Friday, March 14, 2014
Is the Housing Market for Real or Just More Hot Air? The News of a Strong Market is not Supported by the Data.
For some time I thought all the talk about the housing market, that is, things are coming back, prices are going up, we will return to the days prior to the financial crisis, etc. was a lot of hot air. Now I am convinced of it.
I admit that prices are going up. I believe that some of that is basically the purchaser and seller thinking that things are back to normal, ergo the pre-2006 period. Existing home sales have come back to the levels common during 2000 - 2002 (thanks to Calculated Risk), but not even close to the 2004 - 2006 period.
New home sales, however, have not recovered to the pre-2006 period (thanks again to Calculated Risk). In fact current new home sales are at levels not seen since the recessions of the 1970s and 1980s.
In addition a recent article on the Washington Post Blog indicates that the expectation for housing price appreciation for the next 10 years has been declining since 2004. The most recent survey shows that the sample of buyers in 4 major metropolitan areas expect an appreciation rate of 3% per year for the next decade. This is lower than the current mortgage rate, not much of a return on your money. As an aside this survey is completed by the Karl Case and Robert Shiller, the same people that bring us the Case-Shiller Housing Price Index.
Below is the results of the annual survey:
A recent poll of real estate forecasters by Pulsenomics showed that experts expect a nationwide house price appreciation of 4.5% in 2014 declining to about 3.3% by 2018. This is similar to the results of the Case-Shiller annual survey of home buyers.
So what is the housing market going to do? The housing market is always local. Some areas will appreciate and others will largely stagnate. But, overall I am not seeing a lot of strength in the housing market. Mortgage rates will increase over time as interest rates increase. Lending standards are going to remain tough. Higher FICO scores and 20% down (except for first time home buyers) will become the standard. Young people will continue to find home buying difficult because of the down payment and because of what they saw their friends and family go through as the real estate market collapsed after 2007.
You should look at the numbers and make up your own mind, but as for me, I am in no rush to buy a home. I think owning a home will eventually become what it should have always been - not an investment issue, but a cash flow issue.
Posted by CSF - at 12:51 PM
Wednesday, February 27, 2013
Is the Great Rotation a Myth?
The Great Rotation came into the spotlight at the end of 2012, when Bank of America Merrill Lynch investment strategist Michael Hartnett predicted that investors who had fled the stock market for the safety of bonds would start to rotate back into stocks.
In fact, investors have added more money to bonds than stocks almost every week this year. In total, U.S. stock mutual funds have raked in nearly $20 billion in 2013, while bond funds have attracted more than $40 billion, according to data from the Investment Company Institute.
Rather than trimming their bond exposure, investors have been adding to stocks at the expense of their cash holdings, said Jeffrey Rosenberg, chief investment strategist for fixed income at BlackRock.
"In the panic following the 2008 collapse, investors initially flocked to cash," said Rosenberg, noting that assets in money market funds jumped by nearly 40% to about $3.5 trillion and peaked at $4 trillion in 2009.
Cash levels declined steadily from there until the end of last year when fiscal cliff fears sent investors back to cash. And once a deal to avoid the cliff was struck, assets in money market funds and bank deposits began to fall - that's the money that has been flowing into stocks, said Rosenberg.
While the Great Rotation out of bonds and into stocks may still be coming, it won't be anytime soon, according to Tobias Levkovich, chief U.S. equity strategist at Citigroup.
"Unfortunately losing money in bonds may not cause a huge outflow from bond funds which would then pour into stock funds," he wrote in a recent note. Investors didn't start consistently pulling money out of stocks until two years after the tech bubble and stock market peaked in 2000, he noted, adding, "Believing in a rotation now seems fairly premature."
"Perhaps some of the residual fear from the financial crisis that caused investors to shun stocks is starting to dissipate," he said.
Posted by CSF - at 10:24 AM
Monday, February 25, 2013
Tuesday, February 19, 2013
Is Inflation the Problem? Part #2
Posted by CSF - at 6:49 PM
Sunday, February 17, 2013
Is Inflation a Problem?
It seems that to exclusively focus on one side of the equation can be human nature at times, and with regard to inflation concerns humans never see the other side of the equation, i.e., areas where they are actually experiencing deflation in their lives.
The Housing Market
Let`s start with housing, the Case-Shiller 20-City Home Price Index shows quite clearly that after years of inflation, consumers are getting a large break on prices due to the deflationary effects in the housing industry over the last five years.
How about interest rates, rates for getting financing either to finance a first purchase or refinance an existing loan have been a real boon to consumers, and rates generally have been coming down for twenty years. I am sure your parents or grandparents can tell stories of 18% mortgages; we are definitely experiencing deflation in financing costs around borrowing money.
Posted by CSF - at 9:02 AM
Thursday, February 14, 2013
Wednesday, February 13, 2013
US Fiscal Policy - A Problem
Below is an article from the New Yorker that articulates fairly well the issues in Congress when it comes to the budget deficit. The article is in italics.
Reading through the new budget outlook from the Congressional Budget Office, which was released on Tuesday, three figures made the biggest impression on me: 1.4 per cent, 2.4 per cent, and 76 per cent. Taken together, these three numbers explain a good deal about what’s wrong with Washington, and how we are focussing on precisely the wrong things. Rather than tackling the projected rise in entitlement spending, which does present a long-term threat to the country’s prosperity, policy makers, particularly congressional Republicans, are intent on making short-term spending cuts across the board, which would threaten the current economic recovery. In short, they’ve got things upside down.
The 1.4 per cent figure is the C.B.O.’s forecast for how much the economy will grow this year. If you think this sounds like a low figure, you’re right. Last year, which was hardly a rip-roaring one, the inflation-adjusted gross domestic product rose by 2.4 per cent. In an economy recovering from a deep recession that has kept the unemployment rate close to or above eight per cent for four years now, we need annual growth of three per cent or higher to make a real dent in the jobless figures.
You might think, therefore, that both parties would be doing all they can to get the economy humming, and avoiding anything that risks plunging the country back into a recession. But you would be wrong. Ever since the November election, practically the entire debate in Washington has been about cutting spending and raising taxes, both of which reduce the level of demand for goods and services. The fiscal-cliff deal raised the taxes that most working Americans pay by two per cent, and high-income taxpayers had a bigger hike. Now we are faced with the so-called sequester, which, if enacted on March 1st, will cut defense spending by forty-eight billion dollars (about eight per cent of the total) and non-defense spending by twenty-nine billion dollars (about five per cent of the total).
The C.B.O. estimates that, taken together, the fiscal-cliff deal and the sequester will reduce G.D.P. growth by about 1.5 per cent. Another way of putting it is that if neither of these policies had been introduced, growth this year would have been close to three per cent, which is what we badly need. In the interest of reducing the budget deficit and stabilizing the debt-to-G.D.P. ratio, policy makers have effectively hacked growth in half—that’s assuming the sequester goes through, which most people in Washington now think will happen. Consequently, the C.B.O. says, the unemployment rate is likely to stay close to eight per cent for at least another couple of years.
True, the C.B.O.’s forecasts could be wrong. (Like all economic predictions, they often are.) Despite the fact that the G.D.P. fell slightly in the fourth quarter of 2012, according to last week’s advance estimate from the Commerce Department, I think the economy has enough forward momentum to withstand the fiscal hit and still grow at a reasonable pace in 2013—say, 2.5 per cent, or even a bit higher. But I could well be being overly optimistic. When other countries with big deficits shifted from stimulus to austerity, the results were disappointing. In Britain, for example, the outcome was a double-dip recession, which is currently threatening to turn into a triple dip.
The U.S. is taking a big risk, to say the least, by turning to austerity policies, and for what end? Contrary to popular belief, the country is not facing an immediate fiscal crisis. Since peaking in 2009, at 10.1 per cent of the G.D.P., the budget deficit has been steadily declining. This year, according to the C.B.O., it will be 5.3 per cent of the G.D.P., and next year it will be 3.7 per cent. By 2015, it will be just 2.4 per cent of the G.D.P., which is below what it averaged in the three decades prior to 2007.
These figures are based on the assumption that all of the sequester will go into effect, and that Medicare payments to doctors will be cut by a quarter at the start of next year. If neither of these things happen—Congress regularly suspends the Medicare cuts—the deficit would be a bit higher than the C.B.O. projections, but not dramatically so. Under any likely policy scenario, assuming the economy doesn’t go into another slump, the deficit will be back down to manageable levels within a couple of years. Alarmists who say we have to slash now or meet the same fate as Greece are just that: alarmists.
That’s the good news. The worrying thing is that, even according to the C.B.O. projections, the deficit starts to rise again after 2015—not dramatically, but enough to be of concern. By 2021, it will be up to 3.8 per cent of the G.D.P., and thereafter, according to the Budget Office’s latest long-term projections, which it released last summer, things start to get pretty dire. By 2037, according to the C.B.O.’s “extended alternative fiscal scenario,” which assumes that most current policies continue, the debt-to-G.D.P. ratio would be close to two hundred per cent. (At the moment, it is about seventy-five per cent.)
While some countries with very high savings rates, such as Japan, have managed to live with and finance such a high debt burden, the United States, which has a low savings rate—we love to shop—might well have trouble finding enough foreigners willing to buy Treasury bonds. In extremis, the result could be a U.S. default. More likely, a sharp rise in Treasury yields, and quite possibly a generalized financial crisis, would force the government to tackle the problem at some point before then.
It’s no mystery what underpins this worrying scenario: a big rise in entitlement spending—on Medicare, Medicaid, Obamacare, and Social Security, mainly—and interest payments on the rising debt. Forty years ago, mandatory spending, which largely consists of entitlements, made up about a third of the federal budget. Today, it makes up about three-fifths of the budget, and the share is rising. Add in interest payments, which can’t be avoided, and the situation is even more stark. By 2023, according to the C.B.O. projections, three-quarters of the budget will be going to entitlements and interest payments.
The exact figure is seventy-six per cent—the third number I mentioned at the start of the post—which would leave just a quarter of the budget to cover everything else: defense, homeland security, income-support programs for the poor, education, scientific and medical research, national parks, and so on. It doesn’t take a genius to figure out that there wouldn’t be enough money to go around, meaning that the only options would be higher taxes to boost revenues or big cuts in spending on popular programs.
With neither party willing to tell Americans that they need to pay more in taxes, the only sensible alternative would appear to be obvious. Go easy on immediate spending cuts—we need to let the economy recover—but start work now on trimming entitlement programs, essential as they are, so they don’t eventually swallow the rest of the budget. Unfortunately, that order of proceeding runs into party politics. Many anti-government Republicans want to slash federal spending as a matter of principle. Many Democrats are dragging their heels about making cuts to Social Security and Medicare.
On Tuesday, President Obama called on Congressional Republicans to replace the sequester with smaller spending cuts and the elimination of some corporate-tax loopholes. He was right. In recent months, however, he has backed away from earlier suggestions that he would be willing to make tough choices in tackling entitlement reform. The country needs both things: immediate action on the sequester and a sound long-term fiscal strategy. But with the two sides digging in, the most likely outcome is more upside-down policies.
Read more: http://www.newyorker.com/online/blogs/johncassidy/2013/02/us-fiscal-policy-is-upside-down.html#ixzz2KmCg0yMw
Posted by CSF - at 4:20 AM
Tuesday, February 12, 2013
The Great Housing Mania - Insight from Martin Conrad
The full story about housing and the economy has been ignored too long. Like all manias, it was a long time building.
The boom of the 1950s and 1960s, featuring rising incomes and wealth, occurred in a well-balanced economy. The benefits of economic growth were fairly evenly distributed. That was an economy where the U.S. manufacturing sector was competitive and flourishing, its infrastructure was adequate and being improved, and housing valuations were at least fair, if not cheap. The value of housing averaged 80% to 90% of gross domestic product in this era -- about half of the peak value set in the mania that ended so badly in 2008.
During the 1970s and 1980s, as the large baby-boom generation grew to adulthood and formed households, housing markets were distorted. The result: about a 50% rise in the aggregate value of housing, to 120% of GDP. At the end of this period, there was a solvency crisis in the thrifts and banks that had financed the housing sector. A few thousand of them had to be liquidated by the federal government.
During the 1990s, the U.S. enjoyed renewed prosperity, with a booming stock market and the creation of 20 million jobs. Housing valuations moderated, and the aggregate value of housing declined to a bit over 100% of GDP, not much higher than the average during the postwar boom.
More ominously, the few thousand thrifts and banks that had been lost during the savings-and-loans crisis were mostly being replaced by a mortgage-securitization process, not by new banks and thrifts using traditional credit standards. The new home-loan system soon came to be dominated by Wall Street investment banks.
In the late 1990s, there was a major banking reform. The Glass-Steagall Act, a reform of the Depression era that had separated investment banking from commercial banking and had given only the latter government-supported deposit insurance, was repealed. This began an era of mass securitization of mortgages, which enabled large-scale lending to subprime borrowers. Other features of the period included making loans with little or no documentation of borrowers' ability to pay, and loans with low or no down payments. The easy money for homeowners stimulated widespread speculation in everything related to housing, including precarious financing.
This culminated in a final manic race to the top, when the aggregate value of housing exceeded 170% of GDP.
THE INEVITABLE BUT UNEXPECTED RESULT was a wave of mortgage defaults and a catastrophic decline in housing values. The market for securitized mortgages declined and then collapsed in 2008. In that year, houses with mortgages had about $11 trillion in aggregate mortgage debt that was collateralized by a net equity of zero.
At its peak in 2006, 2007, and 2008, this mania had overallocated as much as $10 trillion to the housing sector, based on the long-term average of housing value to GDP. This misallocation came at the expense of more productive and more sustainable economic opportunities in manufacturing, infrastructure, and technological innovation. The catastrophic losses also were a major factor in the extremely unequal distribution of national wealth, as the middle class lost approximately 40% of its net worth, most of it on overpriced and overleveraged housing.
Knowledgeable insiders who were aware of the distortions and the dangers headed for the exits early, leaving the masses with gigantic losses and unmanageable debt. There was an enormous rise of insider selling in 2005 by senior management of the major home builders, and in 2008 there was an epidemic use of derivatives to speculate against overleveraged Wall Street securitizers.
Eventually, the huge unknown risk associated with these complex derivatives led to a crisis of confidence: Could the counterparties pay on their losing bets? Would they pay, even if they could? This lingering destructive counterparty risk is still huge and its many connections mostly unknown, and hence it continues to paralyze investment confidence.
Manias occur for many reasons, but great manias are made possible and sustained by errant government policies that may seem to have good reasons, none of them with any long-term economic value. Housing, despite high leverage, high transaction costs, and poor liquidity, was promoted as a dream investment for everyone. Massive intervention in this market by populist government policies and agencies fostering affordability exacerbated these normal defects and disastrously distorted the market. It was a "dream," in the sense of confused, wishful thinking. But to think and act this way with many trillions of dollars, most of it borrowed, was irresponsible on an historic scale.
There is now much media commentary that no sustained and robust recovery is possible until the housing sector recovers (that is, until house prices rise again). This desire to simply reinflate the collapsed bubble would likely yield the same disastrous result again. Another course would likely be more effective: restructuring away from so much dependence on leveraged, expensive, and speculative housing values. We should no more regret the demise of expensive housing than we should the decline of expensive oil, both of which are poorly correlated with productive, sustainable economic growth, but strongly correlated with damaging inflation.
Disciplined buyers -- too long unfairly disadvantaged by government policies -- are now sitting on trillions in savings that are earning, doing, and financing nothing. This money could clear the housing market, but only at lower, fairer prices. That would finally be "affordable housing."
Manias begin in obscurity and pessimism, rise with confidence and imitation, reach a state of euphoria and finally end in tragedy. They often change history in ways that are not foreseeable.
Posted by CSF - at 7:23 AM