Housing | timiacono.com - Part 30

Economists and the Housing Bubble

More evidence that economists in general and dismal scientists at the Federal Reserve in particular are hopelessly and dangerously detached from reality (i.e., guided by the mistaken belief that, if something doesn’t exist in their models, neither does it exist in the real world) comes via this Associated Press story about a new study by the central bank detailing how wild speculation drove the late, great U.S. housing bubble.

A new federal report shows that speculative real estate investors played a larger role than originally thought in driving the housing bubble that led to record foreclosures and sent economies plummeting in Nevada, California, Arizona, Florida and other states.

Researchers with the Federal Reserve Bank of New York found that investors who used low-down-payment, subprime credit to purchase multiple residential properties helped inflate home prices and are largely to blame for the recession. The researchers said their findings focused on an “undocumented” dimension of the housing market crisis that had been previously overlooked as officials focused on how to contain the financial crisis, not what caused it.

More than a third of all U.S. home mortgages granted in 2006 went to people who already owned at least one house, according to the report. In Arizona, California, Florida and Nevada, where average home prices more than doubled, investors made up nearly half of all mortgage-backed purchases during the housing bubble. Buyers owning three or more properties represented the fastest-growing segment of homeowners during that time.

“This may have allowed the bubble to inflate further, which caused millions of owner-occupants to pay more if they wanted to buy a home for their family,” the researchers noted.

I saw this last week when it was originally published and should have mentioned it at the time (the report from the New York Fed can be found here), but, now that it’s getting lots of attention in the mainstream media it’s a case of better late than never.

Goldman, Barclays See a Bottom for Housing

They say that bottoms for long-term cycles are virtually undetectable in real time because they are so long and so flat with most market participants having lost interest in the sector, as was the case for stocks back in the early 1980s. According to two big investment banks, the long awaited bottom for the U.S. housing market will come in the year ahead, thought it’s not clear if anyone will notice. First, from the Wall Street Journal comes this story about the Vampire Squid’s latest thinking on the property market.

Analysts at Goldman Sachs predict in a new report (published late Friday) that the end of the crash in home values is actually within view.

Goldman’s analysts, Hui Shan and Sven Jari Stehn, project that the national S&P/Case-Shiller home price index has 2.5% to fall before it hits bottom next summer. The Case-Shiller index of prices in 20 large cities is likely to fall 3.5% before hitting bottom in the second half of 2012, they say.

According to this Housing Wire report, a Barclays analyst thinks the non-distressed home market may have already hit bottom and that the rest of the market will soon follow.

Barclays Capital analyst Stephen Kim predicts a housing recovery buoyed by improving jobs numbers and the fact prices for nondistressed homes will have stabilized without government support.

“In the absence of a government homebuyer incentives, prices for non-distressed home sales have stabilized for almost a year,” Kim said. “This is the most important trend in the housing industry right now, and we are amazed at how little attention it has been getting from the media and the street. This stability on the part of nondistressed prices has occurred despite a very high share of distressed activity and continued declines in overall prices.”

Of course, freakishly low mortgage rates have had a lot to do with whatever stability non-distressed home sales have seen and, if home prices finally do stop falling next year, it’s hard to imagine they’ll go back up very quickly as lending rates will also be rising.

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No, Home Building Isn’t Quite This Bad

Cartoons by Tom Toles used to be a regular feature here, but, for some reason, they’ve appeared here infrequently over the last year or two. This one was worth the wait.

From the Tom Toles archive at the Washington Post.

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The Slowdown in China

Worrisome signs have been emerging from China in recent weeks that all is not well. Home prices have been notching modest declines of a fraction of a percent over each of the last three months (though this may be one case where the government’s data is manipulated even more than usual) and the manufacturing sector saw a modest contraction in November for the first time since 2009.

Today, the Chinese services sector notched its weakest growth in three months and, after the central bank loosened bank reserve requirements last week after two years of tightening, policymakers fret that slowing growth could lead to social unrest. Amid daily calls by pundits for a “hard landing”, the LA Times reports that the planned economy is in trouble.

According to an official New China News Agency report published Saturday, China’s top security chief warned provincial officials to brace for unrest if financial conditions continue to deteriorate.

Zhou Yongkang, a member of China’s nine-person Politburo Standing Committee, said the country should focus on developing better social management -– a euphemism for control aimed at stamping out opposition and unrest.

“The Party and the government have always paid a lot of attention to social management … but it still cannot keep up with the changes in economic and social development,” Zhou reportedly said, using typically dense party jargon.

“Faced with the negative impact of the market economy, we still have not established a complete social-management system,” Zhou continued. “How to establish a social management with Chinese characteristics to suit the socialistic market economic system in China is the most pressing task we face today.”

With the labor market now showing some distress as the number of strikes and other protests escalates, income inequality is an increasingly important issue to workers with increasingly idle hands and this is not good news for the government.

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