…The International Monetary Fund (IMF) warned this week in its regular Financial Stability Report that global home prices are now stretched. Stimulus policies backstopped the market, creating moral hazards. Buyers now have a “can’t lose” feeling, pushing them to pay risky premiums for property. As a result, the agency now sees a significant downside in a worst-case scenario. Their model shows the worst-case scenario has double the downside compared to pre-pandemic.
Home Prices Have Been Soaring Across The World
Home prices across the globe have been rising during the recession, which is odd, to say the least. They found soaring home prices and record sales in advanced and emerging economies. The agency attributes this to supply asymmetries, low rates, and rising disposable income. These factors have combined to drive demand (and prices!) much higher.
Typically housing correction risks are due to loose lending, and a recessionary shock. They say this isn’t the case this time. Banks are in a much better position than they were during the Global Financial Crisis in 2008. Forbearance policies have also pushed delinquencies lower, skewing price growth to the upside. This gave homeowners a significant equity windfall, sometimes exceeding their household income.
Rapidly Rising Home Prices Across The Globe IS The Risk
Rapidly rising home prices and lofty gains are the risks. A boost to home equity gives some people a cushion to weather a storm, but also a euphoric high. Lenders eliminating the risk of default and high price growth created moral hazards. The thinking has shifted to, “if they can backstop prices now, they’ll always do it!”
The IMF warns this moral hazard is creating a risk of people believing any price is justified. “Sustained periods of rapid growth in house prices can create the expectation that such prices will continue to rise in the future, potentially leading to excessive risk-taking and rising vulnerabilities in housing markets,” wrote the agency.
People now think the risk of paying more later will always be greater than the risk of losing. This can lead to paying premiums that don’t make sense in practical terms. This can get out of hand pretty fast.
Global Home Prices Have “Significant” Downside Risk Now
Just how bad is the downside risk? “Significant,” said the agency when discussing its worst-case scenarios. In the latest report, the IMF said advanced economies can see a 14% drop in prices on average (rolling back 17% of gains). This is up from the 6% drop in the worst-case scenario pre-pandemic. The timeline for the bottom would be three years after the peak.
Downside Risks For Home Prices In Advanced Economies Rises
The current probability density of home price movements in advanced economies, compared to pre-pandemic risk.
The IMF elaborated, the downside risk is relative to the country’s fundamental misalignment. Countries with a low disconnect from fundamentals would see smaller declines, if any. Those with large disconnects would be overrepresented, and see greater drops. One also assumes the effectiveness of policy support plays a role. An inefficient market can only be extended so long before it spills over into other issues.
Market Inefficiencies May Begin To Spill Over And Undermine The Recovery
Speaking of market inefficiencies, why can’t they just prop up prices to infinity? Well, another risk stated in the IMF report is the impact on inflation. If high home prices trickle into rents, this drives inflation higher. Shelter costs are the largest component of the inflation basket. Everyone needs shelter, including all of the producers and service people. As their costs rise, so do the input costs of goods and services.
The higher cost of living, especially inflation not captured by CPI, becomes a big drag. As the cost of living rises, more capital is diverted from spending into essentials. Since one person’s spending is another person’s income, it can undermine recovery. A slower recovery (or double-dip recession) would end up impacting home prices anyway.
Remember, global home prices are rising, but not to the same extent everywhere. Canada and Germany’s home prices made much sharper gains than other G7 countries…
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How a New Orleans community land trust is providing permanently affordable housing and supporting Black entrepreneurs
The “Rebirth of 1800 St. Bernard” took place last year on a chilly December day by New Orleans standards. Attendees wore protective masks and socially distanced—a difficult feat with at least 100 people present. That day represented more than a…
By Julius E. Kimbrough, Jr.
The “Rebirth of 1800 St. Bernard” took place last year on a chilly December day by New Orleans standards. Attendees wore protective masks and socially distanced—a difficult feat with at least 100 people present. That day represented more than a groundbreaking for residents of New Orleans’ Seventh Ward; it promised the revival of a community anchor in the majority-Black neighborhood that had been decimated by Hurricane Katrina more than 15 years prior.
At the center of this rebirth was the Vaucresson Sausage Company: a small business on St. Bernard Avenue founded by a Black family in New Orleans 120 years ago. Vaucresson Sausage had been a long-standing community anchor in the Seventh Ward, but flooding caused by levee failures following Hurricane Katrina transformed the building from a lively commercial space to a derelict and blighted property. For the past 15 years, Vance Vaucresson, the third-generation owner of the business, had struggled to find funding and partners willing to assist in the redevelopment of the building—a challenge that many Black business owners face nationwide. As the years multiplied, the Seventh Ward lost more of its Black-owned businesses and began to experience the displacement of long-time residents.
It is with these challenges that the mission of the Crescent City Community Land Trust (CCCLT) intersects with Vance Vaucresson’s business goals and the Seventh Ward community. We saw the redevelopment of the sausage factory as not just about brick and mortar redevelopment, but as a pathway to restore Black businesses, stimulate economic development, reinvigorate culture, and provide permanently affordable housing.
Not your typical community land trust
CCCLT focuses on projects that promote racial equity, pro-active community stewardship, and permanently affordable commercial and rental spaces. We were founded in 2011 as a direct response to the city’s housing crisis: Katrina and the levee failures had almost overnight damaged or destroyed 70% of the city’s housing stock. More than five years later, there was little improvement—with housing prices skyrocketing and more and more families, especially Black families, becoming cost-burdened.
Black people developed the community land trust (CLT) model more than 50 years ago as a way to preserve and expand land holdings through collective ownership. Today there are at least 277 CLTs in the United States. Here’s how CLTs work for single family homes:
- The CLT owns and develops the land and the trust is made up of community members.
- A CLT purchaser buys the structure, and leases the land (at CCCLT, the lease is normally for 99 years).
- Because the sales price is based on the structure and not the property, it is much more affordable than market-rate homes in the same area.
- This allows for the family to build equity in the structure (i.e. generational wealth) and for the community to preserve affordability because when the home is resold, it’s done under a formula that splits the anticipated increase in property values to both the owner and the community as represented by the land trust.
Unlike the typical CLT, CCCLT recognizes the need not only for more affordable homeownership—but for subsidized apartments, incubator-like commercial spaces, community stewardship, and housing advocacy. For instance, our first major project was the co-development of the historic Pythian building in downtown New Orleans—which had been a mecca for Black-owned businesses, entertainment, and culture in the early part of the 20th century. We worked with co-developers to revitalize the building—which had fallen into disrepair—into 69 apartments, including 25 affordable workforce rate apartments. Unlike many affordable apartment projects that use tax credits and go back to market rate once their compliance time frame has passed, these 25 apartments are permanently affordable.
While the majority of CLTs are focused on single family housing, our equitable commercial developments give start-up entrepreneurs affordable leases, allowing the community to help preserve small family-owned businesses like Vaucresson. A recent Brookings report detailed the broad promise of commercial community ownership models, citing their ability to support the growth of local businesses and distribute wealth intergenerationally.
The importance of stewardship
For all the potential benefits, the redevelopment and co-ownership of brick and mortar buildings is inadequate without proactive community stewardship: intentional efforts to empower residents with information and tools to grow intergenerational wealth through higher incomes, asset appreciation, and entrepreneurship.
We recently completed the region’s first single-family CLT home community in the Lower Ninth (L9) Ward—where 90% percent of our buyers are Black, many are native to the neighborhood pre-Hurricane Katrina, and many are first-time homebuyers. The community stewardship with our future L9 buyers began long before these CLT homes were sold. Working with our partners, Home by Hand, Neighborhood Development Foundation, Capital One, HOPE Credit Union, and HomeBank, we trained prospective homebuyers on the CLT model of affordability, provided a 12-hour homebuying workshop, and direct counseling to improve credit issues. Research indicates that this third-party support and training can help residents withstand economic shock and retain homeownership.
Stewardship is also at the heart of the 1800 St. Bernard project. Vaucresson Sausage had been a robust small business before Hurricane Katrina, but when the family tried to access capital and assistance to redevelop their property in the wake of devastation, they were shut out along with many other Black businesses in the post-Katrina world. The Vaucresson’s do not need CCCLT’s help to run their sausage making business, but what we bring to the table is pre-development capital; relationships with funders, financiers, and the local real estate community; knowledge of real estate development; and help in growing their brand—with the ultimate end goal of growing intergenerational wealth. Now, Vance Vaucresson has that same knowledge, and as his partner, CCCLT will be there in the long term. Because of this partnership, 1800 St. Bernard will open in early 2022— featuring Vaucresson Café Creole and two permanently affordable apartments.
The Community Land Trust 2.0
This idea of the “CLT 2.0”—including a focus on renters and commercial spaces, not just single family homes—is gaining popularity throughout the nation. Black communities and other marginalized groups are evolving CLTs and expanding community ownership in real estate to fight structural racism and produce opportunities for wealth generation. CCCLT is proud to be part of the new movement.
You cannot pass a good time in New Orleans without serving good food—even during a pandemic. There should be no surprise about what we served at the “Rebirth of 1800 of St. Bernard”: Vaucresson hot sausage po-boys and their Creole jambalaya—the best New Orleans has to offer. But as good as our city’s cuisine is, CCCLT wants New Orleans to be known for more than just food and good times. We want to be known for how our city solves its affordable housing crisis, how we assist emerging, often under-resourced entrepreneurs of color, and how we help families and those entrepreneurs move toward generational solutions and generational wealth.economic shock pandemic real estate
Peter Schiff: Transitory Permanence
Peter Schiff: Transitory Permanence
The inflation that we were emphatically told would be transitory and unmoored continues to persist and entrench. As the troubles gather momentum Washington is doing its best to ignore..
The inflation that we were emphatically told would be transitory and unmoored continues to persist and entrench. As the troubles gather momentum Washington is doing its best to ignore the problem or actively make it worse.
The latest batch of data shows that the Consumer Price Index rose 5.4% in September, the 5th consecutive month that year over year inflation came in at more than 5%. The figure rises to 6.5% if we project the inflation levels of the first 9 months of 2021 to the entire calendar year. The last time we had to contend with numbers like these, Jimmy Carter was telling us all to put on our sweaters.
Recent developments should be sounding the alarms. Whereas earlier in the year inflation was largely driven by supercharged price increases in narrow sectors, such as used cars and hotel rooms, it’s now occurring in a much wider spectrum of goods and services.
In September, the cost of used autos fell month over month (but are still up 24% year over year), but that didn’t help the overall CPI, which saw increases just about everywhere else. Over the past 12 months: beef prices are up 17.6%, seafood prices up 10.6%, home appliances up 10.5%, furniture and bedding up 11.2%, and new cars up 8.7%.
Even more alarming is that oil is up over $80 per barrel for the first time in almost 10 years and many analysts see $100 in the near future. That has translated to more than a $1 increase in per gallon gasoline prices, a 50% increase in a year. Home heating oil prices are already up 42% year over year and are expected to spike up again when winter demand peaks. For many low-income residents of the North and Upper Midwest, these types of increases could be very hard to bear, particularly if we have a cold winter.
As I have said many times before, the biggest flaw in the way we measure inflation (and there are many of them) is how the government deals with housing. While the Case Shiller Home Price Index is up more than 20% year over year, and national rents are up more than 12% over the same time frame, the CPI has largely ignored these increases in housing costs. Instead, the government relies on the dubious and amorphous concept of “Owners Equivalent Rent” which asks homeowners to guess how much they would have to pay to rent a house of similar quality to the one they to the one they own. Conveniently, that meaningless figure, which constitutes almost 30% of the total CPI, is only up 3% year over year. If actual rent increases were used instead, the CPI would be almost three full percentage points higher.
In fact, relying on the government to tell us the truth about inflation is a bit like asking high school students to grade their own report cards. There are countless incentives that exist institutionally for the government to underreport inflation. It allows them to make stealth cuts to Social Security, to create higher nominal incomes and capital “gains” to tax, and to minimize the interest rates it pays on over $28 trillion in debt as inflation. But since GDP is adjusted for inflation, it also makes economic growth appear higher than it really is. The methodology for computing the CPI index was specifically designed to minimize the impact of rising prices. But I don’t believe that this is a conspiracy. Once you understand how institutional bias works, how careers are made by finding new plausible ways to underreport inflation, and how they are ruined by claiming the opposite, you can see how the numbers get farther away from reality with each passing year.
But the disconnect has become so obvious that top officials at the Federal Reserve and the Treasury Department have begun warning the public to prepare for higher prices. In her latest exercise of goal post moving, Treasury Secretary Janet Yellen said, “I believe that price increases are transitory, but that doesn’t mean they’ll go away over the next several months.” We can expect that months will soon turn into years, as the definition of “transitory,” gets ever more elastic.
This week the government announced that the inflation-adjusted cost of living increases for Social Security payments in 2022 will be 5.9%, the highest such increase since 1982. In addition to throwing yet another log on the government deficit fire, the increase is a direct admission that inflation is not going away.
Despite the marginal increase in wages that the Biden Administration likes to talk about, or the cost of living increases for our seniors, the average American makes less money. After adjusting for inflation real hourly earnings in the United States have dropped 1.9% so far this year. This is the stagflation that I have been warning about. Welcome back to the Carter Administration. We can expect Joe Biden to break out our sweaters if home heating bills get too high this winter.
Team Biden has been working overtime to suggest that the price increases and supply shortages are resulting from temporary bottlenecks at port facilities. Imports are particularly sensitive as our trade deficit has widened to record levels in recent months, making Americans ever more reliant on overseas goods. To combat the problem the Administration has ordered that some ports begin to operate 24 hours a day. (Left unsaid was the very fact that American ports – due to the strength of the Longshoreman’s Union – operate at very spare schedules versus foreign counterparts).
But the effect of this order will be far milder than the Administration hopes. Firstly, it is unclear how many port facilities will comply. Some have noted for instance that the Port of Los Angeles agreed to go 24 hours at only one of its six docks. (Currently, the wait time to enter that port is approaching three weeks). And secondly, most industry analysts note that the problem is not the hours of the dock facilities themselves but the shortfalls of the domestic trucking industry to move the goods once they arrive. Not only are we struggling with a lack of drivers, who struggle with government regulations that sharply limit the number of hours they are allowed to drive, but a lack of shipping containers to put back on the ships. Since many ships refuse to leave unloaded, which greatly reduces their profitability, America needs to first solve a host of problems to get the ports in better order.
But what we are seeing in a larger sense are the fruits of 15 years of bad investments in things that we don’t need and very little investment in the things we do. The ultra-low interest rates that have become the bedrock of our bubble economy have channeled investment capital into the wrong places. These low rates have encouraged corporations to borrow recklessly to buy back shares and inflate stock prices. Such moves have enriched shareholders but have done little to expand productive capacity.
Low rates have also led to runaway speculation in untested and unneeded industries. We have seen massive investments in social media, e-commerce, entertainment, cryptocurrencies, financial technology, and most recently Non-Fungible Tokens (NFT’s). As a result, we have really built out our capacity to post videos, buy things online, and pay for them in new ways. But we have invested comparatively little in boring industries like manufacturing, energy, transportation, and agriculture. As a result, we have all sorts of ways to buy stuff, and gimmicks for how to pay for it later, but we lack the capacity to produce and distribute all the goods we want to buy in the first place.
What’s worse is that given the current policies of the Biden Administration, none of that is going to change anytime soon. His expanded social safety net programs, overly generous unemployment benefits, higher taxes and regulation, and unneeded vaccine mandates are discouraging workers from working and employers from hiring. The American workforce is more than five million workers smaller than it was before the pandemic. That is not an accident. If the Democrats get their caucus together long enough to pass even a slimmed-down version of Biden’s Build Back Better plan look for all these problems to get worse.
With fewer workers working, supplies of goods and services have diminished. Government will look to replace the lost production with even more monetary and fiscal stimulus, which just leads to more inflation, financial speculation, and rising asset prices, largely benefiting the wealthy, and falling the hardest on the poor who have no appreciating assets to compensate for the rising cost of living.
But rather than fixing the problem, our current leaders are mostly worried about equity and diversity. The five leading candidates to replace Jerome Powell, if he is not renominated, all are either female or African American. Now I have no problems with hiring women or minorities in key positions. But if all your candidates come exclusively from those groups, then it’s clear that identity is more important than competency at this moment in time. But if there was ever a time that we needed competence, it’s now.
UK Banks – Digital Dinosaurs
UK Banks – Digital Dinosaurs
Authored by Bill Blain via MorningPorridge.com,
“Tuppence wisely invested in the bank…”
As UK bank reporting season kicks off, the dull, boring, predictable UK banks should look good. But the reality…
“Tuppence wisely invested in the bank…”
As UK bank reporting season kicks off, the dull, boring, predictable UK banks should look good. But the reality is they are dinosaurs – their failure to digitise and evolve leaves them vulnerable to tech-savy FinTechs and Challenger filling their niche. If the future of modern finance is a Tech hypersonic missile… British Banks are still building steam trains.
Today see’s the start of the UK bank reporting season. Yawn….
I wrote a piece for the Evening Standard y’day – Another set of numbers to disguise the rot. (I’ve reused some of it this morning – lazy, eh?) Exactly as I predicted in that note, Barclays came in strong this morning with a decent lift from its investment banking businesses. Lloyds and HSBC will also produce acceptable numbers and limited losses on post pandemic recovery. The sector outlook looks positive, the regulator will allow them to increase dividends, and there is higher income potential from rising interest rates.
But… would you buy the UK banks?
They face substantial market and ongoing pandemic risk. The cost of economic reality falls heavy across them all. This morning the headlines are about Medical groups screaming out for a renewal of lockdown measures to protect the NHS – a move that will 100% nail-on recession and cause multiple small businesses to give up. The threat of recession in the UK is pronounced – exacerbated by global supply chain crisis and risks of policy mistakes. The worst outcome for banks would be stagflation resulting in exploding loan impairments.
Lloyds is the most vulnerable to the UK economy – hence it’s underperformed the others. Even without renewed Covid measures, potential policy mistakes by the Bank of England in raising interest rates too early, or by government by raising taxes and austerity spending, will hit business and consumer sentiment hardest, causing the stock prices to crumble back towards its low back in Sept 2020 when it hit £24.72. It’s got the largest mortgage exposure – but no one really expects a significant housing sell-off. (When no-one expects it – is when to worry!)
If you believe the UK’s economic potential is under-stated, then Lloyds has the best upside stock potential among the big three. If the economy recovers strongly, Lloyds goes up. If it stumbles, then so will Lloyds!
Barclays is a more difficult call. It’s a broader, more diversified name. It retains an element of “whoosh” from its markets businesses – which have delivered excellent returns from its capital markets businesses fuelled by low rates, but it also runs a higher-than-average reputational risk for generating embarrassing headlines. But, when the global economy normalises, higher interest rates will impact the fee income of all the investment banks, thus impacting Barclays to a greater extent than Lloyds. Barclay’s international business gives it some hedge against a UK economic slide.
HSBC is the most complex call. The UK banking operation is a rounding error compared to the Bank’s Hong Kong business. The bank is pivoting towards Asia, orbiting China and other high-growth Far East economies where it seeks to attract rising middle-class wealth. It’s underperformed due to a distaste among global investors for its China business, but also the perception it’s just too big a bank to manage effectively.
If its China strategy was to pay off, it will be a long-term winner. But that’s no means certain – Premier Xi’s crackdown on Chinese Tech threatens to morph into a China first policy, and the space for a strong foreign bank in China’s banking system looks questionable, even as the developing crisis in real-estate could pull it lower.
Ok – so good for UK banks…
Whatever the respective bank numbers show this week, the banks will remain core holdings for many investors. Generally, big banks are perceived to be “relatively” safe. Regulation has reduced their market risk profiles, and strengthened capital bases since the post-Lehman unpleasantness in 2008 which saw RBS rescued by government.
Conventional investment wisdom says the more “dull, boring and predictable” a bank is, the more valuable it will be perceived in terms of stable predictable dividends, sound risk management, and for not surprising investors. Strong banks are perceived to be less vulnerable to competition with deep moats around their business.
Since 2008 that’s changed – in ways the incumbent banks have completely missed. The costs of entry have tumbled as banking has evolved into a completely different service. New, more nimble Fin-Techs like Revolut, digital challenger banks such as Starling, and cheaper foreign competitors, including the Yanks, are not only eating their lunch, but dinner as well.
The old established UK banks don’t seem to have a clue it’s happening. These incumbent banks look like dinosaurs wondering what that bright shiny light getting bigger in the sky might be. Despite proudly boasting of hundreds years of history, they are constrained by old tech ledger systems and never built centralised data-lakes from their information on individuals or the financial behaviours of crowds to improve and develop their services and income streams.
The future of banking is going to be about Tech and how effectively banks compete in a marketplace of online digital facilities and services. Banks that you use tech smartly will see their costs tumble, freeing up resources to do more, better! (When I ran a major bank’s FIG (Financial Institutions Group) about 100 years ago – the best banks were those with lowest cost-to-income ratio!)
There is an excellent article outlining FinTechs and Challengers from Chris Skinner this morning: Europe’s Challenger Banks are Challenging (and worth more than the old names). Let me pluck a bite from his piece: “Revolut is the most valuable UK tech start-up in history and the eighth biggest private company in the world, worth an estimated US$33 billion, according to CB Insights. Revolut has more than 16 million customers worldwide and sees over 150 million transactions per month.”
The new generation of nimbler Fin Techs and Challengers can innovate product offerings with sophisticated new systems and software. In contrast, UK bank IT departments are engaged in digital archaeology. I understand only 17% of Senior Tech positions are held by women. Within the banks, I’m told its still a boys club, where the best paid IT jobs are for ancient bearded D&D playing coders brought into to patch 50 year-old archaic systems. Legacy systems leave the big banks with impossible catch up costs.
It’s probably unfair to say the big UK banks don’t know what’s happening – their management can’t be that unaware? Surely not…. But…. Maybe..
Although the banks brag how well diversified they are with over 37% of UK board members female – how much have they really changed? Hiring on the basis of diversity is a fad. At the risk of lighting the blue-touch paper and this comment exploding in my face, I would hazard to suggest the appointment of senior ladies who’ve worked their way up the existing financial system simply risks confirmation-bias on how things are conventionally done in banking.
They might do better hiring outside movers and shakers – rather than listening to themselves.
The bottom line is its not just their failure to innovate tech that’s a crisis. Over the years the UK banks have become increasingly sclerotic – slow to shift and adapt. The middle to senior levels of banking are hamstrung by bureaucracy, a satisficing culture, stifled innovation, a compliance fearful mindset, and senior management fixated on impressing the regulators first and foremost.
If the future of modern finance is a Tech hypersonic missile… British Banks are still building steam trains.
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