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People Tend To Buy In An Inflated Market

It’s Friday desk clearing time for this blogger. “Jewell Handy has a steady income as a teacher, money for a down payment and even a history of successful homeownership. But when she decided to buy a house for herself and her mother in Houston this summer, she discovered that she couldn’t get a conventional mortgage. The reason: a credit score in the mid-600s because of an old issue with a student loan.”

“With a week left before the sale is scheduled to close, she is still fielding paperwork requests from her lender, and she isn’t sure the loan will go through. ‘They’re somehow not confident in my finances, but I don’t really understand why,’ she said.”

“Fugitive businessman Jho Low, accused of orchestrating a multibillion-dollar fraud of a Malaysian sovereign wealth fund, has agreed to forfeit over $100 million worth of luxury real estate as part of a wide-ranging settlement with U.S. prosecutors. That includes two posh London apartments, two New York City condos and a contemporary mansion in Los Angeles, all of which U.S. prosecutors accused Mr. Low of buying with stolen money from a multibillion-dollar heist.”

“One of them, a lavish penthouse atop the Mandarin Oriental Residences by Central Park South, went into contract earlier this month, asking $30 million—approximately $500,000 less than Mr. Low bought it for in 2011. Mr. Low’s other New York City property is asking $9.2 million—several million less than the $13.8 million Mr. Low purchased it for back in 2014. The Los Angeles house is on the market for $24 million—less than two-thirds of the $39 million the businessman paid in 2012.”

“Developers selling the copper-clad pinnacle of the Woolworth Building are trying to drum up a buyer with a $31 million price cut. ‘We realize that the market has fallen a bit, and we’re realistic,’ real-estate developer Ken Horn said, adding that his company, Alchemy Properties, has lowered asking prices in the building by roughly 10%. ‘You would think that with pricing lower and interest rates lower, your buyer pool would be bigger. But people tend to buy in an inflated market as opposed to a market where they should be buying.'”

“The developers of the Woolworth Building aren’t the only ones slashing prices. Real-estate agent Stan Ponte who is helping to market the property said it is ‘a solid buyer’s market.’ ‘Everyone knows it,’ he said. ‘The buyers and the sellers.'”

“The quirky nature of this fall’s Toronto-area real estate market has buyers, sellers and their agents inventing new strategies. Real estate agent Patrick Rocca points to one house on a prime street in Leaside that arrived on the market in early October with an asking price of $2.9-million. It received one bid on offer night and sold, then that deal fell apart. It was relisted and, after a couple of weeks, it drew two offers and sold below asking.”

“Owners of up to 500,000 flats face being unable to sell or get a new mortgage because of uncertainty over government advice on towers clad with flammable materials. Helen Brierley, a property solicitor, tried to sell but found no buyer so she is letting her flat while living with her parents. ‘I am now in a situation where I am having to give up my flat, potentially go bankrupt and, as I then won’t be allowed to practise, potentially lose my career too,’ she said.”

“Gulf News spoke to tenants living in Sharjah to understand how their rents have changed in the last one year and what they expect the payout to be going forward. All the tenants we spoke to unanimously said their rents have slid. Salam P said he is currently living in a three-bedroom villa paying an annual rent of Dh100,000. ‘Last year I paid Dh125,000. This year people are saying we can negotiate harder for a rental drop and that is what I am going to do,’ he said.”

“Malaysia will be seen as a deserted land if the issue of unsold surplus houses and properties now estimated to reach almost RM100 billion is not promptly addressed, said Housing and Local Government Minister Zuraida Kamaruddin. ‘I was horrified to hear almost RM100 billion of houses were not sold, if these houses are without occupants, Malaysia will look like a deserted country,’ Kamaruddin said.”

“Thailand currently has 220,000 residential units waiting to be sold, some sitting unoccupied for a considerable length of time, an official of the Government Housing Bank said at a seminar. Vichai Viratkapan expressed concern about the substantial supply remaining unsold from 2014 to early 2019, such as the 1,140 units waiting for buyers in Nakhon Ratchasima, Khon Kaen and Udon Thani. ‘The most worrying issue, though, is condos for sale at Bt2 million-Bt3 million that are being purchased at a lower rate than the average in the past,’ Vichai said.”

“With home sales crashing, real estate agent Zhang Yonggang is tightening his belt. Zhang, who works in the central city of Taiyuan, said his office sold no apartments last month after Beijing tightened lending controls in July to rein in housing costs and debt. Zhang, 42 and married with a teenage son, said his income has fallen by half from a year ago. ‘I have no money to buy a home and no plans to change cars’ Zhang said. ‘It is definitely the toughest time I’ve ever seen.'”

“The Western Australia housing market took a turn for the worse over the last quarter with broad-based downgrades, according to Moody’s Analytics. ‘Median rental values in Western Australia fell more than 20% peak to trough from November 2013 to September 2016, a sign of continued excess supply,’ said Katrina Ell, Economist at Moody’s Analytics.”

Slow sales of Christchurch‘s 900-home east frame development have aroused concern from Treasury and look likely to trigger changes in the project. Out of 172 apartments, terraced houses and townhouses being built just one-fifth are either under contract to would-be buyers or sold. Real estate agent Brendan Chase said ‘But something there is obviously not working. It could be a sales force problem, or they don’t know what they’re doing in terms of what the market wants, or their pricing is wrong.'”

This Post Has 103 Comments
  1. ‘I am now in a situation where I am having to give up my flat, potentially go bankrupt and, as I then won’t be allowed to practise, potentially lose my career too’

    Well Helen, it was cheaper than renting.

    1. “‘I have no money to buy a home and no plans to change cars’ Zhang said. ‘It is definitely the toughest time I’ve ever seen.’”

      Does he normally buy new homes and change cars on a regular basis?

    2. I have a friend who almost bought in San Diego the last time around at the high and she would have been in the same situation, it would have ruined her professionally. Luckily I was able to talk her out it. Part of the evidence I used was posts from this blogs predecessor. When you buy something five or more times your income you can really mess your life up

      1. San Diego prices are going down ever so slowly! The opportunity to catch one’s self a falling knife in a home purchase seems likely to drag out for at least a few more months.

        1. Agreed! I’m not seeing much movement. Plenty or $900K+ dated 4bd/2ba homes for sale or sold recently.

        2. The opportunity to catch one’s self a falling knife in a home purchase seems likely to drag out for at least a few more months years.

          FTFY

    3. “Owners of up to 500,000 flats face being unable to sell or get a new mortgage because of uncertainty over government advice on towers clad with flammable materials.”

      Aren’t 500,000 mortgages too many to fail?

  2. “The reason: a credit score in the mid-600s because of an old issue with a student loan.”

    I wonder what the issue might have been? Perhaps nonpayment?

    1. “Perhaps nonpayment?”

      In America, there are alway$ creative financial $olution$!:

      Get paid $3,000 by being deliberately infected with flu

      You could get paid $3,310 if you’re willing to have yourself deliberately infected with the flu. Researchers want to see how pre-existing antibodies impact a patient’s flu symptoms after exposure to the virus.

      A clinical trial is looking for healthy adults age 18 to 49 to be infected with the virus under what the National Institutes of Health (NIH) describes as carefully controlled conditions.

      Volunteers will be given a nasal spray with a strain of seasonal influenza. The virus was developed by scientists and NIH says it reliably produces mild to moderate flu in most recipients

      https://www.10tv.com/article/get-paid-3000-being-deliberately-infected-flu-2019-nov

      1. Risk death for a mere $3,000. Gee, where do I sign up? It should come with a million dollar insurance policy for family.

        1. The sad thing is that for some people that $3k might mean the difference between life and death anyway.

    2. If she’s got money for the down payment, then why doesn’t she use that money to pay the student loan and raise her credit score?

      Oh right, I bet she’s looking for an FHA loan, so she likely has under $10K. Which doesn’t go far.

  3. The Financial Times
    Lloyd Green
    A Trump impeachment would further divide an angry America

    It would be a repeat of Kavanaugh’s Supreme Court hearings but on steroids
    4 hours ago

    1. “‘Tis the business of little minds to shrink; but he whose heart is firm, and whose conscience approves his conduct, will pursue his principles unto death.” Thomas Paine

  4. The bank kept insisting she pay it off and she kept insisting that it cramped her lifestyle. She could not believe have long they tried to collect. The bank just did not understand that if it insisted on repayment it would discourage borrowing. She will vote for Warren in 2020 because she understands that insisting that people pay back their loans discourages people from borrowing.

  5. Just like in $helter.$hack hou$ing, $peculations can go awry, “no if’$ or but’$!”

    Market$
    Billion$ Worth of $terling Bet$ to Expire Worthle$$ After Brexit Deadline Passe$

    By Vassilis Karamanis and Charlotte Ryan |Bloomberg |November 1, 2019,

    Pound options with value of over $26 billion$ expired Friday

    Binary Brexit outcome keeps option$ as main tool: Amundi Asset

    Trader$ preparing for a Halloween $hock in currency market$ after the last Brexit deadline placed bet$ worth billion$ of pound$ in option$, most of which expired worthle$$ on Friday.

    … That left many options maturing Friday out of the money, including a notional value of over 10 billion pounds ($13 billion) that the currency would slump below $1.28 or climb above $1.30.

    “Implied volatility is quite expensive as in such an binary environment it is a preferred way to express positions,” said Andreas Koenig, head of global currencies at Amundi Asset Management, which oversees $1.7 trillion. “One day we will know, deal or no deal, in or out. But towards this final certainty it remains binary and the preferred management tool will be still options.”

    These options, giving investors the right to buy or sell at those levels, may have been placed as hedges or as bets on a sharp move for a last-minute Brexit deal or if the U.K. crashed out of the bloc at midnight. Speculation in the pound has emerged as a political issue, with allegations that Prime Mini$ter Bori$ John$on has link$ to such inve$tors and rival Jeremy Corbyn attacking hedge funds at the start of a campaign for a December election.

  6. “Jewell Handy has a steady income as a teacher….”, “…she discovered that she couldn’t get a conventional mortgage. The reason: a credit score in the mid-600s because of an old issue with a student loan.”…”

    Apparently this lady teacher didn’t ‘study’ economics. And apparently she’s not a math teacher either.

    .”…They’re somehow not confident in my finances, but I don’t really understand why,’ she said.”…”

    Jewell Handy: What part of not paying back an existing [student] loan don’t you understand?

    1. What do you mean? She’s just expecting that Fauxcahontas is going to send us that bill after she gets elected.

  7. Remain calm. All is well!

    China Economy
    WeChat rumour sparks run on rural Chinese bank in fresh sign of financial fragility amid economic slowdown
    – Yichuan Rural Commercial Bank in Henan province suffered ‘concentrated cash withdrawals’ on Tuesday
    – Authorities have already been forced to take over or recapitalise Baoshang Bank, the Bank of Jinzhou and Hengfeng Bank in the last six months
    Topic | China economy
    He Huifeng
    Published: 5:15am, 31 Oct, 2019
    Updated: 8:23am, 31 Oct, 2019

    Police in China arrested a woman after she spread a rumour via WeChat that “the local rural commercial bank is going bust”, leading to hundreds of customers rushing to withdraw cash from the lender in Henan province in the latest case to hit small regional banks during the economic slowdown.

    The 29-year-old female, surnamed Wang, was detained by police in Yichuan county after “concentrated cash withdrawals” from Yichuan Rural Commercial Bank. She is expected to be punished with five days in a detention centre for “fabricating facts and disrupting social order”.

    The bank did not specify the reason for the sudden demand for cash withdrawals, but confirmed on Wednesday that “services and operation are running normally”.

    1. Bloomberg
      Markets
      Bank Run in Rural China Tests Faith in Thousands of Lenders
      Bloomberg News
      November 1, 2019, 1:07 AM PDT
      – Yichuan Rural Bank’s depositors rushed to withdraw their money
      – Official intervention underscores China’s tough balancing act

      Terraced Fields In Guizhou
      Photographer: Luo Jinglai/Qianlong.com/Visual China Group via Getty Images

      It started with an unverified rumor from an obscure social media account: Yichuan Rural Commercial Bank was insolvent.

      Within hours of the post on Tuesday, more than 1,000 worried customers had lined up to withdraw their money. By Wednesday, a run on the bank had prompted local authorities to arrange more than 30 billion yuan ($4.3 billion) of liquidity injections. As branch staff sought to restore confidence, they displayed stacks of cash to convince depositors that there was enough to go around.

    2. “ru$hing to withdraw ca$h”

      There’$ a lotta cow$ in the Chinese “crowd gate” (1.386 Billion$) with digital device$, good thing they will never receive a “Fal$e Facebook.In$tagram” po$t regarding their local FDiC protected bank$!

      Thing$ are different in America, The Federal.Re$erve alway$ ha$ the $tockMarket$ back. Alway$!

      1. Bwaha. My daughter calls her dog Wang-Wang (pronounced wong-wong) because to Chinese people it means Woof-woof. Silly, I know…but could come in handy when thinking about rural women named Wang. Woof.

        1. I have a very pretty female friend with the surname Wang so it does not always work. She is from Taiwan.

    3. “The 29-year-old female, surnamed Wang, was detained by police in Yichuan county after “concentrated cash withdrawals” from Yichuan Rural Commercial Bank. She is expected to be punished with five days in a detention centre for “fabricating facts and disrupting social order”.”

      Uh-oh, there goes her social score. Fortunately for her, due to a dearth of female genitalia in China, she will still be attractive as a potential mate. I wonder if China is working on a way for the social score to be shown as a hologram which appears above every person walking around in day to day life?

      1. Gary Shtyngart predicted the concept of a social credit score in his 2010 novel Super Sad True Love Story.

      2. she will still be attractive as a potential mate

        In a rural area probably so. Considering the shortage of women I’m amazed at how picky the Chinese city boys are.

        1. You can’t marry someone of a lower class. Socialism with Chinese Characteristics is very class-based system.

          1. You can’t marry someone of a lower class.

            Hmmm…I was talking about picky about appearances. There are a lot of Chinese women that look good to American eyes but don’t look very good to the Chinese guys. But I hadn’t really thought about an unspoken (in public anyway) caste system but it makes sense.

          2. Yes, the cultural traits of beauty are so different in China. The locally “hot” girls I find average — too thin, too white, too much make-up, too much maintenance.

            What’s the word for a top-tier lady over there, “baifumei” white-rich-pretty!

          3. The locally “hot” girls I find average — too thin, too white, too much make-up, too much maintenance.

            Exactly. They look like one wrong step and they’ll break a bone due to being so thin and so little vitamin D from never going in the sun. Way too much gap (@rms), IMO.

          4. My wife’s idea of beauty are pretty weird…basically, tall, super skinny, and no shape/curves…ugh! Fortunately, even though she’s Chinese, she doesn’t look like that.

    4. The People’s Bank of China assures us that their banks are solid. The fundamentals are great. China Cheerleader Stephen Roach, on Beijing’s payroll, also assures us the Chinese are really clever, owe themselves debt and not foreigners, plus everyone saves 50% of income or more.

      Given this, why would concentrated withdrawals for a rural bank matter?

      Ironically, Stephen Roach’s press releases/op-eds for the CPC published in Anglophone papers would leave one to believe Henan and the rest of interior China doesn’t exist.

    1. Who will get to the moon 1$t?:

      1. India
      2. China
      3. USA
      4. 2019 $tock Price$
      5. 2019 $helter.$hack.$ales

    1. That article was pretty funny. All about the floods and nothing about the fires.

      By the way, doomers were predicting skyrocketing food prices this fall because of the spring flooding in the midwest. Well here it is November, and all the harvest should be in by now. Has anyone noticed any price increases in the stores? I haven’t, but I haven’t been shopping very often.

      1. It’s because food comes from California.

        10.28.19
        The first map of America’s food supply chain is mind-boggling
        Most of our food is moved across great distances—and through many different forms of transit—before it reaches our plates.
        By Megan Konar
        3 minute Read

        My team at the University of Illinois just developed the first high-resolution map of the U.S. food supply chain.
        advertisement

        Our map is a comprehensive snapshot of all food flows between counties in the U.S.—grains, fruits and vegetables, animal feed, and processed food items.

        To build the map, we brought together information from eight databases, including the Freight Analysis Framework from Oak Ridge National Laboratory, which tracks where items are shipped around the country, and Port Trade data from the U.S. Census Bureau, which shows the international ports through which goods are traded.

        We also released this information in a publicly available database.
        This map shows how food flows between counties in the U.S. Each line represents the transportation of all food commodities, along transit routes, such as roads or railways. [Image: Environmental Research Letters (2019)]

        What does this map reveal?
        1. Where your food comes from

        Now, residents in each county can see how they are connected to all other counties in the country via food transfers. Overall, there are 9.5 million links between counties on our map.

        All Americans, from urban to rural are connected through the food system. Consumers all rely on distant producers, agricultural processing plants, food storage like grain silos and grocery stores, and food transportation systems.
        advertisement

        For example, the map shows how a shipment of corn starts at a farm in Illinois, travels to a grain elevator in Iowa before heading to a feedlot in Kansas, and then travels in animal products being sent to grocery stores in Chicago.

        2. Where the food hubs are

        At over 17 million tons of food, Los Angeles County received more food than any other county in 2012, our study year. It shipped out even more: 22 million tons.

        California’s Fresno County and Stanislaus County are the next largest, respectively. In fact, many of the counties that shipped and received the most food were located in California. This is due to the several large urban centers, such as Los Angeles and San Francisco, as well as the productive Central Valley in California.

    2. Why should I believe this prediction will turn out to be accurate? It was predicted that the Maldives Islands would be pretty much underwater by now and that hasn’t happened. Hansen predicted parts of New York City would be underwater by now, and that didn’t happen.

      1. should I believe this prediction

        Careful now. You’ve been told this is Truth. You question that and all sorts of dominoes might start to fall.

  8. Hey, if Jewell needs help with a loan in Houston, she should call our boy Angelo! He “helps” people!

    “Bring me my horizon”! And there she is, and her name is Jewell!

  9. ‘a lavish penthouse atop the Mandarin Oriental Residences by Central Park South, went into contract earlier this month, asking $30 million—approximately $500,000 less than Mr. Low bought it for in 2011. Mr. Low’s other New York City property is asking $9.2 million—several million less than the $13.8 million Mr. Low purchased it for back in 2014. The Los Angeles house is on the market for $24 million—less than two-thirds of the $39 million the businessman paid in 2012’

    A lot of poof going on.

    ‘‘Last year I paid Dh125,000. This year people are saying we can negotiate harder for a rental drop and that is what I am going to do’

    Some of these people talk about how they have much more disposable income etc. Don’t let anyone tell you lower housing prices and costs are a bad thing – it’s exactly the opposite.

  10. San Francisco 2019:

    “These brazen acts of petty theft and shoplifting are a dangerous and all-too-common consequence of Proposition 47, a referendum passed five years ago that critics say effectively gives shoplifters and addicts the green light to commit crimes as long as the merchandise they steal or the drugs they take are less than $950 in value. The decision to downgrade theft of property valued below the arbitrary figure from felony to misdemeanor, together with selective enforcement that focuses on more “serious” crimes, has resulted in thieves knowing they can brazenly shoplift and merchants knowing the police will not respond to their complaints, say critics.”

    https://www.foxnews.com/us/california-prop-47-shoplifting-theft-crime-statewide

    1. Similar problems in Seattle. We got homeless committing crimes within 24 hours of being “jailed” (for an hour or two) of their previous crimes.

      All it’s done is embolden them and made the problem much, much worse.

    1. He was major league embarrassed in Newtown CT the other day, and none of them will ever talk about illegal guns and getting tough with people who use them. So no great loss to America here.

    2. “Hell yes, we’re going to take your AR-15, your AK-47″

      No you’re not, punk. Now run along, little gnat.

  11. You would think that with pricing lower and interest rates lower, your buyer pool would be bigger. But people tend to buy in an inflated market as opposed to a market where they should be buying.’”

    Why would anyone buy into a bursting RE bubble, REIC Boy?

  12. ‘I was horrified to hear almost RM100 billion of houses were not sold, if these houses are without occupants, Malaysia will look like a deserted country,’ Kamaruddin said.”

    If it makes you feel better, Kamaruddin, those vacant shacks are probably worth a great deal less than RM100 billion, and they’re losing more fake value by the day.

  13. I’m now seeing “Free rent until January 1st!” and “$99 deposit!” ads on Craigslist. Gee, that sure doesn’t sound like a strong market for landlords. That being said, their asking rents are still delusional.

    1. And they never tell you that all those concessions are the first year only. That first renewal is a doozy. That’s when they really jack the price, because they know what a hassle it is to move.

  14. I must say that mass public understanding of housing bubbles has come a long way since when Ben started this blog in 2004. I wonder if the economics profession will ever catch on?

    1. Missing from the explanation: The Fed’s role in originating, reflating and prolonging the Bubble…

      Why Housing Market Bubbles Pop
      By Barry Nielsen
      Updated Sep 6, 2019

      Unlike the stock market, where most people understand and accept the risk that prices may fall, most people who buy a house don’t ever think that the value of their home will ever decrease.

      The housing market has generally not been affected by pricing bubbles as other asset markets. That’s because of the large transaction costs associated with purchasing a home, not to mention the carrying costs of owning and maintaining a home discourage speculative behavior. However, housing markets do go through periods of irrational exuberance.

      In this article, we’ll discuss what causes housing price bubbles, the triggers that cause housing bubbles to burst, and why home buyers should look to long-term averages when making critical housing decisions.

      Key Takeaways
      – Housing bubbles are temporary events that can last years, and are characterized by high demand, low supply, and inflated prices.
      – These bubbles are caused by a variety of factors including economic prosperity, low interest rates, better mortgage product offerings, and easy to access credit.
      – Forces that make a housing bubble pop include a downturn in the economy, a rise in interest rates, as well as a drop in demand.

      What Is a Housing Bubble?

      Before we get into the causes of housing bubbles and what makes them pop, it’s important to understand a housing bubble itself. They generally begin with a jump in housing demand, despite a limited amount of inventory available. Demand further increases when speculators enter the market, making the bubble bigger. With limited supply and so much demand, prices naturally skyrocket.

      Housing bubbles have a direct impact on the real estate industry, but also homeowners and their personal finances. The impact a bubble can have on the economy—interest rates, lending standards and practices—can force people to find ways to keep up with their mortgage payments when times get tough. Some may even have to dig deeper into their pockets, using savings and retirement funds just to keep their homes.

      A housing bubble is a normally temporary event. Although bubbles in the equity market happen much more frequently, housing bubbles can be much longer, according to the International Monetary Fund (IMF), and can last several years.

      Normally a temporary event, a housing bubble can last for several years.

      Housing Market Bubble
      Causes

      The price of housing, like the price of any good or service in a free market, is driven by supply and demand. When demand increases and/or supply decreases, prices go up. In the absence of a natural disaster that decreases the supply of housing, prices rise because demand trends outpace current supply trends. Just as important is that the supply of housing is slow to react to increases in demand because it takes a long time to build a house, and in highly developed areas there simply isn’t any more land to build on. So, if there is a sudden or prolonged increase in demand, prices are sure to rise.

      Once you’ve established that an above-average rise in housing prices is primarily driven by an increase in demand, you may ask what the causes of that increase in demand are. There are several possibilities:

      – An upturn in general economic activity and prosperity that puts more disposable income in consumers’ pockets and encourages home ownership.

      – An increase in the population or the demographic segment of the population entering the housing market.

      – A low, general level of interest rates, particularly short-term interest rates, that makes homes more affordable.

      – Innovative mortgage products with low initial monthly payments that make homes more affordable. (To learn more about mortgages, see our Mortgage Basics tutorial.)

      – Easy access to credit—a lowering of underwriting standards—that brings more buyers to market.

      – High-yielding structured mortgage bonds, as demanded by investors, that make more mortgage credit available to borrowers.

      – A potential mispricing of risk by mortgage lenders and mortgage bond investors that expands the availability of credit to borrowers.

      – The short-term relationship between a mortgage broker and a borrower under which borrowers are sometime encouraged to take excessive risks.

      – A lack of financial literacy and excessive risk-taking by mortgage borrowers.

      – Speculative and risky behavior by home buyers and property investors fueled by unrealistic and unsustainable home price appreciation estimates.

      All of these variables can combine to cause a housing market bubble. They tend to feed off of each other. A detailed discussion of each is out of the scope of this article. We simply point out that in general, like all bubbles, an uptick in activity and prices precedes excessive risk-taking and speculative behavior by all market participants—buyers, borrowers, lenders, builders, and investors.

      Forces that Burst the Bubble

      The bubble bursts when excessive risk-taking becomes pervasive throughout the housing system. This happens while the supply of housing is still increasing. In other words, demand decreases while supply increases, resulting in a fall in prices.

      This pervasiveness of risk throughout the system is triggered by losses suffered by homeowners, mortgage lenders, mortgage investors, and property investors. Those losses could be triggered by a number of things, including:

      – An increase in interest rates that puts homeownership out of reach for some buyers and, in some instances, makes the home a person currently owns unaffordable. This often leads to default and foreclosure, which eventually adds to the current supply available in the market.

      – A downturn in general economic activity that leads to less disposable income, job loss and/or fewer available jobs, which decreases the demand for housing.

      – Demand is exhausted, bringing supply and demand into equilibrium and slowing the rapid pace of home price appreciation that some homeowners, particularly speculators, count on to make their purchases affordable or profitable. When rapid price appreciation stagnates, those who count on it to afford their homes may lose their homes, bringing more supply to the market.

      The bottom line is that when loses mount, credit standards are tightened, easy mortgage borrowing is no longer available, demand decreases, supply increases, speculators leave the market, and prices fall.

      Housing Market Crash

      In the mid-2000s, the U.S. economy experienced a housing bubble that had a direct relationship to the Great Recession. Following the dotcom bubble, values in real estate began to creep up, fueling a rise in homeownership among speculative buyers, investors, and other consumers. Low interest rates, relaxed lending standards—including low down payment requirements—allowed people who would normally never have been able to purchase a home to become homeowners. This drove home prices up even more.

      But many speculative investors stopped buying because the risk was getting too high, leading other buyers to get out of the market. This, in turn, caused prices to drop. Mortgage-backed securities were sold off in massive quantities, while mortgage defaults and foreclosures rose to unprecedented levels.

      Mean Reversion

      Too often, homeowners make the damaging error of assuming recent price performance will continue into the future without first considering the long-term rates of price appreciation and the potential for mean reversion. The laws of physics state that when any object—which has a density greater than air—is propelled upward, it eventually returns to earth because the forces of gravity act upon it. The laws of finance say that markets that go through periods of rapid price appreciation or depreciation will, in time, revert to a price point that puts them in line with where their long-term average rates of appreciation indicate they should be. This is known as mean reversion.

      Prices in the housing market follow this law of mean reversion, too. After periods of rapid price appreciation, or, in some cases, depreciation, they revert to where their long-term average rates of appreciation indicate they should be. Home price mean reversion can be either rapid or gradual. Home prices may move quickly to a point that puts them back in line with the long-term average, or they may stay constant until the long-term average catches up with them.

      1. This pretty much sums up what happened in the post-2009 faux housing market recovery:

        “Low interest rates, relaxed lending standards—including low down payment requirements—allowed people who would normally never have been able to purchase a home to become homeowners. This drove home prices up even more.”

        1. Home Mortgage
          Published 3 days ago
          Home purchases to remain solid in 2020, thanks to low interest rates
          By Megan Henney
          FOXBusiness

          Thanks to historically low-interest rates — and cheap mortgage rates — home purchases are expected to continue to increase in 2020, according to a new forecast from the Mortgage Bankers Association.

          The Washington, D.C.-based organization estimated that mortgage originations will grow 1.6 percent next year to $1.29 trillion. That’s a slight drop from 2019, which could post the biggest gain since 2007 at $2.06 trillion.

          Interest rates are expected to remain low next year, with the Federal Reserve poised to reduce borrowing costs for the third time this year on Wednesday. And as the economic outlook remains cloudy, policymakers at the U.S. central bank seem unlikely to raise rates anytime soon.

          “Interest rates will, on average, remain lower for longer given the somewhat cloudy economic outlook,” MBA’s chief economist Mike Fratantoni said in a statement. “These lower rates will in turn support both purchase and refinance origination volume in 2020.”

        2. Is it possible that the HUD mandate that underlies the mortgage mess will be ended during the Trump presidency?

          From Scotsman Guide Residential Edition | November 2019
          Grappling with Unintended Consequences

          Disastrous results can occur during the push and pull of enacting well-meaning regulations
          Grappling with Unintended Consequences

          By Dick Lepre, senior loan adviser, RPM Mortgage

          People in the mortgage origination business wrestle daily with regulations. There may be no industry that faces more government regulations than the mortgage business. Regulations add to the cost of loan origination and also, due to the associated expenses, discourage the creation of new mortgage lenders and banks.

          Civics instructors teach that there are three branches of the federal government: executive, legislative and judicial. This creates checks and balances, meaning that each of the three branches can, in some manner, prohibit the others from becoming too powerful.

          For practical purposes, there is a fourth branch of government — the three above plus the regulatory branch. The regulatory branch contains a massive residue of laws. Congress makes laws with the approval of the executive branch and in so doing creates a new regulatory agency tasked to assure the intentions of these laws are followed. It is the regulatory branch that details what the rules are. And history shows that originators need to pay close attention to what happens in this arena.

          Mortgage mess

          Typically, agencies implement regulations with good intentions in mind. The problem is that these regulations almost always have unintended consequences, some of which can be disastrous.

          The example most relevant to the mortgage and housing industries is the National Homeownership Strategy of 1995 through the U.S. Department of Housing and Urban Development (HUD). The policy identified the lack of cash for downpayments and closing costs as a major impediment for potential homebuyers, and it mandated the private and public sector to creatively overcome this.

          By 2007, Fannie Mae and Freddie Mac were required by HUD to show that 55% of their annual mortgage purchases involved loans to borrowers with low to moderate incomes. Moreover, 38% of all purchases had to be from underserved areas, usually inner cities, and 25% had to involve purchases of loans that were made to low-income and very low-income borrowers.

          After the Great Recession, the federal government formed the Financial Crisis Inquiry Commission, which essentially denied that HUD’s mandate for the government-sponsored enterprises (GSEs) to weaken their lending standards was responsible for their demise. The commission determined that part of the problem was insufficient regulation and it placed the blame on Wall Street’s creation of securities consisting of subprime loans. That was indeed part of the problem but not the entire problem.

          The federal government dictated that mortgage lending standards be lowered and, once those lower standards had disastrous effect, placed the blame on lenders. By 2008, 56% of all mortgages were subprime. The story that this was done by private-label securitization ignores the fact that when the liquidity crisis happened, 76% of all high-risk mortgages were on the books of government agencies.

          Although there have been steady arguments about whether the GSEs or private securitization were mainly responsible for the mortgage mess, it would serve well to look at some numbers. Losses on loans held by Fannie, Freddie and the Federal Housing Administration (FHA) were about $206 billion. Losses for banks and thrifts were about $217 billion so, indeed, private losses were slightly higher.

          Although government and private losses were comparable, there was one very significant difference. Fannie and Freddie had about $70 billion in shareholder equity while private banks had $1.3 trillion in shareholder equity. While some banks were insolvent, the banking system was not. The GSEs, on the other hand, were rendered insolvent by the loan losses they suffered as a result of HUD’s mandate.

        3. 6 low or no down payment mortgage options for 2019
          Dan Green The Mortgage Reports contributor
          October 21, 2019 – 13 min read

          No down payment mortgage

          A no down payment mortgage allows first-time home buyers and repeat home buyers to purchase property with no money required at closing except standard closing costs. Other options, including the FHA loan, the HomeReady™ mortgage and the Conventional 97 loan offer low down payment options with a little as 3% down. Mortgage insurance premiums typically accompany low and no down payment mortgages, but not always.

          Is a no down payment mortgage right for you?

          It’s a terrific time to buy a home.

          Sales are rising, supply is dropping, and prices have increased in many cities and neighborhoods. Compared to next year, today’s market may look like a bargain.

          Furthermore, mortgage rates are still low.

          Rates for 30-year loans, 15-year loans, and 5-year ARMs are historically cheap, which has lowered the monthly cost of owning a home.

          Click to see your ZERO down eligibility (Nov 1st, 2019)

        4. “…to become homeowners.”

          I still cringe every time I see this word misused. Those people became debt owners, not homeowners.

      2. “But many speculative investors stopped buying because the risk was getting too high, leading other buyers to get out of the market. This, in turn, caused prices to drop.”

        I’m not sure this quite captures where we have arrived. After years of appreciation at rates well above historic norms, homeowners and prospective buyers base their demand for housing on expectations of further similar high rates of price appreciation. However, at some point, prices reach a level relative to purchase budget constraints where no further combination of lower interest rates, reduced downpayment requirements, or relaxed lending standards is sufficient to bring in new buyers. At this point, appreciation begins to slow, reducing the attraction of housing as a speculative gamble. The reduction in speculative demand leads to further slowing of price appreciation, and attempts to unwind speculative investments result in an increase in supply. Pretty soon the continuation of this unraveling process sends price appreciation into reverse.

        I believe this explains the tipping point where we are presently.

    1. Scariest Halloween story is…President AOC!

      I saw an “AOC 2028” bumper sticker in Bellevue, WA yesterday. I so need to get out of Seattle…

  15. Will US interest rates join those of Eurozone countries in negative territory before eventually reverting to historic norms?

    1. The Wall Street Journal

      Markets

      Negative U.S. Interest Rates? Options Traders Say Yes
      Wagers via Eurodollar options indicate investors’ belief that ‘negative rates are not just possible but reasonably probable’
      How Negative Yields Work
      Negative yields are occurring with greater frequency in global bond markets. What generates negative yields and why do investors continue to buy these money-losing bonds?
      By Gunjan Banerji
      Oct. 17, 2019 5:30 am ET

      Derivatives traders are betting on something once considered inconceivable: zero or negative interest rates in the U.S.

      They are scooping up options that would pay out if interest rates fell below zero.

      1. I’ve seen several theories that bankers intend to go to negative interest rates, and then outlaw physical currency (and possibly physical gold). You can’t keep cash or gold because it’s not legal. You can’t spend cash to buy stuff because no one will accept it. You can’t save cash in a bank because it will be whittled away by the negative rates. If you spend electronic money to buy stuff, they will track you and ding your social credit score.

        What scares me is that I can’t dismiss these theories out of hand.

        1. First, everyone would have to be in the banking system. And that’s not the case right now.

          1. Second, they’d have to do something about individuals, or communities, that tend to work around obstacles.

          2. Third, eliminating the cash economy would reduce dollar hegemony and risk creating a global depression, due to lost financial liquidity.

          3. Fourth, eliminating paper dollars would give a huge boost to cryptocurrency, undermining the Fed’s influence on global finance, and in particular limiting the base of its 2% dollar inflation tax.

            Scenarios that depend on the Fed limiting its global financial influence seem unlikely to transpire.

    2. BloombergQuickTake
      Analysis
      Negative Interest Rates
      By Jana Randow and Yuko Takeo | Bloomberg
      November 1, 2019 at 11:45 a.m. PDT

      Imagine a bank that pays negative interest. In this upside-down world, savers are penalized and borrowers get paid to borrow money. Crazy as it sounds, the 2008 financial crisis created a lingering economic slump that drove the European Central Bank to experiment by cutting benchmark lending rates below zero in 2014. Then Japan followed. Some 500 million people in a quarter of the world’s economies ended up living with rates in the red. The idea is to jolt lending, spur inflation and reinvigorate economic growth by pushing through the floor after other options are exhausted. Half a decade later, what once seemed unorthodox has become entrenched and hard to shake. The new era of negative rates is now the subject of a debate about whether the policy has distorted financial markets, crippled banks and threatened pensions.

    3. Negative Interest Rates – The Washington Post
      https://www.washingtonpost.com/business/negative-interest-rates/2019/11/01/fca350e0-fcaf-11e9-9e02-1d45cb3dfa8f_story.html

      (snip)

      “Some policy makers have repeatedly warned that ultra-low rates encourage ‘bubbles’ in asset prices and risky lending.”

      No sh1t.

      “If more and more central banks use negative rates as a stimulus tool, the policy might ultimately lead to a currency war of competitive devaluations. There’s also a growing backlash about the impact on savers and concern about how that could taint the public’s view of the central bank. To many critics, though, the policy has simply run out of steam and may prove difficult to reverse.”

      Well, that’s comforting.

      The Bank for International Settlements, a study group for central banks, warned in a September 2019 briefing that there’s ‘something vaguely troubling when the unthinkable becomes routine.’

      “Vaguely troubling”. Translation: We’re screwed.

      “Policy makers who’ve turned to negative rates say they’ve helped their economies and that the downside — so far at least — has been manageable. They also point to a lack of other options: With many governments refusing to boost their economies through more government spending, they say, they need to use every tool they’ve got.”

      BOHICA.

  16. Business News
    October 15, 2019 / 4:03 AM / 18 days ago
    Sub-zero interest rates could be problematic in U.S.: Fed’s Bullard
    FILE PHOTO: St. Louis Federal Reserve Bank President James Bullard speaks at a public lecture in Singapore October 8, 2018. REUTERS/Edgar Su

    LONDON (Reuters) – St. Louis Federal Reserve bank president James Bullard said on Tuesday that negative interest rates could be problematic in the United States.

    Central banks in the euro zone and Japan have cut interest rates below zero to boost inflation and economic growth, raising a debate about the ammunition other major central banks such as the U.S. Federal Reserve have to fight a slowdown.

    “I’m not a fan of this policy,” Bullard told the press on the sidelines of an event in London.

    “Negative interest rates have had mixed results where they’ve been tried,” he said, adding that it was not clear either how multi-trillion dollar U.S. money markets would adapt to such a policy.

  17. Fed “temporary” repos:

    9/17: We’re doing repos today and tomorrow.
    9/19: We’re extending repos until 10/10. $75B overnight, $30B term
    10/4: We’re extending repos until 11/4
    10/11:We’re extending repos until Jan 2020
    10/23:We’re expanding overnight repo offering to $120B, $45B term

    1. Gotta keep the pedal to the metal for a while longer.

      Opinion: The Federal Reserve is in stealth intervention mode
      By Sven Henrich
      Published: Oct 26, 2019 4:23 p.m. ET
      What the central bank passes off as ‘funding issues’ could more accurately be described as liquidity injections to keep interest rates low
      Getty Images
      Federal Reserve Chairman Jerome Powell

      The Federal Reserve has gone into full intervention mode.

    2. The Fed has been injecting hundreds of billions into markets since September’s rate crisis. Here’s why it might not be enough to calm lending conditions.
      Ben Winck
      Oct. 30, 2019, 08:21 AM
      REUTERS/Kevin Lamarque
      – The Federal Reserve has been boosting liquidity since mid-September when a spike in the overnight lending rate shocked the financial system.
      – The central bank is using market repurchase agreements – or repos – and Treasury bill purchases to inject capital into money markets. But many find the actions are ineffective in normalizing the key rate.
      – Here’s why the Fed’s actions may not solve lending pressures, and how they may point to additional problems to come.

      The Federal Reserve has been injecting capital into the financial system for weeks to calm money markets. But the actions are prompting worry among analysts, portfolio managers, and even Democratic primary candidates.

      The central bank is looking to boosting liquidity after the short-term funding rate spiked to 10% from 2% overnight in mid-September. The rate dictates how expensive it is for banks to access quick capital, and the unexpected jump symbolizes volatility in the usually-stable lending market.

      The spike prompted the Fed to start injecting capital through overnight market repurchase agreement operations – also known as “repos” – on September 17. The Fed also began monthly purchases of $60 billion in Treasury bills on October 15 to keep its key interest rate within an intended range.

      Here’s why the Fed’s actions may not be enough to solve lending pressures, and how they may point to additional problems down the road.

  18. With central banks already slashing rates despite no recession in sight, it’s hard to predict how low rates will go the next time a recession strikes.

    GBPCAD
    The Canadian Dollar Crashes after BoC Signals Interest Rate Cut Ahead
    Modified: Wednesday, 30 October 2019 16:18 BST
    Written by James Skinner
    Bank of England Data
    Image © Bank of Canada, Reproduced Under CC Licensing

    – CAD clobbered after BoC hints of a rate cut ahead.

    – Holds cash rate at 1.75% but doubts policy settings.

    – Abandons claim current policy setting is “appropriate”.

    – Sends off-guard market scurrying to price in a rate cut.

    – CIBC and RBC tip first rate cut to come in early 2020.

    The Canadian Dollar slumped against its British and U.S. rivals Wednesday after the Bank of Canada (BoC) surprised an off-guard market by hinting that an interest cut could be imminent given the slowing U.S. and global economies, which pose a risk to Canada’s economic and inflation outlooks.

    Canada’s cash rate was left unchanged at 1.75% on Wednesday, in line with market expectations, but the BoC’s commentary on the economy and outlook took a new ‘dovish’ turn this month. Most notably, the bank has abandoned its oft repeated claim the current level of borrowing costs is “appropriate”, and warned instead that the economy’s resilience will be “tested” by trade conflicts and uncertainty over the global growth outlook in the months ahead.

    The BoC has tipped a slowdown in the second half of the year for a while now, although it’s only ever forecast a modest one. It said Wednesday that growth will be “below its potential” in the second half this year due to trade conflicts, goings on in the energy sector and the fading of “temporary factors” that helped buoy the economy to its best performance since early 2017 in the last quarter.

    “The door was left ajar for a cut down the road, with the Bank noting the global slowing and saying that the resilience we’ve seen “will be increasingly tested”. There was also a mention to the currency having appreciated against non-USD currencies, perhaps a sign that they are concerned about a further climb,” says Avery Shenfeld, chief economist at CIBC Capital Markets. “Overall, a dovish tilt that is consistent with our view that the BoC will cut rates once (in January).”

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