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Oops, We Did It Again: Banks and Houses Dominate the Recovery

One of the many, many lessons we should have learned from the 2009 crash is that an economy driven by inherently-unstable – and completely unproductive – things like rising home prices and bank trading profits can’t be trusted.

And yet here we are again. Bloomberg reports that the Manhattan housing boom has spread to the boroughs:

Brooklyn Home Prices Rise to Record in N.Y. Sales Frenzy

Home prices in Brooklyn, New York’s most populous borough, surged to a record as low interest rates and rising rents across the city swelled demand for homeownership amid a dwindling supply of properties for sale.

The median price of condominiums, co-ops and one- to three-family homes that sold in the second quarter was $550,000, up 15 percent from a year earlier and the highest in more than a decade of record keeping, New York-based appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate said in a report today. The inventory of listings fell 19 percent to 4,704, the lowest for a second quarter since Miller Samuel began tracking the data in 2008, said Jonathan Miller, the firm’s president.

The median price of condominiums, co-ops and one- to three- family homes that sold in the second quarter was $550,000, up 15 percent.

“You choke off supply, you have a slowly improving economy, and prices rise,” Miller said. “And then you compound it by widening your source of demand, when one of your competitors — Manhattan — is experiencing the same inventory problem.”

Rent gains across New York coupled with mortgage rates at historical lows have helped push buyers into a sales market that’s more affordable than Manhattan’s, while owners are still holding back from listing their properties. Homeowners who bought during the previous peak, when Brooklyn prices hit a median of $540,000 in 2007, still don’t have the equity to sell and come up with a down payment for something new, Miller said.

“You’re not under duress, you didn’t lose your job, you just can’t make the move, so what do you do? Nothing,” Miller said. “You just sit and wait for the market to improve.”

Rising Rents

Apartment rents in Brooklyn have also accelerated, jumping 14 percent in June from a year earlier to a median of $2,737, the highest in records dating to 2008, Miller Samuel and Douglas Elliman said in a separate report today. In Manhattan, rents climbed 1.9 percent last month to $3,195, putting them 2.1 percent from the previous peak reached at the end of 2006.

Out on the left coast, according to San Diego real estate analyst Rich Toscano, things look pretty much the same:

May-June 2013 Data Rodeo — Price Explosion

This chart of the Case-Shiller index (with my estimate based on median price per square foot over the last two months) shows just how different the character of this year has been:

San Diego home prices 2013

There was a plodding upwards of prices last year, for sure, but so far this year, prices haven’t so much been plodding as exploding.

For a more granular look, here are the month to month changes in the median price per square foot:

San Diego square foot

The condo series is a bit of a wild animal so I usually ignore it; the underlying trend it better expressed by the more staid detached hom series (blue line).  But even that has been on fire: the detached home median price per square foot is up 23% from a year ago, and up 16% in the first six months of 2013 alone.

This price surge has been due, as I’ve written about incessantly, to ridiculously low inventory and even ridiculously lower mortgage rates.  One of those conditions persists; the other has changed somewhat drastically.  More on that below; first, here are the above two charts starting at the peak of the bubble, followed by the same thing but for the regular median price (vs. price per square foot):

Meanwhile, the big banks are once again stars of earnings season:

Citigroup profit jumps, helped by home prices

Citigroup Inc on Monday reported a stronger-than-expected 26 percent rise in adjusted quarterly profit as stronger home prices reduced losses on mortgages and bond trading revenue jumped.

The biggest boosts in profit came from its securities and banking unit, where bond trading revenue rose 18 percent, while stock trading revenue soared 68 percent, and underwriting and advisory was up 21 percent.

At the Citi Holdings unit, which houses businesses and assets the bank is looking to shed, the bank set aside less money to cover bad mortgages as the U.S. housing market showed signs of recovery.

The results underscored how the bank is returning to normal after getting walloped during the financial crisis and needing three government rescues.

“Citi is a restructuring story and it is an emerging markets story,” analyst Fred Cannon of Keefe, Bruyette & Woods said before the company reported results.

Adjusted net income at the third-largest U.S. bank by assets rose to $3.89 billion, or $1.25 per share, in the second quarter, from $3.08 billion, or $1 per share, a year earlier.

Citi’s shares have risen about 28 percent this year through Friday’s close, slightly better than the KBW index of bank stocks. They have doubled in value in the past year.

Some thoughts
Bank profits “jump” because of the real estate “frenzy” and price “explosion”. Gee, it’ll be interesting to see how this ends…

With interest rates up, it’s possible that the end is already in sight. See Variable Rate World, Part 3: “This Horror Show Is Just the Beginning” for the impact of higher rates on bank bond portfolios. And here’s Rich Toscano on higher mortgage rates and local housing:

This is big, in my view.  Low rates have been a big driver of housing demand, for both investors (who are seeking out yield wherever they can find it) and residents (who are compelled to buy due to the favorable rent-vs-buy comparison enabled by super low rates).  This rate increase will almost certainly undercut both sources of demand.

To what extent, I don’t know, but this illustration helps demonstrate the impact:  eyeballing it, the average mortgage rate prior to the recent surge was in the range of 3.5%.  It’s now about 4.5%.  A buyer who is trying to hit a certain dollar-amount budget for a monthly payment just saw the size of the loan they can afford drop by over 11% in about two months.

That has got to have an impact.   It could be slow to feed through to declining demand… in fact, there may have been an early opposite effect in which buyers feel like they should rush to buy before rates go up further (this is what drove the final peak-volume mania phase of the housing bubble in spring 2004).  But it seems to me that this must cool off the housing market as buyers find they can afford less, and investors see that yields from other investments are less absurdly low. This is to say nothing of the impact that a tightening of credit conditions might have on our over-levered economy in general.

20 thoughts on "Oops, We Did It Again: Banks and Houses Dominate the Recovery"

  1. Pingback: The Küle Library
  2. Another “oops” is that “we” all keep thinking and acting in the same Pavlovian way to Fed manipulations. Besides the non-sequitor of thinking interest rates should fall if the Fed is printing money, why would increased housing prices represent a recovery, especially if it’s the result of artificial and distorted circumstances like limited supply because of financially trapped sellers and Fed induced demand via repressed interest rates and overt support? The only entities that benefit from that kind of price inflation are the banks, not the sellers nor the buyers. The buyers simply pay more in myriad ways, leaving less money for other things, and the sellers either roll over their proceeds on some new economically equivalent form of housing or buy less housing and probably save the rest for retirement. (Okay, maybe furniture and paint sales go up and there may be a few more part-time moving gigs, but that’s pretty pathetic.)

  3. Thanks for the article.

    Investors have taken refuge in US Regional Banks, KRE, and in the Too Big To Fail Banks, RWW, driving up the value of the Russell 2000, IWM, as well as the Small Cap Pure Value Stocks, RZV, and the Small Cap Pure Growth Stocks, RZG.

    Yes it will be interesting how things end. Interest rates are going to being rising much faster and much soon than establishment analysts perceive from their recent July 5, 2013 rally to 2.71%. But today, July 16, 2013, A see saw destruction of fiat money and fiat wealth is underway as Aggregate Credit, AGG, traded higher, as the Interest Rate on the US Ten Year Note, ^TNX, traded lower to 2.53%, and the Russell 2000, IWM, and World Stocks, VT, trade lower at market open.

    I am of an Apocalyptic Vision, and perceive that Bible Prophecy of Daniel 2:25-45, foretells of the soon coming of a Ten Toed Kingdom of regional governance, consisting of toes, that is regions, consisting of a miry mixture of iron diktat and clay democracy, which is synonymous with the Beast Regime of diktat and totalitarian collectivism, seen in Revelation 13:1-4, which will arise out of a global credit bust and financial system breakdown, having its origins in the sovereign insolvency and banking insolvency of the Mediterranean Sea PIGS. The Beast Regime, which is replacing the Creature from Jekyll Island, will be popular with many, even to the extent that they will actually worship it, as related in Revelation 13:3-4.

    Business Insider relates The next financial crisis will come with a crisis of faith.

    Let them eat diktat, is Authoritarianisms call. There will be no populist leader rising to resolve the soon coming economic crisis; rather there will be one familiar with Authoritarianism’s policy of diktat and schemes of debt servitude coming to rule the Eurozone, as foretold in Daniel 8:23-25. This leader is also presented in Revelation 13:5-10, as the New Pharaoh, who will be accompanied by the New Prophet, Revelation 13:11-17, who will together eventually introduce the charagma money system, that is the 666 credit system, where all will be required to take the Mark, in order to buy or sell, Revelation 13:18.

    Yes, a Beast Regime, a Pharaoh and a Pharaoh are coming to rule the world. Corollary #8 from the Dispensation Economics Manifest is that with the ever increasing failure of Liberalism, the old policy of investment choice and schemes of credit, are being replaced by new policies and new schemes for economic and political action under Authoritarianism.

    Under Authoritarianism, the new policy of diktat and new schemes of debt servitude are being developed; these include regional framework agreements, bank deposits bailins, new taxes, privatizations, capital controls, austerity measures, and vitalizations where banks and other corporations are given charter to operate as public private partnerships for regional economic security, regional stability and regional sustainability.

    Economic and political movement under Liberalism was based upon ponzi credit, which provided capital and revenue and resulted in a moral hazard based prosperity. Authoritarianism, on the other hand, is based upon trust which provides vitality for statist underwriting of economic activity.

    Capital perished on May 24, 2013, with the rise in the Interest Rate on the US Government Note to 2.01%, and it is increasingly being replaced by statist vitality, which is defined as diktat establishing oversight by nannycrats, working in public private partnerships and in regional governance, which become the legislators of economic value and the legislators that shape one’s means and one’s ends.

    Gone are the days when liberalism’s bankers, corporations, government, entrepreneurs, and citizens of democracies were the legislators of economic value and the legislators of economic life. Economic and political movement under Authoritarianism is based upon debt servitude which provides for collective action, and crushing austerity.

    1. That already happened with the destruction of the Temple in Jerusalem and the destruction of Rome, you got your time table confused there!

  4. As tweeted on ZH “PIMCO 5-10 Yr holdings soar to 46%, highest since October 2008. 20+ Yr at -1%”. Yet rates are going up, at least for now. What do those folks know that we don’t? An early move to safety facing a possible market move down? A vote of confidence in the Fed? Expecting a major move up in the markets dragging bonds along? Bad weed? Anyone???

    Bill

  5. John – the first paragraph perfectly summarizes America’s economy today. The present economy is a complete fraud, and the rising home prices are going to end very, very badly. The bad thing about artificially inflated home prices is that it robs people of their hard earned money. More money comes out of their pockets each month and goes to the banks instead of into their own pockets where the money can be saved or spent. The fact that home prices are rising right now is not only a travesty, it is an unsustainable fraud that is going to end in disaster.

  6. What I don’t understand is how bank quarterly profits are UP given John’s last article suggesting they are getting hammered from the last two months of rate increases? Maybe housing is just now slowing down after rate increases as those waiting for lower rates rush to buy now as they see rates going up and don’t want to get priced out. We shall see. Seems to me the fed will do all it can to try rates back down. If rates go up very much, it is GAME OVER so I suspect any big rate increases will be a sign the fed has lost control rather than letting it happen.

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