A Post on the Housing Market...and the End of an Era at Financial Armageddon...

After almost six years, 2,200 posts, and eight million page views, I am moving on from posting regular updates at Financial Armageddon so I can devote my energies to an exciting new members-only website called Panzner Insights, where I'll be focusing on markets, economics, and geopolitics.

While I will be keeping Financial Armageddon up and running for the time being and may occasionally post new material at the site, it won't be a priority for me. Needless to say, that doesn't mean I believe the nightmare is over—far from it. I just think it's time to look at things a little differently, to try and handicap the bigger picture going forward, and to offer some suggestions drawn from my experience on Wall Street that might enable members to capitalize on current developments.

Hopefully, those of you who have found my posts, books, columns, and other work interesting or helpful will visit Panzner Insights and check out what is on offer.

And now for today's post...

 

Housing: Plenty of Reasons to Be Pessimistic

There’s plenty of debate about—and money riding on—the question of whether we are in the midst of a sustainable recovery in the housing market. Nobody knows for sure, of course, but there are plenty of reasons to be pessimistic.

For one thing, the supply of homes, in terms of what is currently on the market and what is potentially for sale whether or not prices rebound further—the so-called shadow inventory—remains significant relative to demand, even though data from the National Association of Realtors (NAR) shows that inventories of existing homes are back to where they were eight years ago.

Aside from the question of whether developments that have occurred since then—including the fact that their are more ways to sell property than by going through a broker—have distorted the inventory calculation, the composition of sales has changed from what it was. Nowadays, a much greater share of transactions are in the “distressed” category than before the bubble burst. Given that more than 20 percent of sales are foreclosures and short sales makes the current ratio look healthier than it is in comparable terms.

Needless to say, shadow inventory is far greater than it was during the go-go years, when people were happy to remain long despite a booming market. With prices having fallen sharply since then, we now have a situation akin to those seen in other post-collapse markets: Holders can turn seller on a heartbeat as prices move closer to what they paid or owe on their mortgages. Given that more than 20 percent of mortgagees are underwater, that represents a sizable overhang.

The tide of past, present, and future foreclosures—actual and de facto—has also left lenders with substantial holdings of “real estate owned” (REO) properties that will undoubtedly be offered for sale at some point. These are not voluntary investments being held for the long-term; they are unwanted assets that are costing money by the day to finance and maintain. According to HousingWire, nearly half of mortgage giant Fannie Mae’s REO holdings are unable to reach the market at present.

It’s not just about supply, however. Demand is significantly less than it used to be for a variety of reasons, most notably because it is much harder to get financing now than it was when the property market was booming. Despite some recent loosening of credit conditions and ultra-low mortgage rates, anecdotal and other reports make it clear that lenders are generally unwilling to grant loans except on stringent terms to the highest quality borrowers.

But even if you discount the fact that traditional home buyers are having a difficult time borrowing the money they need to buy a home, it’s apparent that other factors, including societal shifts, are undermining demand—and will likely continue doing so for the foreseeable future.

Number one among them are economic conditions in the post-crisis era, which are having an adverse affect on prospective homeowners’ willingness and ability to take the plunge. A structurally weak employment market, where temporary and low-paid services jobs comprise the lion’s share of the jobs being created and where the odds of finding another, better paying, and more secure opportunity are low, is not the catalyst for people to step up and make what could be the biggest investment of their lives.

Demographic factors are also playing a role. The upheavals of the past decade or so have reaffirmed the truism that growing older means trading down and taking less risk. And while ultra-low interest rates have pushed some of those who survive on their savings to invest in something other than a bank CD, real estate is definitely not the investment of choice. At the same time, broader societal changes, including more people living alone and more single-parent households, is undercutting demand for what has traditionally been a nuclear family-oriented investment.

Perspectives about what really matters are evolving as well, especially among the younger generation. Whereas in the past the milestones of getting married, buying a car, and acquiring a home represented the natural progression of things when children reached adulthood, priorities have changed. A recent Bloomberg report noted that 4G wireless telephones trumped V-8 cars for the 80 million U.S. consumers born from 1981 to 2001. Meanwhile, the still-ailing post-crisis economy has convinced a growing number of young people to embrace “the age of frugality.”

In addition to shifting preferences, many of those who are at the lower end of the demographic scale already have a big financial burden hanging around their necks, which precludes them from taking on other big commitments like a mortgage—that is, student loans. Aside from the fact that, for many graduates, these obligations are far higher than they were, proportionally speaking, even a decade ago, the prospect of being in the hole for as far as the eye can leave a lasting impression on impressionable individuals.

Policy-making in Washington and by the Federal Reserve further underscore doubts about taking big risks that might backfire. While the latter keeps reassuring everyone that it has matters under control and that interest rates will remain low for years to come, given how many promises they and other authorities have broken over the past several decades, it’s not surprising that people are hesitant to count on that on those assertions going forward.

Lastly and perhaps most importantly, demand is being undermined by broader-scale mood swings. People are beginning to accept that it isn’t necessary to own your own home, nor is it necessarily a long-term goal. That might seem like heresy in a country where property ownership has been viewed as a God-given right, but when you consider that in economic powerhouse Germany the share of residential property accounted for by rentals is more than 60 percent in most states and 90 percent in the capital, Berlin, it’s not all that strange.

In sum, while it is easy to focus on the traditional indicators of supply and demand and start believing that the long-awaited recovery in the property market has arrived at last, the fact is that much has changed in the wake of the events of the past decade, a development that is likely to weigh on prices for many years to come.

Comments

[Tom]

Hey Michael, good luck on your new pay to play venture. i can't afford it and so will just check back now and then to see if anything new has been added. Thanks for all the great posts, links, opinions and analysis. i'll miss stopping here everyday, but times are rapidly changing, so i couldn't expect this to go on indefinitely.

i think the big collapse is about ready to fall on us all, if not right after the election, certainly by Jan of next year when the "fiscal cliff" starts things off. i see California got a jump on us all with their $5 a gallon gas forcing many stations to close (it isn't worth it any longer). Once that becomes the norm (and it will) the chaos will begin in earnest. Food prices are jumping weekly (i just bought 2 apples for $4) and shortages are already in the pipeline for winter and next spring! [i've since found another less expensive and locally grown source for apples, but they're still $2/lb (way up from last year)].

One other point, not related to finance directly, but for safety please allow people to view and hear these two vids on the radiation coming from Fukushima that we aren't being told about, and the Bayou Corne catastrophe in the making.
Thanks again and best of luck.

http://www.youtube.com/user/dutchsinse

and

http://www.youtube.com/watch?v=DoTjlJhp3j8

[Another Reason to Be Pessimistic]

In the second half of the show, Max Keiser talks to Professor William K. Black about Deferred Prosecution Agreements, the Financial Conduct Authority and London as the capital of fraud.

http://maxkeiser.com/2012/10/06/kr350-keiser-report-mr-gold-vs-chump-economists/

[wild]

tyty Mr. Panzner, for this website that is an enduring practical witness to economic related occurrences. This website has helped me with graphs & links & clues to non-mainstream news.

wild;)

[Marion Shaw]

I join in with those who
wish you the best of luck,
Michael. The fact you know
when to move on, is a sign
that you will still have
a lot left to say that is
of value to this country.
The old adage may be
trite but it it still true:
The pen is mightier than
the sword.
God bless the good that is
hanging on in America.
Slainte: ms

[abused citizen blowback]

How the banking crash sparked a credit union boom

People are turning away from casino finance and towards a more democratic system that isn't just about money-making

According to Move Your Money UK, over 500,000 people have joined credit unions in this year alone. In the US, the figures are even more remarkable: from the start of 2009 to mid-2010, 1.5 million members joined credit unions in a year – the number of new members usually expected in a 14-year period. When you examine how credit unions works, it's easy to see why.

Unlike big banks, credit unions don't engage in any form of casino finance. When you deposit money into a credit union account, it isn't invested anywhere or gambled in any way. The only time it is used by the credit union is when it is loaned to other account holders; and even then it is guaranteed by an FSA scheme, meaning that it won't be lost if the loan repayments aren't met. Those who join credit unions are not customers, but members – like a co-operative. This allows their interests to be put first, and gives them a share of the profit at the end of the year in the form of a dividend. In credit unions, there are no shareholders demanding more money, no dodgy loans or credit cards, no millionaire CEOs and no bonuses.

But there are also wider social reasons for joining a credit union, and indeed many do so because they value being part of a financial system that is not simply a utility or a money-maker, but something that improves people's quality of life.

Just as we saw people sitting on the steps of St Paul's Cathedral, spontaneously holding general assemblies, those who join credit unions automatically become part of its democracy: having a say in its day-to-day activities and receiving a share of the profits. It's instructive that the sudden spike in credit union deposits has occurred without the encouragement of a single frontbench MP or national newspaper. Perhaps people are losing faith in the democratic mechanisms society uses and are instead creating their own. The sudden rise of community organising in the Labour party, Citizens UK, and my own employer, Unite the Union, might also indicate a recognition that people are turning to self-organised, community-based structures when it comes to running their lives.

http://www.guardian.co.uk/commentisfree/2012/oct/08/banking-crash-credit-union-boom

[A Post on Money-Laundering]

The World's Largest Money-Laundering Machine: The Federal Reserve

The Fed policy's first-order effect is to issue hundreds of billions in "free money" to banks; the second-order effect is to destroy the rule of law in the U.S.

Let's start with a few questions about the proper role of the Central State and Central Bank: why should they bail out private banks? The answer boils down to something like this: "If the private banks absorbed the losses that are rightly theirs in a capitalist system, they would implode. Since the State and Central Bank have enabled these private banks to infiltrate and dominate the nation's financial system, that system is now hostage to these private 'too big to fail' banks."

In other words, "capitalism" in America now means socializing losses and privatizing profits generated by State and Central Bank intervention. Imagine for a moment the "beauty" of this system for owners of private banks: in a truly socialized banking system, the taxpayers would absorb any losses, but the State would also benefit from any future bank-sector profits. In the U.S. system, the losses are socialized but the people draw no benefit; the profits flow to the top 1/10th of 1% private financiers.

This is the perfection of State-financier crony capitalism

That none of this has happened is proof-positive that the rule of law no longer exists in America. The term is phony, a travesty of a mockery of a sham, nothing but pure propaganda. Anyone claiming otherwise: get the above done. If you can't or won't, then the rule of law is merely a useful illusion of a rapacious, corrupt, extractive, predatory neofeudal Status Quo.

The essence of money-laundering is that fraudulent or illegally derived assets and income are recycled into legitimate enterprises. That is the entire Federal Reserve project in a nutshell. Dodgy mortgages, phantom claims and phantom assets, are recycled via Fed purchase and "retired" to its opaque balance sheet. In exchange, the Fed gives cash to the owners of the phantom assets, cash which is fundamentally a claim on the future earnings and productivity of American citizens.

http://www.oftwominds.com/blogoct12/Fed-money-laundering10-12.html

[Thomas]

Follow your heart, Michael.

There`s lots of money to be earned from financial armageddons!