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Silver Regular Contributor
Dukey
Posts: 676
Registered: ‎07-08-2011
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ZH - The Unsafe Foundation of Our Housing 'Recovery'

Voice of sanity and astute analysis by Charles Hugh-Smith thru Zero Hedge:

 

http://www.zerohedge.com/news/2013-02-26/guest-post-unsafe-foundation-our-housing-recovery

 

Dose of reality is that The Foundation of Housing consists of Debt and Federal Subsidies.  The only way debt can increase is if incomes rise or the costs and qualification standards of borrowing decline. Since income for 90% of households has been stagnant for decades, the only way debt can expand is by lowering interest rates and reducing the risk exposure of debt issuers via Federal guarantees.  Now there is only one direction left for interest rates (up) and for housing subsidies and guarantees (down).

 

In broad brush, the wealth of middle class of homeowners has been influenced by four trends:

  1. The stagnation of real income
  2. A rapid rise in mortgage and other debt
  3. The use of debt to fund consumption
  4. The collapse of housing equity as the basis of debt-based consumption

In other words, Federal subsidies and Federal Reserve policies enabled a vast expansion of debt that masked the stagnation of income. Now that the housing bubble has burst, this substitution of housing-equity debt for income has ground to a halt.

This created a reverse wealth effect: The 70% between the bottom 20% and the top 10% have seen their net worth plummet while their debt load remains stubbornly elevated.

 

Unsustainable Pricing Will Introduce the "Poverty Effect"

 

If we put all this together, we get a picture of a middle class squeezed by historically high debt loads, stagnant incomes, and a net worth largely dependent on housing.

 

In response, Central Planners have pulled out all the stops to reflate housing as the only available means to spark a broad-based “wealth effect” that would support higher spending and an expansion of household debt.

 

This returns us to the key question: Are all these Central Planning interventions sustainable, or might they falter in 2013?  

Once markets become dependent on intervention and support to price risk and assets, they are intrinsically vulnerable to any reduction in that support.

 

Should these supports diminish or lose their effectiveness, it will be sink-or-swim for housing. Either organic demand rises without subsidies and lenders originate mortgages without agency guarantees, or the market could resume the fall in valuations Central Planning halted in 2009.

 

 

I sense the days of uber low mortgage rate might come to an end as the inflation is rearing its ugly head due to rounds of QE to oblivion and only way to cool inflation is to raise interest rate and reign in on money printing.

 

Of course the Kool Aid drinkers here will attack and tout buy it now just like they did few years ago...

 

PS - Those old enough may recall high teen (yeah like 18%) mortgage rate in the late 70's where selling point was the mortgage can be "assumed" from seller.

Super Contributor
Fluffer
Posts: 347
Registered: ‎08-05-2009
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Re: ZH - The Unsafe Foundation of Our Housing 'Recovery'

Your analysis may be correct of where we are, but I don't agree with your analysis of where we are going.  

 

The Fed and current administration are all-in on money printing and won't be deterred by increasing inflation.  Really they can't stop because if they did interest rates would spike and the federal government would be shown instantly to be insolvent since interest payments on the debt would replace all discretionary spending and entitlements would need to be reduced drastically.

 

So the politicians and the Fed will face a choice of letting rates rise and risking a severe cutback in federal spending and entitltements as well as collapsing economy, or money printing to pay for it all in the manner of a banana republic.  I say they will choose the latter.  Inflation is popular with polilticians because it is a hidden tax on savers that they can blame on speculators and evil corporations.  Just look at Argentina and Venezuela.  Already Obama's supporters like Krugman are telling the media how we really need more inflation to get us ready for it.  No way will Obama nominate someone to replace Dr. Feelgood Bernanke who is not on board with the money printing. 

 

And if we are headed into inflation, you want to own your home and other hard assets which you acquired with fixed rate debt, since you will be able to pay it off with devalued dollars.  

 

 

Silver Regular Contributor
Dukey
Posts: 676
Registered: ‎07-08-2011
0

Re: ZH - The Unsafe Foundation of Our Housing 'Recovery'


Fluffer wrote:

Your analysis may be correct of where we are, but I don't agree with your analysis of where we are going.  

 

The Fed and current administration are all-in on money printing and won't be deterred by increasing inflation.  Really they can't stop because if they did interest rates would spike and the federal government would be shown instantly to be insolvent since interest payments on the debt would replace all discretionary spending and entitlements would need to be reduced drastically.

 

So the politicians and the Fed will face a choice of letting rates rise and risking a severe cutback in federal spending and entitltements as well as collapsing economy, or money printing to pay for it all in the manner of a banana republic.  I say they will choose the latter.  Inflation is popular with polilticians because it is a hidden tax on savers that they can blame on speculators and evil corporations.  Just look at Argentina and Venezuela.  Already Obama's supporters like Krugman are telling the media how we really need more inflation to get us ready for it.  No way will Obama nominate someone to replace Dr. Feelgood Bernanke who is not on board with the money printing. 

 

And if we are headed into inflation, you want to own your home and other hard assets which you acquired with fixed rate debt, since you will be able to pay it off with devalued dollars.  

 

 


Good points.

 

QE to oblivion has become policy to prop up the economy and more gifts to the banks who borrow at close to zero %, buys Treasuries then sells the Treasuries to Fed for fat profit (not to mention colleting interest) using freshly printed $$$s.  Well this Ponzi scheme can go so far as noted here in Bloomberg Fed Faces Explaining Billion-Dollar Losses in QE Exit Stress  http://www.bloomberg.com/news/2013-02-26/fed-faces-explaining-billion-dollar-losses-in-stress-of-qe3...

 

Fed has repeatedly ran what's called front running the trades by buying the very Treasuries it's trying to auction off in a bid to prop up the price.  This is ILLEGAL but suppose not when Fed does it.

 

The Absurdity Continues: Fed Buys 30 Year Bonds Two Hours Before Treasury Sells 30 Year Bonds  http://www.zerohedge.com/news/absurdity-continues-fed-buys-30-year-bonds-two-hours-treasury-sells-30...

 

In Feb 2013, Fed Will Buy 75% Of New 30y Treasury Supply http://www.zerohedge.com/news/2013-02-07/feb-2013-fed-will-buy-75-new-30y-treasury-supply

 

Fed Now Pre-Monetizing: Bernanke Buys $300 Million Of Treasury To Be Auctioned Off Tomorrow

http://www.zerohedge.com/news/2013-01-09/fed-now-pre-monetizing-bernanke-buys-300-million-treasury-b...

 

So why would Fed blatantly resorting to manipulating the bond auction tied to interest rate?  Maybe 'cos Chinese and other foreign government and banks all over the world are not buying the US debt knowing that they may get paid later with FIAT money AKA USD?

 

As for inflation - it's fine IF one gets nice raises as inflation rears its ugly head but watch out once one's buying power is crimped.

 

And a term one will hear more as Fed's money printing induced growth stalls possible this year with inflation rising (i.e. gas price recently and maybe food price if another drought hits this year) is stagflation:

 

Definition of 'Stagflation'A condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, or inflation.
 Investopedia explains 'Stagflation'Stagflation occurs when the economy isn't growing but prices are, which is not a good situation for a country to be in. This happened to a great extent during the 1970s, when world oil prices rose dramatically, fueling sharp inflation in developed countries. For these countries, including the U.S., stagnation increased the inflationary effects.

 

As for inflation raising housing price et al - be careful what you wish for.

Regular Contributor
bahomeloaner
Posts: 85
Registered: ‎05-15-2012
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Re: ZH - The Unsafe Foundation of Our Housing 'Recovery'

Good points.

 

Note however that high inflation destroys trust and the institution of the Fed itself and the Fed is not foolish enough to destroy itself. If the necessity arises, the Fed would ask Govt to abandon social programs SS/Medicare. It is just that the Fed always imposes the costs on general public if necessity arises while sparing banks/govt. If you are dreaming of return of 1970s era, I would say that you will keep dreaming. Little guys to have to carry higher amounts of mortgage debt with low interest rates is what the Fed is engineering. It most likely will not result in higher/increasing incomes for the little guy ever.

Platinum Trusted Contributor
elt1
Posts: 5,021
Registered: ‎01-04-2010

Re: ZH - The Unsafe Foundation of Our Housing 'Recovery'

Ah yes the specter of stagflation...a seventies phenomenon... Just happened to be the best time to own real estate in my lifetime....Why does Dukey keep bringing up the days when real estate went up 30% a year as a bad thing?  It was Volcker that killed the party in 1981... And yet somehow we all survived....How come the future is always scary? does anyone believe in a bright future or that just for real estate agents and cheerleaders?

Gold Contributor
mediaguru
Posts: 1,896
Registered: ‎03-03-2011
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Re: ZH - The Unsafe Foundation of Our Housing 'Recovery'


elt1 wrote:

How come the future is always scary? does anyone believe in a bright future or that just for real estate agents and cheerleaders?


Maybe your definition of "a bright future" equates to "whatever is good for me, even if other people and society in general gets screwed" -- for example, you seem to think that rampant inflation, or (even worse) 30% asset growth while salaries, incomes, and employment stagnate = "a bright future"

 

To many people, that is not bright. It is scary.  It's scary when people who used to be home-owners at the age of 25 now have to wait to the age of 35 to do so -- setting them a decade permanently behind their predecessors in terms of asset growth and financial stability.  It's scary to think that people graduating with higher college debt that at any other point in history are also graduating into a world where that college degree is the bare minimum to get a job, and that they may have to be underemployed for years before getting a foothold... all while real estate prices are climbing yet their income is not.

 

To you, this is a "bright future" -- so long as you remain gainfully employed, watch your property values climb, and can have a comfortable retirement, who cares if the system is sustainable or if younger generations have to suffer a lower quality of life, right?

Silver Regular Contributor
Dukey
Posts: 676
Registered: ‎07-08-2011
0

Re: ZH - The Unsafe Foundation of Our Housing 'Recovery'

One more food for thought as to why the Fed is giving $83 billion to the TBTF (too big to fail)  banks as reported by Bloomberg today below?  So the big banks borrow money from the Fed's freshly printed $$$s for very low interest rate, buy Treasuries (and sells the Treasury back to Fed for nice interest payments and profit) or give mortgage at 3.5% (and sells the potentially toxic mortgages at a profit to quasi-nationalized bagholders Fannie and Freddie). 

 

Now what if this Ponzi scheme runs its course due to inflation rearing its ugly head (inflation tends to creep up) and Fed has to take the QE punchbowl away?

 

Why Should Taxpayers Give Big Banks $83 Billion a Year?

http://www.bloomberg.com/news/2013-02-20/why-should-taxpayers-give-big-banks-83-billion-a-year-.html

 

Lately, economists have tried to pin down exactly how much the subsidy lowers big banks’ borrowing costs. In one relatively thorough effort, two researchers -- Kenichi Ueda of the International Monetary Fund and Beatrice Weder di Mauro of the University of Mainz -- put the number at about 0.8 percentage point. The discount applies to all their liabilities, including bonds and customer deposits.

 

Small as it might sound, 0.8 percentage point makes a big difference. Multiplied by the total liabilities of the 10 largest U.S. banks by assets, it amounts to a taxpayer subsidy of $83 billion a year. To put the figure in perspective, it’s tantamount to the government giving the banks about 3 cents of every tax dollar collected.

 

The top five banks -- JPMorgan, Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Goldman Sachs Group Inc. - - account for $64 billion of the total subsidy, an amount roughly equal to their typical annual profits...In other words, the banks occupying the commanding heights of the U.S. financial industry -- with almost $9 trillion in assets, more than half the size of the U.S. economy -- would just about break even in the absence of corporate welfare...

 
Platinum Trusted Contributor
elt1
Posts: 5,021
Registered: ‎01-04-2010

Re: ZH - The Unsafe Foundation of Our Housing 'Recovery'

[ Edited ]

mediaguru wrote:

elt1 wrote:

How come the future is always scary? does anyone believe in a bright future or that just for real estate agents and cheerleaders?


Maybe your definition of "a bright future" equates to "whatever is good for me, even if other people and society in general gets screwed" -- for example, you seem to think that rampant inflation, or (even worse) 30% asset growth while salaries, incomes, and employment stagnate = "a bright future"

 

To many people, that is not bright. It is scary.  It's scary when people who used to be home-owners at the age of 25 now have to wait to the age of 35 to do so -- setting them a decade permanently behind their predecessors in terms of asset growth and financial stability.  It's scary to think that people graduating with higher college debt that at any other point in history are also graduating into a world where that college degree is the bare minimum to get a job, and that they may have to be underemployed for years before getting a foothold... all while real estate prices are climbing yet their income is not.

 

To you, this is a "bright future" -- so long as you remain gainfully employed, watch your property values climb, and can have a comfortable retirement, who cares if the system is sustainable or if younger generations have to suffer a lower quality of life, right?


In the BA most people in the last 50 years didn't become home owners till their 30's... Those of us that survived the cold war and Vietnam don't see the current situation as dire as some... If you want to live in the macro world where gloom and doom is the mother's milk of media and politics then the future is dark...but mainly because they want you to feel that way...

Real estate prices climb here more than other areas due to the fact they we have grown from 3m in 1970 to 7m and on to 10m in 2050....There are plenty of other places to live where real estate prices will remain stagnate...If that is the only thing that will make your future brighter then move to those areas..

 

Media, I know you suffer from Gen X malaise. But in reality your generation will live longer than pervious generations so that may salve your generation envy. As far as student debt, inflation would wipe out that problem pretty quickly... The reality is it is old folks on fixed incomes that are being hurt the most with 1% return on the CD's and a zero net return on the SP 500 for the last 13 years.... The future is as bright as you make it... People like buyinghouse and Ptieman are coming here every day fro overseas with prospects for a brighter future...it is all about perspective...The fact that it is fashionable to be gloom and doom and that every other movie predicts the end of the world doesn't mean that any of it is true... Gloom and doom were popular in the early 50's and Seventies...all the predictions were wrong..remember global cooling and Godzilla?