she saw the housing bubble and bust coming. She didn’t.
Janet Yellen called the housing bust and has been mostly right on jobs. Does she have what it takes to lead the Fed?
By Neil Irwin and Ylan Q. Mui, Published: August 16 at 10:00 pm
President Obama’s choice — which appears likely to be between Yellen and combative former Treasury secretary Larry Summers — will determine what set of skills will guide the U.S. economy out of its unexpectedly long slump and grapple with whatever nasty surprises lurk along the way. …
The San Francisco Fed and the housing bubble
Yellen returned to Berkeley in 1999, then re-entered public service in 2004 as president of the Federal Reserve Bank of San Francisco, just as the housing market in California and other western states were entering a full-scale bubble.
Yellen’s economic training made her suspicious early on that the good times could not last, and she directed the bank’s research staff to drill deeper into the data: What could happen when teaser interest rates on new-fangled mortgages reset? What would become of the piggyback loans many homeowners had taken out on top of their mortgages? How leveraged had Americans become?
“Janet was very much a person who asks very probing questions, wants to understand kind of what’s below the conclusions,” said John Williams, who was head of research under Yellen and followed her as president of the San Francisco Fed.
She may have been asking questions, but as I will demonstrate later, she wasn’t coming up with any good answers.
So when the leaders of the Fed gathered around their big mahogany table overlooking the National Mall on Dec. 11, 2007, Yellen was perhaps the most gloomy.
December 11, 2007? The housing bubble peaked nationally in mid 2005. It peaked in California in mid 2006. By the end of 2007 a blind man could see the housing bubble. Not exactly prescient.
“The possibilities of a credit crunch developing and of the economy slipping into recession seem all too real,” she said, reading carefully measured words from a sheet of paper. The “shadow banking system,” the complex financial markets that funnels credit to Americans, was freezing up, she said, and the economy was likely to slow significantly.
As it turns out, the Great Recession was beginning that very month.But while Yellen voiced one of the most prescient diagnoses of the looming crisis, her position on the West Coast left her little role in sculpting the response.
She got to be the messenger who informed her colleagues that they totally screwed up. Big deal.
There was one federal reserve governor who did spot the housing bubble, and he loudly proclaimed it: Atlanta Fed President Jack Guynn called the housing bubble in 2005. Janet Yellen did not call the housing bubble. In fact, she totally accepted the idea of financial innovation (see: The Fallacy of Financial Innovation a post I published in early 2008).
From the June 2005 FOMC June meeting:
CHAIRMAN GREENSPAN. President Yellen.
MS. YELLEN. Thank you, Mr. Chairman. I just wanted to make a couple of comments and also ask a quick question. My first comment relates to the run-up in price-rent ratios that we’ve seen. It seems to me that there might be a couple of factors that could explain at least some portion of the run-up, though probably not all of it, that weren’t mentioned in the presentations.
First, it seems to me that financial innovations affecting housing could have improved the view of households regarding the desirability of housing as an asset to be held in portfolios and thus raised the equilibrium price-to-rent relationship for residential real estate.
Yes, people were gripped by a financial mania and lost all perspective on true value. She suffers from the false assumption that people are rational.
What I’m thinking of is the idea that equity held in residential real estate is a lot more accessible today than it has been in the past.
That happens when you eliminate all lending standards.
Home equity credit at commercial banks is up fourfold since 1999, and many households obviously are now keenly aware that refinancing provides a low-cost avenue for tapping into the equity in their homes.
Lenders trained a generation of Ponzis, and the head bankers were too ignorant to see it or do anything about it.
So, in a sense, there might be less of a liquidity premium embodied in the return for housing. Also, if people feel that the liquidity constraints in holding housing as an asset are diminishing, that could explain a reduced need for precautionary saving in traditional liquid assets.
Fools were putting all their money into housing and eschewing other forms of saving and investment entirely. Rather than being alarmed by this, she thought the public was behaving rationally.
It could even make people willing to put more of their wealth into down payments on houses and may have raised prices through that mechanism.
LOL! Putting more down? People were putting nothing down. Average down payments consistently declined during the housing bubble as more and more people were allowed to put nothing down. Her statistics had to show that.
The other thing that occurred to me is that there might be effects from tax changes. We’ve had changes in the rules for tax exemption and in 1997 on capital gains from the sale of primary residences that would make holding real estate assets more attractive. And the changes in capital gains taxes more generally in 1997 and then again in 2003 would have worked in the same direction.
That much is true. Government threw fuel on the fire.
One of the things that we looked at that we thought was interesting was the behavior of price-rent ratios for residential housing. … it appears that the behavior of price-rent ratios in residential housing has closely mirrored what we’ve seen in commercial office space. The ratios for both have gone up about 30 to 35 percent since around 1998….
That’s the clearest possible indicator that there was a housing bubble. Do you think you could have spotted the housing bubble in 2005 if you had access to the data below?
A second comment I wanted to make concerns the relationship of creative finance to the housing market. One view that I think is very prevalent is that the use of credit in the form of piggyback loans, interest-only mortgages, option ARMs [adjustable-rate mortgages], and so forth, involves financial innovations that are feeding a kind of unsustainable bubble.
Yes, those products clearly were fueling a housing bubble. Anyone with an understanding of Finance 101 could see that — unless they were blinded by greed or willful ignorance.
But an alternative perspective on that is that high house prices, in fact, are curtailing effective demand for housing at this point and that house appreciation probably is poised to slow. So the increasing use of creative financing could be a sign of the final gasps of house-price appreciation at the pace we’ve seen and an indication that a slowing is at hand.
She obviously believed the “alternative perspective.”
So prices won’t go down, but they won’t appreciate as fast. That’s as close as she came to recognizing the housing bubble and the imminent housing bust.
Previously, lenders applied very rigid constraints on loan-to value ratios, but essentially those constraints are now being eased at the margin through these creative financing techniques.
Eased at the margins? LOL! The LTV standards were completely abandoned.
And have you seen the DTIs on modified loans? Lenders didn’t care much about that either.
And that’s providing some elasticity to what was a firm roof. It may slightly diminish the price elasticity of the demand for housing, but the fact that it is blossoming now basically suggests that we really are at the ceiling where it’s binding and will ultimately constrain appreciation.
It certainly did constrain appreciation — to the tune of a 30% to 50% decline.
Finally, with those two comments, a question. It concerns the presentation by Andreas and the numbers cited on loan-to-value ratios at origination. One of the things we’re seeing in California and elsewhere in our District—and maybe this is true nationwide—is a growing use of piggyback loans. Loan-to-value ratios of 90 to 95 percent are common in California, and we’ve even seen combination loan-to-value ratios and piggyback loans going up to 125 percent. I guess that means two things, one of which is that the traditional first mortgage looks utterly conventional. Those mortgages have an 80 percent loan-to-value ratio and I suppose they are being sold off to Fannie and Freddie. The other thing is that with such conventional mortgages being sold to Fannie and Freddie, there’s no need for private mortgage insurance. So Fannie’s and Freddie’s books may look better in some sense—less risky—than they really are because of all of the second mortgages going up to possibly 125 percent.
At least she got that one right. Three years later the GSEs were taken over by the Treasury department, and the US taxpayer had to inject them with $150B to keep them afloat.
CHAIRMAN GREENSPAN. It sounds like a CDO [collateralized debt obligation]. That’s what it is, isn’t it?
MS. YELLEN. Yes. So I wondered if that was something that you’re aware of and something that is included in the numbers.
Chairman Greenspan wasn’t aware of anything.
Personally, I don’t really care who gets in at the federal reserve. The next chair will print money just like Bernanke. Some may be marginally more hawkish or dovish, but the difference on the margins will hardly be noticeable. Janet Yellen may be the best candidate, and she may get the job, but it won’t be due to her great insights into the housing bubble or bust.
[raw_html_snippet id=”newsletter”]
[idx-listing mlsnumber=”OC13161866″ showpricehistory=”true”]
18212 SHARON Ln Huntington Beach, CA 92648
$749,000 …….. Asking Price
$220,000 ………. Purchase Price
7/27/1988 ………. Purchase Date
$529,000 ………. Gross Gain (Loss)
($59,920) ………… Commissions and Costs at 8%
============================================
$469,080 ………. Net Gain (Loss)
============================================
240.5% ………. Gross Percent Change
213.2% ………. Net Percent Change
4.8% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$749,000 …….. Asking Price
$149,800 ………… 20% Down Conventional
4.59% …………. Mortgage Interest Rate
30 ……………… Number of Years
$599,200 …….. Mortgage
$155,743 ………. Income Requirement
$3,068 ………… Monthly Mortgage Payment
$649 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$156 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$150 ………… Homeowners Association Fees
============================================
$4,023 ………. Monthly Cash Outlays
($753) ………. Tax Savings
($776) ………. Principal Amortization
$257 ………….. Opportunity Cost of Down Payment
$114 ………….. Maintenance and Replacement Reserves
============================================
$2,865 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$8,990 ………… Furnishing and Move-In Costs at 1% + $1,500
$8,990 ………… Closing Costs at 1% + $1,500
$5,992 ………… Interest Points at 1%
$149,800 ………… Down Payment
============================================
$173,772 ………. Total Cash Costs
$43,900 ………. Emergency Cash Reserves
============================================
$217,672 ………. Total Savings Needed
[raw_html_snippet id=”property”]
When Greenspan, Bernanke, and Yellen are in a room together you can just feel the inflation increasing.
Are Fannie Mae and Freddie Mac Really Profitable? Really?
So are Fannie Mae and Freddie Mac really profitable? For months now, the GSEs have reported rising current profits, an amazing rebound that has caused the hopes of many members of Congress to likewise elevate. The financial press has been filled with hopeful stories to the effect that the zombie dance queens may actually dig their way out of a several hundred billion dollar hole they created during the subprime crisis.
But now a report released earlier this week by the Federal Housing Finance Agency’s Inspector General raises new concerns. Specifically, the IG asks why Fannie Mae, Freddie Mac and the Federal Home Loan Banks have been dragging their feet implementing 2012 accounting changes that would accelerate the timing of tens of billions of dollars of unrealized losses on bad loans from the uber toxic 2004-2008 period. The IG report states:
“The advisory bulletin directed the enterprises and the Federal Home Loan Banks (FHLBanks) to classify any outstanding loan balance in excess of the fair value of the property, less cost to sell, as “Loss” when the loan is no more than 180 days delinquent. The issue was identified by FHF A examination staff during the course of a credit examination of Freddie Mac completed in January 2012. The advisory bulletin’s background section provided the following rationale: The purpose of this guidance is to establish a standard and uniform methodology for classifying assets of the Enterprises and the FHLBanks based on the credit quality of the assets. The classification of assets is a critical element in evaluating the risk profile and the adequacy of capital, loan loss reserves, and earnings.”
Here’s the quote that had me scratching my head:
“Washington is a city of lies, let us remember, with a good part of the population paid to disseminate falsities as part of their job description. But the biggest lie of all was allowing the GSEs to avoid marking their impaired assets down to fair value as commercial banks are required to do. Had this been done, the losses reported by the enterprises would have been far larger.”
It sounds an awful lot like Christopher Whalen, one of the most respected banking analysts of our time, does not believe mark-to-market accounting was suspended for commercial banks, and he just said so on ZeroHedge.
Sorry, the last paragraph was my own words and wasn’t meant to be italicized.
This was a Chris Whalen article on ZeroHedge.
Indeed, that’s what I was referring to. He seems to have denied the existence of mark-to-fantasy accounting at banks.
It’s strange that an independent banking risk analyst would post that on Zerohedge of all places.
The commercial banks are simply not claiming these assets are impaired. In 2011, they were finally forced to market down the value of second mortgages behind underwater non-performing firsts. That’s as close as they come to reporting FMV on their bad loans. If you read their financial filings, many will report the actual FMV, but on an accounting basis, the basis used to calculate their capital ratios, they are allowed to report the fantasy value.
That seems like a plausible explanation although I’m curious if that’s what he really meant.
My guess is that the GSEs have been allowed to report whatever they want and aren’t restricted by the even the lax accounting rules on commercial banks.
Fixed Mortgage Rise as Market Reacts to Fed Taper Talk
Fixed mortgage rates jumped this week as markets awaited the release of minutes from the Federal Open Market Committee’s (FOMC) July meeting, which contained hints of when the Federal Reserve might start reducing its bond purchases.
According to Freddie Mac’s Primary Mortgage Market Survey, the 30-year fixed-rate mortgage (FRM) averaged 4.58 percent (0.8 point) for the week ending August 22, up from last week’s 4.40 percent. A year ago at this time, the 30-year FRM averaged 3.66 percent.
The 15-year FRM averaged 3.60 percent (0.7 point), up from 3.44 percent previously.
Adjustable rate movements trended downward. The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.21 percent (0.5 point), down from 3.23
percent in the last survey. The 1-year ARM averaged 2.67 percent (0.5 point), flat week-over-week.
Recounting the minutes of the FOMC’s meeting, Freddie Mac chief economist Frank Nothaft noted “the committee members were broadly comfortable with a plan to start reducing its bond purchases later this year, although a few emphasized the importance of being patient.”
More from the Uncovery Crowd LLC
New Home Sales Fall 13.4%
New home sales plunged 13.4% to an annual rate of 394,000 units.
Expectations were for 487k and a prior reading in June of 497K that was revised down to 455K. So the July read declined and was below expectations.
In baseball parlance, this was a big swing and a miss.
In boxing parlance, that’s an ass kicking.
Do you think it changed the Taper odds in September?
No, the odds were zero before, and they are still zero.
Watch the herd shift from taper is on, to taper is off. They will be culled.
That’s the $64,000 question, isn’t it?
Well, I think it has to factor into the FEDs calculus. Housing is one of the seven leading economic indicators and a drop in housing sales presages a drop in housing prices. A significant drop in new home sales means a drop in starts, which means a loss of construction jobs. Since the FED has conditioned tapering on “continued economic strengthening,” any significant pullback in employment, inflation, GDP, income or wages, inflation, or corporate profits would make the FED reconsider its tapering plans.
When the FED began talking about reducing the amount of QE back in May, the stock market was reaching new highs, the headline unemployment number fell to 7.5%, mortgage rates were 1% lower than today, and housing prices were way up year over year.
Now, the stock market has had its worst week of 2013, corporate profits are down, unemployment remains low, but household income is level with a year ago. GDP growth rate is less than 2% and likely headed lower. Sequester and tax cuts are just starting to make their way into the broader economic indicators.
So, what would it take for the FED to postpone the Taper? I think there is considerable momentum for the Taper to occur. Something significant would have to happen for the FED to change course. I think it is far more likely that they will reduce the amount of the Taper rather than postpone. That way they continue along the path of tightening, even at a snail’s pace. There is much to be said for this approach, as markets dislike uncertainty.
I don’t see the FED reversing course. I would look for them to try to stabilize rates in the mid-fours by continuing to Taper. Since inflation is more or less restrained, there is nothing forcing their hand. The economy is already reeling from the tax hikes and rising rates. The FED should keep a steady hand on the tiller and weather the rate storm of its own creation. If the consensus is reducing from 85B/mo. to 65/mo., I think we may see somewhere in the 70-75B/mo. range starting in October. October is about when the re-sale sale numbers are going to start hitting the fan. Rates may drop down into the lower fours and help to stimulate a housing market that is on the ropes if the FED undertapers. Is that a word?
Now that housing is cooling off, GDP is falling, the stock market is falling, and inflation is more or less restrained, I don’t see a driving force behind tightening other than market stability as a result of the FED following through on the ground work they have been laying the last few months.
Russ – Great comment!
I second that, great comment.
I don’t. Not only does it have misinformation, but it also misemphasizes the priorities of the Fed.
awgee: can you elaborate on the misinformation? I would really like to know if there is something that I am misstating. I don’t presume to be right. I am only trying to get my thoughts out there so that, through the crucible of debate, I can learn and hopefully figure out what the hell is going on.
My understanding is that the FED has a dual mandate of “full” employment and moderate inflation. What other priorities am I missing? Clearly, the FED is loosely interpreting that mandate by purchasing MBS and Treasuries. They have certainly dropped rates to buoy housing prices, and thereby protect the construction jobs, realtor jobs, mortgage broker jobs, and all the other jobs that depend on housing transaction volume. Which makes it kind of curious that the FED would tighten just as the transaction volume is starting to recover. Inflation concerns must be driving the tapering, since the FED doesn’t want to taper too late.
The economy is not a science. It’s not even a well tuned machine. It’s more like cantankerous old bloodhound that only expresses its mood by either biting you or pissing on the rug. And it doesn’t do either close enough to the thing that pissed it off so that you have any idea what you did right or wrong. This is why central planning never works.
Russ – “since inflation is more or less restrained”
You would have to believe that the government is telling truth. I buy stuff. What do you think the annual percentage of currency devaluation is right now. Inflation is actually an increase in money supply. What do you think the money supply is doing right now? Prices going up or down is not inflation or deflation. Prices going up or down are price increases or price decreases and may have nothing to do with currency devaluation. And then there is currency devaluation, which most call inflation.
The Fed’s real mandate is to enrich and empower it’s shareholders. If you look at what the Fed does as opposed to what it says, who benefits from 90% of the Fed’s actions? The Fed is purchasing derivatives from the member banks in order to make the banks solvent. With all the currency the Fed has spent on derivatives of mortgage backed securities, it could have paid off every mortgage in America multiple times and it would have paid off some amount of mortgages if it’s intention was really to stabilize the housing market. Why would it be curious that the Fed would start tightening when it has NOT started tightening? What taper?
Forget completely what the Fed says. What does it do? If the Fed never said anything and kept completely silent on it’s actions or intentions, it’s real intentions and future actions would be obvious.
The Fed is creating debt when it purchases new treasuries. Is there really anybody who thinks that creating debt can produce even one nickel of added productivity? It has to be paid back. If you borrow money and buy a tv today, have you become any richer or created a job? How is the Fed or the government any different? Are they magic? Granted, it pushes consumer habits forward, but the money has to be paid back out of future wages and when the future becomes the present, (payments), the consumer can not consume in the present. The idea that creating more debt can produce prosperity is a lie, and it is a lie that enriches banks and keeps the proletariat, in metaphorical chains.
The real reason the Fed is doing what it can to keep interest rates low is to make it easier for the banks to profit from interest rate swaps. Why do you think the Fed gives one spit of real concern to mortgage rates when the interest rate swaps market is a $700 trillion market to the banks. Forget what the Fed says. What does the Fed do?
Whenever you want to know what the Fed is going to do or why it is doing what it does, just ask what will be the most profitable action for the Fed’s shareholders? The public or taxpayers or citizenry do not own the Fed and the Fed is not accountable to us nor to Congress.
For me it is obvious that the Fed will neither taper nor tighten because the banks are still insolvent and the member banks make a ton off ZIRP and POMO.
Awgee: Thanks for the feedback. I limited my response to three subject areas.
1. Inflation
“What do you think the annual percentage of currency devaluation is right now. Inflation is actually an increase in money supply. What do you think the money supply is doing right now? Prices going up or down is not inflation or deflation. Prices going up or down are price increases or price decreases and may have nothing to do with currency devaluation. And then there is currency devaluation, which most call inflation.”
Yes. I realize that the textbook definition of inflation is an inflation of money in circulation. Now. Just because the FED creates debt by purchasing UST and MBS, does that mean that the money in circulation increases directly from their actions? If the FED buys UST when no one else is buying, the FED is merely keeping treasury rates lower than they otherwise would be. This means the US Government has to pay less to holders of UST. So the US taxpayers have to pay less to borrow money from China. Right? We have to use less of our tax dollars to service the debt.
Now, where does this newly created monetary inflation go next? The US Treasury takes this money and pays for goods, services and debt service. For this monetary inflation to result in price inflation, the goods and services purchased must be at current capacity. In other words, all the goods must be spoken for with no speck inventory in stock. Also, there must be no extra manufacturing capacity so that more goods can be produced at the same price. In some cases, increasing orders can drop prices since fixed costs are fixed and per unit costs will drop with higher quantities.
In a slack labor environment, service costs won’t increase either. Same as goods, just substitute unemployment. As the economy expands, the slack conditions abate, and the monetary inflation will drive price inflation.
When it comes to MBS, the FED is ameliorating lack of available credit. Investors don’t want to make loans at the rates required to roll over their bad loans at current debt levels. This is certainly inflationary inre housing prices, but is deflationary inre everything else in the economy. High housing prices directly impacts discretionary income, which directly impacts consumer spending.
What the FED is doing, and I think you pretty much would agree, is preventing price deflation. They are doing this by devaluing the dollar. If a dollar would have bought a gallon of milk before the recession, the FED prevented the dollar from buying 2 gallons of milk, instead having the dollar buy only 0.9 gallons of milk today (2%inflation/yr).
If you want to see real devaluation, look at how the dollar is doing against the yen since the start of the year.
2. Taper.
“The Fed is purchasing derivatives from the member banks in order to make the banks solvent. … Why would it be curious that the Fed would start tightening when it has NOT started tightening? What taper?”
Is the FED purchasing derivatives, too? I thought they were only purchasing Mortgage Backed Securities (MBS). Correct me if I’m wrong, but I believe derivatives are ancillary to a main contract or security. For instance a credit default swap (CDS) or a Collateralized Debt Obligation (CDO). Are you referring to something other than the $40B/mo. of MBS?
Why would the FED say it’s going to taper, and then not taper? Why would it say it’s going to taper, re-affirm the intent to taper several times, and then not taper? When you are the FED, saying something often has a greater impact than just doing it. Why project a change in course, which they know will have a material effect on market rates? Do you have an explanation for why they would do this if they never intended to taper? If they just wanted to enrich member banks why not say nothing, or emphasize the negative data to keep the game afoot?
I think the FED announced their intentions to determine how the market is going to react so that they can temper their taper accordingly. Or is that taper their temper. This is so confusing.
3. Federal Debt and Productivity
“The Fed is creating debt when it purchases new treasuries. Is there really anybody who thinks that creating debt can produce even one nickel of added productivity?”
Ummmm… I do, for one. It’s called running a business. Borrowing is just about the only way to build a business. You can either borrow the money from other prior assets, or you can borrow it from investors, or you can borrow money from a bank. If you borrow money from anyone, they are going to expect to get the money back, with interest. So, the productive use you put the money to needs to be more productive than the interest you pay. If I want to go into the widget business, and I need to lease a factory, and buy/lease the machines to build the widgets, I am going to need a loan to cover those expenses, not to mention salaries, until my sales pickup to the point they can cover the costs. If you don’t take the loan, your productivity is zero, if you take it, it’s either more or less than zero (depending on the person managing the factory). Businesses need capital to grow, just as banks need to be paid interest for the use of their depositors money. If you don’t like how the banks are managing your money, there are now startups for direct lending between depositors and companies. Regardless if a bank is loaning your money, or you loan it directly, I think you deserve to be paid something for its use. Right? Debt is productive for the company and employees, and it’s productive for you since it is hard to take your money, and run 20 different diversified businesses yourself and get a decent risk-managed return. Does holding gold do anything productive? Does trading gold do anything productive?
One other point, awgee:
“For me it is obvious that the Fed will neither taper nor tighten because the banks are still insolvent and the member banks make a ton off ZIRP and POMO.”
The FED isn’t raising the short end of the yield curve. They are raising the long end. The FED was very clear that they aren’t changing either the discount or target rates as part of the taper. They are only decreasing the amount of UST and MBS they are buying. Why is this significant? Because banks have unlimited access to the discount window. They can borrow money from the FED at 0.75% and make a mortgage loan at 4.75%. The banks earn origination and servicing fees on these loans plus the difference between the discount and the note rate until they re-sell to Fannie or Freddie. So the taper may actually increase the amount the banks make for each loan. If it weren’t for the issue of volume…
Obama is sure to appoint another Keynesian lap-dog as Fed Chairman/Chairwoman to support the expansion of his welfare state. But it’s hard for me, a libertarian who leans right, to say I’d expect anything different from a Republican.
Lee – A republican would appoint another Keynesian lap dog to support the expansion of the corporate / banking state.
Lee – A republican would appoint another Keynesian lap dog to support the expansion of the corporate / banking state.
Kinda like BO did when he reappointed the Bernanke … right. After all, the vampire squid was BO’s number one contributor in ’08. Remember that?
Nah, the Republican administrations aren’t Keynesian: Keynes believed in contracting government spending during boom times.
(Not much evidence that the Democratic administrations are Keynesian by this metric either.)
Nah, the Republican administrations aren’t Keynesian: Keynes believed in contracting government spending during boom times.
Nice … +1
“Obama is sure to appoint another Keynesian lap-dog as Fed Chairman/Chairwoman to support the expansion of his welfare state.”
Like Edward Demarco? He has to be near the top of Obama’s list…
Evidently, the bulls ”recovery” narrative has crumbled to dust…
HUGE MISS: NEW HOME SALES DROP 13%
New home sales plunged 13.4% month-over-month in July to an annualized pace of 394,000 units in July.
Economists polled by Bloomberg were looking for new home sales to fall 2% to an annualized pace of 487,000 units.
There was also a huge downward revision to June’s number. New home sales climbed a more modest 3.6% to 455,000 units, down from the initial reading of an 8.3% rise to 497,000 units.
http://www.businessinsider.com/july-new-home-sales-2013-8#ixzz2cnqaZXmh
Image this is just an increase in mortgage rates from 3.5% to 4.5%. 4.5% is no where near the 7% to 9% average.
I continue to be suprised by the VELOCITY of the deterioration over the last 60 days. It just further reinforces the notion that the trend of decreasing interest rates were the ONLY thing propping up the real estate market and inflating values.
Now that interest rates are increasing, and there is the expectation for continued increases, the housing momentum is GONE.
Every now and then, on different blogs, I read that the ‘Cash for Your Gold’ shops and the sudden increase of the number of those shops is an indicator of positive sentiment. Positive sentiment being a negative indicator. And I have posted how I never understood that increase as being an positive sentiment indicator. If anything, it would seem to me to be a negative sentiment indicator. Positive sentiment is when everybody, Joe 6-pack, is buying, and extreme positive sentiment is when everybody is buying with borrowed money; leverage. The increase in the number of ‘Gold for Cash’ shops would indicate that Joe 6-pack is SELLING, not buying, right? And when I point this out, nobody ever responds to my logic, including the persons who post that the ‘Cash for Gold’ shops indicates a gold mania, or a positive sentiment indicator. And I have always asked the question, “When Joe 6-pack is selling, who is buying?” And nobody has ever answered, including the persons who say that ‘Cash for Gold’ shops are a positive sentiment indicator. I have had my suspicions on where the scrap gold is going, that’s what it is called, scrap gold, and have lately had my suspicions verified.
So, I ask you, is the increase in ‘Cash for Gold’ shops a positive sentiment indicator, a negative sentiment indicator, or no indicator at all? And where do you suppose all that scrap gold is going? Who is buying?
BTW, I have wondered when those shops would start going out of business, or if they would, and I just saw one that closed down. That is the first one that I have seen close.
Yes, it is off topic, but where else do I ask these questions?
I agree with you that it is a negative indicator. Cash for Gold meant gold reached a high enough value that struggling families could sell old jewelry to people taking advantage of them. $1,000 for jewelry collecting dust is hard to pass up. No one cared that the true value of what they gave up was probably $2,000. Now that the check isn’t as big and the margins aren’t as good, the shops will close. Those closings would seem to be a positive indicator since fewer people are willing to hock their gold. Or those who are willing already have. The closings also mean that the economic conditions/forecasts are positive enough to push gold prices down. They are just overglorified pawn shops. I’m not sure that anyone would view an onslaught of pawn shops in their town to be a sign of good times.
I think the Cash for Gold shops is a sign of how hard up mall owners are to lease space. After all, as someone else said, these are glorified pawn shops. In the good times an upscale mall would never want these as tenants…but now they are hungry for every dime of net operating income per square foot they can get, so they let almost anyone in there.
These types of shops are dual purpose– tend to pop up during times when the wholesale demand for physical gold far exceeds supply (price action validates). But, also provide a convenient outlet for people to come-in and sell when they need cash, and once the bulk of the neighborhood has sold-off, they simply close. Not much else to read into them IMHO 😉
el O – I have never seen these shops pop up before. Pawn shops and coin dealers are known to buy gold, but until the last few years, I had never seen a strictly ‘Cash for Gold’ store. Why the increase now? If there is a need for “a convenient outlet for people to come-in and sell when they need cash”, hasn’t there always been that need. Why has the number increased now? I have read many posters tell of that observation when making the claim that the increase in these stores is an indicator of positive sentiment in the gold market and therefore a reason to sell. They also noticed an increase in these stores. Whether they are a glorified pawn shop is irrelevant to whether or not they are or aren’t a sentiment indicator and what type of indicator, positive or negative. How can an increase the the number of Joe 6-packs selling be an indicator that gold ownership is popular? Would it not say just the opposite?
Likewise I’ve noticed a large increase in the number of Vehicle Title Loan outlets in my area. That cannot be a sign the local economy is doing well…
I’ve noticed that as well. Perhaps central banks are buying up the world’s supply of used vehicles.
And there goes the MBS….
http://www.mortgagenewsdaily.com/mbs/
Looks like they staged a decent recovery rally today. 5% rates may have to wait a few more weeks.
Groucho Marx ‘called it’
“The secret of life is honesty and fair dealing. If you can fake that, you’ve got it made”
Larry-
There seems to be an error in your post today. You state:
“Eased at the margins? LOL! Have you seen the LTVs on modified loans?
You then post a chart highlighting back end DTI’s. Obviously, a back end DTI is measuring something completely different than LTV. Virtually every loan modified under HAMP is underwater, so the current LTV’s would be north of 100%.
Thanks, I updated the post.
U.S. economy can handle reduction in bond-buys: Fed’s Fisher
The U.S. economy can withstand a reduction in the Federal Reserve’s stimulative asset-purchase program, even though the easy-money policies have boosted U.S. manufacturers and other companies, a top central bank official said on Thursday.
“Personally I think the economy is strong enough to begin the process,” Dallas Fed President Richard Fisher, one of 19 policymakers at the central bank, said of the $85-billion monthly quantitative easing program, or QE3.
Investors are trying to guess when the Fed will start to wind down QE3 after Chairman Ben Bernanke said in June that it would likely happen later this year. Most observers predict the Fed will act in September, and a survey of dealers published on Thursday reinforced that view.
While U.S. growth is still tepid and the unemployment rate remained high at 7.4 percent last month, that rate is down from 8.2 percent a year earlier and economic data has been encouraging in the last few months. The Fed launched the bond-buying in September aiming to spur investment, hiring and economic growth.
“The key thing is the cumulative effect (of QE3) and understanding the cost of continuing to do this,” Fisher told reporters on the sidelines of a manufacturing conference.
“Even if we do start dialing it back, whenever that is, we still will be buying more” bonds, he added. “It’s a question of buying less than we did before.”
With many expecting the policy change to come at a September 17-18 Fed policy meeting, investors are now wondering by how much the program could be reduced.
I don’t think this article really proves that Yellen missed the housing bubble. In the cited testimony, she doesn’t address the question of whether she believes a housing bubble exists or not.
In Sept 2005, she gave this testimony about whether the fed should try to deflate a housing bubble. It seems pretty clear that she believed a housing bubble did exist:
http://www.frbsf.org/our-district/press/presidents-speeches/yellen-speeches/2005/september/the-us-economy-and-monetary-policy-london/
Thank you for posting her additional comments on housing.
She was concerned about a housing bubble, particularly since governor Guynn was making such a big deal about it. However, read these statements from her testimony:
The news article suggests she “called the housing bust.” Clearly, she didn’t. The impact of the collapsing housing bubble was exceedingly large, and nothing in her statements suggests that the federal reserve can or should do anything about it. Further, she still embraced the foolishness of financial innovation.
Bump in the road? The largest recession since the Great Depression was triggered by the collapse in housing. The overhang of mortgage debt is one of the main reasons the economy continues to sputter six years later. This was a big miss.
Perhaps the article doesn’t firmly establish that Janet Yellen completely missed the housing bubble, but I think we can confidently say she didn’t grasp how bad it was or how devastating the impact on the economy would be, and that would be a skill I would want in a central banker. Further, the contention that she “called the housing bust” as expressed in the news article is completely erroneous.
“First, if the bubble were to collapse on its own, would the effect on the economy be exceedingly large? Second, is it unlikely that the Fed could mitigate the consequences? Third, is monetary policy the best tool to use to deflate a house-price bubble?
My answers to these questions in the shortest possible form are, “no,” “no,” and “no.” “
I wonder if she still thinks the same thing today. I remember thinking at the time that prices can’t possibly continue upward at this pace. I don’t know if I was thinking this was a bubble, but something sure didn’t seem right in 2005. By 2006, it was pretty clear that I wouldn’t be buying anytime soon.
By tapering in light of a 28% yoy rise in OC home prices, it seems the FED is now saying: yes, yes, and yes.
Hold on everybody!!! The NAR just said July 2013 sales spiked:
http://www.realtor.org/news-releases/2013/08/existing-home-sales-spike-in-july
But you have numerous conflicting news reports from bloomberg, washington post, and government data that says otherwise:
http://mobile.bloomberg.com/news/2013-08-23/sales-of-new-homes-in-u-s-plunged-more-than-forecast-in-july.html
http://www.washingtonpost.com/business/economy/july-new-home-sales-plunge-by-the-most-in-three-years-construction-remains-low/2013/08/23/e8d10494-0b62-11e3-8974-f97ab3b3c677_story.html
You can put lipstick on a pig, but….
Your seeing the effect of the different ways sales are reported. Existing home sales are reported at closing, which has a 60 day delay due to escrow. New home sales are reported at the time of contract signing, so there is no delay. When new home sales drop off a cliff, it’s a leading indicator of what is about to happen with existing home sales. August and September existing home sales will not have the “feel good” headline like July did.
In 30 years of investing in RE in California I have never seen the lights go off so fast, but I also never have seen interest rates go up 35% in two weeks. Take a look at Ladera Ranch, 75 condo’s available with some now at $270 square foot. The folks at Rancho Mission Viejo have new homes to be finished in 60 days with no buyers and at $340 square foot, this should be interesting to watch how they move there unsold product.
How is the Mello Roos in RMV? Ladera Ranch is one of those special bubble cases where a lot of the homes were sold at the bubble, and the Mello Roos is ~0.7% of the value of the home WHEN SOLD. So, if you are trying to sell a home that was built in 2006 in Ladera Ranch, you may have to drop $/sf to make the Mello Roos affordable. It’s not always an apples to apples comparison. There is another bubble mello roos area in Fullerton, Amerige Heights. We looked there in 2011, but couldn’t stomach the $700/mo mello roos on a 700k listing that sold for 1.2M in 2006. There was also an association fee. We started looking elsewhere to spend a G/mo. The mello roos puts a floor on affordability as the bubble burst. Even if I could afford to buy the house, the RENT WAS TOO DAMN HIGH!