Nowhere is the new normal more evident than the frenzied hording of so-called "trophy homes" by the world's 1800 billionaires. As Bloomberg reports, the ultra-luxury housing market is scaling new heights as a record number of properties around the world command prices topping $100 million. Demand is growing among affluent Americans and Europeans; billionaires from unstable economies, such as Russia and Middle Eastern countries; and buyers from mainland China, who were barred from investing overseas before 2012. Why - simple (to them?)... "They’re a scarce commodity. And they’re better than gold because you can boast about it."
When student debt and subprime car loans aren't enough, you have to get creative. It now appears Wall Street is set to feed its securitization machine with a new kind of debt: peer-to-peer loans. You read that correctly. Soon enough, the pool of micro loans that are facilitated by sites like LendingClub will be used to create CDOs.
In every inflating bubble, there’s usually two camps. The first group points out various metrics suggesting something is inherently unsustainable, while the second reiterates that this time, it is different. After all, if everyone always agreed on these things, then no one would do the buying to perpetuate the bubble’s expansion. The Canadian housing bubble has been no exception to this, and the war of words is starting to heat up.
The past few years have been a period of relative stability for the U.S. economy. A lot of people have been lulled into a false sense of security during that time. These people have become convinced that our problems have been fixed. But they haven’t been fixed at all. In fact, our problems are far, far worse than they were just prior to the last financial crisis. Don’t let this next recession take you by surprise.
There are three financial hurricanes hurtling towards our country and most people are oblivious to the coming catastrophe. The time to prepare is now, not when the hurricane warnings are issued.
Following the plunge in new home sales (and surge in existing home sales), pending home sales rose slightly more than expected in March. Up 1.1% MoM (vs +1.0% exp), this is still a slowing in the pace of appreciation from February's upwardly revised 3.6% jump. A 13.4% surge YoY (NSA) has prompted exuberance from NAR as they throw off any vestiges of weather-related problems and proclaims the spring housing market is back (except Northeast saw sales drop 1.5% - for the 4th straight month; and The Midwest fell 2.5% MoM).
In the Common Knowledge Game, fundamentals – whether they are of the stock-picking sort or the macroeconomic sort – don’t matter a whit, and your personal view of those fundamentals matters even less. The only thing that matters is whether or not the QE-works lesson has been absorbed by the learning process of investment professionals, and that’s driven by the lesson’s transformation into common knowledge by Missionaries (like Deutsche Bank's Torsten Slok).
Earlier today the US Census released its latest quarterly data, which confirmed that for what is left of America's middle class, owning a home has become virtually impossible, with the homeownership rate tumbling from 64.0% to 63.7%, which is tied for the lowest historic print since the first quarter of 1986, with the only difference that then the trendline was higher. Now, as can be seen on the chart below, it isn't. At this rate, by the end of the 2015 and certainly by the end of Obama's second term, the US homeownership rate will drop to the lowest in modern US history.
It took a while, but after going nowhere for the past year and in fact declining significantly on a Year over Year basis, the second tech bubble has once again managed to "trickle down" into the San Francisco housing market, which in the month of February saw the west coast tech mecca as the sterling outperformer of all US real estate markets according to the latest Case Shiller data. On the other end: Cleveland was down -1.0%.
Following the default on major Chinese developer Kaisa this week, and with the continued softness in the Chinese property market, many are asking who's next among the highly-leveraged firms. However, as The Real Deal's Konrad Putzier notes, Kaisa’s default carries significance for New York’s real estate industry. Chinese investors spent $3 billion on New York properties in 2014. Many in New York continue to associate Chinese real estate companies with limitless funds and a never-ending ability to invest... But what if they are wrong?
Hence, if and when a genuine price for risk reappears, the effect may be greatly magnified as it was in the US housing market a few years back under not dissimilar circumstances. As Karl Popper noted, volatility can be suppressed in a capitalist system, but it must ultimately reappear. Sooner or later, we will face a good deal of fireworks.
After failing to comfortably beat expectations for the last 7 months, March Existing Home Sales surged 6.1% to a 5.19mm SAAR - the highest since Sept 2013. Despite collapsing macro data throughout March all blamed on 'the weather' The Midwest saw existing home sales rise the most (by 10.1%). All this 'pent-up demand' has crushed affordability as home prices are up 7.8% YoY - the largest gain since Feb 2014.
In January when we first brought news of one of China's largest developer's inability to cover interest payments on its debt, we raised the question of who's next. Now that it is official - China's first major developer to default on its US currency debt - and property prices are falling at a record rate, we suspect the likes of Wanda and Agile will also start to collapse once again (after being bid up incredibly amid China's latest exuberant bubble). Kaisa’s debt problems underscore the slump in China’s property sector, which has been hit by the slowing economy and a series of cooling measures instituted by Beijing to avoid a bubble in what had been an overheated housing market.
As we observed yesterday when we showed that if comparing the collapse in China's housing market with that of the US following their respective peaks then China is already a recession, we added that "as shown in the chart below [China] has recently engaged in several easing steps, with many more to come according to the sell-side consensus." Sure enough, just a few hours later, the PBOC announced its second Reserve Requirement Ratio (RRR) for all banks since February 4, when China had its first industry-wide RRR cut since May 2012. The move will be effective Monday, April 20.
Moody's puts $3 billion in student debt-backed ABS on default watch leading us to wonder when 30% delinquency rates in a market where nearly $1.3 trillion in credit has been extended will finally result in the bursting of what is America's most spectacular debt bubble.