MacroScope

Canada housing: This time it’s different, eh

AResults are in from the latest Reuters poll on Canada’s rampant property market from economists and market analysts, and the message is everything’s fine.

Prices will rise gradually over the next few years and there is very little risk of a crash.

But house prices in Canada have been rising in nearly a straight line for the better part of a generation, more than doubling, and taking household debt up with them.

They have risen by more than a third since the market last paused for breath five years ago, at the start of the financial crisis.

Meanwhile, Canada’s household debt to income ratio has soared to more than 160 percent, much higher than where it was in the U.S. before the crisis, and nearly as high as it was in Britain in 2007, where house prices have taken off again in the past year after spending years in the doldrums.

U.S. new home sales: the good, the bad and the ugly

What’s happening with the U.S. housing market?

Ask three different economists and you’ll get three different answers.

While that’s not anything new, the different ways some analysts have spun the surprise — one of the biggest on U.S. data in many months — is exceptionally far from anything resembling a consensus.

New home sales – a leading indicator for housing – plummeted by 14.5 percent in March, totally wrong-footing the Reuters consensus of forecasters. They were expecting modest improvement after a decidedly poor winter for the U.S. economy on nearly all measures.

 

 

 

 

 

 

 

 

 

Here’s how some of them explained away the data.

 

The good

“Based on the data, it is easy to conclude that housing demand is rolling over, perhaps due to higher mortgage rates. Yet, this conclusion is out of synch with home prices which continue to appreciate rapidly and indeed show no sign of slowing. We believe that the answer to these seemingly diverging trends lies on the supply side. Measured as a percentage of the housing stock, total housing inventory – including shadow or pending supply – stands at the lowest level since 2005, when the housing boom was in full swing. While inventory shortages may be curtailing sales, they are unambiguously positive for residential construction and for the broader economy going forward.” – Aneta Markowska and Brian Jones, Societe Generale

Housing boom and bust lesson still not sinking in

Housing markets are booming again in parts of the U.S. and Britain and they haven’t stopped doing so in Canada for the better part of a generation.

What is most striking about the latest round, at least when you listen to those who ought to know, is how nothing much except the price has changed.

We were told a stern lesson in the months and years after the financial crisis, borne out of an over-inflated, over-leveraged U.S. housing market securitised up to the scalp by Wall Street and leaping ever higher up a steeper incline on a blind instinct never to look back.

How to play down a housing boom like it’s 1999

Here’s some of the top reasons from a 1999 Reuters poll on why a housing bubble wouldn’t form, which are re-appearing 14 years later.

The Bank of England will stop a bubble forming

    2013: “If there’s another bubble, the Bank of England and the Government of course have means by which we can anticipate that and ensure that that doesn’t happen again.” – Danny Alexander, chief secretary to the UK Treasury.
    1999 Reuters poll: ”Economists and property specialists say the Bank of England won’t let another inflationary boom happen. The Bank has already said it will monitor house prices closely. ‘It’s unlikely to become inflationary unless the monetary policy stance becomes too loose and that’s highly unlikely,’ said economist Trevor Williams of Lloyds Bank TSB.”

 

House prices expressed in real terms are below their peak and affordability is better

Fed taxonomy: Lacker is a hawk, not a bull

Not to mix too many animal metaphors but, generally speaking, monetary policy hawks also tend to bulls on the economy. That is, they are leery of keeping interest rates too low for too long because they believe growth prospects are stronger than economists foresee, and therefore could lead to higher inflation.

That is not the case, however, for Richmond Fed President Jeffrey Lacker, a vocal opponent of the central bank’s unconventional bond-buying stimulus program, particular the part of it that focuses on mortgages. He reiterated his concerns last week, saying the Fed should begin tapering in September by cutting out its mortgage bond buying altogether.

But when I asked him whether upward revisions to second quarter gross domestic product reinforced his case, Lacker was surprisingly skeptical of forecasts for a stronger performance in the second half of the year.

Curious timing for Fed self-doubt on monetary policy

If there was ever a time to be worried about whether the Federal Reserve’s bond-buying stimulus is having a positive effect on the economy, the last few months were probably not it. Everyone expected government spending cuts and tax increases to push the economic recovery off the proverbial cliff, while the outlook for overseas economies has very quickly gone from rosy to flashing red. But the American expansion has remained the fastest-moving among industrialized laggards, with second quarter gross domestic product revised up sharply to 2.5 percent.

Yet for some reason, at the highest levels of the U.S. central bank and in its most dovish nooks, the notion that asset purchases might not be having as great an impact as previously thought has become pervasive.

Fed Chairman Ben Bernanke’s 2012 Jackson Hole speech, made just a month before the Fed launched a third round of monetary easing, made a strong, detailed case for how well the policy was working.

U.S. housing outlook still promising despite rise in rates: Citigroup economist

U.S. housing sector fundamentals remain favorable despite the recent rise in interest rates and the sharp drop in housing starts in June, says Citigroup economist Peter D’Antonio.

Housing starts fell 9.9 percent to a ten-month low of 836,000 units in June.

But the decline was almost all in the volatile multi-family sector, D’Antonio notes. Single-family starts remained in a range just below 600,000, while multi-family fell 26 percent to 245,000.

Multi-family starts have been an important growth sector in housing in the past year, but month-to-month changes in multi-family starts – noted for their volatility – are meaningless. Multi-family housing starts rose 21 percent in March, fell 32 percent in April, rose 28 percent in May, then fell 26 percent in June.

Fear the Septaper

Credit to Barclays economists for coining the term ‘Septaper’

A solid U.S. employment report for June appears to have cemented market expectations that the Fed will begin to reduce the pace of its bond-buying stimulus in September.  Average employment growth for the last six months is now officially above 200,000 per month.

Never mind that, even at this rate, it would take another 11 months for the job market to reach its pre-recession levels – and that’s not counting the population growth since then.

John Brady, managing director at R.J. O’Brian & Associates in Chicago, nails the market’s sentiment:

Surge in foreclosures strains social services in Philadelphia: Philly Fed report

In the wake of a historic housing crisis that has just recently begun showing signs of a turnaround, foreclosure counseling services are coming under strain. The foreclosure mess may be over for big banks, which recently settled with regulators for $8.5 billion.

Not so for homeowners, who continue to face a bureaucratic morass in dealing with lenders and servicers. According to a new report from the Philadelphia Fed, the city of Philadelphia’s already weak infrastructure for dealing with the fallout from the foreclosure crisis is fraying at the edges.

The report’s conclusion:

Foreclosure counseling in Philadelphia is in high demand, but the city’s housing counseling agencies have limited resources with which to meet that need. There is a high degree of reliance on public funding for operations, which is particularly problematic in the current environment of increased concern over budget deficits and public debt. Counselors are being asked to provide services to numerous clients, and agencies have to meet multiple sets of requirements to access and to maintain funding from the primary funding sources. In recent years, these pressures have led to a reduction in the number of agencies offering such counseling in Philadelphia and may continue that trend without new sources of funding to bolster service provision.

New drama casts American Dream in a cold light

The American Dream distorted almost beyond recognition by mass foreclosures, women working on straight commission, men not working at all, and an alleged “higher power” who wants you to be rich beyond your wildest dreams, is the subject of the Women’s Project Theater’s production of “Bethany,” a new play by the young playwright Laura Marks.

The central character, Crystal, (played by America Ferrera, star of the “Ugly Betty” television series) is trying to regain custody of her daughter, Bethany, who has been placed in foster care because foreclosure has left her mother homeless.

Crystal is a victim of the American Dream, portrayed in this work as little more than an elaborate con game where honest, frantic people run like rats on a wheel – with firmer, secure ground hopelessly out of reach.