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Economic View: Before Housing Bubbles, There Was Land Fever

April 20, 2013 by Leave a Comment

Fundamental factors like inflation and construction costs affect home prices, of course. But the radical shifts in housing prices in recent years were caused mainly by investor-induced speculation.

Anyone contemplating the purchase of a home wants an idea of where prices will be when it is eventually time to sell, perhaps many years later. For that kind of long-term forecasting, we need to understand the reasons for the recent, violent price cycle, and whether it is likely to repeat itself.

History has much to teach us about real estate bubbles, and some of it is reassuring. The land booms of New York State in the 1790s, Kansas in the 1850s, California in the 1880s and Florida in the 1920s all appear to have been relatively isolated events. And the cycle was not repeated in short order.

But those events were fundamentally different from the recent housing bubble. As relatively local phenomena, involving a fairly small number of adventurers, they did not consume most people’s attention. And a major cause can be easily identified: they developed from the promotion of supposedly valuable lots of land.

In fact, outside of New York City and a few urban centers, most speculators in past decades didn’t focus much on home prices. The term “housing bubble” was not even in their vocabulary. Land, not houses, was the object of their desires. They had “land mania” or “land fever.”

In a 1932 book, “The Great American Land Bubble,” Aaron M. Sakolski offers a vivid history of these manias, going back hundreds of years. There were repeated examples of promoters creating land subdivisions with vaunted plans for development, and advertising campaigns to sell them to investors.

As president in the 1790s, George Washington helped promote the sale of lots in his namesake capital city, and even bought some himself. Earlier in his life, he was a surveyor, and in 1763, he was a founder of the Mississippi Land Company, which was to acquire land, survey and subdivide it, and sell off individual farm and town plots to settlers. While his involvement in the development of Washington, D.C., was ultimately successful, his earlier company failed.

Land fevers tend to have a definite starting point and vector of contagion: they begin when a promoter subdivides land into lots small enough for many investors, and are usually accompanied by an advertising blitz with glowing descriptions of the future town and country, setting off a buzz and speculative excitement.

The Florida land bubble of the 1920s provided a turning point in public opinion, thanks to newspaper reporting around the country that made it clear that a mania was being artfully promoted. Anne O’Hare McCormick wrote in The New York Times in 1925: “What impressed me most was that every jungle and swamp and palmetto hummock from Lake City to Key West is staked out in city lots and offered for sale as building sites.” Such colorful writing can have a lasting impact. Many people now remember the image of the trusting Northerner unwittingly buying a lot in a Florida swamp. And the whole enterprise of subdivision, advertising and promotion of empty lots for sale, which made the manias possible, faded.

Shady operators were called purveyors of “premature subdivisions” and “defunct subdivisions.” Local regulators came to demand that development plans were at least intended to produce homes that people would actually live in, not sham operations to defraud ignorant investors.

The first widely documented, nationwide speculative fever attached to single-family homes, as opposed to lots, was in the housing boom of 1943 to 1950. But home prices remained relatively quiet for many years thereafter. Starting in the 1970s, home price bubbles became more frequent and severe. By the end of the 20th century, housing speculation became at least a pastime for many Americans.

THE great housing bubble of the 2000s was diffused widely through the population and didn’t owe its beginnings to any single promotional scheme. The bubble became so big apparently because of a number of kinds of financial promotion — of subprime mortgages, no-down-payment mortgages, securitized mortgages and other innovations.

It was also driven by confusion about supply: people without much experience with housing bubbles seemed to accept the old real estate argument that because land is finite, its price must rise. And they may have thought that when they bought a home, they were primarily investing in land.

If so, they were wrong, but not by as much as they would have been in previous decades. According to a 2007 study by Morris Davis of the University of Wisconsin and Jonathan Heathcote of the Federal Reserve Bank of Minneapolis, the share of nonfarm home value accounted for by land rose to 36.4 percent in 2000 from 15.3 percent in 1930. In an update, they put the percentage at 23.7 percent in the third quarter of 2012.

In fact, except in some densely populated areas, the value of a home has always been mostly in the structure, not the land. But because land’s fraction was rising until recently, people may have been deluded into thinking that investments in housing and land were one and the same.

Next week: demographic and cultural factors. Robert J. Shiller is Sterling Professor of Economics at Yale.

Article source: http://www.nytimes.com/2013/04/21/business/before-housing-bubbles-there-was-land-fever.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

Awaiting a Greek Payout

January 11, 2012 by Leave a Comment

That, more or less, is the bet that a growing number of investors are making now as they load up on Greek government securities that mature in March. That is when Athens hopes to receive a potentially make-or-break bailout payment — a lifeline of as much as 30 billion euros ($38 billion) from the European Union and the International Monetary Fund.

Greece’s new prime minister, Lucas D. Papademos, has warned that without that infusion, his country might well default on its debts, a move that might force Greece to leave the euro currency union.

So even though Greece is already effectively bankrupt, some investors are buying and holding the country’s short-term debt — gambling that, at least in March, Athens will make a point of paying its creditors. The risks those investors run, though, include the possibility that their very actions could help prompt the European Union and I.M.F from handing Greece the March bailout installment that would enable Athens to pay make those debt payments.

With the stakes so high, investors are betting that Europe will go the extra mile to keep Greece afloat. And if the price to do that means that taxpayer funds end up bolstering the returns of a few hardy speculators — then, as far as those investors are concerned, all the better.

Such a trade-off, however, carries ramifications that go well beyond the profit motives of its participants.

For months now, Greece has desperately been trying to persuade its private sector creditors — its bondholders that are not other governments — that it is in their interest to exchange their existing Greek bonds for longer-term securities, while accepting about a 50 percent loss as part of the bargain. The negotiations are known as the private sector involvement, or P.S.I., to employ the widely used shorthand.

A few months ago such a deal looked doable, as the large European banks that held most of this private sector debt, estimated to be about 200 billion euros, recognized that it was probably a better alternative than a default by Greece, which could wipe out their holdings. Moreover, the banks were vulnerable to political pressure from their home countries, where they have a big stake in remaining on good terms with the government and important officials.

But as the talks have dragged on, many of these banks, especially big holders in France and Germany, have sold their holdings. Among the buyers have been London hedge funds and other independent investors that are now questioning why they should accept a loss — if at least in the short run Greece keeps meeting its debt payments.

And as the number of such hedge funds holding Greek debt has grown, so has their ability to forestall a restructuring private sector agreement, thus bringing them closer to being able cash in on their high-stakes gambit.

“They are calculating that Greece will not default before March,” said Mitu Gulati, a sovereign debt expert at the Duke University School of Law and a co-author of a recent paper on the dynamics of the debt restructuring process in Greece.

Mr. Gulati points out that it is these investors that are in many ways behind the delay in executing a private sector involvement. deal. “If you own a bond that matures in March and it is January, then you have every incentive to delay,” he said.

Yet private sector involvement could prove a crucial component of the set of provisions that Greece must meet to receive its next lifeline payment from Europe and the I.M.F.

The private sector loss agreement was expected to lower Greece’s borrowing expenses by as much as 100 billion euros through 2014. The agreement was also supposed to reduce Greece’s ratio of debt to gross domestic product to 120 percent by 2020, down from about 143 percent today. In short, the private sector involvement represents a crucial pillar of the 199 billion euros in financing that Greece will need from outside sources in the next three years.

The German chancellor, Angela Merkel, the most vocal proponent of requiring some sacrifice on the part of private sector lenders, has been the most forceful political leader in pushing for a resolution of the negotiations. Mrs. Merkel met with Christine Lagarde, the managing director of the I.M.F., in Berlin on Tuesday. They issued no statement, but aides said Greek debt was high on the agenda. Ms. Lagarde was then to meet Wednesday with the French president, Nicolas Sarkozy, in Paris.

Article source: http://www.nytimes.com/2012/01/11/business/global/hedge-funds-the-winners-if-greek-bailout-arrives.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Swiss Bank Chief Quits After Uproar Over Trades

January 10, 2012 by Leave a Comment

FRANKFURT — The head of the Swiss central bank unexpectedly resigned Monday, saying that doubts about currency trades he and his wife made last year threatened to undermine his ability to focus on steering the bank through a global financial crisis.

The departure of the bank chief, Philipp M. Hildebrand, 48, cut short the public career of a prominent international advocate of stricter banking regulation. He resigned as the Swiss National Bank battled to keep the country’s currency from becoming so strong that Swiss companies could not sell products abroad.

But analysts predicted the central bank would maintain a limit it set on the franc’s appreciation against the euro, by vowing to buy unlimited amounts of foreign currency. “It may be that some speculators will try to test the market, but we’re convinced that the S.N.B. will continue to defend the exchange rate,” said You-Na Park, an analyst at Commerzbank in Frankfurt.

Appearing before reporters in Bern, the Swiss capital, Mr. Hildebrand said he would also resign immediately from several international posts, including vice chairman of the Financial Stability Board. The panel of central bankers and regulators has played a discreet but influential role in establishing rules for big international banks that are likely to be adopted by most large countries.

The resignation was a surprise. Just last week, Mr. Hildebrand offered a detailed defense of his conduct, releasing personal financial statements related to currency trades made last year. He appeared to have the support of the council that oversees the Swiss National Bank.

“Switzerland is losing an outstanding central banker with excellent international connections, which have brought great benefit to our country,” the Bank Council of the Swiss National Bank said Monday. Mr. Hildebrand said he could not prove that he did not know about a transaction of 400,000 Swiss francs by his wife, Kashya, last August, just before the Swiss National Bank stepped up its intervention in currency markets. At the time, the transaction was valued at some $500,000.

The bank released an e-mail from Mrs. Hildebrand to the couple’s financial adviser at Bank Sarasin in which she wrote, “We would like to increase our dollar exposure to 50 percent.” Mr. Hildebrand acknowledged that use of the word “we” would cause some people to doubt his version of events.

Mr. Hildebrand said he sent an e-mail to the adviser the next day ordering that no further trades be made without his approval, and he informed the S.N.B.’s general counsel of the trade.

“I never lied,” Mr. Hildebrand said. But, he said, “I can’t once and for all prove that it was the way I said it was.”

He said he was resigning because he feared the accusations might have been a burden “during a time when total focus is needed on the duties” of the office. “Credibility is a central banker’s most valuable asset,” he said.

Thomas J. Jordan, vice chairman of the S.N.B. governing board, will be the acting leader of the bank. Mr. Jordan is an economist who has worked at the bank since 1997. He is known for being slightly more hard-line on inflation than Mr. Hildebrand. But analysts said they did not expect a major shift in course.

“We do not expect any change in the conduct of the Swiss monetary policy,” Julien Manceaux, an analyst at ING Bank, wrote in a note to clients. The exchange rate floor “is here to stay, with or without Philipp Hildebrand,” he wrote.

For much of the last three years, the S.N.B. has battled to keep investors from bidding up the value of the franc, which is seen as a haven from global turmoil. The rise of the franc against the euro and other currencies threatened to make Swiss exports too costly on world markets.

Mr. Hildebrand said he would also leave the board of the Bank for International Settlements, an institution based in Basel, Switzerland, that acts as a clearinghouse for national central banks. He will also resign as one of two Swiss representatives on the board of governors of the International Monetary Fund.

“This is a step which saddens me greatly,” Mr. Hildebrand said. “I depart on good terms, and I would like to think I have been a damn good central banker.”

Mark Carney, the governor of the Bank of Canada and chairman of the Financial Stability Board, said in a statement that Mr. Hildebrand “has been instrumental in helping to manage the response to the global financial crisis and in developing major reforms to strengthen the resiliency and stability of the international financial system.”

While Mr. Hildebrand earned renown outside Switzerland, he had critics at home. The right-wing Swiss People’s Party accused him of squandering the national wealth on intervention to buy euros and other currencies, whose value nonetheless continued to fall against the Swiss franc, resulting in losses for the central bank.

The party acknowledged playing a role in Mr. Hildebrand’s ouster, serving as the conduit for information taken from Bank Sarasin. A former information technology worker there faces criminal charges of violating bank secrecy laws in the case.

Mr. Hildebrand probably will not be missed by many in the banking industry, either.

He is a former banker himself — he and his wife met while both worked at Moore Capital Management, a hedge fund in New York.

After the S.N.B. rescued the Swiss bank UBS in 2008, Mr. Hildebrand became a visible advocate of measures to limit the level of risk that banks take. He suggested Monday that his stands might have contributed to the vehemence of the attacks on him. He said a friend sent him an e-mail quoting Woodrow Wilson: “If you want to make enemies, change some things.”

Mrs. Hildebrand apologized to the Swiss people and to her husband, Reuters reported. “I failed my husband by not considering the perception of a ‘conflict of interest’ created by my purchase of dollars,” she said. “My husband is a man of the utmost integrity, and I deeply regret that my actions might have led anyone to question this.”

Article source: http://www.nytimes.com/2012/01/10/business/global/swiss-central-bank-chief-tenders-surprise-resignation.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

In Asset Sale, Greece to Give Up 10% Stake in Telecom Company

June 7, 2011 by Leave a Comment

Greece exercised an agreement to sell a 10 percent stake in the Hellenic Telecommunications Organization, the state-owned telecommunications company known as O.T.E., to Deutsche Telekom of Germany for about 400 million euros, or $585 million. The German company said it would honor the agreement.

While that sum will make only a small dent in Greece’s total debt of 330 billion euros, Lorenzo Bini Smaghi, a member of the executive board of the European Central Bank, said the country had marketable assets worth 300 billion euros and was not bankrupt.

“Greece should be considered solvent and should be asked to service its debts,” Mr. Bini Smaghi said Monday, signaling that the bank remained firmly opposed to any plan to allow Greece to stretch out its debt payments or oblige investors to accept less than full repayment, a so-called haircut.

Speaking in Berlin, Mr. Bini Smaghi offered an unusually detailed and forceful rebuttal to German leaders who are pushing for investors to share the cost of a Greek bailout.

Top officials of the European Central Bank usually avoid sparring with elected officials in public, and Mr. Bini Smaghi’s comments illustrated the intensity of the debate on how to keep Greece afloat.

Restructuring of Greek debt would be costly for European taxpayers, reward speculators and discourage Greece from modernizing its economy, Mr. Bini Smaghi said.

A sovereign debt restructuring “may have severe implications, both for the debtor’s and the creditor’s economies,” Mr. Bini Smaghi said, according to a text of the speech.

“Restructuring should only be the last resort, i.e., when it is clear that the debtor country cannot repay its debts,” he said.

Many economists say they believe some kind of restructuring is inevitable, and European governments have begun warming to the idea as a way to show their taxpayers that investors will also have to help pay for Greece.

But Mr. Bini Smaghi contested the idea that “there exists such a thing as an orderly debt restructuring.”

“More often than not, restructurings have been disorderly, harmful and fraught with difficulties,” he said.

Among other catastrophic effects, he said, Greek banks would be devastated and require bailouts that the Greek government would not have the money to finance. The problems would spread to other countries exposed to the Greek economy, and ultimately taxpayers in those countries would suffer, Mr. Bini Smaghi said. Greece would also not have the resources needed to make its economy competitive again.

“Imposing haircuts on private investors can seriously disrupt the financial and real economy of both the debtor and creditor countries,” he said.

German and French banks are the biggest holders of Greek government debt, according to data released Monday by the Bank for International Settlements in Basel, Switzerland. German banks held $22.7 billion of Greek government debt at the end of December, while French banks held $15 billion.

Mr. Bini Smaghi said a default would reward speculators who had bet on Greece’s failure, while punishing investors who had supported the country.

The European Central Bank itself would suffer if Greece defaulted, because since last year it has bought the country’s debt to stabilize bond markets.

The bank owns bonds valued at 75 billion euros from Greece, Ireland, Portugal and possibly other countries.

But the bank’s exposure is greater than that because it also accepts the bonds from banks in the euro area as collateral for loans carrying an interest rate of 1.25 percent.

On Monday, a British research organization, Open Europe, estimated the European Central Bank’s total exposure to the Greek government and Greek banks at 190 billion euros.

Critics say that the bank’s credibility has suffered because its stake in Greek debt creates a conflict of interest.

“Huge risks have been transferred from struggling governments and banks onto the E.C.B.’s books, with taxpayers as the ultimate guarantor,” said Mats Persson, director of Open Europe, an organization skeptical of the monetary union, backed by British business executives.

The European Central Bank declined to comment on Open Europe’s estimate of its exposure to Greece. The bank has never disclosed what kind of bonds it has purchased.

The Greek government has begun trying to raise money by selling stakes it owns in companies like O.T.E., but the privatization drive has encountered fierce resistance from citizens already weary of austerity measures.

Deutsche Telekom already owns a 30 percent stake in O.T.E. that it bought in 2008. A Telekom spokesman, Andreas Fuchs, said that the price for the 10 percent stake was still being calculated, but would be about 400 million euros.

Article source: http://www.nytimes.com/2011/06/07/business/global/07euro.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Bucks: Gold Is Not an Investment

May 24, 2011 by Leave a Comment

Carl Richards

Carl Richards is a certified financial planner in Park City, Utah. His sketches are archived here on the Bucks blog and on his personal Web site, BehaviorGap.com.

Gold is not an investment. It’s a speculation.

Investments are made by evaluating underlying value. Speculative bets are made by looking at the price of something and simply hoping the price goes up. Investing is about value; gambling is about price.

Gold has no real underlying value. I know there is a market for it. I know it is real, just like real estate was real in 2007.

But what is the value of a bar of gold?

It has no value except the one assigned by a herd of speculators. This is true for most commodities. They don’t actually produce anything. They are raw material. No value. No dividend. No cash flow.

Investing in gold is a very dangerous game right now. Whenever the price of something rises as much, and as quickly, as gold has, we need to stop and consider the end game. While in Florida last week, I was surprised to see guys standing on the street waving “We Buy Gold” signs. They looked exactly like the guys I used to see all over Las Vegas with the signs announcing open houses and touting real estate as a sure bet.

Remember when your brother-in-law told you that you had to invest in real estate because they weren’t making any more of it? Or the common justification people used — that at least with real estate you could see, touch and feel it? It was real! And how did that work out?

Now I hear people using the same argument for gold. It’s real. Tangible. And you can enjoy it because it’s pretty. But what does that have to do with investing?

Keep in mind that there are huge institutional players in the gold market right now. When they decide that the run is over, there won’t be time for you to run to your safe in the basement, pack up all your coins and gold bars, run to the local pawn shop and get rid of the stuff.

I have no idea where the price of gold is going, but for me it doesn’t matter. But if George Soros is selling while your grandmother is buying, you have to wonder who’s more likely to get hurt. The point here is that it (literally) pays to consider that the time to bet on gold was 2007. At this point if you are counting on the gold under your bed to fund your retirement, things could get very ugly.

Article source: http://feeds.nytimes.com/click.phdo?i=8173915756cbc550562fe4798148f7a1

Filed Under: Your Money Tagged With: , ,