Housing | timiacono.com - Part 5

Janet Yellen and the “B-Word”

John Cassidy writes in the New Yorker that Federal Reserve Chair Janet Yellen didn’t see fit to once mention asset bubbles in her speech at the Economic Club of New York the other day and that, in itself, is a bit disconcerting.

But what was most striking to me about Yellen’s remarks was that she didn’t even discuss the financial markets and the overriding need to avoid another damaging speculative bubble, like the ones that the American economy experienced in the late nineteen-nineties and mid-two-thousands. Indeed, Yellen didn’t use the B-word at all. Given that her immediate predecessors, Alan Greenspan and Ben Bernanke, will be remembered for, among other things, their roles in inflating the bubbles in the stock market and the housing market, that was a pretty remarkable omission.

Recent history can’t be avoided, and neither can the task of maintaining financial stability and avoiding boom-bust cycles, particularly in the credit markets. Together with maintaining an adequate level of over-all demand in the economy, which is necessary for investment and job creation to proceed, it is the key challenge that all central banks face. But Yellen didn’t even mention it. Instead, she couched her remarks in terms of the old-fashioned inflation-unemployment trade-off, which is precisely the conceptual framework that encouraged Greenspan and Bernanke to shrug off what was happening in the financial and housing markets.

It’s hard to believe that Yellen will be any different than her predecessors in spotting a looming crisis be it of the bursting asset bubble variety or something different.

Moreover, when considering that history rarely repeats, but often rhymes as Mark Twain purportedly quipped, the Fed will probably be more attuned to spotting something they’ve already seen (e.g., stock bubble, housing bubble, etc.) rather than the more likely case of something completely different (e.g., currency crisis, sovereign debt crisis, etc.)

Tyler Cowen of Marginal Revolution notoriety points readers to two CBC News stories about the listing of the cheapest house for sale in the Vancouver market at just under $600,000 and its subsequent sale just two weeks later at almost $50,000 more than the sellers asked.

From the latter, we learn the following:

Vancouver’s cheapest listed single family home attracted large numbers to open houses, with two written offers pushing the final purchase price seven per cent over asking.

The house was the cheapest listing in Vancouver last week.

The price of the 100-year-old, 1,951-square-foot, three-bedroom, detached house at 2622 Clark Dr. was set low initially due to its smaller size and half lot site.

“It’s very rare, and that’s why all the excitement,” said RE/MAX realtor Mary Cleaver.

“I believe this house was, potentially, saved because it is on a different kind of lot, one that isn’t necessarily appealing to builders. So this has been a lovely family home for 100 years and, if well taken care of, could house a family 100 years from today,” she said.

Looking at the house and that lot, the excitement really is perfectly understandable.

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The latest Gallup survey on investment preferences in the U.S. puts real estate ahead of gold and stocks for the first time in at least a few years in yet another example of how most people (at least in the U.S.) simply follow established trends.

Interestingly, those favoring real estate as the best long-term investment rose to as high as 50 percent a decade ago when the prior housing bubble was inflating.

There’s also a breakdown of preferences by income, age, and political party affiliation. Not surprisingly, those with higher incomes favor stocks and real estate over other investment choices and the appeal of gold goes up as income goes down.

By a wide margin, younger Americans think more highly of Savings accounts/CDs than do other age groups, but the most interesting part of this survey (at least to me) was how views toward equity markets change  based on party affiliation. Some 30 percent of Democrats think stocks are the best investment, but only 26 percent of Republicans agree, yet just 19 percent of independents also see it this way.

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The Commerce Department reported(.pdf) that U.S. housing starts rose 2.8 percent last month, from an upwardly revised seasonally adjusted annual rate of 920,000 in February to 946,000 in April, however, this was below the consensus estimate of 955,000 that was expected, at least in part, due to better weather in the spring after a severe winter.

After jumping in February in anticipation of warmer temperatures in most parts of the country, permits for new construction actually declined last month, falling 2.4 percent from a downwardly revised rate of 1,014,000 to 990,000.

Both measures of U.S. homebuilding activity came in below consensus estimates that were a bit higher than they would otherwise have been, working on the assumption that there would be a larger spring bounce than usual, however, that was not to be.

On a year-over-year basis, permits for new construction – a key leading indicator for the industry – rose 11.2 percent, however, housing starts are actually lower than a year ago, down 6.4 percent, in what was the widest contraction in almost three years.

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