2011년 12월 18일 일요일

How speculators fed U.S. housing bubble, fuelled bust

THE WEEK

How speculators fed U.S. housing bubble, fuelled bust

MICHAEL BABAD | Columnist profile | E-mail
Globe and Mail Update
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These are some of the major stories Report on Business followed this week. Get the top business stories on weekdays on BlackBerry or iPhone bybookmarking our mobile-friendly webpage.
Of house 'flippers' and the U.S. bust
Speculators played a major role in the U.S. housing bubble, researchers at the Federal Reserve Bank of New York have found, probably helping to drive up prices and then defaulting as the real estate market collapsed

Andrew Haughwout, Donghoon Lee, Joseph Tracy and Wilbert van der Klaauw recently unveiled new findings from their study of real estate investors, those who loaded up on credit to buy several properties in the run-up to the crash.
"These investors likely helped push prices up during 2004-2006; but when prices turned down in early 2006, they defaulted in large numbers and thereby contributed importantly to the intensity of the housing cycle's downward leg," they wrote.
"As mortgage lenders have long known, investors are more likely than owner-occupants to walk away from an underwater property," they added in their research, which is posted on the New York Fed's website.
"So when a borrower acknowledges on the mortgage application that she won’t live in the house, the lender will typically require a higher downpayment and charge a higher interest rate to reflect the additional default risk. Within the category of real estate investors, some buy properties with the intention of renting them out, while others intend to simply 'flip this house,' selling quickly and reaping a capital gain."
At the market's peak, more than one-third of all lending for residential real estate purchases went to buyers who already owned at least one property. In the worst states, Arizona, California, Florida and Nevada, that level was a stunning 45 per cent. These speculators could continue buying up property as prices climbed because they weren't risking much money.
"We conclude that investors were much more important in the housing boom and bust during the 2000s than previously thought," the researchers said.
"The availability of low- and no-downpayment mortgages in the nonprime sector enabled investors to make these bets. This may have allowed the bubble to inflate further, which caused millions of owner-occupants to pay more if they wanted to buy a home for their family. In the end, even the value of the 20-per-cent downpayments made by responsible, prime borrowers was wiped out - leaving the housing market, and the economy, in the vulnerable state we find them in today."
The U.S. housing market was, of course, where it all began so long ago, and the Federal Reserve warned again this week that the industry remains depressed.
Deep in debt
As Merle Travis put it in his 1946 recording Sixteen Tons, we're another day older and deeper in debt.
Based on the latest Statistics Canada data, the debt burden of Canadian households is at troubling levels, which could be a shock for some when interest rates inevitably rise. That's because consumers are taking on more debt, but not bringing in much more pay, a worrisome development amid projections of slower economic growth and high unemployment.
The Globe and Mail's Tavia Grant reported this week that the ratio of debt to personal disposable income, a key measure, climbed in the third quarter to a record 152.98 per cent, from 150.57 in the second quarter. That's a measure that takes in not only debt but also outstanding liabilities, like taxes that are owed.
There's a separate measure, which is good for comparison with other countries, that looks at just credit market debt. That increased to 150.8 per cent, according to Statistics Canada. Mortgage credit reached $1-trillion and other consumer debt $48-billion.
What's important there, according to economist Diana Petramala of Toronto-Dominion Bank, is how uncomfortably close that second measure is to the the level of 160 per cent in the United States just before its housing market crashed.
"We are of the view that household debt has become excessive," Ms. Petramala warned.
"If indebtedness continues to grow at this speed, the debt-to-income ratio will hit 160 per cent – the level at which both U.S. and U.K. households got into trouble – within the next few years. To stop indebtedness from rising, households are going to have to cool borrowing further and increase savings, both of which will imply a modest pace of consumer spending over the next few years."
At the same time, household net worth fell by 2.1 per cent in the quarter for the second month in a row, as declines in stock values more than offset real estate gains.
The report came in the same week that Bank of Canada Governor Mark Carney warned that too much of the capital coming into Canada is being used to fund household spending, though he doesn't see consumer debt as a "clear and present danger" like the euro crisis.
Douglas Porter, deputy chief economist at BMO Nesbitt Burns, doesn't see a slowdown in mortgage credit, given the buoyancy of the real estate market.
"By far and away, mortgages are the biggest component of Canadian household debt, and they are still chugging along at a 7-per-cent-plus pace," he said. "The single biggest driver of mortgage growth is the path of home prices. While we have seen some moderation recently, they are still up 5 per cent year over year. Unless and until home prices truly crack, don’t expect a big slowdown in mortgage credit growth (and thus household debt). Again …careful what you wish for."
Karen Cordes Woods and Derek Holt of Scotia Capital take a different view than some others, wondering why there's such a "fixation" on the debt-to-income measure. They worry about slowing growth of consumer debt.
"Our concern is that the debt-to-income ratio is one of the worst metrics of household finances, whereas the evidence of a sudden deceleration in household debt growth is clear and provides a cautionary note against further policy tightening that could risk tipping the ship right over from a soft landing to a potentially harder one," they wrote in a report.
Two years gone
Two years on, the euro zone debt crisis is now in a "chronic phase," with dire warnings and few expectations that it's going to ease any time soon.
Germany's Angela Merkel has warned that there's no quick fix, though she's confident of holding together the 17-member monetary union. But there's no confidence in the euro zone leaders that they can muddle their way through, and pressure has been unrelenting.
Christine Lagarde, the chief of the International Monetary Fund, for example, warned this week that the global economy could face the same issues as those that led to the Great Depression, and she called on all countries to work together.
There had been some hope after last week's EU summit, at which most of the governments in the group agreed to a new fiscal pact that will impose budget discipline. But it didn't take long for markets to realize that summit leaders agreed on little that would fix the mess now, leading to the same confusion and lack of action that have dogged investors for months. Along with that are the divisions that remain, notably now between Britain's David Cameron, who didn't sign on to the deal, and his colleagues.
"The euro crisis has moved from an acute to a chronic phase, a move mirrored by global risk appetite," said Kit Juckes, the foreign exchange chief at Société Générale.
"The crisis has not gone away - far from it - but this weekend will see the second anniversary of the move by Greek [credit default swaps] levels above 250 and we're learning to live with the possibility the crisis won't be resolved one way or another for a long time to come."
Like others, of course, Mr. Juckes hopes the crisis ends soon.
"Some people expect - and a few even hope - that the system will collapse," he said. "Some are daft enough to think that would be a good thing for growth. But the risk it would drag on all year was one of the themes of our 2011 outlook and there must be a risk that happens again."
What does it mean heading into 2012? It means more turmoil, no doubt more summits, and more pressure on Europe's financial system.
"The bottom line is that for the euro to survive it needs to go for full-blown fiscal union, or break up, it’s as binary as that, and currently the odds are on it breaking up, given the obstacles in its way, on a political level, as well as a legal level," warned CMC Markets analyst Michael Hewson.
Europe's discontent
We've seen the anti-austerity strikes, protests and riots flashed from across Europe. What we don't get to see is life on the streets. And by all accounts, it's ugly.
According to The Wall Street Journal, suicides have almost doubled in Greece. In some Greek hospitals, drugs have been withheld because of missed payments, while the country's consumer protection agency warns against scam artists. In Ireland, the latest statistics show a rise in emigration. And, in Britain, according to Reuters, students are turning to prostitution, gambling and other ways of raising money.
This is the troubling new era in the Old World, where governments are cutting deep and unemployment is a blight after the financial crisis and recession.
The Reuters news agency this week offered a disturbing look at Britain, where youth programs have been slashed and more than one million young people can't find jobs, the highest in records dating back about a decade. Many young Britons have taken to prostitution, gambling and taking money for clinical trials, the news agency reported.
The English Collective of Prostitutes, an aid group, told the news agency the number of people looking for its help has doubled over the past 12 months as students turn to alternatives.
“In some cases that’s sex work, but we’re also hearing about clinical trials, gambling ... dangerous work where there’s very little, if any kind of employment rights,” an official of the National Union of Students told Reuters.
Where RIM stands
Who would have thought at the beginning of 2011 that shares of Research In Motion Ltd.
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