Tag: news

While the public’s attention has been focused recently on revelations involving currency manipulation by all the same banks best known until recently for dispensing Bollinger when they got a Libor end of day print from their criminal cartel precisely where they wanted it (for an amusing take, read Matt Taibbi’s latest), the truth is that manipulation of FX and Libor is old news. Time to move on to bigger and better markets, such as physical commodities, in this case crude, as well as Interest Rate swaps. And, best of all, the us of our favorite manipulation term of all: “banging the close.”

The story of crude oil manipulation, primarily involving Platts as a pricing intermediary, has appeared on these pages in the past as far back as a year ago, and usually resulted in either participant companies, regulators or entire nation states doing their best to brush it under the rug. However, it is becoming increasingly more difficult to do so as the following Bloomberg story demonstrates.

Four longtime traders in the global oil market claim in a lawsuit that the prices for buying and selling crude are fixed — and that they can prove it. Some of the world’s biggest oil companies including BP Plc (BP/), Statoil ASA (STL), and Royal Dutch Shell Plc conspired with Morgan Stanley and energy traders including Vitol Group to manipulate the closely watched spot prices for Brent crude oil for more than a decade, they allege. The North Sea benchmark is used to price more than half the world’s crude and helps determine where costs are headed for fuels including gasoline and heating oil.

 

The case, which follows at least six other U.S. lawsuits alleging price-fixing in the Brent market, provides what appears to be the most detailed description yet of the alleged manipulations and lays out a possible road map for regulators investigating the matter.

 

The traders who brought it — who include a former director of the New York Mercantile Exchange, or Nymex, one of the markets where contracts for future Brent deliveries are traded – – allege they paid “artificial and anticompetitive prices” for Brent futures. They also outline attempts to manipulate prices for Russian Urals crude and cite instances when the spread between Brent and Dubai grades of crude may have been rigged.

 

The oil companies and energy-trading houses, which include Trafigura Beheer BV and Phibro Trading LLC, submitted false and misleading information to Platts, an energy news and price publisher whose quotes are used by traders worldwide, according to the proposed class action filed Oct. 4 in Manhattan federal court.

The method of manipulation is a well-known one to regular readers: spoofing.

Over 85 pages, the plaintiffs describe how the market allegedly showed that the Dated Brent spot price was artificially driven up or down by the defendants, depending on what would profit them most in swap, futures or spot markets. They allege the defendants used methods including “spoofing” – – placing orders that move markets with the intention of canceling them later. Platts’ methodology “can be easily gamed by market participants that make false, inaccurate or misleading trades,” the plaintiff traders alleged. BFOE refers to the four oil grades — Brent, Forties, Oseberg and Ekofisk — that collectively make up the Dated Brent benchmark.

Ironically, spoofing is one of the primary mechanisms by which the HFT cabal has also benefitted, and been able to, levitate the market to ever record-er highs on ever lower volume. That, and Bernanke of course.

What do the plaintiff’s allege?

Kovel represents plaintiffs Kevin McDonnell, a former Nymex director, as well as independent floor traders Anthony Insinga and Robert Michiels, and John Devivo, who held a seat on Nymex and traded for his own account. The complaint says the plaintiffs are among the largest traders of Brent crude futures contracts on Nymex and the Intercontinental Exchange. The four, who don’t specify the amount they are claiming in damages, seek to represent all investors who traded Brent futures on the two exchanges since 2002.

 

The plaintiffs allege that in February 2011, defendants manipulated the trade of Forties-blend crude, one of four grades used by Platts to determine the Dated Brent benchmark, which represents the price of physical cargoes for delivery on the spot market.

 

Shell offered to sell shipments to keep the price of Forties “artificially low,” according to the plaintiffs.

 

Morgan Stanley (MS) was the only buyer for one of four such orders, or cargoes, totaling 2.4 million barrels of oil, the traders said. The Feb. 21, 2011, transaction was prearranged to set a lower price for Dated Brent, according to the complaint.

So how was such wholesale manipulation able to continue for over a decade? Simple – same reason why nobody “knew” anything about the Libor cabal until recently – alligned financial interests of every participating party, in this case Platts, a unit of McGraw Hill Financial – the same parents as Standard & Poors rating agency – and all the other major commodity players in the space.

“By BFOE boys,” the plaintiffs said in their complaint, “this trader was likely referring to the cabal of defendants, including Shell, which controlled the MOC process.” The claimants also alleged that in September 2012, Shell, BP, Phibro, Swiss-based Vitol and Netherlands-based Trafigura rigged the market through “a combination of spoofing, wash trades and other artificial transactions” in the Platts pricing process.

 

The defendants pressured the market downward at the start of the month by colluding to carry out irregular and “uneconomic” trades, according to the lawsuit. They drove prices higher later that month, it said.

 

The four traders said Platts was “reluctant to exclude” the irregular trades because BP and Shell are “significant sources of revenue” to Platts.

Or, said simpler, don’t ask, don’t tell, and keep cashing those checks.

Full lawsuit can be read below:

 

* * *

And in other news, the CFTC just charged DRW Investments with price manipulation by way of “banging the close” in Interest Rate Swap Futures Markets.

Defendants allegedly manipulated the IDEX USD Three-Month Interest Rate Swap Futures Contract by “Banging the Close”

 

The U.S. Commodity Futures Trading Commission (CFTC) today filed a civil enforcement action in the U.S. District Court for the Southern District of New York against Donald R. Wilson (Wilson) and his company, DRW Investments, LLC
(DRW). The CFTC’s Complaint charges Wilson and DRW with unlawfully manipulating and attempting to manipulate the price of a futures contract, namely the IDEX USD Three-Month Interest Rate Swap Futures Contract (Three-Month Contract) from at least January 2011 through August 2011. The Complaint alleges that as a result of the manipulative scheme, the defendants profited by at least $20 million, while their trading counterparties suffered losses of an equal amount.

 

According to the Complaint, in 2010 the Three-Month Contract was listed by the International Derivatives Clearinghouse (IDCH) and traded on the NASDAQ OMX Futures Exchange, and was publicized as an alternative to over-the-counter, i.e., off-exchange, products. Wilson and DRW believed that they could trade the contract for a profit based on their analysis of the contract. At the end of 2010, Wilson caused DRW to acquire a large long (fixed rate) position in the Three-Month Contract with a net notional value in excess of $350 million. The daily value of DRW’s position was dependent upon the daily settlement price of the Three-Month Contract calculated according to IDCH’s methodology. As Wilson and DRW knew, the methodology relied on electronic bids placed on the exchange during a 15-minute period, the “settlement window,” prior to the close of each trading day. In the absence of such bids, the exchange used prices from over-the-counter markets to determine its settlement prices. Wilson and DRW anticipated that the value of their position would rise over time.

 

The market prices did not reach the level that Wilson and DRW had hoped for and expected, according to the Complaint. Rather than accept that reality, Wilson and DRW allegedly executed a manipulative strategy to move the Three-Month Contract market price in their favor by “banging the close,” which entailed placing numerous bids on many trading days almost entirely within the settlement window, none of which resulted in actual transactions as DRW regularly cancelled the bids. Under the exchange’s methodology, DRW’s bids became the settlement prices, and in this way DRW unlawfully increased the value of its position, according to the Complaint.

But the take home message here is simple: no matter the pervasive manipulation everywhere else, and seemingly by everyone including such titans of ethical fortitude as Steve Cohen, gold is not, repeat not, never has been, never will be manipulated.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/mzsANJTu9uk/story01.htm Tyler Durden

While the public’s attention has been focused recently on revelations involving currency manipulation by all the same banks best known until recently for dispensing Bollinger when they got a Libor end of day print from their criminal cartel precisely where they wanted it (for an amusing take, read Matt Taibbi’s latest), the truth is that manipulation of FX and Libor is old news. Time to move on to bigger and better markets, such as physical commodities, in this case crude, as well as Interest Rate swaps. And, best of all, the us of our favorite manipulation term of all: “banging the close.”

The story of crude oil manipulation, primarily involving Platts as a pricing intermediary, has appeared on these pages in the past as far back as a year ago, and usually resulted in either participant companies, regulators or entire nation states doing their best to brush it under the rug. However, it is becoming increasingly more difficult to do so as the following Bloomberg story demonstrates.

Four longtime traders in the global oil market claim in a lawsuit that the prices for buying and selling crude are fixed — and that they can prove it. Some of the world’s biggest oil companies including BP Plc (BP/), Statoil ASA (STL), and Royal Dutch Shell Plc conspired with Morgan Stanley and energy traders including Vitol Group to manipulate the closely watched spot prices for Brent crude oil for more than a decade, they allege. The North Sea benchmark is used to price more than half the world’s crude and helps determine where costs are headed for fuels including gasoline and heating oil.

 

The case, which follows at least six other U.S. lawsuits alleging price-fixing in the Brent market, provides what appears to be the most detailed description yet of the alleged manipulations and lays out a possible road map for regulators investigating the matter.

 

The traders who brought it — who include a former director of the New York Mercantile Exchange, or Nymex, one of the markets where contracts for future Brent deliveries are traded – – allege they paid “artificial and anticompetitive prices” for Brent futures. They also outline attempts to manipulate prices for Russian Urals crude and cite instances when the spread between Brent and Dubai grades of crude may have been rigged.

 

The oil companies and energy-trading houses, which include Trafigura Beheer BV and Phibro Trading LLC, submitted false and misleading information to Platts, an energy news and price publisher whose quotes are used by traders worldwide, according to the proposed class action filed Oct. 4 in Manhattan federal court.

The method of manipulation is a well-known one to regular readers: spoofing.

Over 85 pages, the plaintiffs describe how the market allegedly showed that the Dated Brent spot price was artificially driven up or down by the defendants, depending on what would profit them most in swap, futures or spot markets. They allege the defendants used methods including “spoofing” – – placing orders that move markets with the intention of canceling them later. Platts’ methodology “can be easily gamed by market participants that make false, inaccurate or misleading trades,” the plaintiff traders alleged. BFOE refers to the four oil grades — Brent, Forties, Oseberg and Ekofisk — that collectively make up the Dated Brent benchmark.

Ironically, spoofing is one of the primary mechanisms by which the HFT cabal has also benefitted, and been able to, levitate the market to ever record-er highs on ever lower volume. That, and Bernanke of course.

What do the plaintiff’s allege?

Kovel represents plaintiffs Kevin McDonnell, a former Nymex director, as well as independent floor traders Anthony Insinga and Robert Michiels, and John Devivo, who held a seat on Nymex and traded for his own account. The complaint says the plaintiffs are among the largest traders of Brent crude futures contracts on Nymex and the Intercontinental Exchange. The four, who don’t specify the amount they are claiming in damages, seek to represent all investors who traded Brent futures on the two exchanges since 2002.

 

The plaintiffs allege that in February 2011, defendants manipulated the trade of Forties-blend crude, one of four grades used by Platts to determine the Dated Brent benchmark, which represents the price of physical cargoes for delivery on the spot market.

 

Shell offered to sell shipments to keep the price of Forties “artificially low,” according to the plaintiffs.

 

Morgan Stanley (MS) was the only buyer for one of four such orders, or cargoes, totaling 2.4 million barrels of oil, the traders said. The Feb. 21, 2011, transaction was prearranged to set a lower price for Dated Brent, according to the complaint.

So how was such wholesale manipulation able to continue for over a decade? Simple – same reason why nobody “knew” anything about the Libor cabal until recently – alligned financial interests of every participating party, in this case Platts, a unit of McGraw Hill Financial – the same parents as Standard & Poors rating agency – and all the other major commodity players in the space.

“By BFOE boys,” the plaintiffs said in their complaint, “this trader was likely referring to the cabal of defendants, including Shell, which controlled the MOC process.” The claimants also alleged that in September 2012, Shell, BP, Phibro, Swiss-based Vitol and Netherlands-based Trafigura rigged the market through “a combination of spoofing, wash trades and other artificial transactions” in the Platts pricing process.

 

The defendants pressured the market downward at the start of the month by colluding to carry out irregular and “uneconomic” trades, according to the lawsuit. They drove prices higher later that month, it said.

 

The four traders said Platts was “reluctant to exclude” the irregular trades because BP and Shell are “significant sources of revenue” to Platts.

Or, said simpler, don’t ask, don’t tell, and keep cashing those checks.

Full lawsuit can be read below:

 

* * *

And in other news, the CFTC just charged DRW Investments with price manipulation by way of “banging the close” in Interest Rate Swap Futures Markets.

Defendants allegedly manipulated the IDEX USD Three-Month Interest Rate Swap Futures Contract by “Banging the Close”

 

The U.S. Commodity Futures Trading Commission (CFTC) today filed a civil enforcement action in the U.S. District Court for the Southern District of New York against Donald R. Wilson (Wilson) and his company, DRW Investments, LLC (DRW). The CFTC’s Complaint charges Wilson and DRW with unlawfully manipulating and attempting to manipulate the price of a futures contract, namely the IDEX USD Three-Month Interest Rate Swap Futures Contract (Three-Month Contract) from at least January 2011 through August 2011. The Complaint alleges that as a result of the manipulative scheme, the defendants profited by at least $20 million, while their trading counterparties suffered losses of an equal amount.

 

According to the Complaint, in 2010 the Three-Month Contract was listed by the International Derivatives Clearinghouse (IDCH) and traded on the NASDAQ OMX Futures Exchange, and was publicized as an alternative to over-the-counter, i.e., off-exchange, products. Wilson and DRW believed that they could trade the contract for a profit based on their analysis of the contract. At the end of 2010, Wilson caused DRW to acquire a large long (fixed rate) position in the Three-Month Contract with a net notional value in excess of $350 million. The daily value of DRW’s position was dependent upon the daily settlement price of the Three-Month Contract calculated according to IDCH’s methodology. As Wilson and DRW knew, the methodology relied on electronic bids placed on the exchange during a 15-minute period, the “settlement window,” prior to the close of each trading day. In the absence of such bids, the exchange used prices from over-the-counter markets to determine its settlement prices. Wilson and DRW anticipated that the value of their position would rise over time.

 

The market prices did not reach the level that Wilson and DRW had hoped for and expected, according to the Complaint. Rather than accept that reality, Wilson and DRW allegedly executed a manipulative strategy to move the Three-Month Contract market price in their favor by “banging the close,” which entailed placing numerous bids on many trading days almost entirely within the settlement window, none of which resulted in actual transactions as DRW regularly cancelled the bids. Under the exchange’s methodology, DRW’s bids became the settlement prices, and in this way DRW unlawfully increased the value of its position, according to the Complaint.

But the take home message here is simple: no matter the pervasive manipulation everywhere else, and seemingly by everyone including such titans of ethical fortitude as Steve Cohen, gold is not, repeat not, never has been, never will be manipulated.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/mzsANJTu9uk/story01.htm Tyler Durden

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Forcing young workers to pay into a Ponzi Scheme is generational injustice on a vast scale.

Why should young workers pay into a retirement system that will give them nothing, a system that will dissolve in insolvency long before they're old enough to retire? This is a question that Max Keiser posed in our conversation on Peak Retirement, and I think it deserves an answer.

I think the core issue here is the generational injustice of pay as you go social programs, which boil down to unsustainable Ponzi schemes. As I noted yesterday in The Problem with Pay-As-You-Go Social Programs (November 5, 2013), all pay as you go programs funded by payroll taxes–Social Security and Medicare in the U.S.–are only sustainable if the number of workers rises faster than the number of beneficiaries, because it takes multiple full-time workers' payroll taxes to fund each beneficiary.

As I showed yesterday, it takes about ten low-wage (and hence low-payroll tax) workers to fund one retiree. At this rate, Social Security's 57 million beneficiaries (on its way to 70+ million as the Baby Boom retires en masse) would need 500 million workers paying into the system for it to be sustainable.

It takes only a few high earners (those making $85,000 or more annually) to fund one retiree, but there are too few high earners to support the system (13 million workers earn $85,000 or more, while beneficiaries will soon top 60 million).

While the number of beneficiaries will soar for the next decade as 60+ million Baby Boomers retire, the number of full-time jobs has stagnated, as this chart shows:

If the system doesn't change, the young workers currently paying payroll taxes to fund their elders' retirements will get little to nothing out of the system. This is ordained by two trends: demographics and the end of (paid) work. Global Reality: Surplus of Labor, Scarcity of Paid Work (May 7, 2012).

A huge cohort of retirees requires an even larger cohort of workers to support its retirement in pay as you go systems. This is what renders Social Security a Ponzi Scheme: a Ponzi Scheme only works as long as the number of new marks is substantial enough to pay the promised riches. Once the number of marks declines below a threshold, the Ponzi Scheme implodes.

The soon-to-be 70 million beneficiaries of Social Security would need roughly 210 million full-time workers earning decent money to sustainably fund their benefits. The U.S. economy is short about 100 million full-time jobs, and given the end of work realities I have often covered here (just type end of work into the custom search box on the main blog page), the number of full-time jobs with decent pay may well decline sharply, even in "good times," i.e. periods of expansion.

We can expect widespread destruction of paid work as technology creatively destroys one sector after another.

Why should young workers pay into a retirement system that cannot possibly offer them any benefit? The conventional answer is a lie: "Social Security is essentially eternal and will be here forever."

The other conventional answer is pure self-serving, self-justification by retirees: "We wuz promised." Well guess what, Boomers (I am 59 and a Boomer), things change in pay as you go systems. When the number of full-time workers falls to 2-to-1 or less and the number of retirees drawing benefits skyrockets, the system is no longer sustainable, regardless of what was promised by feckless politicos and their toadies.

The Social Security system could be made sustainable, but it would take radical reform. The constituencies that would oppose these reforms are among the most political powerful in the nation, so there is no chance these would ever be aired, much less approved:

1. Eliminate Social Security benefits for double and triple-dippers, i.e. those drawing pensions from other private or government sources. Re-engineer Social Security into a system for those with no other retirement benefits or pensions.

2. Tax all income, not just earned income. Lower the total Social Security tax from 12.4% to 10% but apply it equally to all income. Why should someone earning $1,000,000 pay less a percentage than someone earning $10,000? Why should I pay nothing on $100,000 I skimmed in a stock trade? Lower the tax but tax all income. Simple, fair, no loopholes.

3. Ditch the bogus Trust Fund of lies and set up a real Trust Fund that is outside the Federal Budget and Congressional avarice. Any surplus (i.e. when taxes collected exceed benefits paid in that year) would go into a true Trust Fund that uses the cash to buy Treasuries, other government bonds and AAA corporate bonds. This fund would thus help keep interest rates low, and the interest generated by the bonds would be real, not borrowed.

Congress would not be allowed to appropriate the Trust Fund for any purpose (bridges to nowhere, discretionary wars, etc.). It would be managed by trustees elected by the citizenry.

With a true Trust Fund, young workers would actually have some hope that the fund would still have real assets to liquidate to fund their retirement.

Radical transformation is necessary if Social Security is to become something other than a massive wealth transfer scheme from the young to the elderly.

Forcing you
ng workers to pay into a Ponzi Scheme is generational injustice on a vast scale. Self-serving justifications of the status quo by those benefiting from this transfer of wealth should be outed for what they are: justifications of exploitation, avarice and injustice.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/NQob58VhpiA/story01.htm Tyler Durden

Whether it is ‘cover’ for the all-too-obvious collapse to come (when another round of ratings agency litigation will take place as blame is apportioned) or more likely a ‘fool-me-once…’ perspective on reality, Fitch has a new report blasting the “unsustainable” jump in home prices, adding that “the extreme rate of home price growth is a cause for caution.” While they note, rising prices are a positive indicator for a recovery, Fitch adds that unprecedented home price growth should be paired with economic health that is similarly unprecedented, the evidence for which is lacking in this case.

Based on the historic relationship between home prices and a basket of econometric factors, Fitch considers estimates national prices to be approximately 17% overvalued in real terms (Bay Area home prices to be nearly 30% overvalued, which approximates the environment in 2003, three years into the formation of the previous home price bubble) – as “speculative buying, not increasing demand” is driving the market. Between this ‘speculation’ and interest rates, affordability is “strained.”

Via Fitch:

As a whole, the signs of a strengthening economic recovery are present, with momentum continuing to trend in a positive direction. Fitch expects these trends to continue, although the high rate of home price growth is not considered to be sustainable. Currently, Fitch’s Sustainable Home Price Model estimates national prices to be approximately 17% overvalued in real terms, with individual geographic regions varying widely.

Based on the historic relationship between home price levels and the primary drivers of supply and demand in the market, there is a misalignment. A continuing recovery and exuberant home-buying population could well push prices further for many more quarters, or even years. However, Fitch identifies a bubble risk in continuing price rises and sees several factors which could halt or even reverse recent gains in the market.

Interest rate concerns are rising…

The NRI, which measures the relative default risk of a constant quality loan as compared to average originations of the 1990s, has risen in two consecutive quarters, showing a rise for the first time since 2007.

Currently at 1.14, the NRI implies that the default risk of a loan originated today is 14% higher than the 1990s average. Since the peak in early 2007, risk has been declining for newly originated loans as the bubble unwound and prices reverted towards historic averages. On the back of the abrupt price rises across the country and interest rate rises which are expected to limit prepayment speeds for the next several years, the NRI has now increased.

…the extreme rate of home price growth is a cause for caution. Prices remain below the pre-recession peak, but the region never saw the extent of declines that much of inland California did, and prices never fully unwound the effects of the bubble. In San Francisco, prices hit a bottom in 2009 at nearly 125% above 1995 prices and have grown another 30% from that point. In San Jose, prices are up 48% from their post-crash trough and are now only 11% away from setting new highs.

Of course, rising prices are a positive indicator for a recovery and the growth is encouraging to a region that has seen the largest up- and down-swings in the housing market over the past few decades. However, Fitch expects that unprecedented home price growth should be paired with economic health that is similarly unprecedented, the evidence for which is lacking in this case. Based on the historic relationship between home prices and a basket of econometric factors, Fitch considers Bay Area home prices to be nearly 30% overvalued, which approximates the environment in 2003, three years into the formation of the previous home price bubble.

Most concerning, there is growing evidence that recent gains have been bolstered by an increase in investment sales, both to institutions and local investors.

Cash sales are often indicative of investor behavior and the concern is that housing prices are being driven up more through speculative buying than from an increasing base demand.

Typically, bubble cycles form when an initial catalyst causes prices to rise and the increase in prices drives investment activity to the market, hoping to cash in on the rising prices. As investment activity increases, demand builds artificially, reflecting a level of demand that fluctuates drastically with the growth rate of prices instead of long-term demand based on housing necessity.

Full detailed report here…

---

 

And yes… a rating agency – the same entity that enabled the last housing market crash – just warned of a housing bubble. How the times have changed – maybe it is different this time?

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/PF5wkkQ_Xpo/story01.htm Tyler Durden

Whether it is ‘cover’ for the all-too-obvious collapse to come (when another round of ratings agency litigation will take place as blame is apportioned) or more likely a ‘fool-me-once…’ perspective on reality, Fitch has a new report blasting the “unsustainable” jump in home prices, adding that “the extreme rate of home price growth is a cause for caution.” While they note, rising prices are a positive indicator for a recovery, Fitch adds that unprecedented home price growth should be paired with economic health that is similarly unprecedented, the evidence for which is lacking in this case.

Based on the historic relationship between home prices and a basket of econometric factors, Fitch considers estimates national prices to be approximately 17% overvalued in real terms (Bay Area home prices to be nearly 30% overvalued, which approximates the environment in 2003, three years into the formation of the previous home price bubble) – as “speculative buying, not increasing demand” is driving the market. Between this ‘speculation’ and interest rates, affordability is “strained.”

Via Fitch:

As a whole, the signs of a strengthening economic recovery are present, with momentum continuing to trend in a positive direction. Fitch expects these trends to continue, although the high rate of home price growth is not considered to be sustainable. Currently, Fitch’s Sustainable Home Price Model estimates national prices to be approximately 17% overvalued in real terms, with individual geographic regions varying widely.

Based on the historic relationship between home price levels and the primary drivers of supply and demand in the market, there is a misalignment. A continuing recovery and exuberant home-buying population could well push prices further for many more quarters, or even years. However, Fitch identifies a bubble risk in continuing price rises and sees several factors which could halt or even reverse recent gains in the market.

Interest rate concerns are rising…

The NRI, which measures the relative default risk of a constant quality loan as compared to average originations of the 1990s, has risen in two consecutive quarters, showing a rise for the first time since 2007.

Currently at 1.14, the NRI implies that the default risk of a loan originated today is 14% higher than the 1990s average. Since the peak in early 2007, risk has been declining for newly originated loans as the bubble unwound and prices reverted towards historic averages. On the back of the abrupt price rises across the country and interest rate rises which are expected to limit prepayment speeds for the next several years, the NRI has now increased.

…the extreme rate of home price growth is a cause for caution. Prices remain below the pre-recession peak, but the region never saw the extent of declines that much of inland California did, and prices never fully unwound the effects of the bubble. In San Francisco, prices hit a bottom in 2009 at nearly 125% above 1995 prices and have grown another 30% from that point. In San Jose, prices are up 48% from their post-crash trough and are now only 11% away from setting new highs.

Of course, rising prices are a positive indicator for a recovery and the growth is encouraging to a region that has seen the largest up- and down-swings in the housing market over the past few decades. However, Fitch expects that unprecedented home price growth should be paired with economic health that is similarly unprecedented, the evidence for which is lacking in this case. Based on the historic relationship between home prices and a basket of econometric factors, Fitch considers Bay Area home prices to be nearly 30% overvalued, which approximates the environment in 2003, three years into the formation of the previous home price bubble.

Most concerning, there is growing evidence that recent gains have been bolstered by an increase in investment sales, both to institutions and local investors.

Cash sales are often indicative of investor behavior and the concern is that housing prices are being driven up more through speculative buying than from an increasing base demand.

Typically, bubble cycles form when an initial catalyst causes prices to rise and the increase in prices drives investment activity to the market, hoping to cash in on the rising prices. As investment activity increases, demand builds artificially, reflecting a level of demand that fluctuates drastically with the growth rate of prices instead of long-term demand based on housing necessity.

Full detailed report here…

---

 

And yes… a rating agency – the same entity that enabled the last housing market crash – just warned of a housing bubble. How the times have changed – maybe it is different this time?

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/PF5wkkQ_Xpo/story01.htm Tyler Durden