Housing Market

There is an interesting dynamic unfolding in the housing market. Real estate agents in places like California are arguing that there is a lack of inventory and are also generally against the government unloading blocks of properties to big investors. Why? There has been bulk selling and buying to the investor class and a large amount of crowding out has occurred. This brings about an interesting set of problems for your average buyer in the current market. They are competing with swaths of big investors but also local flippers trying to make a quick buck once again courtesy of low interest rates and another mania in some markets. SoCal is now in a mania again as you will see with some of the patterns occurring. This is also happening in many other states as well. A new feudal system has emerged. The banks were bailed out by the Fed, were allowed to circumvent accounting standards, and now deep pocket investors in the financial class are buying up these places either to increase prices on flips or to hike up rents. In the end, if you want to compete in today’s market you need to bow down to the Fed, put on a football helmet and go head-to-head with big investors, flippers, suckers, and take on a massive mortgage.

If it wasn’t because the government sponsorship doping Q3 US GDP, we wouldn’t have much on the bright side.

European equities still desperate to shoot up. Feels like too many fickle shorts and too many uncomfortable longs at the same time.

Markets uneasy after round-tripping back to OMT / QE unleash levels and no follow-up stimuli to be seen.

Before the campaign contributors lavished billions of dollars on their favorite candidate; and long after they toast their winner or drink to forget their loser, Wall Street was already primed to continue its reign over the economy. For, after three debates (well, four), when it comes to banking, finance, and the ongoing subsidization of Wall Street, both presidential candidates and their parties’ attitudes toward the banking sector is similar  – i.e. it must be preserved – as is – at all costs, rhetoric to the contrary, aside. Obama hasn’t brought ‘sweeping reform’ upon the Establishment Banks, nor does Romney need to exude deregulatory babble, because nothing structurally substantive has been done to harness the biggest banks of the financial sector, enabled, as they are, by entities from the SEC to the Fed to the Treasury Department to the White House.

While the media continues to push the idea that the housing market is on the mend the data really doesn't yet support such optimism.  The current percentage of the total number of housing units available that are currently occupied remains at very depressed levels. When it comes to the reality of the housing recovery the 4-panel chart (below) tells the whole story. There is another problem with the housing recovery story.  It isn't real.  The nascent recovery in the housing market, such as it has been, has been driven by the largest amount of fiscal subsidy in the history of world. The problem, however, is that for all of the financial support and programs that have been thrown at the housing market - only a very minor recovery could be mustered. With household formation at very low levels and the 25-35 cohort facing the highest levels of unemployment since the "Great Depression" it is no wonder that being a "renter" is no longer a derogatory label.

Last month, hours after the announcement of QEternity, we said that in validation of the 'Flow' model taking over from the Fed's flawed 'Stock' model, the Fed will have no choice but to continue the long-end $85 billion in monetary flow addition to the market, if not economy (i.e. expand the QE program from $40bn per month to $85bn per month starting in January - in order to maintain the 'flow' post-Operation Twist). Last night, Goldman has officially agreed with us (as has Bloomberg's chief economist Joe Brusuelas). It appears that starting January 2013 Ben is really going to town. But don't expect this to be announced today. It will, as Goldman speculates, be disclosed at the Fed's December FOMC meeting. For now, two weeks ahead of the election, expect more "autopilot" from Bernanke as coming up with any surprises 'now' would be seen as beyond political.

Or to put in another way, by Christmas we may very well see Case-Shiller and other indicators of home prices headed back down, erasing the gains made in housing during 1H 2012.  

The primary, if not only, reason there has been a brief spike in subsidized demand for housing in recent months, has been the GSE/FHFA endorsed REO-To-Rental plan, and associated securitization conduits, in which large asset managers have been encouraged to take advantage of government funded, risk-free financing (and entirely bypassing banks who have given up on loan origination due to legacy liability issues which have every bank tied up in litigation from now until Feddom come - just see today's Bank of America results) and purchase foreclosed properties in bulk, with the intention of converting them into rental properties. Needless to say, the subsidization of this wholesale purchasing of foreclosures, coupled with the ongoing "foreclosure stuffing" pursued by the big banks (as a reminder days to foreclose in New York just hit a record 1,072 per RealtyTrac as banks simply refuse to clear housing inventory faster knowing full well withheld inventory is an additional clearing price subsidy) is the main reason why the punditry has been confused into believing there is a housing rebound. That this "rebound" is merely a subsidized demand pull phenomenon a la the "cash for clunkers" auto sales program is patently clear to most. Nonetheless what little confusion is left, is finally coming to an end, thanks to none other than one of the first entrants in the REO-To-Rental space, $31 billion hedge fund Och Ziff, which a year after entering the program with hopes of quick riches, is now looking to cash out.

This morning's New Home Starts and Building Permits was called by some 'The Most Bullish Development On The Entire Earth'. That is indeed a very bullish statement about a sector of the economy that is still running at very recessionary levels of activity. However, let's analyze the data beyond the headline to determine what is really occurring. Among the various 'surprises' are seasonal adjustments, as we saw with the retail sales, were exceptionally large in September; the underlying fundamentals, especially in the 25-35 cohorts, are simply not in place to create a sustainable upturn in housing; and the disconnect between the housing data and the real demand for construction workers. The current activity falls well within the bounds of normal volatility, and we will likely see revisions lower in the coming months ahead, as seasonal variations began to negatively impact the data towards year end. The important point, however, is that while the housing data on the surface is showing improvement the more important components to sustainability from employment to lending are not.

When one combs through the usual hodge podge of purposefully distracting headline bullets in Bank of America's quarterly release one as usual ends up with a sorry picture. Here are the key numbers: Noninterest income for the firm, traditionally about half of total revenues in addition to Net Interest Income, has continued to decline, and slid fo $10.5 billion, down from $12.4 billion in Q2 and down from $18.0 billion in Q3 2011. The other side: Total Interest Income (before expenses) also has continued to decline, and dropped to $13.976 billion from $13.992 billion a quarter ago, and down from $15.853 billion a year earlier. These numbers are hard to fudge. The number that is very easy to fudge is the Net Income (and per share) line, which was reported at $340 MM or $0.00 in diluted earnings per share after dividends. What helped substantially here is the following: while the firm booked a provision for credit losses of just $1.774 bilion, in line with Q2 and half of the $3.4 billion in Q3, 2011, what more than offset this was the surge in reserve reduction which soared to the highest in years at $2.348 billion, up from $1.853 billion in Q2 and way up from the $1.679 billion in Q3 2011. What is even more paradoxical is that despite what Moynihan is saying about an improvement in the housing market, the bank's total chargeoffs rose to the highest in a year, at $4.122 billion, up from $3.626 billion in Q2, and the highest since Q4 2011. The result is that the Net charge off ratio also spiked to the highest in a year, at 1.86%.

To summarize: European stocks are little changed although Spanish shares rise. Spain 10-yr bond yields fall to the lowest level in more than 6 months. S&P futures are now higher on the trading session, driven by correlation engines as the euro is up vs the dollar, despite major disappointments by IBM and Intel. In other news Germany formally shut down the debt redemption fund proposal, ending one more rescue avenue for when the recent baseless euphoria ends, even as Spanish La Vanguardia reports that Germany is pressuring Italy to request European aid alongside Spain so that the government of Prime Minister Mario Monti doesn’t reap the benefit of lower borrowing costs without being tied to tougher economic reforms. Needless to say, Italy is said to resist the proposal: after all in Europe one just wants the upside from being bailed out, as opposed to actually being bailed out...

• Hillary Clinton Accepts Blame for Benghazi (WSJ)
• In Reversal, Cash Leaks Out of China (WSJ)
• Spain Considers EU Credit Line (WSJ)
• China criticizes new EU sanctions on Iran, calls for talks (Reuters)
• Portugal sees third year of recession in 2013 budget (Reuters)
• Greek PM says confident Athens will secure aid tranche (Reuters)
• Fears over US mortgages dominance (FT)
• Fed officials offer divergent views on inflation risks (Reuters)
• China Credit Card Romney Assails Gives Way to Japan (Bloomberg)
• Fed's Williams: Fed Actions Will Improve Growth (WSJ)
• Rothschild Quits Bumi to Fight Bakries’ $1.2 Billion Offer (Bloomberg)

After starting the overnight trading at its lows, the EURUSD has once again seen the now traditional overnight levitation, this time with absolutely no economic news, in the process raising equity futures across the Atlantic, even as unfounded Chinese optimism for more liquidity has waned leading to the SHCOMP closing down 0.3%. Perhaps the most notable event in the quiet trading session so far has been the surge in 10 year Greek debt whose yield has tumbled to post-restructuring lows, driven by more and more hedge funds piling in to piggyback on Dan Loeb's recent public GGB purchase announcement (strength into which he has long since sold), and hopes that Greece will somehow see an Official Sector Initiative (OSI) to make recovery prospects for Private Investors more attractive: a capital impairment the ECB has said would happen only over its dead body. But in the new normal, facts and rules are for chumps, and only exist to be broken. More on this amusing stupidity here. Amusingly, this comes just as Greece’s Staikouras says the economy’s downward spiral is not over yet. But, again, who cares about fundamentals.

A new week begins. Here are the major global market-moving events to look forward to for both the next week, and for the remainder of October and November.

"We've seen rallies that fizzle before" is why Bob "I don't see the reason to call this a major turning point" Shiller is not calling the bottom in the housing market as he notes that while momentum helps, "right now it is partly seasonal" in an excellent reality-based discussion with CNBC's Rick Santelli. From the rise and fall of Greenspan's nationwide housing market correlations (not convinced this is anything but idiosyncratic) to the fact that a 'bottom' does not mean a recovery is coming and his expectations of longer-to-wait; the esteemed gentleman, dismissing concerns over rising interest rates and house prices - and pointing out how mortgage rates do not help forecast a house price recovery, makes a vital point: "Why the urgency" to buy a house? Despite the 'money for nothing', Shiller and Santelli explain there is "no way for Bernanke to change our 'animal spirits'" and his ZIRP is in fact psychologically damaging not invigorating. Absolute must watch!

Blowout quarter, or do US bank numbers just blow?