News: Real Estate, Risk, Economics. Jul. 31, 2014

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Table of Contents
(Click to sections below.)

1) The Top 30 US Metro Areas for Walkability Herald the End of Car Dominance | Sustainable Cities Collective

2) Are Mega-Investors Changing Rental Housing? | Realtor Magazine

3) Crisis caused deficits and high debt, not vice versa – Independent ie

4) Robert Skidelsky takes Germany to task over its refusal to address its massive current-account surplus. – Project Syndicate

5) Mark Cuban: Companies moving overseas will raise everyone's taxes – Yahoo Finance

6) Blame tax code if Walgreens exits – Chicago Sun-Times

7) Draghi Safety Net Becomes Blindfold to Risk as Bonds Soar – Bloomberg

8) 10 things your home inspector won't tell you – MSN Real Estate

9) Britain's economy: Bigger, not better | The Economist

10) High Prices Pushing Hotel Investors Into Select Service, Second-Tier Markets – CoStar Group

11) Why the super rich are running scared of inequality | Business Spectator

12) S&P warns on increasing mortgage risks | | MacroBusiness

13) China's investors go on global property buying spree in H1, London, US most popular – JLL | Reuters

14) Understanding Triple Net Leases | Thompson Coburn LLP – JDSupra

15) Joseph E. Stiglitz makes the case for a return to industrial policy in developed and developing countries alike. – Project Syndicate

16) Richard Fisher Has Wrongly Warned of Inflation 5 Times Since 2011 | New Republic

17) The Tradeoff between Inflation and Unemployment: What We Don't Know Can Hurt Us | Jared Bernstein | On the Economy

18) FOMC Statement – Tim Duy's Fed Watch

19) Paterson council approves plan to acquire abandoned properties – News – NorthJersey com

20) Fed Tunes Into Yellen Still Playing Labor-Market Blues – Bloomberg

21) Bank Of America | Faulty Mortgages | Jed Rakoff Judge

22) Dovish Fed takes edge off dollar rally | Reuters

23) UCLA flood from water line rupture is red flag for LA infrastructure – LA Times

24) US Drought Portal

25) Why we should value the Fed's independence | Forum:Blog Forum:Blog | The World Economic Forum

26) 2014 California Housing Market – California Sale – HousingPredictor

27) Foreign real estate investment in US

28) The Federal Budget: How the US Got Here, and Where It Is Headed

29) Expect Higher Treasury Yields in Second Half of 2014 | PRAGMATIC CAPITALISM

  1.    The Top 30 US Metro Areas for Walkability Herald the End of Car Dominance | Sustainable Cities Collective

    America's cities are becoming more walkable as the country gradually turns its back on the automobile as the number one determiner of urban planning. But the end of sprawl is not yet in sight.

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  2.    Are Mega-Investors Changing Rental Housing? | Realtor Magazine

    At the end of 2013, mega-investors controlled about 200,000 single-family properties. That's not much in a national market of 13 million single-family home rentals. It's certainly not a game changer. Still, within certain niche markets in cities such as Atlanta, Phoenix, and Tampa, mega-investors are more of a factor. Most of these buyers have concentrated on a dozen or so cities with good potential for price appreciation. The one exception is American Homes 4 Rent, which owns properties in many more markets. Even within these markets, mega–investors won't buy just anything. They are buying mostly homes priced between 100 and 140 percent of median price in locations where the sales price-to-rent ratio is favorable enough to yield a 5 to 10 percent annual cash flow with a five- to eight-year hold period.

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  3.    Crisis caused deficits and high debt, not vice versa –

    Joseph Stiglitz:

    Europeans have been asked to make continuing further sacrifices – in terms of lower wages, lower benefits, weakened systems of social protection – all in the name of saving the euro.

    Promoting an ambitious agenda

    A much more ambitious, and different, agenda is needed: it is clear that, in its current form, the euro is failing the continent. And yet allowing the currency to dissolve would also be extremely costly.

    What is needed, above all, is fundamental reform in the structure and policies of the euro zone. By now, there is a fairly clear understanding of what is required:….

    Much of the euro's design reflects the neo-liberal economic doctrines that prevailed when the single currency was conceived. It was thought that keeping inflation low was necessary and almost sufficient for growth and stability; that making central banks independent was the only way to ensure confidence in the monetary system; that low debt and deficits would ensure economic convergence among member countries; and that the free flow of money and people would ensure efficiency and stability..

    Erroneous doctrines

    Each of these doctrines has proved to be wrong. For example, partly because of their misguided focus on inflation instead of financial fragility, partly because of ideological presuppositions that markets, on their own, are always efficient and that therefore, regulation should be kept to a minimum, the independent US and European central banks performed much more poorly in the run-up to the crisis than less independent banks in some leading emerging market.

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  4.    Robert Skidelsky takes Germany to task over its refusal to address its massive current-account surplus. – Project Syndicate

    Robert Skidelsky:

    …according to the German finance ministry, the surplus is "no cause for concern, neither for Germany, nor for the eurozone, or the global economy." Because no "correction" was needed, it was up to the deficit countries to adjust by tightening their belts.

    John Maynard Keynes pointed out the deflationary consequence of this attitude in 1941. Deficit countries with a fixed exchange rate (as is the case in the eurozone) are forced to cut their spending, while surplus countries are under no equivalent pressure to increase theirs. Keynes's proposed solution to this problem was an international payments system that would force symmetric adjustment on both surplus and deficit countries. Persistent surpluses and deficits would be taxed at an escalating rate. His plan was rejected.

    …we will have to rely on Draghi and quantitative easing to save the euro from Germany. Money will have to fall from the proverbial helicopter before Germany shows any willingness to reduce its surplus.

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  5.    Mark Cuban: Companies moving overseas will raise everyone's taxes – Yahoo Finance

    We didn't include the video here because it is autoplay without a setting to turn that feature off (no fun for you, as a site visitor, to have to scroll down to find the offending video).

    The video is hardball.

    …is a plea for "economic patriotism" a substitute for a change in policy? In the accompanying video, Yahoo Finance's Jeff Macke argues absolutely not, saying these companies aren't flouting patriotism, they are simply following the law.

    We need industrial policies to counter the trend (more on that below). It isn't all about tax rates.

    Add your comment.

  6.    Blame tax code if Walgreens exits – Chicago Sun-Times

    U.S. Rep. Brad Schneider (D-IL):

    It is estimated that these inversions will cost the federal government billions in lost revenue. When deciding where to invest and expand operations, businesses need more than just financial certainty, they need to know there will be roads, train tracks and ports to transfer their goods. They need to know there will be reliable communications infrastructure to stay connected with global partners. They need to know there will be world-class schools to teach and train the next generation of workers. Unfortunately, if we don't address the perverse incentives contributing to inversions, our country will have fewer resources for critical investments, further driving companies to move abroad.

    That's all true, but the easiest way to handle it all is via a modern fiscal policy that does away with government borrowing to create currency to invest in all those things mentioned.

    Add your comment.

  7.    Draghi Safety Net Becomes Blindfold to Risk as Bonds Soar – Bloomberg

    Although Draghi's pledge may eventually create complacency among investors and governments, its success in preserving the currency bloc is far more important, according to Stuart Edwards, a money manager at Invesco Perpetual, based in Henley-on-Thames, west of London. The company is part of Invesco Ltd., which had about $802 billion under management as of June 30.

    "There's always a risk that these countries become either complacent, or there's enough domestic political pressure brought to bear on them that slows the reform process — or even reverses it," he said in a July 22 phone interview. "But there was a far bigger risk before: the catastrophic result that would have occurred had the euro zone broken up; or if the status quo from a couple of years ago had prevailed.

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  8.    10 things your home inspector won't tell you – MSN Real Estate

    A thorough pro will look at the foundation and the framing to make sure nothing is cracked, warped or rotting, and examine the roof for problems with shingles and gutters. Inspectors should also look for plumbing leaks and make sure the water heater, wiring, heating systems and fireplaces are safe.

    So what constitutes going too far? A less helpful inspector might dwell on things like surface mold, chipped paint or other superficial problems, or present buyers with a long litany of issues, with no context about their relative importance and no estimate of the cost of fixing them.

    We think the long list is professional if reasonably prioritized and documented with images.

    Cost estimating is something over and above purely inspecting and reporting. Bad estimates could open the door to errors-and-omissions claims for ill-prepared inspectors. There are also contractor-licensing issues that may arise. We haven't checked every jurisdiction as to the legal requirements and limitations placed upon inspectors versus licensed contractors regarding professionally estimating repair costs either. Do your homework before venturing into unknown waters.

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  9.    Britain's economy: Bigger, not better | The Economist

    …the fact that households are squeezed between lower incomes per person and a higher cost of living is troublesome. Straightening this out will be a huge challenge for both the government and the Bank of England. Those who say that Britain still has a long way to go until it fully recovers from the crisis are right.

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  10.    High Prices Pushing Hotel Investors Into Select Service, Second-Tier Markets – CoStar Group

    One major reason that fundamentals are so strong is that supply growth is expected to remain below the long-run average of 1.9% through 2016 before rising to 2.1% in 2017, according to PKF's survey conducted in the spring, which tracks changes in investment and financing criteria over the prior 12 months.

    Modest levels of new hotel development should keep occupancy high and allow operators to raise average daily rates (ADR), resulting in robust revenue per available room (RevPAR) growth through 2016.

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  11.    Why the super rich are running scared of inequality | Business Spectator

    Steve Keen on Richard Vague:

    His reservations here are its enormous foreign capital reserves, low government debt (meaning that it can afford to bail out its banks) and its capacity to control and restructure its banks in a way that no Western government has been willing to even contemplate. But given those reservations, he still expects a serious economic slowdown in China driven by these private debt excesses, with extreme flow-on consequences for economies that are dependent on China.

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  12.    S&P warns on increasing mortgage risks | | MacroBusiness

    …we believe the strong residential property price inflation is likely to be translated by some households into a self-reinforcing feedback loop, pushing up demand on the back of increased leverage as a result of a cyclical low in interest rates—all against a backdrop of slower income growth. In our opinion, the risk is that mortgage repayments become an increasing problem for some households, particularly those recently entering the housing market, when interest rates begin to rise. A further shock to national income growth could also weigh on labour market conditions and add to the mortgage repayment pressures of some, in our opinion. We believe this could be transmitted through falling terms of trade, possibly bought about through a slowing China…

    Highly likely.

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  13.    China's investors go on global property buying spree in H1, London, U.S. most popular – JLL | Reuters

    China's institutional investment in property overseas rose 17 percent in the first six months of this year, with residential investment surging 84 percent, real estate services firm Jones Lang LaSalle (JLL) said on Wednesday.

    The gains come as Chinese investors pursue opportunities outside their home turf, where the outlook for the real estate sector is overshadowed by issues such as tight financing and high inventories which are weighing on prices.

    Add your comment.

  14.    Understanding Triple Net Leases | Thompson Coburn LLP – JDSupra

    There is a thriving niche in commercial real estate for what are commonly called "triple net leased properties." These transactions most commonly involve fast food restaurants, convenience stores or some other franchise-type business operating at the property, but can also involve significant office, manufacturing and industrial properties.

    A "triple net leased" property is one where the tenant under the lease is solely responsible for paying all taxes, insurance and repairs/maintenance that may be necessary during the lease term. A property that is leased "net" of the landlord having any obligation for these obligations is called a triple net leased property. All the landlord does is collect the rent check each month during the lease term. The landlord has no obligation to perform any work or repair at the property.

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  15.    Joseph E. Stiglitz makes the case for a return to industrial policy in developed and developing countries alike. – Project Syndicate

    Here's the industrial policy bit we mentioned above: Joesph Stiglitz:

    Industrial policies — in which governments intervene in the allocation of resources among sectors or favor some technologies over others — can help "infant economies" learn. Learning may be more marked in some sectors (such as industrial manufacturing) than in others, and the benefits of that learning, including the institutional development required for success, may spill over to other economic activities.

    Such policies, when adopted, have been frequent targets of criticism. Government, it is often said, should not be engaged in picking winners. The market is far better in making such judgments.

    But the evidence on that is not as compelling as free-market advocates claim. America's private sector was notoriously bad in allocating capital and managing risk in the years before the global financial crisis, while studies show that average returns to the economy from government research projects are actually higher than those from private-sector projects — especially because the government invests more heavily in important basic research. One only needs to think of the social benefits traceable to the research that led to the development of the Internet or the discovery of DNA.

    But, putting such successes aside, the point of industrial policy is not to pick winners at all. Rather, successful industrial policies identify sources of positive externalities — sectors where learning might generate benefits elsewhere in the economy.

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  16.    Richard Fisher Has Wrongly Warned of Inflation 5 Times Since 2011 | New Republic

    …take Fisher's predictions with a grain of salt. More than anyone else on the FOMC, he has been wrong about the economic implications of Fed policy.

    But that doesn't necessarily mean that Fisher is wrong this time. …

    If wage growth picks up suddenly, these measures could surge upward, but that's a big if. Fisher and his fellow inflation hawks (like CNBC's Rick Santelli) want to tighten policy now to make sure that inflation stays under control. But doing so would mean blocking real wage growth for workers, something they haven't seen in more than a decade. On the other hand, Fed Chair Janet Yellen, who has the best record of forecasting the economy out of any of her Fed colleagues, wants to keep monetary policy on its current trajectory and adjust it if inflation increases. In the meantime, she will allow wage growth to happen and continue, rightly, to ignore inflation hawks like Fisher and Santelli.

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  17.    The Tradeoff between Inflation and Unemployment: What We Don't Know Can Hurt Us | Jared Bernstein | On the Economy

    Jared Bernstein:

    …a prominent macro economist recently suggested to me that we must have been at full employment for the past 20 years, because inflation has essentially hovered around the Fed's target of 2% since then (average core PCE, year-over-year, since 1994: 1.7%; standard deviation: 0.4%). If output gaps truly persisted, then inflation should have fallen well below this band; if we were overheated, vice versa.

    Given the obvious absence of full employment in recent years, I think his point was really that traditional relationships between critical variables are shifting in ways we don't understand. And given how large this relationship looms both as a policy determinant at the Fed and in understanding the dynamics behind their mandate to balance full employment and price stability, this is a serious problem.

    We'll hazard a guess that women moving into the workforce since the 1970's and then labor moving to other countries has had a great deal to do with the breaking of the Phillips curve.

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  18.    FOMC Statement – Tim Duy's Fed Watch

    Tim Duy:

    …a fairly strong confirmation that Federal Reserve Chair Janet Yellen has the support of the FOMC. As a group, they continue to discount the improvement in the unemployment rate. And as long as wage growth remains tepid, this group will continue to have the upper hand.

    … The data continues to evolve in such a way that the Fed can remain patient in regards to policy normalization. We will see if that changes with the upcoming employment report; focus on the underlying numbers, as the Fed continues to discount the headline numbers.

    Add your comment.

  19.    Paterson council approves plan to acquire abandoned properties – News –

    With more than 1,000 vacant properties creating crime havens all around the city, Paterson officials on Tuesday night approved a plan designed to spur the redevelopment of the abandoned locations. The City Council unanimously approved an ordinance that would expedite the process for Paterson to take control of abandoned properties in need of repair.

    Add your comment.

  20.    Fed Tunes Into Yellen Still Playing Labor-Market Blues – Bloomberg

    The Federal Open Market Committee's policy statement yesterday diminished the unemployment rate as a measure of progress toward its full-employment goal, saying "a range" of indicators suggest "significant underutilization of labor resources."

    That's a view Yellen has expressed repeatedly since she became chair in February. In her mid-July testimony to House and Senate committees, Yellen's discussion of labor-market slack turned on broader indicators such the participation rate, rather than the unemployment rate alone.

    And rightly so. We had been advocating for using many more employment variables long before Janet Yellen took the reins.

    Add your comment.

  21.    Bank Of America | Faulty Mortgages | Jed Rakoff Judge

    Bank of America has been ordered to pay $1.27 billion in penalties in a mortgage fraud case.

    Federal District Court Judge Jed Rakoff determined the Charlotte, N.C.-based bank's penalties for selling defective loans to Freddie Mac and Fannie Mae prior to the financial crisis.

    Add your comment.

  22.    Dovish Fed takes edge off dollar rally | Reuters

    …the two-year Treasury yield jumped to its highest in over three years at 0.59 percent, which in turn helped boost the allure of the U.S. dollar.

    Another month of healthy U.S. jobs growth will only embolden dollar bulls, with markets continuing to look for signs of when the Fed will eventually lift interest rates.

    Keep in mind that lower Treasury prices means pressure against real estate and construction, two key economic drivers. Construction employment has yet to truly recover.

    Add your comment.

  23.    UCLA flood from water line rupture is red flag for L.A. infrastructure – LA Times

    UCLA tallied the damage from rampant flooding triggered by the rupture of a 90-year-old city water line, Los Angeles city leaders on Wednesday were once again confronted with the consequences of deferred maintenance on the city's aging infrastructure.

    Officials have long known that hundreds of miles of city water lines have deteriorated and need replacement, with many past the century mark. But in recent years, L.A.'s elected leaders have been unwilling to hike water rates enough to fix them more rapidly. As it stands, the city-owned Department of Water and Power is on track to replace main water lines only once every 300 years.

    Tuesday's rupture sent rivers of fresh water — more than 20 million gallons — coursing across the campus of UCLA, flooding underground parking garages and drenching the wooden basketball floor of storied Pauley Pavilion.

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  24.    U.S. Drought Portal

    The US National Integrated Drought Information System (NIDIS) of the National Oceanic and Atmospheric Administration (NOAA):

    The U.S. Drought Portal is part of the interactive system to:

    • Provide early warning about emerging and anticipated droughts
    • Assimilate and quality control data about droughts and models
    • Provide information about risk and impact of droughts to different agencies and stakeholders
    • Provide information about past droughts for comparison and to understand current conditions
    • Explain how to plan for and manage the impacts of droughts
    • Provide a forum for different stakeholders to discuss drought-related issues

    The site offers helpful maps, info, and data.

    Add your comment.

  25.    Why we should value the Fed's independence | Forum:Blog Forum:Blog | The World Economic Forum

    The Reference Policy Rule is essentially the rule first proposed in 1993 by John Taylor of Stanford University, based on his statistical estimate of what the Fed appeared to have been doing under Paul Volcker and Alan Greenspan during a period of both low inflation and low unemployment. It states that the federal funds rate should be 2% plus the current inflation rate plus one-half of the difference between current and target inflation and one-half of the percentage difference between current and full-employment GDP.

    All of this implies that if the economy is at full employment and targeted inflation, the federal funds rate should equal 2% plus the rate of inflation. It should be higher if the inflation rate is above the target level and lower if current GDP is less than the full-employment level.

    …given US banks' vast holdings of excess reserves as a result of the Fed's bond-buying policies (quantitative easing), the federal funds rate is no longer the key policy rate that it once was. Instead, the Fed will be focusing on the interest rate on excess reserves.

    (Soapbox:) The Fed has a number of other tools it is focusing on including some under development. We've also discussed the break in the Phillips curve: Interest rates and unemployment have deviated from the formerly assumed tight causality that prevailed when the Taylor rule was developed.

    We are for rules-based monetary policy but not as proposed. We are for eliminating Treasurys altogether (governmental borrowing) and for using fiscal actions to raise and lower the amount of currency in circulation dependent upon the velocity of money (the rate at which it is actually circulating and its impact upon productivity growth of the best kind for the overall economy).

    In other words, we are fundamentally opposed to the Federal Reserve System, per se, and would rather the monetary authority and central bank be the US Treasury mandated by constitutional amendment to be controlled via opensource computer algorithms designed perfectly to match the currency level to zero price inflation/deflation at unemployment set at 0%, rather than 5.5 or some other figure, and to do so in as real time as possible. This would entail the US being the employer of the unemployed as necessary. It would be workfare. Welfare would still exist for those unable to work.

    We believe this would unleash US productivity provided it be done as democratically as practicable. It would eliminate the national debt. It would allow us to completely fund all needed infrastructure and other desirous projects and programs without any fears of a boom or bust caused by artificial actions or inactions. Even responding to natural disasters would be greatly improved. Our educational system through graduate school could be completely publicly funded to do away with student loans. We would be limited by our imaginations rather than a lack of funding. Poverty could likewise be eliminated.

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  26.    2014 California Housing Market – California Sale – HousingPredictor

    …can actual improvement be expected, given the rising home prices in California? Market analysts expect prices to soar to ever higher heights this year. According to the June edition of the quarterly UCLA Anderson Forecast, there's reason to believe so given the increasing number of construction jobs. Yes, 15.1 percent fewer homes sold in May 2014 compared to the same month in 2013. This figure comes from DataQuick, a company based in San Diego. However, the report explains that the figure is only a normalization trend that the market is experiencing. A more 'normal' housing market means more new constructions. It also means higher prices, fewer sales, and a more stable market overall. Some of the factors contributing to the slowdown in sales and increase in prices include fewer foreclosures on the California market in 2014 (compared to 2013).

    Add your comment.

  27.    Foreign real estate investment in U.S.

    U.S. secondary markets are an increasing target for global investors primarily due to their transparency. What's the benefit of placing your money into Austin versus Beijing? Investors are flocking to markets like Houston and Phoenix because they know their money will be safe.

    When Russian tanks rolled into Ukraine earlier this year, commercial real estate buyers beat a swift, and predictable, retreat. Nothing shakes investors' faith in a market faster than fear of war, sanctions and civil unrest.

    The geopolitics at work concerning Ukraine is a highly controversial topic. We won't delve into it here. That said, the balance of the article avoids such land mines and sticks to the practicalities of investing in US real estate.

    Add your comment.

  28.    The Federal Budget: How the U.S. Got Here, and Where It Is Headed

    As we discussed above at "Why we should value the Fed's independence | Forum:Blog Forum:Blog | The World Economic Forum," this article covers what could be completely avoided were we to do away with federal governmental borrowing and do the other things we've suggested.

    Add your comment.

  29.    Expect Higher Treasury Yields in Second Half of 2014 | PRAGMATIC CAPITALISM

    The net supply of treasuries is not static. In particular when it comes to treasury notes and bonds (excluding bills), the Fed has been the dominant buyer (see chart). With the Fed tapering, the net supply is expected to rise.

    Foreign buying of notes and bonds has declined and is not expected to replace the Fed's taper.

    Of course, a great deal depends upon geopolitics. The worse things get, the more the US as safe haven will come into play. Also, China's economic situation is still very much up in the air as far as the headlines are concerned. We think they have only been buying time (masking) without doing what must be done to avoid a serious crash becoming obvious.

    Add your comment.

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