Linking ≠ endorsement.
Fed tapering was widely expected to push up US yields. Instead, US yields have fallen since the beginning of the year, raising the question of whether we’re seeing a new version of the Greenspan 2005 conundrum. Interestingly, a successful explanation of this new conundrum cannot just rely on a flight to safety explanation as it also needs to rationalize why 5-year yield and 10-year yield have diverged over the same period.
James Hamilton writes … Another possibility is that more people are starting to take seriously the suggestion that we’re on a path now of secular stagnation with weak economic growth and poor investment opportunities over the next decade. But that’s hard to reconcile with the stock market, which climbed impressively this year.
We don’t think so. We think many people just don’t know what else to do and are gambling in equities because they don’t see any place else to be with their investment dollars. They really don’t understand Treasurys.
The smartest money is taking the longest view. The Greater Depression is taking much longer than was generally predicted.
Flight to safety really does answer most of the question.
↑ ‘Mortgage crisis’ is coming this winter: Bove
“If the government is adamant that the GSEs must go, housing prices will fall. This will be a crisis.”
We mostly agree.
…neither is there much evidence to suggest that interest rate levels are an important factor in incentivizing risky business ventures, or investment generally. Lower interest rates post-2008 were correlated with less business investment, due to the economic malaise. Lower interest rates — far from being a tool incentivizing excessive risk taking — have revealed themselves to be an ineffective tool even at getting the economy back to a historically normal level of risk taking.
Ordinarily, we like John Aziz’s articles; however, on this one, we see that he’s arguing from the wrong side of the curve, the downhill side and the bottoming out and attempted rise again rather than what the Austrians focus upon, which is after thins get roaring, artificially maintaining low interest rates too low. They crest, and then comes the steep down slide. They argue that Alan Greenspan held rates way too low for much too long. From a monetarist standpoint, which the Austrians are not, they are correct about that.
↑ [Recommended] BBC News – China’s property conundrum
Perhaps the best article we’ve seen from Linda Yueh, Chief business correspondent, BBC:
…property developers, unlike households, tend to take on more debt. It’s true in China as it is elsewhere.
If Chinese homebuilders’ debt exceeds the equity that they hold, which would largely consist of the value of their properties, by nearly 30%, then it raises the risk that declining prices will lead to an inability to repay that debt. And, if they are seeking to borrow from offshore, then it suggests that they have financing difficulties. And going offshore begins to drag in global banks, though the amount of their exposure remains small.
So, if these property companies can’t repay the loans that they have borrowed, then that could affect the banks. And if banks end up holding a lot of non-performing loans, then they would sell assets to try to recoup some of their money.
It can lead to a fire sale in the property sector that further pulls down property prices, which in turn worsens the value of the equity held by companies and also banks.
This is the pattern witnessed in other banking crisis around the world.
The local bond idea isn’t enough either.
Four adults and two children died when a fire raged through their home shortly after 1 a.m. at 552 Gibbs Road, off N.C. 411. That’s about a mile from the Bladen County line, and roughly 10 miles north of White Lake.
“In just a couple of minutes,” she said, “everything was gone. In just a couple of minutes.”
↑ Objections to Fiscal Policy are Groundless—It Works | The Fiscal Times
…for a balance sheet recession, tax cuts targeted at both balance sheet repair and increased consumption, government spending on infrastructure and other projects, and enhanced social insurance to smooth the way for the unlucky workers struggling to find employment are all desirable policies. The ARRA largely followed this prescription, and most research concludes that it helped to prevent an even worse recession. The problem was the size of the stimulus package, not its composition. It was far too small to address the huge problems we faced.
Here’s Brad DeLong going deeper into what Jérémie Cohen-Setton, above, covered well in his blog review on the subject.
Is there actually an intelligent entity—some kind of distributed anthology intelligence suffering from some sort of aphasia—that we call Ms Market that actually has expectations and whose expectations we can read off of bond yields? And if there is such an entity, is there any reason we should pay any attention to her expectations either as guides to some central tendency of investor sentiment or as forecasts that are in their own right worth incorporating into our own information sets, and hence into our own forecasts? Who knows? I don’t.
Just to be clear, we wrote our brief analysis above before reading Brad’s. As our analysis stated, Brad’s Ms. Market doesn’t really understand. Do we still have to take her into account? Absolutely. Trying to get ahead and then to stay there is the issue.
↑ Chinese love US housing so much, now they’re building it
Chinese nationals have been buying U.S. residential real estate at a fast clip for the last few years. Now they are building it, setting their sights on some of the priciest parcels of land in the hopes of attracting U.S. and Chinese buyers alike.
“The Chinese real estate market is very competitive, and the U.S. housing market is recovering and expanding rapidly, so for us as a company to invest a certain amount in the U.S. makes a lot of sense for us,” said Tian Ming, chairman of Landsea, a China-based developer, through an interpreter.
Landsea, which bills itself as China’s “pre-eminent green builder,” is investing $1 billion in the U.S. housing market, beginning with three new developments. It will build condominiums in the New York City market, townhomes in San Francisco and single-family homes in the Los Angeles area.
↑ Hackers may have stolen credit data from Home Depot
Do you use Home Depot for property maintenance and improvement equipment and materials?
Home Depot may be the latest retailer to have suffered a massive credit card breach, with the company moving to assuage consumers’ fears after a large cache of stolen data reportedly appeared on black market sites.
↑ How do you Determine the Cash on Cash Return on Rental Properties? – Invest Four More
How do you determine the cash on cash return, and why is it better than using ROI on rental properties?
…this investment is popular because it not only allows tenants to get into a house without the necessary down payment, and it brings investors a great source of income for a 3 — 5 year period.
One of the mistakes that novice investors make is to purchase a home that could be difficult to sell if the tenants default. So to help avoid that, I’ve compiled my top 5 keys to buying rent to own investment property.
Derrick Evens points to Dodd-Frank rules for all-cash, foreign real-estate investment in the US. He thinks the Dodd-Frank rules will be dismantled.
Our view is that, that would be a very bad idea because it would allow people to get in over their heads again and for an artificial housing bubble to blow up and then burst. We would have learned nothing and would repeat the Greater Depression.
Derrick is also advocating residential flipping for the foreign investors. The easy money there has been made. Flipping is mostly in the high-end now.
RealtyTrac’s analysis found Millennials (considered born between 1977 to 1992, in this survey) to be the most mobile generation, moving away from counties with populations of 178,000 or fewer and moving into counties with larger populations (500,000-plus).
Frances Coppola says that Mario Draghi is not planning US-style QE for Europe but is calling instead for fiscal and monetary policy to work together to repair the unemployment and employment-participation rates Europe-wide.
We haven’t been following Mario Draghi closely enough to say whether or not Frances is somehow misunderstanding Draghi’s message; but we will say that if she’s right, it would explain why people have been noticing otherwise mixed signals from Mario about US-style QE for Europe.
↑ As Self-Storage Cash Flows Rise, Competition for Assets Compresses Rates | Self Storage content from National Real Estate Investor
Robert Carr reports that self-storage is returning well but REIT’s seem to have the financial strength to be the ones building more capacity, which is low right now. There’s a lag time of 3-5 years to profitability (” the dividend you need”) if we’re reading the article correctly.
↑ [Very highly recommended] Democracy in the Twenty-First Century by Joseph E. Stiglitz – Project Syndicate
Joseph E. Stiglitz:
…Piketty’s work raises fundamental issues concerning both economic theory and the future of capitalism. He documents large increases in the wealth/output ratio. In standard theory, such increases would be associated with a fall in the return to capital and an increase in wages. But today the return to capital does not seem to have diminished, though wages have. (In the US, for example, average wages are down some 7% over the past four decades.)
…Piketty’s forecast of still higher levels of inequality does not reflect the inexorable laws of economics. Simple changes — including higher capital-gains and inheritance taxes, greater spending to broaden access to education, rigorous enforcement of anti-trust laws, corporate-governance reforms that circumscribe executive pay, and financial regulations that rein in banks’ ability to exploit the rest of society — would reduce inequality and increase equality of opportunity markedly.
If we get the rules of the game right, we might even be able to restore the rapid and shared economic growth that characterized the middle-class societies of the mid-twentieth century. The main question confronting us today is not really about capital in the twenty-first century. It is about democracy in the twenty-first century.
We couldn’t agree more.
If you are a residential or commercial landlord, you can own and lease Rolls Royce properties or regular-Ford properties or both.
If you’re on the common-Ford level, it pays that your tenants are generally doing well in the overall economy. That’s what’s at the heart of what Joe Stiglitz is getting at. It’s also why Henry Ford paid all of his employees enough to be able to buy the cars they were making. It was smart business.
↑ US bonds are tracking ECB policy – FT.com
As the prospect of the ECB and Fed pushing their respective monetary policies in opposing directions looms, so a strengthening dollar stands to boost the appeal of US assets such as bonds and equities.
Alan Ruskin, strategist at Deutsche Bank, says: “A policy divergence will favour the US dollar and the [Treasury] yield pick-up is there. Core eurozone yields are unattractive, full stop, and those of the periphery countries no longer offer a significant pick-up over the US.”
That’s what we think has been going on, with the smart money anyway.
↑ Bond Markets Tilt Toward Frankfurt as Draghi Negates Fed – Bloomberg
With yields already so low in Europe, speculation the ECB will finally embrace a form of monetary stimulus it has long avoided has also been a boon for bonds outside the region.
Debt securities of all types worldwide returned 1.3 percent in August, the most since January, according to index data compiled by Bank of America Merrill Lynch.
“There’s a push for yield and it’s having an effect” on bond demand around the world, Matthew Eagan, a fund manager at Loomis Sayles & Co., which oversees $231 billion, said in a telephone interview on Aug. 27.
In the U.S., where yields on 10-year Treasuries exceeded comparable bunds by the most since 1999, those on the benchmark note decreased by the most in seven months in August as investors took advantage of the yield premium.
The storm clouds aren’t just over Europe. They’re over China too. Japan is stalling because of the sales-tax rise. Employment still doesn’t look rosy enough in the US. We don’t see the Fed raising rates until the inflation writing is clearly on the wall. It would be pointless and could likely make matters worse. The recovery has been extremely weak and fragile in our view.
↑ 30-Year Fixed Mortgage Rates Experience Biggest Weekly Drop Since January, Fall Back Below 4 Percent | Zillow Blog
As we predicted, we hit the 3’s again.
Mortgage rates for 30-year fixed mortgages fell 12 basis points this week, with the current rate borrowers were quoted on Zillow Mortgages at 3.96 percent, down from 4.08 percent at this same time last week.
↑ Time to Go Global With Real-Estate Investing? – Barron’s
…the SPDR Dow Jones International Real Estate ETF (ticker: RWX ), the largest exchange-traded fund for non-U.S. real estate, attracted net inflows of $304 million in August, the most of any property ETF, driving its shares outstanding—a proxy for demand—to a record, according to data compiled by Bloomberg. Last month’s surge catapulted property ahead of energy for the first time in industry fund flows year-to-date, the data show.
↑ Toll loses steam as climbing home prices deter rich Americans | Reuters
Toll Brothers Inc (TOL.N) is finally feeling the pinch as a steep rise in home prices discourages even the most affluent Americans from buying its luxury homes.
The company, whose homes can cost more than $2 million, had so far reported stellar results by selling more homes at higher prices. But analysts said the largest U.S. luxury homebuilder seems to have pushed its prices to the limit.
↑ REAL ESTATE: Inland home-price gains still highest in nation – Press Enterprise
Home prices, ratcheting up in the Inland Southern California market since late 2012, continue to dominate the national scene, a new real estate index shows.
Irvine-based CoreLogic reported Tuesday that home prices rose 7.4 percent in July, with the Inland region experiencing the biggest year-over-year gain of any location in the United States.
↑ Why the Phoenix housing market is stuck in the mud – Phoenix Business Journal
Arizona State University housing expert Michael Orr shares in his monthly housing report that single-family sales are down 19 percent over the past year including a 53 percent drop in purchases by investors and flippers.
Orr said home prices also are losing steam after some post-recession gains. He said expensive homes are the main driver of an 8 percent increase in median Valley home prices between July 2013 and July 2014.
Sluggish post-recession population and job growth, millennials eschewing home ownership and foreclosure and short sale victims’ poor credit are all dampening demand for mortgages and home purchases.
Those factors also are encouraging more apartment developments and construction, Orr said.
↑ Regulators set rules meant to ward off bank crisis – Business – The Boston Globe
Federal regulators are requiring big banks to keep enough high-quality assets on hand to survive during a severe downturn, the latest move under congressional mandate to lessen the likelihood of another financial meltdown.
The Federal Reserve adopted rules on a 5-0 vote Wednesday that will subject big US banks for the first time to so-called liquidity requirements.
↑ Louisville’s Apartment Sector Regains Momentum – YouTube
After seeing occupancy and rent growth levels cool in 2013’s second half, Louisville’s apartment sector has posted strong gains through the first six months of 2014.