News, Commentary, & Analysis. Jan. 28, 2014. #RealEstate

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1) Calculated Risk: FOMC Preview: More Tapering

2) [Registration required] Multinationals: China loses its allure | The Economist

3) Chinese Stocks Sink to Five-Month Low as Economic Concern Mounts – Bloomberg

4) Major Default Looms In China’s Huge ‘Shadow Banking’ System #China

5) China’s economy: In three parts | The Economist

6) China to step up international co-operation in fight against tax evasion | South China Morning Post

7) ICBC Chief: China’s Shadow Banking Overblown – TheStreet

8) West Coast air being fouled by Asia’s industrial emissions, study shows – The Globe and Mail

9) Is Abenomics Misguided? Officials Not Ready to Concede – Real Time Economics – WSJ

10) Japan Trade Deficit Hits Record High In 2013 $MACRO

11) Taper threatens Hong Kong property – Craig Stephen’s This Week in China – MarketWatch

12) Davos 2014: Are the BRICS in midlife crisis? Forum:Blog | The World Economic Forum

13) Tapering and emerging-market capital flows | vox

14) Euro Jobless Record Not Whole Story as Italians Give Up – Bloomberg

15) mainly macro: Bullard on the ‘Death of a Theory’

16) Will robots steal our jobs? The humble loom suggests not.

17) E-commerce vs physical retail, or the best of both worlds? | Jones Lang LaSalle EMEA Research Blog

18) The death of the mall | REwired

19) REITs Gaining 26% Ditch Failing Shopping Malls: Mortgages – Bloomberg

20) Do You Own the Land Under Your Home? | Zillow Blog

21) IRS Rules on Owner Financing | eHow

22) Understanding the Anti-Steering Protection Act | Zillow Blog

23) Five Takeaways: Treasury Official Outlines Mortgage-Market Priorities – Real Time Economics – WSJ

24) Why has the dog not barked? Quieter, wiser heads are worried about our economy | Inman News

25) How Much Higher Can Rents Go When Incomes Are Falling?

26) 2013 Tucson Commercial Real Estate Market in Review

27) Phoenix-area housing market tilts in favor of buyers

28) All-Cash Buyers Scoop Up Bay Area Real Estate | KQED News Fix

29) Real Estate Valuation Methods

  1.    Calculated Risk: FOMC Preview: More Tapering

    Well, the following is the general consensus, but the general consensus has been way off before.

    Fed Chairman Ben Bernanke will chair his last FOMC meeting this week on Tuesday and Wednesday. It appears the FOMC will reduce monthly asset purchases by another $10 billion per month, from $75 billion to $65 billion. The weaker than expected December employment report will probably not derail another round of tapering.

    There’s nothing magical about $10B. Why couldn’t they go for $5B to show they understand the bad data since they tapered $10B?

    We would not taper again this time. We wouldn’t have done it last time.

    How would you have handled it, what would you do now, and why?

  2.    [Registration required] Multinationals: China loses its allure | The Economist

    We don’t think pessimism about China is unwarranted. US and other firms have left in droves.

    … growth is flagging … while costs are rising. Talented young workers are getting harder to find, and pay is soaring.

  3.    Chinese Stocks Sink to Five-Month Low as Economic Concern Mounts – Bloomberg

    Chinese stocks have taken a hit apparently largely on account of the coal industry being such a heavy polluter. When combined with the following (also connected directly to the coal industry) and other bad news coming out of China, things aren’t being painted as rosy there anymore but rather much more realistically.

    Credit traders have taken out the most protection on China’s debt in 14 months amid speculation a 3 billion-yuan ($496 million) trust product distributed by the nation’s biggest lender would fail to repay holders this week.

  4.    Major Default Looms In China’s Huge ‘Shadow Banking’ System #China

    … authorities must walk a fine balance between cracking down and preventing protests by angry investors — as well as setting off a chain reaction that sharply tightens credit in an economy where growth is already slowing.

    Products sold by China’s roughly 65 trusts offer high returns and big risk, drawing comparisons to the West’s “junk bonds” of the 1980s.

    “Some central government-level policymakers could be open to seeing a default, as it would encourage more careful risk assessment,” Goldman Sachs economist Andrew Tilton said in a recent research report.

    But he added: “If the realisation of significant losses by investors causes others to pull back from funding various forms of shadow banking credit, overall credit conditions could theoretically tighten sharply with consequent damage to growth.”

    That’s an understatement. In our estimation, it could crash the Chinese economy.

  5.    China’s economy: In three parts | The Economist

    … credit is spent wastefully, either on consumption or on misconceived projects, such as bridges without destinations or coal mines without markets. These loans add nothing to the economy’s productive capacity, but they do add to demand. They make a claim on the economy’s goods and services, without adding anything to its ability to provide them. Credit of this second kind should, then, result in higher inflation, increasing nominal GDP but not real GDP.

    The surprising lack of inflation suggests that much of China’s credit is instead of a third kind. It is spent speculatively, on existing assets, real or financial, in the hope they will rise in value. Because these assets already exist, they can be purchased (and repurchased) without adding directly to GDP or straining the economy’s capacity to produce new goods and services. Credit and asset prices can chase each other higher, even as consumer prices remain flat.

    Because this third kind of credit adds little to economic growth, curbing it need not, in principle, subtract much from growth.

    In principle, perhaps. In reality, forget it? They haven’t shown that they are that good at handling their economy. They haven’t had to be. Times change though and have.

  6.    China to step up international co-operation in fight against tax evasion | South China Morning Post

    The mainland’s tax commissioner, Wang Jun, says international co-operation to combat tax evasion will be stepped up.

    His comments were posted on the State Administration of Taxation’s website just days after the international focus on tax evasion and money laundering was intensified following revelations from the US-based International Consortium of Investigative Journalists (ICIJ).

    China would fulfil its responsibilities as a big nation in international tax initiatives, while using international co-operation to reform its tax system, Wang said at an Organisation for Economic Co-operation and Development (OECD) taxation forum in Paris this week.

    They’re following the leader: The US.

  7.    ICBC Chief: China’s Shadow Banking Overblown – TheStreet

    To finance infrastructure and factory-building projects designed to boost China’s economy after the 2008 global financial crisis, local governments used quasi-public financing platforms to raise trillions of yuan though trusts, wealth management products, securities and bonds. This activity on top of China’s array of private lending networks, which finance all kinds of commercial activity outside the banking system, has long raised concerns about unsupervised banking.

    Some experts say if the non-bank credit system collapsed, the impact on China would rival the fallout from the subprime mortgage crisis four years ago in the United States that hammered borrowers and financiers.

    We agree; however, “rival” may be another understatement.

  8.    West Coast air being fouled by Asia’s industrial emissions, study shows – The Globe and Mail

    Canada and the United States may have outsourced a large amount of manufacturing to China over the years, but a new study shows that pollution from heavy industry concentrated on the east coast of Asia is drifting across the Pacific Ocean and helping foul the air on North America’s west coast.

    The emissions from that outsourced production — which have contributed to pushing heavily polluted areas such as Los Angeles over air quality limits — have even greater impact on sparsely populated areas with less industry, such as British Columbia.

  9.    Is Abenomics Misguided? Officials Not Ready to Concede – Real Time Economics – WSJ

    Some economists say it may be time to rethink Abenomics’ emphasis on a weak yen, or at least to ask if yen weakness has gone too far. But Japanese officials aren’t quite there yet.

    It’s extremely premature to write off Abenomics.

    Something not mentioned in the article has been the high cost of Fukushima. Japan was too dependent upon nuclear energy. They are working very hard on that, but it will take years to make up for decades of heading the wrong way: bad risk management.

    Of course, they could restart the “safer” nuclear-energy plants, but that would send a defeatist signal on truly safer alternatives no matter how safe their safer nuclear plants are. If they were to begin now building new nuclear plants, which are less risky but still riskier than, and just as expensive as, many alternatives sources of energy, it would take years before they’d be able to bring those online.

    In addition, they are risking a terrible accident in cleaning up the disaster. They should have obtain more international help. They shouldn’t have been worried about saving any face over it.

    It’s not too late to ask.

  10.    Japan Trade Deficit Hits Record High In 2013 $MACRO

    Japan’s trade deficit swelled to a record in 2013, data showed Monday, as once bumper surpluses disappear under the weight of soaring post-Fukushima energy bills, an imbalance stoked by premier Shinzo Abe’s cheap-yen policies.

    The yen’s decline inflated profits at exporters such as Sony and Toyota, and kicked off a stock-market rally that saw the Nikkei index surge 57 percent last year, its best run in over four decades.

    But after suffering through years of a record-high yen, most firms have not slashed overseas prices, and the now-weaker unit has jacked up Japan’s energy costs.

    There’s the energy aspect we mentioned above.

  11.    Taper threatens Hong Kong property – Craig Stephen’s This Week in China – MarketWatch

    analysts warn that a policy shift by the U.S. Fed can do what seemed beyond the power of Hong Kong’s government: it can reverse property prices.

    According to new strategy note by Société Générale, Hong Kong property will soon be a casualty of U.S. tightening. It expects 2014 to mark the end of the uptrend in prices. Given how important QE was in pushing prices up, it will have a sting when it exits, they argue, making local property highly vulnerable to subsequent tightening of U.S. monetary policy.

    Although bearish views on property are becoming increasingly common, prices have, at least so far, proved remarkably resilient. But despite this, there are some vulnerabilities in the property outlook emerging.

    The article also discusses other potential negatives.

  12.    Davos 2014: Are the BRICS in midlife crisis? Forum:Blog | The World Economic Forum

    Nouriel Roubini:

    Sixth, many BRICS may end up in the middle-income trap, failing to progress to a higher per capita income. Solid institutions, good governance and appropriate macro policies, mobilization of savings, capital and labour inputs can lift an economy from a low per-capita income to middle-income status (as many emerging markets and most of the BRICS have done in the last two decades), but transitioning into a developed market is much more difficult. Indeed, World Bank studies suggest that only a small number of emerging market economies have escaped the middle-income trap, and as more emerging markets navigate from low to middle income, avoiding the trap becomes harder.

    Making the transition means moving from resource mobilization (of labour and capital) to sustained increases in total factor productivity growth, and requires innovation, investment in new technologies and the digital economy, an opening up of the economy and fostering of private-sector development. Innovation is harder to achieve than the mobilization of resources and the copying or reverse engineering of existing technologies. Thus, many BRICS may be close to the point where the easy sources of growth are gone, while the sources of fast growth that propel an economy to high-income status are harder to achieve.

    That’s what we were saying above about China.

    Nouriel Roubini also mentions getting rid of “state capitalism.” We wonder just how far he thinks they should go with privatization. Massive privatization, which went hand in hand with likewise massive (we think often thoughtless) deregulation, has been a double-edged sword in the USA.

  13.    Tapering and emerging-market capital flows | vox

    Andrew Burns, Mizuho Kida, Jamus Lim, Sanket Mohapatra, and Marc Stocker:

    The Federal Reserve has begun to ‘taper’ its programme of quantitative easing. The ‘taper tantrum’ that followed the announcement of tapering in May 2013 suggests that the normalisation of rich countries’ unconventional monetary policies may lead to capital outflows and currency depreciations in emerging markets. This column presents the results of recent World Bank research into these effects. In the baseline scenario, the unwinding of QE is predicted to reduce capital inflows by about 10%, or 0.6% of developing-country GDP by 2016. However, if markets react abruptly, capital flows could decline by as much as 80% for several months.

    Although the probability of disorderly adjustments remains low at present, policymakers in developing countries need to make contingency plans and be prepared for the inexorable tightening of global financing conditions. Countries with adequate policy buffers and investor confidence may be able to rely on market mechanisms, and counter-cyclical macroeconomic and prudential policies, to deal with a retrenchment of foreign capital. In other cases, where the scope for manoeuvre is more limited, countries may be forced to tighten fiscal and monetary policy to reduce financing needs and attract additional inflows. Where adequate foreign reserves exist, these can be used to moderate the pace of exchange-rate depreciation, while a loosening of capital inflow regulation and incentives for foreign direct investment might help smooth adjustments. Eventually, reforming domestic economies by improving the efficiency of labour markets, fiscal management, the breadth and depth of institutions, governance and infrastructure will be the most effective way to restore confidence and spur stability.

    “… could decline by as much as 80% for several months.” It looks like they’d figure on about a quarter, but that just feels really short to us.

    The markets listened to Ben Bernanke about the taper such that when they did finally taper, the reaction was muted. However, recent market movements suggest that globally, the markets are still quite easily spooked and might even be more aware of how interconnected economies are due to hot-money flows from low interest rates and gigantic excess reserves in the US, which we think it fair to say, nobody has a full handle on, not even the Fed itself.

  14.    Euro Jobless Record Not Whole Story as Italians Give Up – Bloomberg

    This is not widely known.

    Among euro-zone countries, Italy has the largest group of potential workers who don’t appear on official unemployment statistics. The gap between the country’s labor underutilization rate, encompassing people between the ages of 15 and 74, and its unemployment rate is more than twice that of Spain and more than five times that of Greece.

  15.    mainly macro: Bullard on the ‘Death of a Theory’

    Simon Wren-Lewis:

    There is a perfectly sensible argument which says that for fine tuning demand, monetary policy is more flexible than fiscal policy. I have no problem with this. However what we are talking about today is a very large and prolonged recession. The fiscal actions that are required are not fine tuning. Furthermore, in both the US and the UK we had in 2009 governments acting to implement countercyclical fiscal policies, and by most accounts these did indeed stimulate demand, although not by enough to end the recession. Now perhaps ‘ill-suited’ is code for ‘many politicians dislike this policy’. But if it is, then you do not talk about the ‘death of a theory’, but instead you discuss the political problems of implementing a theory.

    We agree.

  16.    Will robots steal our jobs? The humble loom suggests not.

    … it takes fewer bank tellers to operate a bank branch, thanks to the ATMs. This makes it less costly to operate a bank branch, allowing banks to open more of them. With more branches, banks can expand their markets. But more branches mean greater demand for tellers, offsetting the loss in the number of tellers per branch. Bank tellers today perform different tasks than in the past – they do fewer simple jobs like counting cash and more of the customer interaction of “relationship banking.” These tasks require different skills, but ATMs have not eliminated teller jobs.

    The fact, however, is that many banks are closing branches more than they are opening new ones.

    As we’ve written before, humanity must begin thinking about providing for each other in the face of technology replacing the need to work. This will require rethinking/reimagining compensation.

  17.    E-commerce vs physical retail, or the best of both worlds? | Jones Lang LaSalle EMEA Research Blog

    James Brown, Head of European Retail Research, Jones Lang LaSalle EMEA Research:

    … I am optimistic that the physical space is still fundamental to retail.

    Less so all the time.

  18.    The death of the mall | REwired

    Kerri Ann Panchuk puts the demise of the retail space in terms of economic class.

    Middle-class retailers JCPenney (JCP) and Sears (SHLD) are hurting for customers, and when they take a hit so do investors in commercial mortgage-backed securities.

    So this is what’s happening in America.

  19.    REITs Gaining 26% Ditch Failing Shopping Malls: Mortgages – Bloomberg

    “There are some tired malls out there that shouldn’t exist and won’t exist in a few years,” Ryan Severino, a senior economist at Reis Inc. (REIS), a New York-based real estate data company. “It’s very difficult to bounce back. Very difficult.”

    We think perhaps restaurants, entertainment venues, schools, daycare facilities, various main-street type businesses, offices, and residential units (condos and rentals) should all be merged and the mall way treated as a pedestrian way (as it is now) for the mini-town/neighborhood. The larger anchor buildings could be carved up in various ways. The excess-parking areas could be turned into park-like areas, school fields, and many other innovative uses. Every old mall doesn’t have to be torn down. Many could just be repurposed.


  20.    Do You Own the Land Under Your Home? | Zillow Blog

    Best course of action: Review all documentation, disclosures and title paperwork prior to signing a real estate contract or during a due diligence period. If you’re uncertain, ask your agent for help reviewing the documents or hire a real estate attorney to pore through the paperwork on your behalf.

    Your offer can also be contingent upon the seller transferring full mineral and air rights, etc.: that the seller will warrant in the agreement that no other entity has or will have any such rights in the property. We think that would afford full recourse; but consult your real-estate attorney, and be aware that recourse is only as good as the court’s jurisdiction (sellers can move) and assets of the seller.

    Your offer can include things to cover such issues, but you’ll also risk scaring off many sellers, especially during any seller’s market.

    All-cash buyers will also most likely be always more attractive to the seller regardless of such contingencies.

    Therefore, there are many factors to weigh. Real estate agents can become pretty impatient with buyers who want to do novel things. The agents/brokers won’t want to have to spend the extra time educating other agents/brokers and various sellers. You’ll need an especially good buyer’s broker/agent who will help you grow your investment portfolio and stay in it for the long haul with you.

  21.    IRS Rules on Owner Financing | eHow

    Owner Financing

    Owner financing can take one of many forms. Depending on the arrangement, it could involve you continuing to make your normal mortgage payment then having the buyer pay you back each month. If you own the property without a mortgage on it, you may simply provide the entire mortgage for the buyer. The buyer will simply make a mortgage payment to you until the property is paid in full. By doing this, you get the purchase price and interest.

    There are many ways to structure owner financing, but be careful of non-assumable loans: those that can be called in full upon a sale. If the interest rate is high though, the lender may simply allow the sale to go forward and allow the buyer to assume the loan even though it wasn’t originally assumable. Check with the lender, unless you have deep pockets; but then why would you want to pay higher interest?

  22.    Understanding the Anti-Steering Protection Act | Zillow Blog

    … there is a safe harbor provision in Dodd-Frank in regard to this regulation. The loan officer may present you with loan offers for each type of transaction in which you express interest (such as a fixed rate loan, adjustable rate loan, or a reverse mortgage) and the loan options presented to the consumer may include:

    • The loan with the lowest interest rate for which you qualify.
    • The loan with the lowest total dollar amount for origination points or fees and discount points.
    • The loan with the lowest rate loan you qualify for, without negative amortization, a prepayment penalty, interest-only payments, a balloon payment in the first 7 years of the life of the loan, a demand feature, shared equity, or shared appreciation.

    The article immediately above said no more balloon payments. Who’s right?

  23.    Five Takeaways: Treasury Official Outlines Mortgage-Market Priorities – Real Time Economics – WSJ

    REFINANCING, PART TWO: Mr. Stegman endorsed creating a HARP-like program for loans that aren’t backed by Fannie and Freddie, which he said could reduce the urgency in a handful of hard-hit communities to seize those loans via eminent domain. Such a plan, for which he also voiced support last year, would require congressional action, which seems difficult in the current political environment:

    We must not forget about the inability of performing underwater borrowers whose loans are held in private-label security trusts to access refinancing. This has motivated some communities whose housing markets have yet to recover to consider using eminent domain to help families refinance and “right size” their mortgage debt. While we understand their frustration, we think refinancing legislation is a better way to go.

    OVERHAULING FANNIE AND FREDDIE: Mr. Stegman said that the status quo in which Fannie and Freddie remain in some form of government-controlled limbo shouldn’t be allowed to continue, even as the crisis becomes a distant memory now that companies are hauling in huge profits. For one, many of those profits are either one-time gains or they’re being generated by the firms’ large investment portfolios that are being wound down, he said:

    It is good news that [Fannie and Freddie] have generated record earnings over the past several quarters…. But we believe that their recent financial results may significantly overstate the true financial condition of the enterprises, especially on a go-forward basis…. Recent financial results at the enterprises have also benefited significantly from strong home-price appreciation and low interest rates, both of which may moderate in future periods.

    We think the refinancing legislation is a good idea, but the explanation concerning Fannie and Freddie is extremely sketchy at best. We have yet to hear a solid reason for why Fannie and Freddie must be wound down.

  24.    Why has the dog not barked? Quieter, wiser heads are worried about our economy | Inman News

    Lou Barnes:

    The fracking boom is big, especially in oil, but natural gas really can’t fall below three bucks, too low for drilling.

    At that level a huge benefit to American commerce, but not a global-price undercutter. Oil could drop, but a fall in its price is more stimulative than deflationary, low gasoline prices a booster.

    He has his points. It would take a great deal of oil to drop prices across the board more than revving up the economy and jobs and wages and … finally general consumer-price inflation (food included).

    Of course, the US economy is changing in structural ways. We just can’t rev up the manufacturing the way we used to, and those jobs just aren’t paying what they once did relative to top incomes. The Phillips curve just isn’t what it once was. Money is hot for emerging markets and then cool again but doesn’t find its way to the US main street jobs at high wages.

  25.    How Much Higher Can Rents Go When Incomes Are Falling?

    It’s a worry. Donna S. Robinson:

    … just because these properties are for rent, does not mean that tenants can pay the often steep asking prices that Wall Street landlords will need. The Census Bureau has data showing that real incomes have been shrinking since 1999. Somewhere along the trend line, rental rates and tenant incomes are even now on a collision course, just as mortgage payments were getting out of hand 10 years ago, so the breaking point for rent rates is looming ever closer.

    Jobs, jobs, and more jobs at living wages is what this country needs. Those in positions of authority to put the people back to work are too slow about it, don’t you think? Many of them have the whole idea backwards: thinking that we (the government; the people) can’t afford to hire ourselves, as if the government can’t create the money it needs and do so at a non-inflationary rate.

    If the increase in money matches 1) the velocity (the rate at which the money circulates) and 2) real growth (industrial; non-finance sector), there is no inflation, with the exception of interest on the national debt, which could be eliminated by issuing non-interest-bearing United States Notes rather than interest-bearing Federal Reserve Notes.

    Cui bono from Federal Reserve Notes versus United States Notes? Bankers and their shareholders is the answer.

    The general population pays to enrich the lenders over and above general borrowing by firms and households. We believe the general public doesn’t know or understand this. We think it is a long-term drain on economic growth and represents a very large and unjustified redistribution of wealth from the middle and working classes to the very top.

    Those at the Fed would argue that their relative independence is necessary to control the money supply, but is that a big enough hurdle that we couldn’t design a system where fiscal deficits and a national debt wouldn’t be required? We could have a system where the money supply is automatically regulated to match economic needs without causing either inflation or deflation. It could still stand above political manipulations for short-term, political gains at the negative expense of the economy as a whole.

  26.    2013 Tucson Commercial Real Estate Market in Review

    Nice commercial-real-estate-market overview on Arizona’s second largest city: Tucson:

    Don’t want to digest reams of stats on the Tucson commercial real estate market’s state of affairs? We’ve got short snapshots for you here. That being said, if you enjoy diving into that statistical stuff, say the word, and we’ll send some your way…

  27.    Phoenix-area housing market tilts in favor of buyers

    The number of houses for sale in metro Phoenix has climbed almost 40 percent in the past year. With many more properties from which to choose, the market is tilting away from sellers toward people looking to buy.

  28.    All-Cash Buyers Scoop Up Bay Area Real Estate | KQED News Fix

    Here’s some quantifiable proof of how the Bay Area housing market is squeezing out the little guy: The percentage of homes going to all-cash buyers soared from 14 percent to 27 percent over the course of last year.

    The national numbers are even more dramatic. All-cash buyers were snapping up 18 percent of American homes at the end of 2012; by the end of 2013 they were buying more than 42 percent of them. (Note: All-cash buyers are those who can make the purchase without taking out any loans, not necessarily those who offer up a briefcase full of Benjamins.)

    Daren Blomquist is a vice president at RealtyTrac, the company that monitored and reported these numbers. He explains that all-cash buyers in the Bay Area are typically investors looking to flip houses for quick profits as home values spiral upward. In other areas of the country, where homes cost less, large investment funds also get into the action, buying houses for cash and aiming to rent them out for five years or so, then sell.

    It was supposed to slow down, but the Fed talked taper and then finally did it.

  29.    Real Estate Valuation Methods

    Pretty good overview by Jilliene Helman:

    In real estate, every property is different — and that makes determinations of value (outside of an actual sale) potentially difficult. Appraisers and other professionals who are charged with this task generally estimate property values utilizing three approaches: market data, cost, and income.