Exclusive: Housing bubble brewing – prices are now unaffordable for middle earners, says Business Secretary Vince Cable

by Andrew Grice

Business Secretary warns most families are ‘nowhere near’ able to afford homes at average prices as failure to build more homes condemned for producing property bubble Home ownership has now become “unaffordable” to people on middle incomes, Vince Cable admitted, as he warned that the bubble developing in the housing market could be more serious than during the last property crash. Amid growing tension between the Conservatives and Liberal Democrats over rising house prices, the Business Secretary told The Independent: “The fundamental problem is a chronic imbalance between supply and demand. A recovering mortgage market is just fuelling demand again.” Mr Cable warned: “A family on average income is nowhere near able to afford a house at the average price. Property has become much more unaffordable for people on middle incomes.” The Lib Dem minister said that, in the mid-1990s, the average house price was three times average earnings. Today, at roughly the same stage of the economic cycle, the ratio is about 5.5. It rose to more than six before the crash of 2007. The Lib Dem minister hit back at comments by Kris Hopkins, the Conservative Housing Minister, who told the BBC’s Newsnight programme that rising house prices are a good thing. Mr Cable said: “I do not agree with Kris Hopkins that rising house prices are a good thing. If you are an owner-occupier who has paid off your mortgage, it is an increase in your paper or real wealth. But if you are a young family trying to get into the housing market and it is unaffordable, it is an extremely bad thing". Although Tory ministers will be infuriated by Mr Cable’s comments, his warning will be taken seriously. As the Lib Dems’ economic spokesman during the previous Labour Government, Mr Cable was dubbed “the sage of the credit crunch” after warning that the housing market would collapse, calling for the nationalisation of Northern Rock and predicting the banking crisis. The Business Secretary believes the country now faces a different – and possibly even worse – housing market crisis. Last time, the problem was mortgage lenders being over-exposed. This time, he said, the “real issue” is the need for more housebuilding. Mr Cable added: “We have taken some very good measures in government like allowing those areas with severe need for additional housing to increase borrowing against their assets to build new houses. We’ve made financial help available to small businesses in the building trade to increase competition and introduced one for one replacement of council housing every time one is sold. The number of council houses actually fell under Labour. But more needs to be done. We must build many more houses - that and only that is the solution to our housing problem.” His comments will be seen as a move by the Lib Dems to champion voters in their 30s who are struggling to get on to the housing ladder. Last month’s Budget, which included sweeping reforms on pensions and savings, was seen as a pitch by the Conservatives to the over 50s. Mr Cable was alarmed by this week’s survey by Nationwide Building Society, which found that the “house price gap” between London and the rest of the country is at its widest since records began in the 1970s. Prices in London have risen by 18 per cent to an average of £362,699 in the past year. The average in the rest of the UK is £178,124, an increase of 9.2 per cent over the same period. Some Lib Dems are worried that the Government’s Help to Buy scheme, which guarantees 95 per cent mortgages, may be contributing to a housing bubble by encouraging people to buy rather than miss out on rising property values. They hope the Bank of England, which is monitoring the programme, may call for it to be limited to regions outside London and the South East and for the £600,000 property price limit to be halved. George Osborne admitted the Government needed to be “vigilant” about house prices but rejected criticism that Help to Buy had acted as "fuel" for a surging market. The Chancellor told the Treasury Select Committee: “I think we have to keep a close eye. Clearly house prices have started to rise. But that is why we have created the [Bank’s] Financial Policy Committee.” Treasury figures show that, a year after its launch, Help to Buy has enabled 17,395 home sales to go ahead. The average value of the property sold is £194,992, with 88 per cent going to first-time buyers and 77 per cent outside London and the South East. Mr Hopkins insisted that Help to Buy accounted for only 0.5 per cent of transactions in the last quarter of last year. "We are nowhere near the peak at this moment in time," he said. “I don't agree that we are stoking demand, I certainly agree that we need more housing.” He admitted the country was "woefully short" of housing supply.

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Hot Air Hisses Out Of Housing Bubble 2.0: Even Two Middle-Class Incomes Aren’t Enough Anymore To Buy A Median Home

by Wolf Richter

As home prices have soared in cities around the country, sales have cratered. The weather has been blamed, though the weather has been gorgeous in California where sales have crashed too, even in temporary boom town San Francisco. The “lack of inventory” and other excuses have been dragged out as well. In reality, homes have gotten too expensive…. Even for hedge funds, private equity funds, REITs, and other forms of Big Money with access to the Fed’s limitless free juice. They’d become the primary buyers over the last two years, gobbling up vacant homes sight-unseen by the thousands, in order to get them off the closely watched for-sale list and shuffle them over to the ignored for-rent list, where they might languish undisturbed. The hope is that they might rent them out somehow and sell them later at a big fat profit, to the dumb money via a ridiculously hyped IPO. But now their business model has collapsed. “Prices have gotten to the stage where we cannot buy a house, renovate it, rent it, and still make a reasonable return,” explained Peter Rose, a spokesman for Blackstone Group, a private equity giant whose real-estate division, Invitation Homes, has grown in two short years from nothing to the largest landlord in the country with 41,000 rental single-family houses to is name. “There was a moment in time where it made sense,” Rose said. Not anymore. Blackstone already cut its purchases in California by 90% last year. It wasn’t alone. Another mega-buyer with access to nearly free money, Colony Capital, is doing the same thing. Oaktree Capital is trying to dump its portfolio of 500 homes before prices head south. “Private capital made a lot of money early, and now they’re starting to pull back,” Dave Bragg, head of Residential Research at Green Street Advisors, told the LA Times. “Home prices are up significantly, and houses are definitely less attractive.” With these mass-buyers out of the market, volumes have collapsed to a four-year low, according to Redfin, an electronic real-estate broker that covers 19 large metro areas around the country. Because, let’s face it, who can still afford to buy these homes? Forget first-time buyers, the crux of a healthy housing market. In February, they only bought 28% of the homes, down from 30% a year earlier, down from the three-decade average of 40%, and down from the mid-40% range during good times. That hapless lot has been pushed out of the market a while ago. And the middle-class household, supported by one earner? Teachers earning on average $69,300 in my beloved state of California, are facing a housing market where the median home lists for $485,000. With their salary, they can only afford a $260,000 home – or only 17.4% of the listed homes. Where exactly are all these high-income people who’re supposed to buy the remaining 82.6% of the homes? Sad fact: they don’t exist in those large numbers. In the inland areas, teachers have a better chance for being able to buy a median home. But forget it in the coastal areas. My zany city of San Francisco topped the list: exactly 0% of the homes listed were within reach of a teacher’s salary [read.... California Housing Bubble: Now Even Teachers Can No Longer Afford To Buy A Home]. Turns out, even two middle-class incomes aren’t enough anymore for a median home in many cities around the country. Real wages that have stagnated for the last 25 years – thanks to that wondrous elixir of inflation – are now colliding with soaring home prices. Based on non-distressed homes listed on the Multiple Listing Service as of March 30, Redfin reports that in 40 large cities, only 10% of the homes are affordable on one median salary. It defined an affordable monthly payment as 28% or less of gross monthly income. And it found that “just 41% of homes currently for sale across 40 US cities are affordable for a family earning two median incomes.” In San Francisco, where the median home lists for nearly $1 million, and in Santa Ana in Southern Cal, only 7% of the homes were within reach of a family with 2 median salaries. In San Diego 9%, in LA 12%, in Miami 19%, in Denver 23%, in Nassau (Long Island) 24%, in Austin 32%. There are some cities where the fiasco is less pronounced. For example, in Atlanta a family with two middle-class incomes can afford 59% of the listed homes – but even there, who is going to buy the other 41% that are priced beyond the reach of two middle-class incomes?! The richest 1%? Or people who have to overextend themselves and become house-poor for years to come, assuming that another housing downturn, or a layoff, or an illness doesn’t wreck their homeowner status? And where the heck are all the high-income people who will buy the median homes when investors, speculators, and PE firms that have become the largest landlords in the country are pulling up their stakes? There aren’t that many high-income people around, and they don’t like to live in median homes. Sales are already heading south. And last time this debacle happened, prices followed soon after. So this is going to be, let’s say, an interesting scenario. And a direct consequence of the Fed’s policies that engineered an environment where Wall Street can borrow unlimited amounts for nearly free, buy all manner of assets, drive up prices, take huge risks that it then shuffles off at peak valuations to other entities, hopefully to the unsuspecting public via over-priced IPOs, toxic synthetic structured securities of the kind that blew up the banks during the financial crisis, and other shenanigans that end up getting stuffed into conservative-sounding funds that people buy for their retirement. It starts here: evictions in San Francisco hit the highest level since 2001, when the dotcom bubble was disintegrating. Everything these days gets benchmarked against the last bubbles: the dotcom bubble that blew up in 2000, the housing bubble that blew up in 2007.

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China's Problems Are The World's Problems

by STA Wealth Management

Insight Newsletter - April, 2014

US corn harvest may prove bigger than sowings data suggest

by Agrimoney.com

The switch away from corn by US farmers may end up proving less momentous than it first appears. Sure, it looks like corn has fallen well out of favour, with US growers expected to cut sowings of the grain by 3.9%, or 3.67m acres, to a four-year low of 91.7m acres. But the impact on corn production may not be as large as the planting data imply, even before getting to the important issue of summer weather risks. What history says There are two reasons not to expect such a sharp drop in corn production. The first is that, for corn, history suggests that today's planting figure may well be an underestimate � March planting reports have a habit of being too downbeat on corn's appeal. OK, that was not true a year ago, when the March estimate of 97.3m acres turned out to be 1.9m acres too big. But 2013 witnessed unusually difficult spring sowing conditions, thanks to persistent rains. For 2012, the March sowings forecast was 1.3m acres too low. In fact, in seven out of the past 10 years, the final sowings figure has beaten the March estimate. Where acres are being lost The second dynamic to factor in is where corn area is being lost. The farmers turning away from corn this time are, to a great extent, in area less-suited to the grain. Certainly, plantings are being cut in many higher-yielding areas too, notably in the productive state of Nebraska. But the south eastern states and, especially, Texas, where growers are switching large areas to cotton, have a more patchy long-term record of beating the average yield. And the biggest loss of corn acres is in the northern Plains, where growers have consistently fallen short of their peers elsewhere on corn yields, especially in North Dakota, which alone is losing 900,000 acres of corn sowings this year. By contrast, plantings are being gained in Iowa, where corn crops have yielded more than the average even in 2013, when handicapped by worse weather than other parts of the Corn Belt. Soybean switch Of course, the opposite effect may be seen in soybeans, for which March sowings data have a habit of overestimating final plantings, and which North Dakota farmers are scrambling too in their switch from corn. The state, which is best known as a wheat producer, has a history of producing well-below-average yields of soybeans, as well as corn. Indeed, it is testimony to the standing at which wheat has fallen in growers' affections that farmers on land best suited to the grain opt for row crops instead, even with the likelihood of well-below-par yields.

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Hedge funds' bullish spree on ags tests 'record'

by Agrimoney.com

Hedge funds' raised the stakes in their bets on agricultural commodity prices for a ninth successive week, one the longest sprees on record, as a  US corn planting hopes added to concerns over weather setbacks to a number of crops. Managed money, a proxy for speculators, raised its net long in future and options in the top 13 US-traded agricultural commodities by more than 49,000 contracts in the week to last Tuesday, according to data from the Commodity Futures Trading Commission regulator. Hedge funds have raised their net long position – the extent to which long holdings, which benefit when prices rise, exceed short bets, which profit when values fall - in agricultural commodities every week since early February. That nine-week spree matches the longest unbroken run of bullish positioning on records beginning in 2006, with the last time occurring in 2006 itself. Strong quarter The rise in long bets also underlined a bullish finish for a quarter which proved unexpectedly strong for agricultural commodity prices, as concerns over drought in Brazil's coffee belt sent arabica coffee futures soaring more than 60% in New York, while dryness in the US Plains lifted wheat prices 19% in Kansas City.

Lean hog futures rose nearly 50%, lifted by concerns over losses to the US herd from porcine epidemic diahorrea virus (PEDv). Grain prices also received a boost from tensions in Ukraine, a major corn and wheat exporter, culminating in Russia's annexation of Crimea. And the quarter ended with data showing that US corn stocks were lower than investors had anticipated, with US farmers' plans for sowing the grain this year below expectations too. Over the quarter, hedge funds raised their net long in the main US ag contracts by nearly 950,000 lots, to 1.17m lots.

Speculators' net longs in grains and oilseeds, Apr 1, (change on week) Chicago corn: 275,836, (+36,549) Chicago soybeans: 193,446, (+8,017) Chicago soymeal: 72,679, (+2,106) Kansas wheat: 45,709, (+2,757) Chicago wheat: 45,025, (+8,533) Chicago soyoil: 11,864, (-9,834) Sources: Agrimoney.com, CFTC

Surprise data In the latest week, to April 1, the increase in the managed money net long was driven by corn, in which hedge funds increased their exposure to rising Chicago prices by more than 36,000 lots to 275,836 contracts, the highest since late 2012.

Speculators' net longs in New York softs, Apr 1, (change on week) Raw sugar: 121,827, (+7,389) Cocoa: 69,650, (+702) Cotton: 63,305, (-4,711) Arabica coffee: 39,956, (-3,460) Sources: Agrimoney.com, CFTC

The US Department of Agriculture on March 31, in a much-anticipated report on domestic grain stocks, revealed inventories of corn which, while u0 30% year on year to 7.01bn bushels, were 90m bushels below market expectations. The USDA also curtailed expectations of 2014 corn production prospects by estimating sowings at a four-year low of 91.7m acres, down some 3.7m acres year on year. However, the figure was more than 90m bushels below market expectations, with traders expecting inventories to have shown a bigger rise after last year's record harvest. And the USDA, in a separate closely-watched report, curtailed expectations of corn harvest prospects for this year by estimating sowings at a four-year low of 91.7m acres, down some 3.7m acres year on year. Sweet on sugar In Chicago, hedge funds also raised their bets on rising wheat prices, lifting their net long position above 45,000 contracts for the first time in 16 months.

Betting on rising wheat futures has been a winning strategy for much of the time since early February, when Chicago futures began a recovery from three-year lows, although prices eased back last week, undermined by ideas of rain to refresh drought-hit US winter wheat seedlings. Among New York-traded soft commodities, hedge funds proved particularly keen on raw sugar, in which they raised their net long position above 120,000 contracts for the first time since November. The sweetener has been supported by concerns of an El Nino weather pattern, which tends to bring deleteriously heavy rains to Brazil's central cane belt, following on from the drought which began in late December.

Speculators' net longs in Chicago livestock, Apr 1, (change on week) Live cattle: 138,954, (+1,496) Lean hogs: 73,922, (-572) Feeder cattle: 15,429, (+439) Sources: Agrimoney.com, CFTC

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Wheat Market Still has Some Bounce

By: Fran Howard

U.S. livestock producers are once again feeding corn at the expense of the wheat market. "Exports and feed demand for wheat aren’t as aggressive as what was anticipated," says Randy Martinson, executive vice president with Progressive Ag, Fargo, N.D. "But fewer acres planted to wheat should help to support the market." USDA’s Prospective Plantings and quarterly Grain Stocks reports, released March 31, were mixed for wheat. USDA’s estimated planted acreage for all wheat in 2014 was 55.8 million acres, down 1% from 2013 and nearly 1% less than the average trade estimate. Winter wheat acres for 2014 fell 42 million acres, a drop of 3% from 2013. Of this total, about 30.2 million acres are hard red winter wheat, 8.43 million acres are soft red, and 3.35 million acres are white winter. Producers are expected to have 12 million acres planted to spring wheat, which is 4% more than last year. Most of this, 11.3 million acres will be in hard red spring wheat. Acres planted to Durham this year are estimated at 1.8 million acres, up 22% from 2013. Wheat acres in northern Minnesota and northern North Dakota shifted into specialty crops such as canola and sunflowers at the expense of wheat. Canola acreage in North Dakota alone was 38% higher than a year ago. A late spring and extreme drought in Oklahoma and far western Kansas will also reduce this year’s wheat crop. Supply Higher "We have less wheat in this country than a year ago," says Mike Krueger, president of the Money Farm, Fargo, N.D. "Some people, and I was among them, thought we would see a lower wheat stocks number. We didn’t see that." According to USDA’s quarterly Grain Stocks report, an estimated 1.06 billion bushels of wheat was stored in all positions on March 1, 2014. That’s a decline of 27.5% from the previous quarter and 15% smaller than a year ago. Estimated quarterly stocks, however, were about 2% larger than the average trade estimate of 1.042 billion bushels. On-farm stocks estimated at 238 million bushels were slightly higher than a year ago, while off-farm stocks, at 818 million bushels, were down 18% from a year ago. The indicated disappearance for wheat in the second-quarter of the marketing year slipped 4% below a year ago to 419 million bushels. Canada’s record-large wheat crop is now steadily moving out of the country, which might be cutting into U.S. exports, notes Martinson. Moreover, the unrest in Ukraine has subsided temporarily, which has also pressured wheat prices lately. With Russia still hinting that it could try to take over more of eastern Ukraine, however, geopolitical tensions will remain high, creating volatility in commodity markets. While wheat prices have typically peaked by this time of year, Martinson expects to see yet another bounce in September wheat futures, Minneapolis, to between $7.65 and $7.85. "It will be tough for September wheat to move above that," he adds.

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