In his weekly letter, John Mauldin provides us with more signs of stress in Chinese property markets.
Futures Down After Shanghai Composite Plunges On Slowdown In Housing Prices, Foreign Trade; BoJ PolicySubmitted by Tyler Durden on 08/10/2010 07:33 -0400
The Chinese Shanghai index was lower by almost 3% overnight after a series of disappointing economic releases out of the country. The first showed a further cooling in property prices, leaving many to speculate if the housing ponzi was not beginning to unravel/ As Xinhua reports: "Housing prices in major Chinese cities rose 10.3 percent year on year in July, down from the 11.4 percent growth in June, the National Bureau of Statistics (NBS) said Tuesday. It was the third consecutive month that China's property prices rose at a slower pace and the lowest growth rate in six months." Adding to the downward pressure was news released from the Customs Administration (which we will spread later), which indicated that "China's exports rose 38.1 percent year on year to 145.52 billion U.S. dollars in July, but the growth rate was down from the 43.9-percent surge in June, the General Administration of Customs (GAC) said Tuesday." Concluding the Asian trifecta of negative news, was the Bank of Japan's refusal to further ease its monetary policy. US futures are lower by about 0.5% although all the action in the US will be focused on the FOMC statement released early this afternoon.
The International Monetary Fund (IMF) stress tested 53 large banking holding companies, and concluded that despite restoration of some stability, there remain certain important risks to the U.S. financial system and economy mainly coming from the real estate sectors.
John Paulson is a billionaire for good reason: he has been right far more than wrong. Yet is his "recovery" bet premature? Does his entire strategy hinge on a bet on housing, which as Bullard, Greenspan and Shiller all say is very precariously balanced on the edge of another leg down. Will Paulson finally be proven wrong, and if so will he be remember for his one wrong bet far more than for the series of right ones?
The Spanish banks rallied after the (faux) stress tests, just to have reality spank them the following week. This time around, will the revolution be televised, or covered through a blog?
A New Spin on Bank Fraud: Banks Defrauding Their Invesors, Auditors and Regulators, Which Also Helps Delinquent MortgageesSubmitted by Reggie Middleton on 07/28/2010 06:52 -0400
Now we know how those banks were able to post improving credit metrics last quarter!
Interesting things have been happening in the real estate markets, but does it mean we are in a real estate recovery?
Buy USD & JPY and leave the Bloomie for a few months.
- Asian shares mostly lower despite Alcoa's positive earnings report.
- Avg housing prices in China fell in June for the first time in 16 mos, as govt checks speculation.
- China reiterates policy-tightening bias on property sector.
- Euro drops down to $1.2550 in early European trading.
- European banks poised to win a reprieve in Basel as regulators shape new capital rules.
- France's Sarkozy rejects tax increase, retreat on raising retirement age.
- Japanese stocks rise on profit expectations; metals retreat on fears of slowing China demand.
- Moody's downgrades Portugal's bond ratings to A1, growth prospects to remain weak.
Guest Post: How Increasing Inflation Could Affect Housing Prices - Correlating Mortgage Rates And Housing PricesSubmitted by Tyler Durden on 07/09/2010 10:02 -0400
I was talking with a friend who was telling me that it was the absolute perfect time to buy a house because housing prices have tumbled and interest rates are low. I asked him, "What happens to housing prices if there is inflation and rates go up?" "Housing prices should go up with inflation as they do for all goods. Housing is a natural hedge for inflation" Did my friend have a point? Yes and no. Yes, he was right that in a high inflationary environment, housing prices should rise with all other assets. Rents will go up, as will the price of all the inputs into housing such as lumber and labor costs. Obviously, housing prices will go up to reflect this reality. But no, when inflation and thus nominal interest rates increase, housing prices tumble. When rates fall, housing prices tend to increase.
At Kerrisdale Capital, we've written about the housing market before, but estimating the fair value of the US housing market is difficult. Two of the best ways to estimate fair housing prices are to compare housing costs to household income or rental rates. Obviously people can only spend so much on housing relative to their incomes, but secular trends in spending, tax rates, and cyclical trends in income make the data difficult to interpret. Likewise, comparable rental rates do a good job of showing the relative cost of ownership, but in an inflated market, rental rates are likely to be inflated as well. A third way to estimate the fair value of the housing market is to look at the replacement cost of existing homes. If the cost of building a home is equal to the cost of buying a home, then the price to cost multiple is 1x, implying a breakeven level of profitability for homebuilders. If homebuilders can build a house for $300k and sell it for $400k (a 30% return) they will continue to build homes until they can only sell them for around $330k (a 10% return).
- API reported a decline of 3.4M barrels in US' oil stockpiles.
- Asian markets stay in the red but pare early losses.
- Australia reportedly close to mining-tax compromise.
- Consumer Confidence grows in Euro zone, ebbs in UK.
- IMF chief: No double-dip for global economy; defends G20 focus on deficit reduction.
- Japanese stocks fall to seven-month low as US consumer confidence drops.
Summary of the weekly's events and macro observations courtesy of RCS Investments
So early in the morning, Bloomberg runs a story, "Sales of Existing Homes in U.S. Probably Climbed on Tax Credit". A few hours later, the housing report comes out and Bloomberg then runs "Existing Home Sales in U.S. Unexpectedly Fell to 5.66 Million Rate in May". Hmmm! BoomBustBlog readers saw this coming way back in March with "It’s Official: The US Housing Downturn Has Resumed in Earnest". Thus far, we've been right on the money. Hey Bloomberg editors, I'm available if you need me...
All those who thought only our brilliant financial alchemists had the ingenious idea of sweeping all the toxic assets plaguing bank balance sheets under the rug of taxpayer bailouts "until things get better," are in for a surprise. It appears that recently insolvent Spain is not only as big an offender in this regard, but has been ahead of the curve for a several years. In an attempt to pretend all was good, Spain's banks, which are now locked out of financial markets for good reason, onboarded worthless mortgages as long ago as two years back. This was done with the hope that sooner or later (but definitely in under two years) prices would pick up and these homes could be sold for at least one dollar of equity. Alas, something happened on the road to financial nirvana: the Keynesian model collapsed, and the properties are now worth less than they ever have been, are generating the same amount of cash as they did two years ago (none), and now, finally, banks are forced to start accounting for these loans in a manner at least marginally close to reality. The result: a scramble to reflate the housing bubble like never before, in the hope to get at least a few mortgage payments out of the newest batch of greater fool. As the WSJ reports: "Banks are piling on incentives. Midsize Banco Espanol de Credito SA offers deferred deposit payments and 100% financing "for many of our houses," according to its website. Larger lender Banco Bilbao Vizcaya Argentaria SA and smaller Banco Pastor SA offer generous financing and lower teaser rates, as well." In other words, all the ingredients that were present in the creation of the first housing bubble are here once again. And just to be safe, Spain has decided to multiply the dosage by a factor of ten. When this little scheme implodes, which it will, the consequences for the economy will be comparably be about 10 times as bad.