News: Real Estate, Risk, Economics. May 24-26, 2014

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Table of Contents
(Click to sections below.)

1) Negative deposit rates: The Danish experience | Pia Huttl at Bruegel org

2) The return of moderation: Sea of tranquillity | The Economist

3) Credit Suisse in court: Not too big to jail | The Economist

4) The curious rise of high-yield bonds – Bankrate, Inc.

5) Coppola Comment: Barclays is in the doghouse again

6) Freddie Mac – More Than Half of States Still Show Improving Housing Markets

7) Contrary to What You Read in the Washington Post, House Sales Have Recovered | Beat the Press

8) Fed's Williams: Expected 'Much Stronger Tailwind' from Housing – Real Time Economics – WSJ

9) Rent Stabilization Association | RSA Mortgage

10) Washington Equitable Center for Growth | The Honest Broker: Mr. Piketty and the "Neoclassicists": A Suggested Interpretation

11) Antonio Fatas on the Global Economy: The US labor market is not working.

12) China: A Manufactured Chimera? Part One | Brookings Institution

13) Use This Quick Primer to Incorporate Universal Design Into Your Work | Remodeling

14) Condo sales surge ahead of single-family homes | Nightly Business Report

15) [Recommended] Michael Spence describes an era in which developing countries can no longer rely on vast numbers of cheap workers. – Project Syndicate

16) 20+ Story Development Proposed Near SoMa Caltrain – Development Watch – Curbed SF

17) Few Cities Have Condo Conversions | Multifamily content from National Real Estate Investor

18) Congress Is Blowing a Huge Opportunity to Rebuild America | The Fiscal Times

19) Reviewing Lawrence H. Summers's Review of Piketty II: The Post-1980 Rise of Extreme Inequality in America

20) China Real Estate Developers Star In Real Life Coming Of Age Drama – Forbes

21) Did Thomas Piketty Get His Math Wrong? – NYTimes com

22) FT criticism on income inequality 'ridiculous', says French economist Thomas Piketty – Livemint

23) Is Piketty All Wrong? – NYTimes com

24) Piketty Picked Apart | John Rentoul | Independent Eagle Eye Blogs

  1.    Negative deposit rates: The Danish experience | Pia Hüttl at Bruegel.org

    Nice technical reporting by Pia Hüttl at Bruegel:

    Overall, the negative deposit rate introduced by Danmarks Nationalbank in July 2012 was successful in limiting capital inflows and helped to push back the exchange rate of the Danish krone toward the central parity. Therefore, the adoption of the negative deposit rate was helpful in reaching the major objectives of its introduction. Moreover, while money market rates and treasury bill yields were already negative before the introduction of the negative DNB rate, after its introduction, these yields fell slightly further and yields on mortgage bonds also stabilised at a very low level. The evidence suggests that the rate cut did not lead to changes in retail interest rates, nor an increase in bank lending. With the normalisation of euro-area financial markets, the DNB could increase the deposit rate from -0.2 percent to -0.1 percent in January 2013 and to +0.05 percent in April 2014.

    The concern that banks, reluctant to pass the cut on to their own depositors, might be tempted to increase lending rates in order to offset the decline in their profitability did not materialize in Denmark. Figure 6 shows that the pass-through to retail lending rates was minimal, with rates to corporates and households being more-or-less stable since the deposit rate cut in 2012. Lending activity from banks to the corporate sector decreased slightly, from 144.54 bn in 2012 to 141.7 bn in 2013 (See Figure 6).

    We'd be interested to see what a larger negative rate would do vis-a-vis lending, which, however, wasn't the aim of the central bank.

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  2.    The return of moderation: Sea of tranquillity | The Economist

    The big question is whether the return of the Great Moderation has also prompted a return of the sort of risk-taking that produced the crisis. There are troubling signs. Issuance of poorly-rated "junk" bonds has risen sharply, as have loans to already highly indebted firms; former pariahs like Greece can now borrow at single-digit rates. Charlie Himmelberg, an author of Goldman's report, considers the appetite for leveraged assets rational, since the Great Moderation makes borrowing safer. Any threat of a systemic crisis is far off, he says, because new regulations have made it much harder for banks and investors to lever themselves. But even he concedes, "Eventually, this will lead to no good.

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  3.    Credit Suisse in court: Not too big to jail | The Economist

    SINCE Arthur Andersen, a giant accountancy firm, collapsed after being found guilty of obstruction of justice in 2002, the prevailing wisdom has been that no financial firm could survive a criminal conviction. Various financial licences and permissions, after all, depend on the regulators' agreement that a firm is fit for the task; clients also make similar, if less formal, judgments. Yet on May 19th Credit Suisse, a multinational bank based in Switzerland, pleaded guilty to a criminal charge of having helped its customers elude America's tax authorities.

    … in spite of the popular belief that wayward bankers precipitated the financial crisis, no bank in America has admitted to, or been convicted of, any crime related to it.

    Did Credit Suisse lose any of its licenses? Nope.

    Who says that crime doesn't pay? Did Credit Suisse make more in profits on its illegal activities than it shelled out in fines? If so, there's little financial or economic incentive not to engage in more illegalities.

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  4.    The curious rise of high-yield bonds – Bankrate, Inc.

    It's no secret that the Fed's low interest rate policy has pushed investors toward riskier assets, and low corporate default rates combined with the recent performance of bonds has tempted plenty of investors into the more speculative areas of the bond market. According to a recent story in The Wall Street Journal, "Chasing yield, investors plow into riskier bonds," large investors are behind the recent inflows, but small investors could be pulled into the fray in their hunt for yield.

    This is more of the Great Moderation effect mentioned above. This is part of what Minsky was talking about.

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  5.    Coppola Comment: Barclays is in the doghouse again

    The ever-brilliant Frances Coppola:

    Fraud, price fixing and ripping off customers seem to be endemic not only on trading floors, but in retail banks and even private banks. It seems that we are gradually dismantling the entire ethos of late 20th Century banking. I wonder what the eventual cost will be….

    Add your comment.


  6.    Freddie Mac – More Than Half of States Still Show Improving Housing Markets

    Freddie Mac Chief Economist Frank Nothaft:

    "Despite a slowdown over the winter months, the housing market continues to show improvement in most states, although at a somewhat slower pace. And while not all the MiMi indicators are trending in a better direction — in particular, home-purchase applications have weakened in many areas — gains in local employment and loan performance have really helped many markets across the country, especially those that were hardest hit. Outside of these areas we also are seeing positive improvement from the Carolinas and Tennessee as their local unemployment rates fall further."

    Add your comment.


  7.    Contrary to What You Read in the Washington Post, House Sales Have Recovered | Beat the Press

    Dean Baker:

    If we go back to the pre-bubble years of the mid-1990s, we find that existing home sales averaged just over 3.4 million in the years from 1993-1995. Adjusting this figure upward by 20 percent for population growth would still get is to less than 4.2 million, well below the sales rate reported for April.

    New home sales are still running below historic averages, so that would bring the total sales close to their pre-bubble levels but there is not much of a case that they are lower than what should be expected. Furthermore, if we consider the aging of the population, the excuse given by many economists for the drop in labor force participation, we should expect a drop in the ratio of home sales to population.

    Older people less frequently buy homes than younger people. It is perhaps an inconvenient truth for economists, but the population that comprises the potential labor force is the same population that comprises the group of potential home buyers.

    Add your comment.


  8.    Fed's Williams: Expected 'Much Stronger Tailwind' from Housing – Real Time Economics – WSJ

    Federal Reserve Bank of San Francisco President John Williams said Thursday that in an economy that's clearly on the mend, he's been caught off guard by weakness in the housing sector.

    The official said he expected housing to be "a much stronger tailwind" driving the economy's momentum. "While home construction and sales showed substantial momentum in 2012 and the first half of 2013, the wind has been taken out of the sails since then," Mr. Williams said in the text of a speech prepared for delivery in San Francisco.

    Mr. Williams said the likely culprit for the weakening in housing momentum appears to be the rise in mortgage rates last year.

    Yes, it was the taper-talk and then the actual taper.

    So, why are mortgage rates not up? Flight to safety, as we had predicted. However, we also predicted the slowing of the economy as a result of the premature tapering, not that the whole Fed bond-buying program is a good one.

    As we've said many times, we think proper fiscal spending was, and remains, the way to go. We need jobs, even if they are government jobs for at least public-infrastructure repairs and replacements.

    We'd really like to see new, major, truly productive infrastructure projects. No bridges to nowhere.

    Add your comment.


  9.    Rent Stabilization Association | RSA Mortgage

    The Rent Stabilization Association trade group, in conjunction with another nonprofit, is launching a mortgage brokerage aimed at serving the city's smaller landlords.

    Add your comment.


  10.    Washington Equitable Center for Growth | The Honest Broker: Mr. Piketty and the "Neoclassicists": A Suggested Interpretation: For the Week of May 17, 2014

    Economics historian Brad DeLong:

    The coal, steam, and metal technologies of the First Industrial Revolution devalued the strong backs. The second and third generations of the assembly lines of the Second Industrial Revolution devalued the nimble fingers. But that was okay because every machine and every process still needed a cybernetic controller. And no alternative cybernetic controller could fit in a shoebox and run on 50 W of power. Human brains remain a unique resource, one strongly complementary with capital. With labor a complement to capital the rate of profit could not but fall with an increasing wealth-to-annual-income ratio to the extent that increasing wealth took the form of increasing numbers and sophistication of machines and processes. But now rapidly-exploding information and communications technologies are severely reducing the need for human brains as blue-collar or white-collar cybernetic controllers of machines, processes, and accounting and distribution systems. Rather than just substituting for backs and fingers and leaving brains as complements to capital, now increasing capital substitutes for brains as well. What will be left are smiles—services that are inherently and necessarily personal, "face time"—and genuine creative insight. That is the world we are moving into. And is that world still a world in which labor and capital are complements?

    No.

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  11.    Antonio Fatas on the Global Economy: The US labor market is not working.

    Among OECD economies, the US stands towards the bottom of the table when it comes to employment to population ratio for this cohort [25-54 years old] (#24 out of 34 countries).

    The US needs a massive public-works program paid for via debt-free United States Notes rather than debt-ladened Federal Reserve Notes.

    Add your comment.


  12.    China: A Manufactured Chimera? Part One | Brookings Institution

    Absolutely correct:

    If our real competition comes from high-wage countries that are outperforming the United States in advanced production, then we need to get serious about the types of strategies—investing in R&D, designing great worker training systems, and building strong regional manufacturing ecosystems—that will help us compete better with those countries. And maybe we should spend less time worrying about the low-value work going on in assembly plants in China.

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  13.    Use This Quick Primer to Incorporate Universal Design Into Your Work | Remodeling

    These are good to rentals too.

    Some of the more common universal
    design features that are also incorporated into aging-in-place remodels:

    • No-step entry. No one needs to
      use stairs to get into a universal home or into the home's main rooms.
    • One-story living. Places to eat,
      use the bathroom and sleep are all located on one level, which is
      barrier-free.
    • Wide doorways. Doorways that
      are 32-36 inches wide let wheelchairs pass through. They also make it easy
      to move big things in and out of the house.
    • Wide hallways. Hallways should
      be 36-42 inches wide. That way, everyone and everything moves more easily
      from room to room.
    • Extra floor space. Everyone feel
      less cramped. And people in wheelchairs have more space to turn.

    Some universal design features just
    make good sense. Once you bring them into your home, you'll wonder how you ever
    lived without them. For example:

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  14.    Condo sales surge ahead of single-family homes | Nightly Business Report

    Multifamily housing starts (five housing units or more), which include both condominiums and rentals, rose 43 percent in April from March and were up 70 percent from a year ago. Developers, well aware of the housing recovery, continue to believe that rental demand and demand for condominiums will be strong for the foreseeable future.

    Add your comment.


  15.    [Recommended] Michael Spence describes an era in which developing countries can no longer rely on vast numbers of cheap workers. – Project Syndicate

    Futurist Michael Spence, Professor of Economics, NYU's Stern School of Business:

    Developing countries in the early stages of growth need to understand these trends. Labor, no matter how inexpensive, will become a less important asset for growth and employment expansion, with labor-intensive, process-oriented manufacturing becoming a less effective way for early-stage developing countries to enter the global economy.

    Re-localization will be seen everywhere, including lower-income countries. Production will not vanish; it will just be less labor intensive. All countries will eventually need to rebuild their growth models around digital technologies and the human capital that supports their deployment and expansion.

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  16.    20+ Story Development Proposed Near SoMa Caltrain – Development Watch – Curbed SF

    The first plan calls for 204,000 square feet of residential space, 4,368 feet of retail and 153,064 square feet of office space. The second includes 47,678 square feet of retail and 335,064 square feet of office space.

    Add your comment.


  17.    Few Cities Have Condo Conversions | Multifamily content from National Real Estate Investor

    About two-thirds of the properties bought by condo converters in 2013 were in Manhattan—and because Manhattan property is so expensive, those deals accounted for 75 percent of the $1.1 billion in transactions. The rest of the properties bought by condo converters were in Washington, D.C, Brooklyn and San Francisco.

    These places have more in common than just sky-high property values and strong market acceptance for condominiums. They also have lots of attractive, older buildings that can potentially be converted, including architecturally significant office buildings or historic hotels.

    Add your comment.


  18.    Congress Is Blowing a Huge Opportunity to Rebuild America | The Fiscal Times

    This article is all pretty much correct with the exception that it is calling for borrowing to undertake the needed infrastructure spending. Rather than borrow, the US government could simply issue debt-free United States Notes to pay for everything just as if it had raised the money via bonds. The only difference would be that United States Notes would require zero interest be paid.

    So, why does the US government issue bonds and take on debt rather than issue debt-free currency?

    There's only one answer, those who want the American taxpayers to pay interest via their income taxes want to make passive returns on buying the bonds and have been rich enough to get the US government to go along with that draining plan.

    Add your comment.


  19.    Reviewing Lawrence H. Summers's Review of Piketty II: The Post-1980 Rise of Extreme Inequality in America

    Very interesting:

    the big difference between the First Gilded Age, the Social-Democratic Age, and our Second Gilded Age as far as the distribution of the surplus from sophisticated-technology increasing-returns mass-production value chains lies mostly in union threat: political, organizational, legal, and technological—how easy would it be for the workers to organize and destroy the organization as a profit-generating institution while still leaving it largely-intact as a production organization? And how easy would it be to recruit and keep scabs? Where the first is easy and the second is hard, union threat is mighty and we get the Eastman Kodaks and General Motorses of yore. Where the first is hard and the second is easy, we get Carnegie and Apple.

    Not, mind you, that I think that there was necessarily or clearly a better economic development strategy than the one the Chinese Communist Party as reformed by Deng Xiaoping has followed. But I would like to hear what Marx, Engels, Lenin, and Mao would say about its historical role as straw boss for America's plutocratic entrepreneurs and yuppie and non-yuppie consumers…

    Add your comment.


  20.    China Real Estate Developers Star In Real Life Coming Of Age Drama – Forbes

    "This year will separate the men from the boys" in China's real estate market. That was the prediction from Ronnie Chan, the billionaire chairman of Hong Kong's Hang Lung Properties, when I appeared with him at a real estate event in Shanghai last month, and his prophesy seems to have been fulfilled within the last week as the founders of a major Chinese developer announced that they are selling out to another real estate firm.

    On Friday last week the owners of Hong Kong-listed Greentown China Holdings , (3900.HK) announced that they would be selling up to 30 percent of their stake in the Hangzhou-based company to sometimes-partner Sunac Holdings. The sale would mean a relinquishment of control in the oft-troubled developer, which has been struggling during China's current real estate slowdown and survived China's 2012-2012 downturn only by selling off assets and equity to more stable competitors.

    Add your comment.


  21.    Did Thomas Piketty Get His Math Wrong? – NYTimes.com

    "As I make clear in the book, in the online appendix, and in the many technical papers I have written on this topic, one needs to make a number of adjustments to the raw data sources so as to make them more homogeneous over time and across countries," he told the F.T. He added, "I have tried in the context of this book to make the most justified choices and arbitrages about data sources and adjustments. I have no doubt that my historical data series can be improved and will be improved in the future (this is why I put everything online)."

    He did not specifically address the accusations of data-entry errors or give detailed responses to some of Mr. Giles's criticisms about questionable assumptions that underlie Mr. Piketty's broader work.

    But in his e-mail to me, he wrote with an almost jovial tone: "Every wealth ranking in the world shows that the top is rising faster than average wealth," adding, "If the FT comes with a wealth ranking showing a different conclusion, they should publish it!"

    Add your comment.


  22.    FT criticism on income inequality 'ridiculous', says French economist Thomas Piketty – Livemint

    French economist Thomas Piketty hit back on Saturday at criticism by the Financial Times of his best-selling book on income inequality, telling AFP that the newspaper was being "ridiculous".
    The FT claimed on Friday that there was little evidence in the 43-year-old's original sources to underpin his argument in Capital in the Twenty-First Century that an increasing share of total wealth is in the hands of the richest.
    But Piketty said: "The FT is being ridiculous because all of its contemporaries recognize that the biggest fortunes have grown faster.

    "… all of its contemporaries recognize that the biggest fortunes have grown faster." It's obvious. The data (Americanized) shows it all over the place.

    Add your comment.


  23.    Is Piketty All Wrong? – NYTimes.com

    Paul Krugman:

    … the landmark CBO study on the distribution of income; it shows the distribution of income by type, and capital income has become much more concentrated over time:

    It's just not plausible that this increase in the concentration of income from capital doesn't reflect a more or less comparable increase in the concentration of capital itself.

    Beyond that, we have, as Piketty stresses, evidence from Forbes-type surveys, which show soaring wealth at the very top. And we have other estimates of wealth concentration, like Saez-Zucman, that use completely different methods but point to the same conclusion.

    And there's also the economic story. In the United States, income inequality has soared since 1980 by any measure you use. Unless the affluent starting saving less than the working class, this rise in income disparity must have led to a rise in wealth disparity over time.

    Add your comment.


  24.    Piketty Picked Apart | John Rentoul | Independent Eagle Eye Blogs

    Giles has produced this graph, with Piketty's numbers in blue and the actual numbers, from which Piketty claims to have derived his own, in red. (The divergence in 2010 is because there are two different sets of official data.) As I thought, the 1990s were the only decade since 1910 in which wealth inequality increased in the UK, as opposed to Piketty's picture of a steady increase since 1980.

    The significance of these errors is that it weakens Piketty's claim that there has been a trend to greater inequality since 1980 in all rich countries. It is true of the US, but not, as is now clear, of those European countries cited in Piketty's book.

    What will be most interesting is any revision allowing us to specifically gauge the impact of deregulation, etc., in the UK versus the US.

    Add your comment.


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