Another housing market of cards

Rising home prices have some concerned that we could be building another house of cards. Housing prices are up 8.1 percent over last year, according to the S&P/Case-Shiller price index.

Sales have been improving too. The National Association of Realtors estimates that 4.65 million previously owned homes were sold in 2012, up 9.2 percent from 2011. Some of the numbers are truly eye-popping. Phoenix home prices were up 37 percent, followed by Las Vegas, where prices rose by 30 percent.

The question is whether the housing recovery is caused by rising demand from people who are doing better economically, or big investment companies, private equity firms, hedge funds and foreign buyers betting on the housing market’s recovery by buying homes, renting them for short-term profit and holding them for long-term price appreciation.

They are buying in places like Florida, Georgia, Arizona, Nevada and Califomia,places where home prices fell the most during the Great Recession.

In the process, they are helping fuel the home price surge, bankrolled by cheap credit made available by the Fed’s zero interest rate policy. They are also shrinking inventory, crowding out local buyers, and making homes beyond the economic reach of first-time home buyers.

It’s like the story about a soapbox orator speaking to a Wall Street crowd about the evils of drugs. When he asked if there were any questions, an investment banker asked, “Who makes the needles?” Never  miss an opportunity.

In the early 2000s, America saw the creation of a housing bubble, encouraged by low interest rate policies implemented in the wake of the 2000 stock market crash and recession that was caused when the dot-com bubble burst. Low interest rates reduced mortgage costs. This stimulated demand for houses and drove up prices.

Rising prices led to the perception that houses were more than just a place to live, they were an investment whose value seemed likely to keep rising, building wealth and funding the homeowner’s retirement. That perception further increased demand for houses, driving prices still higher.

In 2005, Federal Reserve Chair Ben Bernanke said, “House prices have risen by nearly 25 percent over the past two years … at a national level these price increases largely reflect strong economic fundamentals, including robust growth in jobs and incomes, low mortgage rates, steady rates of household formation, and factors that limit the expansion of housing supply in some areas.”

Since the consumer price index we use to measure inflation excludes assets like homes and securities, the index’s nearly flat trend during the middle of the last decade made it easy for the Fed to convince us to be more worried about deflation than inflation and helped justify its decision to keep interest rates low.

China and other low-wage countries were happy to help the Fed keep rates low. By exploiting their nonĀ­-union labor forces, they continually reduced the prices of their exports, which Americans bought in ever-increasing numbers. Then they took the proceeds and bought up the U.S. Treasury debt being issued to fund two wars in the wake of large Bush administration tax cuts.

Ours was a nation awash with capital, much of it debt-based, seeking investments that offered generous yields. Home prices peaked in May 2006, stalled and then fell. The American economy officially slipped into recession at the end of 2007.

The housing bubble burst in the fall of 2008, experiencing its Wile E. Coyote moment. Many financial institutions had to write off billions in toxic or worthless mortgage assets. All the large American financial institutions- including Bank of America, Citigroup, Wells Fargo and insurance giant AIGĀ­ ended up getting bailed out by taxpayers. When the housing bubble burst, the 2008-09 recession affected nearly every business in the U.S. and then worldwide.

Let’s hope Wall Street’s speculative housing bet facilitated by the Federal Reserve’s zero interest rate policy doesn’t lead to another crash in which the rise in home prices is not supported by economic fundamentals and ordinary people ultimately bear the cost.

originally published: May 18, 2013

Congress and the president can compromise -to protect themselves

On Monday, April 5, Patriots Day, two improvised explosive devices detonated 10 seconds apart near the finish line of the Boston Marathon, killing three people and wounding more than 260. That same day, despite whining, complaining, and hand-wringing about the lack of bipartisanship in Congress and claims that our federal government is broken, the President quietly signed Senate Bill 716.

It is reassuring to learn that Congress can bridge the gaps between the two competing visions of the role government should play in a free society. What a relief to know they could set aside their ideological divide and come together to reach a solution that incorporated the best thinking on both sides. And you thought you could count on one hand the number of times Congress and the President would agree on anything.

The bill they agreed on rolled back key transparency provisions of the Stop Trading on Congressional Knowledge Act, known as the STOCK Act, which was signed into law in April 2012, an election year, in a highly visible signing ceremony where it was said that the legislation would address the “deficit of trust” that divides Washington and the rest of America.

The Senate gutted the disclosure requirements on Thursday evening, the House followed suit the next day and the President signed the bill Monday afternoon.

The STOCK Act, which was written in the wake of a “60 Minutes” segment on insider trading practices in Congress that aired in November 2011, prohibited members of Congress and senior executive and legislative branch officials from trading based on knowledge they obtained as a result of their jobs. It increased transparency by beefing up financial disclosure requirements on stock trades and posting the annual financial disclosure forms filed by federal officials on a publicly available online database.

Senate Bill 716 gutted the provisions of the STOCK Act that were designed to curb trading by 28,000 senior government officials that was based on market-moving non-public information. Sure, insider trading by members of Congress and federal employees is still prohibited, but the ability to verify that such trades took place has been compromised.

But hey, the legislation  is a blessing in disguise. And it is very well disguised.

By unanimous consent, Congress removed the online disclosure requirement for congressional and executive branch staff. Why waste time by asking members to go on record and cast a roll call vote when everyone agrees?

The move clearly violates President Obama’s 2008 campaign promise to allow time for public input by posting every bill Congress passes online for five days before he acts on the legislation. No big deal; it’s not like anyone in government is trying to hide anything.

The new law is a hopeful sign in the wake of all the wretched partisan excess we’ve seen of late. Can progress on gun control, immigration, and the nation’s fiscal woes be far behind?

originally published: May 14, 2013