Nouriel Roubini, an economist made famous by correctly predicting the last housing bubble, is warning that there is a new housing bubble.
"What we are witnessing in many countries looks like a slow-motion replay of the last housing-market train wreck. And, like last time, the bigger the bubbles become, the nastier the collision with reality will be."However, there is a twist this time: the housing bubble is global.
the affected overheated housing markets include those in Switzerland, Sweden, Norway, Finland, France, Germany, Canada, Australia, New Zealand, the United Kingdom (London), Hong Kong, Singapore, China, Israel, Turkey, India, Indonesia and Brazil.You'll note the United States isn't on this list. But before you relax you should be aware that the American real estate market has been effected and distorted by this global bubble, and that the origin of this global bubble is the United States.
To understand what I mean you need to take a step back and look at global monetary policy since 2008.
The Fed Reacts
Recall that a little over five years ago, the banking system in the US was going under because of its own corruption and short-sightedness. In response the Federal Reserve cut interest rates to nothing and then started quantitative easing, which is printing money to buy the same assets that the major banks owned. This pushed up the asset prices of what the banks held.
It also created a lot more money in the system, which should cheapen it because the law of supply and demand says making a lot more of something out of nothing should make something worth less.
A lot of money.
A mountain of money.
They succeeded in keeping their currencies cheap in comparison to dollars, thus protecting their export markets, but there were costs. Those costs involved a massive shift in inequality in the world, from the workers to the owners.
You see, the high global unemployment and the crushing of labor unions meant that wages would not rise. Not just in America, but in Japan too, where regular wages have been falling for 17 months. This meant less economic activity, reflected in falling money velocity. This gave cover to central bankers because without money velocity, their money printing wouldn't turn into price inflation.
Even if the wealthy didn't sell those rising assets to the banks, they could borrow against those assets at practically no interest and buy more rising assets. It's exactly like free money for the rich.
That somewhere was first the bond market. But then interest rates were pushed below the inflation rate, so they bought lots of stocks. Which they continue to do, but with record stock prices and falling corporate earnings, the wealthy elite needed to diversify.
That means real estate.
To give you an idea of how this effects the American real estate market, let's look at China.
China responded to the 2008 crisis by throwing a mountain of credit at it. It kept China out of recession, but there are costs.
A $6.6 trillion credit binge during the past five years, encouraged by Beijing policy makers as stimulus to combat a global economic slowdown, now threatens to stoke a debt crisis.Easy credit almost always brings out the speculators looking to make a quick buck. That means malinvestments, which leads to bankruptcies.
Which leads to a bank crisis.
China’s biggest banks are already affected, tripling the amount of bad loans they wrote off in the first half of this year and cleaning up their books ahead of what may be a fresh wave of defaults.Bad news for China, but how does that affect you and me? Well, a lot of those speculators made enormous amount of money and now are looking for a safe place to put that money, and that means overseas.
In the U.S., the six biggest metropolitan areas have attracted $2.88 billion in commercial real estate investment by Chinese companies this year, up from $321 million in all of 2012, according to New York-based research firm Real Capital Analytics Inc...Wealthy investors
In cities such as New York, Chinese developers are betting on rising demand from the increasing number of wealthy Chinese seeking property outside their own country, including homes for children studying abroad, according to Ozden and Chiway’s Qian.
One reason is because banks have been keeping foreclosed inventory off the market so that they don't have to book losses, or not foreclosing at all. 12.6 million homes are sitting vacant right now. Banks are creating artificial scarcity in order to drive up prices.
But the biggest reason for the recent boom in prices has to do wealthy American investors looking to park money somewhere, and that's bad news for working families.
Wall Street’s influence on the residential real estate market is growing as the biggest investors, Blackstone Group LP (BX) and American Homes 4 Rent (AMH), have together bought about 60,000 homes across the country to benefit from low prices and rental demand from millions of former home owners who have lost properties through foreclosures....This is bad news in the short-term because working families can't purchase a home and start building equity. Some may say that it is balanced by the fact that home prices are now going up, thus saving those already in the housing market.
“There’s a tremendous pressure on inventory in the areas that are being dominated by investors,” said Keith Gumbinger, vice president of HSH.com, a Riverdale, New Jersey-based mortgage website. “People end up wanting to buy a home, but they can’t. All the homes have been converted into rentals.”
But those people are wrong.
Why? Because there is a fundamental difference between investors and homeowners: investors always sell.
There are no exceptions to this rule. None.
Complicating this mess is the fact that speculators at Blackstone and AMH purchased whole neighborhoods. When those speculators run towards the exits they are going to be dumping houses on the market by the hundreds, unlike when homeowners sell.
It's going to crash local home prices.
It’s the strangest thing, but even though vacancy rates for apartments have fallen to 8.2 percent, which is their lowest level since 2001, single –family homes bought after foreclosure have VACANCY RATES OF 50 PERCENT and higher… according to Bloomberg this past July.Why would that be? The answer is three part: location, location, location.
What's more, when homeowners sell they almost always purchase another home somewhere else.
These speculators won't be doing that.
Much like the idea of giving mortgages to anyone who wants one was a bad idea, this latest scheme of buying up foreclosed homes to rent out is poorly designed and bound to end in tears.
Yet the Obama Administration is working with Fannie Mae to funnel these homes to private investors at steep discounts.