China is Worried about rising Property Prices

Posted by PITHOCRATES - February 23rd, 2013

Week in Review

Housing sales are booming in China.  And prices are soaring.  So much so that the government is taking some action (see China Orders More Cities to Restrict Housing Purchases by Bloomberg News posted 2/21/2013 on Bloomberg).

China told local authorities to “decisively” curb real estate speculation and take steps to rein in the property market after prices rose the most in two years last month…

The government’s almost three-year effort to curb property prices has included raising down-payment and mortgage requirements, increasing construction of low-cost social housing and restricting home purchases in about 40 cities. Authorities also imposed a property tax for the first time in the cities of Shanghai and Chongqing.

Why all the concern of rising property prices?  Because of what happens when they stop rising.  Like they did in the U.S.  When people were paying mortgages that were greater than the market value of their houses some of them walked away.  And let the bank have their house.  As more did more foreclosed houses entered the market.  When interest rates rose on Adjustable Rate Mortgages (ARM) some could no longer pay their mortgage payment.  And they, too, let the banks have their houses.  Putting more foreclosed houses on the market.  With more houses on the market prices fell further.  Putting more people underwater in their mortgages.  And so on.  Until the U.S. eased itself into the Great Recession.  Just as the Japanese eased themselves in their Lost Decade when their asset bubble burst.

This is what the Chinese want to avoid.  That downward spiral of prices.  Deflation.  Sending their economy into a tail spin.  Like the Japanese are still trying to pull themselves out of some two decades later.  Because housing sales are the biggest driver of the domestic economy.  Building houses.  And furnishing houses.  It all adds up to a lot of economic activity.  Which the Chinese want so desperately so they are not wholly dependent on their export economy.  For they really don’t want to end up like the Japanese.  But they probably will.  As the Chinese are trying to manage the economy too much.  Just as the Japanese did.  All that government partnering with business.  It just doesn’t build real economic activity.  Because you have bureaucrats making economic decisions.  Not the market.  And bureaucrats often get things wrong.  Unlike the market.  Especially when it comes to asset bubbles.  When the market creates them they’re not that big and the corrections are not that painful.  But when the government creates one with their excessive interference into the free market economy you get a Lost Decade.  Or a Great Recession.

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Homeowners are still Suffering in the Housing Market but Speculators are Profiting

Posted by PITHOCRATES - February 3rd, 2013

Week in Review

Housing sales drive the economy.  Because it takes a lot of economic activity to build houses.  And even more for homeowners to furnish their homes.  This is why the government gave us the subprime mortgage crisis and the Great Recession.  They kept interest rates artificially low.  And the Clinton administration forced lenders to lower standards to put as many people into houses as possible.  But, alas, they put a lot of people into homes that couldn’t afford them.  Using subprime mortgages to get them into those homes.  Like the adjustable rate mortgage.  And when interest rates went up so did their mortgage payments.  And they defaulted.  Which kicked off the subprime mortgage crisis.  Giving us the Great Recession.

These low interest rates created a great demand for housing.  Everyone was borrowing money to buy.  Because money was so cheap to borrow.  And with those lower standards borrowing money was never easier.  Especially for investors.  Who bought houses.  Fixed them up.  And put them back on the market.  House flippers.  With all this demand housing prices soared.  Creating a great housing bubble.  Which burst.  As all bubbles do.  And housing prices plummeted.  Leaving people with mortgages greater than the new value of their houses.  Some walked away.  Especially those who put little to nothing down.  Like those house flippers.  And those subprime borrowers.  Flooding the market with more homes.  Putting further pressure on housing prices.

It was a huge mess the government gave us.  The damage was great.  And we’ve been waiting a long time for the housing market to recover.  Housing prices are finally rising.  But not for the right reasons (see Home prices on the rise, but not ownership by Alejandro Lazo posted 1/29/2013 on the Los Angeles Times).

The sharp increase in home prices — particularly in regional markets such as Phoenix and Las Vegas, which had been so decimated by the bust — is raising concern among some economists…

It is those kinds of big increases that could fuel speculation.

“It does concern me a bit,” Zillow.com chief economist Stan Humphries said. “It encourages people to think about housing as a short-term investment, instead of a long-term investment…”

While prices may be rising, homeownership is struggling, an indication that investors are playing a big part in fueling the market’s rebound. The Census Bureau said Tuesday that national homeownership fell 0.6% to 65.4% in the fourth quarter over the same period a year earlier…

The spike in prices is masking the trouble that borrowers with underwater mortgages are facing. In fact, it’s precisely because so many borrowers cannot get out from underneath their upside-down homes that prices are rising so much, economists have said, because those people are simply hanging on and not putting their homes on the market.

People underwater are hanging on because they don’t want to take a huge loss by selling.  When you lose some 25-40% of your home’s value there’s only one way to get it back.  You keep living in it.  For a long time.  For only time can restore a home’s value.  Which a homeowner will lose if he or she sells.

So house prices are coming back up.  But like elsewhere in the economy it’s the rich who are doing well.  Not middle class families.  Those who want to live in their homes.  Furnish their homes.  These people who drive real economic activity.  Not the house flippers who are just trying to profit off the misfortune of others.  Who are picking up houses on the cheap thanks to those lost their homes or sold them at a loss.  And flipping them to make a profit.  These are the people doing well in Obama’s America.  Not middle class families.

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Housing Boom, Subprime Lending, ARMs, Housing Bubble, CDOs, Subprime Mortgage Crisis, Housing Inventories & Sales and Great Recession

Posted by PITHOCRATES - July 24th, 2012

History 101

Artificially Low Interest Rates and Federal Pressure to Qualify the Unqualified created a Housing Bubble

The federal government loves home sales.  Because they generate a lot of economic activity.  From the washing machines and refrigerators new homeowners buy to furnish them.  To the raw materials extracted from nature to make the concrete, bricks, wood, pipes, wires, shingles, glass, plastic, paints, carpeting, insulation, etc., to build them.  Enormous amounts of economic activity at every level throughout the stages of production.  It reduces down to a simple formula.  Make it easy for people to buy houses.  Enjoy a booming economy.  And how best to do that?  Make mortgages cheap.  By keeping interest rates cheap.  Artificially low.  To stimulate a housing boom.

This is Keynesian economics.  Government intervention into the private market.  By having the Federal Reserve keep interest rates lower than the market would have them.  To encourage more people to buy houses.  Then the Clinton administration took it up a notch with their Policy Statement on Discrimination in Lending.  Investor’s Business Daily reported (see Smoking-Gun Document Ties Policy To Housing Crisis by PAUL SPERRY posted 10/31/2011 on Investors.com) that this policy statement forced lenders basically to qualify the unqualified.

At President Clinton’s direction, no fewer than 10 federal agencies issued a chilling ultimatum to banks and mortgage lenders to ease credit for lower-income minorities or face investigations for lending discrimination and suffer the related adverse publicity. They also were threatened with denial of access to the all-important secondary mortgage market and stiff fines, along with other penalties…

“The agencies will not tolerate lending discrimination in any form,” the document warned financial institutions.

The unusual full-court press was predicated on a Boston Fed study showing mortgage lenders rejecting blacks and Hispanics in greater proportion than whites. The author of the 1992 study, hired by the Clinton White House, claimed it was racial “discrimination.” But it was simply good underwriting.

There was no racial discrimination.  Just people who couldn’t qualify for a mortgage.  But that didn’t stop the Clinton administration.  So there were artificially low interest rates.  And federal pressure to qualify the unqualified.  To let those who can’t afford to buy a house buy a house.  Enter subprime lending.  A way lenders could approve the unqualified for a mortgage.  With adjustable rate mortgages (ARMs).  Interest only mortgages.  Zero down mortgages.  No documentation loans (say you earn whatever you want and we’ll enter it into the application without documenting it).  Anyone who wanted to have a house could have a house.  And a lot of people bought houses.  Even those with insufficient incomes to pay their mortgage payment if interest rates ever rose.

When the Housing Bubble Burst it Destroyed a lot of Economic Activity and a lot of Jobs

The economy was heating up.  There was a housing boom.  The boom turned into a housing bubble.  Housing prices soared demand was so high.  Builders couldn’t build them fast enough.  And people couldn’t buy a house big enough.  McMansions entered the lexicon.  Houses in excess of 3,000 square feet.  For a family of four.  Or smaller.  But then these artificially low interest rates began to heat up inflation.  And it was the Federal Reserve’s responsibility to keep that from happening.  So they raised interest rates.  Causing the interest rates on those ARMs to reset at a higher rate.  Making a lot of those monthly payments beyond the homeowners’ ability to pay.  Homeowners defaulted in droves.  Causing the subprime mortgage crisis.  And the Great Recession.

Facilitating this economic carnage was the secondary mortgage market.  Fannie Mae and Freddie Mac.  Who bought those very risky mortgages from the lenders.  Repackaged them into collateralized debt obligations (CDOs).  And sold them to unsuspecting investors.  Who thought they were buying high-yield safe investments.  Because they were backed by historically the safest investment.  A mortgage.  But that was before subprime lending.  For these subprime mortgages weren’t your father’s mortgage.  These mortgages were toxic.

So when the housing bubble burst it not only destroyed a lot of economic activity, and a lot of jobs, it wreaked financial destruction in people’s investment portfolios.  All because of a formula.  Make it easy for people to buy houses.  But when you play with the economy too much you don’t create economic growth.  You created bubbles.  And the bigger the bubble the longer and the more painful the recession will be when that bubble bursts.  As those artificially high house prices fall out of the stratosphere back to real market levels.

The Current Gulf between Housing Inventories and Sales is what made this Recession the Great Recession

If you look at the housing inventories and housing sales for the decade from 2001 to 2011 you can see how bad the recession was.  And will continue to be.  We took housing data from the United States Census Bureau.   Housing inventories from Table 7A.  And housing sales from Houses Sold.  The data shows housing units in inventory and sold.  We used 2001 as a base year, dividing each number by the 2001 base numbers.  Graphing the results shows how inventories and sales trended for this decade.

From 2001 to 2005 housing sales were rising at a greater rate than inventories.  Indicating demand for houses was greater than the supply of houses.  Causing house prices to rise.  Encouraging builders to build more houses.  Heating up the housing market.  Sending prices higher.  Creating the great housing bubble.  Then around 2005 the Federal Reserve began to raise interest rates to tamp out inflation.  And those ARMs began to reset at higher rates.  Causing housing sales to fall.  From about 2005 to 2008 inventories continued to rise while sales collapsed.  Leaving the available housing supply far outstripping demand.  Causing house prices to collapse.  Leaving people underwater in their mortgage (owing more than their house is worth).  Or living in paid-off houses that lost up to half their value.  Or more.

The gulf between inventories and sales is what made this recession the Great Recession.  And is why the Great Recession lingers on.  There are just so many more houses than people want to buy.  Killing new housing starts.  And all that economic activity that building a house generates.

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