With housing markets, the elephant in the room is shadow inventory. Much has been written about the subject over the last several years. It’s been portrayed as an apparition among the housing bulls, as if the millions of delinquent mortgages simply don’t exist. Most bulls comfort themselves with fanciful notions of loan modification programs succeeding and some simply denying there is a problem at all. Well, there is a problem. Lenders underwrote trillions of dollars worth of mortgages to people who couldn’t or wouldn’t pay them back. Contrary to the popular myth in the mainstream media, it isn’t a problem of a few unemployed prudent borrowers temporarily unable to keep up with their mortgage payments. The few successes in the loan modification programs served that small group. The problem is the millions of Ponzis who can only pay their bills if a lender gives them more credit. Ponzi borrowing became a lifestyle choice during the bubble, and it’s the Ponzis who are persistently delinquent and won’t survive the amend-extend-pretend dance. Giving Ponzis a reduced payment doesn’t solve their problem. They can’t afford a payment, even a reduced one, without fresh infusions of credit. The shadow inventory problem is an indirect measure of Ponzi behavior. The fact that it has been so persistent shows just how widespread this behavior is.
The real question isn’t whether or not shadow inventory exists.
It does.
The question isn’t whether or not loan modifications and short sales will make the problem dissipate.
They won’t.
The question is whether or not the banks can manage the flow of properties to prevent a supply imbalance on the MLS from forcing prices to move lower yet again.
Essays in Fragility: Shadow Banking, Housing Inventory and Liabilities
Housing has recovered for two reasons:
1. The Federal government has socialized the mortgage industry, guaranteeing over 90% of all mortgages originated
2. Mortgage lenders have withheld homes off the market to restrict supply, thus driving prices up.
About 15% of the entire mortgaged-home market is held in shadow inventory (about 47 million mortgages, about 7 million in the shadow inventory).
This strategy of artificially restricting supply while socializing mortgages has worked to a point, but housing is vulnerable to any slackening in demand or political pressure to limit the socialization of mortgages. For example, FHA, which has done all the heavy lifting since Fannie Mae was recognized as insolvent, will soon need a taxpayer bailout. Will the public ever tire of subsidizing a manipulated housing market? Stay tuned.
Right now, it’s unlikely anyone will complain about the federal bailout of the FHA or the ongoing market manipulations. Lenders, loanowners, and homeowners are all united in their desire to see higher house prices — at whatever the cost. The government bailout solution is particularly appealing to lenders and loanowners because then they don’t have to bear the full brunt of their foolish decisions. The people who are getting really screwed are renters and future home buyers, but nobody speaks for them.
‘Shadow’ Overhyped as Housing Threat
December 25, 2012, 5:30 p.m. ET
It’s been a hard year to be a housing bear.
U.S. housing markets finally came alive in 2012, with home sales and housing starts up strongly. And prices are on track to end the year in positive territory for the first time since the downturn began in 2006.
It was a hard year to be a housing bear. There are very few left. Although I am cautious, and I will continue to point out the problems the market faces, I no longer believe prices are going down either. I left the bear camp in September, and as I pointed out in October, The housing bears are right, but prices will go up anyway.
S&P/Case-Shiller home-price data due Wednesday should confirm those gains. The main 20-city, composite index for October is expected to rise by 4.1% from one year ago, according to Zillow Inc.
Skeptics often point to the sizable overhang of properties headed toward foreclosure—the “shadow” inventory—that they say will erode such recent gains. While shadow inventory remains high, there is good reason to think it won’t choke off the nascent recovery in 2013.
He does acknowledge shadow inventory exists. That’s a start.
First, the shadow is shrinking. It has already fallen to 3.4 million units this year from a peak of 4.7 million in 2009, according to John Burns Real Estate Consulting.
One of the big stories of early 2013 will be the “surprising” increase in delinquency rates. Delinquency rates have hovered above 7% since last February. There has been no progress on delinquencies since the settlement with the banks last year. Instead, the banks chose squatting and can-kicking over foreclosure processing to bring down inventories. They sacrificed making progress on delinquencies to accomplish their goal. The mainstream media has been ignoring the fact that the monthly delinquency numbers have flatlined and instead they continue to focus on the year-over-year drops. In early 2013, we will see a year-over-year increase in delinquency rates, and the notion of declining shadow inventory will be dashed.
As well, inventories of new homes for sale are at 50-year lows, while listings of previously owned homes are at an 11-year low. Banks have also become better at approving short sales, where homes sell for less than the mortgage owed.
The danger in focusing so heavily on supply is that skeptics have overlooked demand, which revved up this past year.
There is no danger in focusing on supply. Managing supply is what caused the markets to bottom in 2012, and without continued success in managing supply, prices may turn south again. Demand is up over the dismal levels of last year, but only because we have record low interest rates and increased investor activity. Originations for loans among owner occupants is stuck at 1990s levels.
Sales of existing homes in November were up 14.5% year over year to a three-year high.
Those numbers always look good when compared to a very low base level. In California, demand is still about 5% below the average from 1988 to 2011.
Meanwhile, hearty investor appetites for foreclosed properties have trimmed the backlog and reduced the discount at which foreclosures sell. In September, foreclosures sold for around 7.7% less than traditional home sales, down from a 24% discount three years ago, according to Zillow.
The shadow does pose a threat to some markets. States such as New York, New Jersey, and Florida, where banks have struggled to meet court-administered foreclosure processes, have larger backlogs than the rest of the country. Arizona and California, by contrast, have less restrictive foreclosure processes and have cleared more bad debt.
In California, we’ve only cleared out the bad debt on the below-median households. The move-up market is still clogged with bad debt and committed squatters.
If banks increase foreclosures, it’s more likely to resemble a tornado than a flood, striking some communities while bypassing others, said Jeffrey Otteau, president of appraisal firm Otteau Valuation Group.
It will be years before housing is back to normal. But as long as demand keeps pace, the market shouldn’t fear its shadow.
It’s not about the demand. The demand for houses will be whatever it is. It’s all about the supply. Can the supply be managed to meet, but not exceed, whatever demand is present? If you had asked me prior to 2012, I would have said no. Cartels are inherently unstable, and it didn’t seem plausible that a collection of lenders who were stupid enough to inflate a massive housing bubble would be intelligent enough to control the supply to prevent its deflation. I was wrong. 2012 proved they could. It took a reduction of inventory of over 35% nationally to do it, but lenders finally managed to find a level of foreclosure and short sale processing that didn’t cause prices to drop. The recent price increases had nothing to do with demand and everything to do with controlling supply.
So can the banks keep control of the supply?
I think the banks can keep control of the supply well enough to prevent another major decline in house prices, assuming interest rates don’t go up. Banks will come under increasing pressure to do something about their 10%+ delinquency rates, if not from regulators, then from rising capital costs. They’ve had six years practice to learn how to dispose of their inventory, and with a great deal of trial and error, they seem to have finally figured it out. I do believe the processing of shadow inventory will cause appreciation to remain below buyer expectations, but I also believe lenders will manage it well enough to keep the 2012 bottom from being taken out.
Ponzis from the start
After looking at thousands of mortgage records, I see patterns in people’s behavior. Many people started Ponzi borrowing tentatively at first, but during the mania, they went for broke and ended up losing their homes. However, some of the people were already well versed in Ponzi borrowing behavior from the first moment they took the keys. Today’s former owners were in the latter category. For them, Ponzi borrowing is just how personal finances are managed. I wonder what they are doing now?
- This property was purchased on3/6/2001 for $229,000. The owners used a $184,000 first mortgage, a $23,000 second mortgage, and a $22,000 down payment.
- On 6/12/2002 they refinanced with a $239,062 first mortgage and obtained a $38,250 stand-alone second.
- On 1/6/2003 they opened a $56,200 HELOC.
- On 7/3/2003 they opened a $80,000 HELOC.
- On 1/5/2004 they refinanced with a $310,500 first mortgage.
- On 9/10/2004 they obtained a $53,000 HELOC.
- On 6/28/2005 they opened a $14,167 HELOC.
- On 10/12/2006 they refinanced with a $488,750 first mortgage.
- On 3/14/2007 they obtained a $28,750 stand-alone second.
- Total property debt was $517,500.
- Total mortgage equity withdrawal was $310,500.
The quit paying in late 2008 and squatted for four years.
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Proprietary OC Housing News home purchase analysis
5292 BELLE Ave Cypress, CA 90630
$399,900 …….. Asking Price
$229,000 ………. Purchase Price
3/6/2001 ………. Purchase Date
$170,900 ………. Gross Gain (Loss)
($31,992) ………… Commissions and Costs at 8%
============================================
$138,908 ………. Net Gain (Loss)
============================================
74.6% ………. Gross Percent Change
60.7% ………. Net Percent Change
4.7% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$399,900 …….. Asking Price
$13,997 ………… 3.5% Down FHA Financing
3.41% …………. Mortgage Interest Rate
30 ……………… Number of Years
$385,904 …….. Mortgage
$99,178 ………. Income Requirement
$1,714 ………… Monthly Mortgage Payment
$347 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$100 ………… Homeowners Insurance at 0.3%
$402 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$2,562 ………. Monthly Cash Outlays
($253) ………. Tax Savings
($617) ………. Equity Hidden in Payment
$15 ………….. Lost Income to Down Payment
$120 ………….. Maintenance and Replacement Reserves
============================================
$1,827 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$5,499 ………… Furnishing and Move In at 1% + $1,500
$5,499 ………… Closing Costs at 1% + $1,500
$3,859 ………… Interest Points
$13,997 ………… Down Payment
============================================
$28,854 ………. Total Cash Costs
$28,000 ………. Emergency Cash Reserves
============================================
$56,854 ………. Total Savings Needed
The property above is available for sale on the MLS.
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38 Responses to “Is the threat of shadow inventory truly manageable?”
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The waste of it all is just unspeakable. Very plain to see that none of that stolen money went to making this sad little house more livable- it depresses me just to look at the pictures. Any $1000 a month rental would be a nicer place to live. This house is a tear-down.
Count me among those angry as hell at the bailout of the FHA and the housing market in general, and at the expenditure of trillions of dollars to bail out banks, the housing agencies and home borrowers. I am forced to contribute by way of taxes paid to manipulations that once more price me out of a decent place to live and/or force me to borrow to the max just for a reasonable condominium, just as prices were dropping back to within the pale of reason and to the point where I could come in with a substantial amount of cash and have money left over to make the place more livable. Nobody is really benefiting from the bailout of the housing market except the most unreliable borrowers, and lenders. The rest of us- cash buyers, market rate renters, people who have paid off their house loans, and aspiring buyers, the working poor who are too “rich” to qualify for welfare gimmes but too poor to afford a decent rental, good food, or decent clothing- are all being hosed to pay for it.
I know how you feel. It’s become responsible versus irresponsible and it’s not really based on income. If you middle class ponzi that took out all your equity on your house, don’t worry we have programs that make the responsible who didn’t help pay your share. Being responsible is no longer rewarded; 3.5% FHA loans, bank settlements, modifications programs all benefit irresponsible behavior. You save money, then you .5% interest in the bank for it.
“Nobody is really benefiting from the bailout of the housing market except the most unreliable borrowers, and lenders.”
And what’s worse is that nobody seems to see that. Responsible homeowners are getting hosed too, but since the value of their houses are going up, they either don’t see it or don’t care.
You are one of the few media outlets to report on the issue. Unfortunately, most people think what the MSM tells them to think and they are too busy or not educated enough to question the narratives being fed to them.
Collectivists have been counter-educated. They are unable to understand unintended consequence. Even if you force them to read Bastiat they would discount it, ignore it, or use their misinformation to “disprove” it. Try it with your friends:
http://www.econlib.org/library/Bastiat/basEss1.html
Yuri Bezmenov was 100% correct. We’ve been dumbed down over several generations by collectivist rot. Paying for it with your own productivity feels pretty good, doesn’t it?
http://www.youtube.com/watch?v=A-ZQbJHagx4
Interviewer is G Edward Griffin, author of “Creature From Jeckyll Island”. Both intelligent, free men. We need more of them.
Thanks for that link. I am about half way through, and I find it very interesting. It was written 150 years ago, but it resonates through the ages.
“…Nobody is really benefiting from the bailout of the housing market except the most unreliable borrowers, and lenders…”
Mostly true, but it’s hard to prove a negative or an alternative scenario. e.g. Let’s say our federal government were as polarized over the last 6-7 years as it is today, and nothing could get done; and therefore TARP, GSE rescue, bailouts, etc. never occurred.
I’m pretty sure the Irvine house I want today selling for $1m would be closer to $500k, maybe less. I’m also pretty sure my income and/or my wife’s would have had serious interruptions over that period. Would I be better off in my micro-economic world? I doubt it. I would bet I’m better off under the actual scenario, even though it annoys me just as much as most others here.
Because my industry was hit so hard, I feel like I got the worst of both worlds. I say no appreciable benefit from any of the bailouts, and I will end up paying the bills.
Bullshit. Complete and utter bullshit. You are justifying privatized profits and socialized losses because of a misunderstanding of economics. Bankruptcy is healthy. Pain is healthy. The correction/recession/depression is healthy. You are perpetuating that which is unsustainable, and not enough money exists in the world to do so.
Read Bastiat. There are major consequences created by such moral hazard, which will take YEARS to surface. This will end in extremely high interest rates and debt service consuming 100% of tax revenue, solution or nightmare?
TARP, GSE takeover, bailouts do not solve the problem, they merely compound the problem and socialize the losses. They create a short term, ‘smoke and mirrors’ bandaid in exchange for a larger problem down the road.
Ask yourself, “How did we get to systemic?”, then reread the response you wrote above. That’s how.
I’m not justifying anything. I’m simply speculating as to how my household’s finances may have been different in 2012 had all of the bailouts not occurred. But I’m glad your crystal ball is so clear. That must mean you profited greatly from this recession and will be profiting from all of the things you know will occur over the next decade, right?
Perspective,
I believe that you are correct. We’re we to return to “sane” housing policies, the interruptions which would occur in other areas of the economy would hurt us in other ways. Lest we forget, the solvency of our employers and business associates is measured in much the same way as the incompetent banks which we justly rail against.
Conform or be cast out.
“I left the bear camp in September, and as I pointed out in October, The housing bears are right, but prices will go up anyway.”
I still consider myself in the bear camp, but it’s getting lonely. Actually, if nothing happens in 2013, then I give up, it’s over, because it would have been 6 plus years in that camp. The cartel won and we have 10 years for below normal housing transactions to keep the squatters going in their houses. Inflation will eventually make this home prices aligned with income.
I am 100% still in the bear camp. Remember, manipulated interest rates send false signals only to those who misinterpret them.
However, I own 100% real money and view real estate through that prizm.
IR is right, but in real terms so am I.
ZIRP, zero interest rate policy, is forcing cash buyers to capitulate to purchasing overpriced real estate.
It’s an ugly misallocation of resources. Terrible for the economy.
Almost half of the properties in the shadow are delinquent and not yet foreclosed
As of October 2012, 2.3 million housing units still remain in shadow inventory, CoreLogic reported Wednesday.
The total translates into a supply of 7 months and sits 12.3 percent lower than the 2.6 million units in October 2011, according to the data provider. From September 2012, shadow inventory shrunk by about 1 percent.
In dollar terms, shadow inventory stood at $376 billion, down from $399 billion in October 2011.
“The size of the shadow inventory continues to shrink from peak levels in terms of numbers of units and the dollars they represent,” said Anand Nallathambi, president and CEO of CoreLogic. “We expect a gradual and progressive contraction in the shadow inventory in 2013 as investors continue to snap up foreclosed and REO properties and the broader recovery in housing market fundamentals takes hold.”
To determine the number of residential units in shadow inventory, CoreLogic calculated the number of properties that are seriously delinquent, in foreclosure, and held as REOs but not currently listed on multiple listing services.
Seriously delinquent properties were the main contributors to shadow inventory and numbered 1.04 million units (3.3 months’ supply) out of 2.3 million. About 903,000 properties in some stage of foreclosure were in the shadows, representing a supply of 2.8 months, while REOs in shadow inventory totaled 354,000, which is a 1.1 months’ supply.
“Almost half of the properties in the shadow are delinquent and not yet foreclosed,” noted Mark Fleming, chief economist for CoreLogic. “Given the long foreclosure timelines in many states, the current shadow inventory stock represents little immediate threat to a significant swing in housing market supply.”
Mortgage Debt Relief Act Extended for Another Year
Struggling homeowners who are considering a short sale or modification will be eligible for tax relief in 2013.
The “fiscal cliff bill” passed by Congress on January 1 included a provision to exclude borrowers from paying taxes on debt forgiven through a short sale, foreclosure, or loan modification.
Known as Mortgage Debt Relief Act of 2007, the act was scheduled to expire December 31, 2012, but received an extension for another year.
Industry experts and political leaders from all sides expressed support for the act’s extension.
In November, 41 state attorneys general wrote a letter urging U.S. House and Senate leaders to extend the act, arguing the act’s expiration would take away from the effectiveness of the national mortgage servicing settlement.
Through the settlement, state and federal officials reached an agreement with five of the largest servicers over “foreclosure abuses.” The settlement requires the servicers to provide $20 billion in consumer relief to struggling homeowners.
As of September 30, a report from settlement monitor Joseph Smith found servicers provided 21,833 borrowers with $2.55 billion in relief through first lien principal reduction modifications, which averages to about $116,929 in debt forgiveness for each borrower.
If the act did not receive an extension, borrowers who received relief in the form of forgiven debt would be liable to pay taxes on the debt.
Bank finally realize monthly payment affordability matters
The Federal Reserve Bank of Boston recently conducted a study to clarify the effect of mortgage payment size on likelihood of default, and the researchers concluded “interest rate changes dramatically affect repayment behavior.”
Traditionally, “the prepayment option makes it impossible to use payment increases to measure the effects of payment changes,” the report reads. However, the Boston Fed was able to examine hybrid adjustable-rate mortgages (ARMs) that experienced payment declines during the recent economic climate.
Researchers compared homeowner payment behavior both before and after payment reductions and compared them to similar loans that did not receive simultaneous reductions.
“Our results show that the size of the monthly payment matters strongly for delinquency and cures, even for borrowers who are deeply underwater,” the Fed study states. “These findings, which we argue are consistent with theoretical predictions, shed light on the driving forces behind mortgage default and have a variety of policy implications.”
According to the findings, a payment reduction of about 2 percentage points results in a 50 percent decline in default probability. A 4 percentage point reduction decreases the likelihood of default by about 75 percent.
Even when applied to underwater borrowers, the Fed’s assertion that payment size plays an important role holds true. “Even severely underwater borrowers will be much more likely to cure if their interest rate is reduced substantially,” the report states.
Even the housing bears are predicting price increases in 2013
Home prices will increase by 3.1 percent in 2013 and top off 2012 with a 4.6 percent gain, according to Zillow’s December Home Price Expectations Survey.
The survey, which was conducted by Pulsenomics LLC, was based on responses from 105 economists and industry experts.
In September, survey panelists projected more modest gains and predicted prices would rise by 2.4 percent in 2013 and increase overall by 2.3 percent in 2012.
Through 2017, panelists expect prices to increase by more than 3 percent annually.
Among the experts surveyed, Zillow reported the most optimistic quartile averaged a 6.3 percent increase for 2012 and the most pessimistic experts averaged a 3 percent increase.
“An organic recovery in the housing market really took hold in the latter half of 2012, and this improvement is echoed in some of the most optimistic price projections we’ve seen in years from this group,” said Dr. Stan Humphries, Zillow’s chief economist.
Zillow found predictions for prices in 2013 averaged as high as 4.9 percent among the optimistic panelists and as low as 0.8 percent.
“Record levels of affordability and an improving overall economic picture have really helped buoy the market and have us well positioned for continued growth, albeit slightly slower, in 2013 and beyond,” Humphries added.
The forecast is based on the projected path of the S&P/Case-Shiller Index over the next five years. The most recent S&P home price report revealed a monthly decrease in October for both the 10-city and 20-city indices.
Gary Watts is predicting a 10% increase for OC in 2013.
A broken clock is right twice per day. He may be right. If the inventory remains low and interest rates remain low, prices will almost certainly go up.
Once an idiot, always an idiot.
06/07 Watts BS. He’s a shill. Zero credibility:
http://www.ronforhomes.com/garywatts2007.htm
There were some small changes in deductions this year….Hmmm….
Deductions Limits Will Affect Many Taxpayers
By JOHN D. MCKINNON
WASHINGTON—One of the biggest tax increases in the fiscal-cliff bill is also one of the least understood: a set of limits on tax deductions and other breaks that will hit far more households than the bill’s rate increases for top earners.
The bill approved in Congress to avert the fiscal cliff would bring the first major tax increase on high earners in 20 years. Laura Saunders breaks down how new tax increases will impact across different tax brackets.
The bill that cleared Congress Tuesday boosts the tax rate for single filers making more than $400,000 and married couples filing jointly making more than $450,000, or roughly the top 1% of filers.
But provisions that reduce the value of personal exemptions as well as most itemized deductions, including those for mortgage interest and state income-tax payments, will affect about twice as many people since they carry a lower income threshold—$250,000 for singles and $300,000 for married couples.
Those new limits drew complaints from some groups that benefit from deductions, particularly charities that depend on tax-deductible donations. They worry that new curbs on deductions, coupled with other taxes on higher-income Americans, will put a damper on giving.
“We are concerned,” said Diana Aviv, president of Independent Sector, a coalition of foundations, nonprofits and other charitable groups. “The big question for us now is, if we are [also] increasing rates on folks…does the combination create a greater disincentive for people to give?”
The debate foreshadows bigger fights in 2013, when Congress likely will try to overhaul the federal tax code, in part by further narrowing tax breaks.
The new limits are “like another cannonball being fired across our bow,” said Jerry Howard, chief executive of the National Association of Home Builders. “Clearly, it shows that the notion of limiting deductions is still one that’s being considered by policy makers.”
But a J.P. Morgan analyst, Michael Feroli, predicted that the new tax-break limits “should not directly affect…giving to charities or taking on more mortgage debt.”
The limits—known as PEP and Pease—were originally part of a budget deal passed by Congress in 1990, and were in effect for more than a decade. The Bush-era tax cuts of 2001 gradually got rid of PEP (which stands for “personal exemption phaseout”) and Pease (named for a Democratic congressman who pushed for the deduction limit).
Now the fiscal-cliff bill calls for their return, at least for higher-income people.
The PEP and Pease limits work on the same basic principle, limiting the value of exemptions and deductions for households that exceed a threshold. For example, the Pease limitation reduces a household’s itemized deductions by 3% of the amount over the threshold. The reduction can’t exceed 80% of the total deductions.
A couple with income of $400,000 average about $50,000 in itemized deductions, according to IRS statistics. Because their income would exceed the $300,000 threshold by $100,000, their allowed deductions would be reduced by about $3,000 to $47,000—potentially boosting their tax bill by about $1,000.
The original proponent of the deduction limit, the late Rep. Donald Pease of Ohio, viewed it as “the best available means…to ensure that nobody could game the system,” given the growing number of tax breaks that were being passed by Congress, said William Goold, his former chief of staff. The limit might be viewed now as dated, but “the goal remains as valid now as it did then,” he added.
From a political standpoint, the limits allow the Obama administration to achieve its long-sought goal of raising taxes on people making more than $250,000. PEP and Pease represent about $150 billion of the tax increase of about $620 billion over 10 years, making them a key element of the deal.
But some groups that benefit from itemized deductions—charities, for example—worry that the Pease provision might cause donors to be less generous.
A coalition of nonprofit groups, the Alliance for Charitable Reform, said this week that lawmakers should consider excluding charitable-donation deductions from the new limits, in order to protect charitable giving. The coalition also said that lawmakers should take other steps to “continue to preserve the charitable deduction…as we move forward into both tax reform and measures to address the federal deficit.”
It will be interesting to see if/how this affects higher-end markets. Your income must be pretty high (married AGI well above $300k) before these phase-outs start really biting. The example in the article is good:
“…A couple with income of $400,000 average about $50,000 in itemized deductions, according to IRS statistics. Because their income would exceed the $300,000 threshold by $100,000, their allowed deductions would be reduced by about $3,000 to $47,000—potentially boosting their tax bill by about $1,000…”
I suspect they will revisit this again later. The amount of the tax increase was tiny, and it will have no impact on the housing market. By the same token, it will have no impact on the budget deficit either.
Agreed. I think the Right got the rates/brackets they wanted, and now might trade deductions for spending cuts in the debt ceiling debate.
Question is, will the many seasoned
investorsspeculators (who’ve chosen to transact in a system that favors debtors and renters over creditors and landlords) going to be able to ‘get-out’ in time….As long as the properties are cashflow positive, there won’t be a rush to the exits. Even when the hedge funds liquidate, they will release product slowly to get the price they want.
Crowded trades always end badly
Inflation talk.
PIMCO’s Gross warns investors of looming inflation
Reuters – 1 hour 6 minutes ago By Sam Forgione
NEW YORK (Reuters) – Bill Gross, founder and co-chief investment officer of bond giant PIMCO, wrote in his first letter to investors this year that money printing by central banks will lead to a destructive bout of inflation.
Gross, who has criticized the Federal Reserve’s purchases of Treasuries and agency mortgage bonds in past letters, wrote in his January investment outlook entitled “Money for Nothin’ Writing Checks For Free” that the purchases will lead to a devaluation of currencies and gradually weaker investment returns.
“The future price tag of printing six trillion dollars’ worth of checks comes in the form of inflation and devaluation of currencies either relative to each other, or to commodities in less limitless supply such as oil or gold,” Gross wrote.
Gross, whose Pacific Investment Management Co. had $1.92 trillion in assets as of September 30, 2012, referred to a speech in 2002 by Federal Reserve Chairman Ben Bernanke in which Bernanke said that the United States could print an unlimited amount of dollars “at essentially no cost.”
Gross countered in his letter that the cost will be inflation, which will weaken the returns on long-term bonds and eventually risk assets such as stocks and high-yield bonds, and also hurt businesses.
Gross likened inflation to “dragons” lurking within the “cave” of money-printing programs.
“Zero-bound interest rates, QE maneuvering, and ‘essentially costless’ check writing destroy business models and stunt investment decisions which offer increasingly lower ROIs and ROEs,” Gross wrote, referring to returns on investment and equity.
Gross’ flagship PIMCO Total Return Fund earned a return of 10.36 percent in 2012, besting 88 percent of U.S. intermediate-term bond funds, according to Morningstar. The fund attracted $18 billion in new cash last year, bringing assets in the fund to $285 billion.
According to PIMCO’s website, the flagship fund’s biggest holdings are in mortgage and Treasury bonds, the securities which the Fed pledged to buy at $85 billion per month last December. The fund had 44 percent of its holdings in mortgage bonds and 23 percent of its holdings in Treasury securities as of the end of November 2012.
Gross recently wrote on PIMCO’s twitter account on December 30 that stocks and bonds will return less than 5 percent in 2013.
It appears the ‘numeraire’ does not agree.
Hmmm….
if ”inflation was looming” and in Q4-12, the TR fund was weighted 67% in bonds/treas. instruments, ‘offloading’ must be imminent.
Or, perhaps it was -’QE infinitas NOT- that is looming…..
http://www.zerohedge.com/news/2013-01-03/fomc-minutes-released-dissension-qe4eva-growing
Despite the fed’s desire for transparency, their actions still leave many unanswered questions.
1. Will they or won’t they keep printing money in 2013?
2. If inflation exceeds 2.5% before unemployment hits 5.5%, will they keep printing money and accept more inflation, or will they turn hawkish and tolerate high unemployment?
2/3s of the fund loaded with bonds haha, would anyone today consider it wise to own a fund in 2005 weighted 2/3s Florida condos?
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You know what it’s called when a group of people or corporations conspire to make a product unavailable to the consumer at market price?
It’s called a cartel, and it’s illegal under US law.
The banking system and real estate agents have formed an illegal cartel.
I agree.
Is the banking cartel in violation of the Sherman Antitrust Act?
I would argue the bear case. US real estate has zero value. The US has become quite the police state, recently. Imposition of martial law being one of our rulers’ major goals, I cannot see any serious point to your discussion! Once all of you have been thrown into FEMA labor camps, with UN peacekeepers quartered in all of the country’s housing (pending Obama’s executive order bestowing ALL upon the country’s foreign creditors)…your discussion of manipulated US interest rates/housing prices/shadow inventory will have proven moot.