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STORIES:
The
federal reserve is inflating a bubble in the apartment market - (www.ochousingnews.com) The federal
reserve has lowered the cost of borrowing to near zero. As a result, there is
plenty of cheap debt available to financial managers to invest. These managers
are under increasing pressure to obtain returns, so they bid up the price of
all financial assets in pursuit of higher yields. This inflates all asset
classes, which is apparently what the federal reserve wants. The cash returns
on all cashflowing assets has been steadily declining due to all this cheap
debt searching for a home, and financial managers have been forced to accept
ever-more optimistic assumptions in order to justify their acquisitions. One of
these assumptions is the future sales price. In other words, financial managers
are starting to expect higher and higher rates of appreciation in order to make
their deals work, and as I pointed out above, it’s the assumptions on future
appreciation that lead to asset bubbles
What
Happens to the Housing Market When the Investors Leave? - (www.usnews.com) The housing
market has improved significantly since the start of 2012, thanks in large part
to the elevated role of investors and all-cash homebuyers, which accounted for
about 19 percent and 30 percent respectively of all sales in March 2013,
according to the National Association of Realtors. Heightened demand from the
investor and cash-buyer set has helped home prices recover in many markets
across the country, lifting homeowners out of negative equity territory and
fueling more home building. But the current role of investors and cash buyers
is not sustainable over the long-run, because as home prices continue to rise
and real estate investments become less attractive, that group will exit the
housing market. That raises the question: Is there housing demand to replace
these buyers if they pull back? A key demographic impact of the housing and
economic downturns of the last few years has been a reduced rate of household
formation. While the nation's population has continued to grow, the number of
independent households – both renters and owners – has not kept pace.
MBIA
Said to Get About $1.6 Billion in Cash in BofA Deal - (www.bloomberg.com) MBIA Inc. (MBI) will
get about $1.6 billion as part of a deal to end five years of litigation against
Bank of America Corp. (BAC) and
its Countrywide unit over claims of defective securitized mortgage loans, a person familiar with the
matter said. As part of the settlement, Bank of America will get warrants for a
5 percent stake in MBIA, said the person, who asked not to be identified
because the matter isn’t public. MBIA first sued Countrywide in 2008 in New
York state Supreme Court in Manhattan for fraud and breach of contract related
to securitized home equity loans. Armonk, New York-based MBIA guaranteed
payments to investors in the securities. Charlotte, North Carolina-based Bank
of America acquired Countrywide that year. MBIA claimed the loans were riskier
than represented.
Unemployment
Benefit Cut Adds to Drag on U.S. Spending: Economy - (www.bloomberg.com) Dentral Smith had to say no when her granddaughter asked for a treat on
the way home from school. The government’s cut in unemployment payments leaves
her with less spending money. “It was a setback,” said Smith, a 45-year-old
Philadelphian who has been out of work since November. “My granddaughter, she
said ‘Nanna, you’ve got your wallet.’ And I said, ‘Yeah, there’s nothing in
it.’” Federally funded benefits paid to the
long-term unemployed were lowered by 10.7 percent starting March 31 as part of
reductions to planned government spending called
sequestration. Benefit cuts will affect about 1.8 million workers, based on
Labor Department data,
and add to the drag on consumer spending from
a payroll tax increase that took effect in January. The reductions will shave
about $2.4 billion from the unemployment trust fund this fiscal year, according
to an Office of Management and Budget report.
While that’s not enough to have a measurable impact on $11 trillion in annual
consumer spending nationwide, the effect will be magnified in places with large
numbers of long-term unemployed and in states with generous programs, such as
Hawaii.
Diminished
Housing Wealth Effect Keeps Pressure on Fed - (www.bloomberg.com) The wealth effect from rising house prices may not be as effective as it
once was in spurring the U.S. economy. Rather than
using their properties as ATM machines to boost spending, homeowners
increasingly are paying down the principal and shortening the maturities of
their mortgages in a move Florida banker Rob Nunziata
calls “forced savings.” Cash-in refinancings -- in which borrowers invest more
of their own money in the house -- outnumbered cash-outs by more than two-to-
one in the fourth quarter, according to Freddie Mac (FMCC). The
wealth effect “is much smaller,” said Amir Sufi, professor of finance at the
University of Chicago Booth School of Business. Sufi, who participated in last
year’s central-bank conference at Jackson Hole, Wyoming, reckons that each dollar increase in
housing wealth may yield as little as an extra cent in spending. That compares
with a 3-to-5-cent estimate by economists prior to the recession.
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