A periodic blog dedicated to providing commentary and encouraging debate on topics in Economics and Finance.
Monday, April 30, 2007
Was he tired of losing his self-respect and credibility through shameless servitude to his evil masters at the NAR, or did they can him because nearly all of his bold "predictions" (cheerleadings) turned out to be so horribly wrong and destructive to those who harkened them?
I believe that both are true, and that being a "cheerleader" Economist (vs. a real Economist) for any special-interest group presents its challenges. However, there are many industry cheerleaders who conducted themselves far less shamefully than Mr. Lereah did.
Ah, Dear Old David, I Wish I Hardly Knew You:
David Lereah, given his widespread "tell-them-what-they-want-to-hear" media coverage, played a significant role in inflating the housing bubble, tirelessly (despite an overwhelming majority of real, independent Economists stressing otherwise) proclaiming that housing "never goes down" and that it's always a "good time to buy" in the housing market, even if that purchase is a one-way ticket to financial ruin and decades-long house poverty.
Like any clown, he used multi-decade historical norms and tried to apply them to an anomalous short-lived situation and, circularly, then tried to claim that the anomaly was the new norm. I have to believe that even a dunce like him is smart enough to have seen the folly in his arguments, which is what made his disingenuous claims so sickeningly disturbing.
He helped to put housing out of reach for countless young families and low-income Americans (unless they wanted to take some kind of toxic, subprime, neg-am option-ARM "death spiral" loan). Housing hasn't been so expensive, dollar-for-inflation-adjusted-dollar of income, since the early 1980's, during the most severe economic contraction since the great depression. When housing lost its affordability, Mr. Lereah simply changed the definition of affordable - Presto! Problem Solved! As a testament to this new measure of "affordability," foreclosure rates are now exploding as record numbers of households default under their loans, their lives, for all intents and purposes, ruined, and all this despite a healthy economy and ultra-low unemployment.
His fear-mongering books, quotes, data-manipulations and half-truths led millions of Americans to believe that they'd be "priced out forever" if they wouldn't spend 50% of their incomes on housing immediately, for fear that it would get worse (despite the fact that the very claim itself is a logical absurdity). Out of fear, many desperately jumped head-first into ruinous financial commitments simply to obtain shelter, now doomed, at best, to years or perhaps decades of indentured servitude. All during this charade, Mr. Lereah, his faithful Realtors and their Mortgage Broker buddies were laughing all the way to the bank - at the expense of everyone else.
It was only a matter of time before the mania subsided and truth boiled to the surface. Housing has gone down plenty of times when inflation is factored in, and now it looks like (uniquely) housing will fall in nominal terms this year. Thanks to you, David, for doing your part in pushing our economy to the brink of disaster. Thanks for helping us to flush trillions of dollars worth of capital down the toilet, leaving us with nothing but a massive, useless oversupply of housing. No, it's not all your fault, but we couldn't have done it without you.
I sincerely hope you left because you couldn't live with watching the pain that you helped cause, and couldn't do the bidding of your employer any longer in good conscience. If you were forced out, you now have a golden opportunity to redeem yourself. Let's just hope your replacement finds his or her way more quickly.
Hat-tip to Housing Panic for the wonderful graphic.
Tuesday, April 24, 2007
Yes, the weather was bad in parts of the country, but sales declined everywhere, and a lot!
Yes, bad weather can reduce sales, but I'd think it would take a biblical plague to reduce sales this much. Throughout floods, hurricanes, blizzards, earthquakes and tornadoes, sales haven't declined this much in 18 years.
"The Americans are not there. They're not in Baghdad. There are no
troops there. Never. They're not at all."
Here's last month's existing home sales report headline: "Existing-Home Sales Rebound in February, Market Stabilizing." If stabilizing means consistently falling, well, then yes, the market is stabilizing.
No, Mr. Lereah, nobody with half of a brain believes your garbage. Though, I guess if you call the bottom enough times, you'll eventually be right.
For all of the newer house bubble readers out there, check out David Lereah's entry in Wikipedia to see how comical the timing of his books is. Probably the best is his book on how to get rich in tech stocks, which was published in June 2005... right about the time when you would have sustained maximum damage in the market.
Today is D-Day for the NAR. I'm anxious to see how they spin numbers that I believe will be horrendous based on their pending home sales index during the last two months. Let's see if the trend of revising last month's figures downward (so this month doesn't look so poor by comparison) continues. Will they admit that housing is crashing, or will they manipulate the figures and call bottom one more time?
I'm also enjoying the fact that an egregious bout of price inflation, supported by the government at the expense of 30% of its citizens (actually more if you count all of those young house-poor couples who bought at the peak), has been over for quite some time now. Most of those who were left out earn lower wages those who owned their house already, who were insulated from the damage. (They could just trade their overvalued house for another... didn't need to pay $4000 a month like a first-time buyer in California.) Don't forget that the whole reason that families needed to take out those toxic subprime loans was because they couldn't afford to buy a house any other way.
The consensus is a seasonally-adjusted rate of 6.6 million homes, down 2.9% from last month's figure of 6.8 million homes. I'm also expecting another significant YOY decline in median house prices.
Friday, April 20, 2007
Sorry from the absence of posts! Jury duty ("ugh") has thrown a monkey wrench in my whole routine.
As promised, I'll be delivering a "real" buy vs. rent (or anything vs. anything calculation) shortly. Please understand that putting together a good piece of original work (not simply pasting someone else's work) takes a good bit of time... especially when data-gathering is required. In the meantime, I'd like you to check out a great site:
Bubble News Network
If you have some free time at work or at home, this is a great way to get news on the housing bubble without sitting through those annoying pieces on Angeline Jolie's ninth adoption from the planet Skylon.
The link above will take you to an entertaining interview of PIMCO's Bill Gross. PIMCO's (bond fund company) estimates are right in line with mine below. They actually looked at the NUMBERS! What a novel concept.
Always remember: while all analysts / economists see the same things that I do, whether or not they decide to show you those things usually depends on how rich or poor it might make them. If you ever have heard the Latin term "cui bono? (who benefits?)", this is its essence. When examining anyone's "advice," always remember to examine that person's motives... more often than not, you'll find a trail leading to that person's wallet.
PIMCO's angle: While Gross talks about a gracious rescue for housing by the Fed, what he fails to mention is that the Fed has much less control over long-term rates than you might think. Did you notice that the Fed increased its target by more than 4% and long-term rates barely budged? Instead, Mr. Gross is salivating at the hefty returns rate cuts would generate for his short-term bond funds (when rates fall, your existing bonds have interest rates that are now "above market" - people will pay more for them).
For those of you who think that a Fed rate cut might actually work... check out the Bank of Japan's response to their real estate implosion in the early 90's. They dropped rates to virtually 0% - that's right - from 1990 to 2003. What effect did that have? Nada. Leverage, even at 0% interest, has little appeal when prices are declining.
Friday, April 13, 2007
A Word on Fundamentals
In the medium and long-run, fundamentals always drive asset price valuation (the value of your stock or real estate). In real estate prices, the main fundamental drivers are incomes and interest rates. When your broker says the fundamentals are strong, she is indeed correct: interest rates are low and incomes are increasing (though not excessively so). However, there is not some line at which fundamentals become "officially strong" and put a lead foot on the infinite asset price accelerator. While this is the way its generally presented in the media or by your brokers, it's ridiculous if you sit for a moment and think about it. If interest rates decline by 1%, what happens? Will the "magic" of 5% mortgage interest cause prices to rise 5 times faster than incomes rise for all time?
The obvious answer is no. The buyer still has the same amount of money in hand to dedicate to housing. The price he is willing to pay will adjust upward in the long-run until the monthly payment approximates what it did at the higher interest rate. After that happens, even though the "fundamentals are strong," it's ridiculous to assume that prices will continue to increase indefinitely unless "Average Joe's" income rises proportionately.
If that's true, then what happened to housing? Answer: Speculation
Notice that I use the term "long-run" above. In the short run, speculative greed and fear of missing out (i.e. you'll miss out if you don't buy now... you'll be priced out forever) can cause significant distortion in markets. Speculators are the "technical" traders in the stock market or the flippers in the real estate market who live by the mantra "the trend is your friend." They don't buy based on an asset's underlying value, but instead they speculate on price swings in search of a short-term "easy money" profit.
To an extent, speculation is a self-fulfilling prophecy. As the rise in prices cause more and more speculators to pile on, with each participant searching to cash-out off of a "greater fool," the rate of price increase accelerates. In the end, the "smart money" takes its profits off of the table before the inevitable fall in prices, and they sell to the "greatest fools" who are left holding the bag as profit-taking feeds on itself, increasing the rate of price decline. Eventually, the market falls out of favor with speculators, fundamentals dominate and the market regulates for a time. The effects of speculation are well documented in history, from "Tulipomania" in 1600's Holland to the dot.com bubble of the late 1990's and the housing mania of 2004-2006, with plenty of stops in between.
What Should House Prices Be Today Given the Fundamentals?
I'll start with the good old days of April, 2000. When the boys were boys, the economy was strong and the "beer flowed like wine." Based on the U.S. Census data taken at the time, the median household income was $42,000 and the median house price in the U.S. was around $125,000. At a rate of 8.2%, a 100% mortgage payment on the "median" house was around $935. Through April 2006 (data is not yet available for April 2007, but I'll provide estimates later), incomes rose 19% according to the U.S. Bureau of Labor Statistics, meaning we can expect, based on incomes, that the median mortgage payment would also rise 19% to $1113 per month.
Given the lower interest rates in April 2006 (6.43%), that $1113 per month can buy a lot more house than it used to(which is why interest rates are a second major "fundamental.") Adjusting for both wages and interest rates, the "fundamental" value of a median U.S. house would be $177,343 in April,2006, up from $125,000 in April, 2000 - a perfectly valid 42% appreciation in house prices (before speculators stepped in and screwed the darn thing up). The manic fever that swept the country (we're always looking for the easy ticket to fortune) drove median prices all the way up to $211,578, based on changes in the OFHEO Home Price Index from our base value of $125,000, creating a 19.3% ($34,000) gap between the 2000-based fundamental value and the actual price of a house. So, when your real estate broker or David Lereah tries (or tried) to use the "fundamentals" to support current house prices, the numbers simply don't add up, and haven't for two years. (Unless you believe that some new housing technology has made houses 20% better at providing shelter... or all houses jumped 20% in size over the last 7 years - most of the houses out there today were around back then.)
Click on the picture for a larger image.
As you can see in the graph above, from 2001 to 2004, buyers were able to get a better "deal" than in 2000, and buying could have been considered a fantastic value in historic terms (especially in 2003). However, as prices began to rise, at first due to better fundamentals, speculation took hold, driving the prices way above their 2000-associated "fair value." Based on estimates for April 2007, we can already start to see house prices converge with the fundamentals.
Assuming (generously) flat house prices from this time last year, and a 3.0% increase in wages (most recent BLS estimate), and given the current drop in mortgage rates to 6.20%, we can already see the house prices begin to converge with the historic fundamentals.
Click on the picture for a larger image.
If we assume mortgage rates stay the same (given the mess in mortgages and inflationary pressures, I believe they're more likely to rise, but just for argument's sake), and incomes rise by 3%, it will be 4 more years until the median family budget buys as much house as it did back in 2000... if house prices don't fall appreciably.
Click on the picture for a larger image.
Divergences from fundamentals don't often last that long... it's more likely that prices will decline slightly to aid the correction. A 3% annual decline in house values and a 3% annual increase in incomes will erase the market distortion by April 2009. At any rate, it looks like a particularly ugly time to buy a house right now.
Click on the picture for a larger image.
For my next post... I'm going to give you the real goods on "Buy vs. Rent," and explain why you can "throw your money away" just as easily by paying too much for a house as you can by renting. In fact, it's not a matter of throwing your money away at all... we do so in both instances. It's a matter of whether you're throwing more money away buying or renting.
At the request of John M., you can find the numbers for the charts below.
A note on the 2000 adjustment (for the UberNerds out there)... the Census data actually says that the median house price was $119,600 in 2000. However, since the Census doesn't have a yearly home price index, there is no way to get the Census yearly % change. So, I used OFHEO's % changes from this figure. Because of the differences in methodology between the Census and OFHEO, doing that only yielded a value of $202,000 in April 2006, below the $210 - $225 k range reported. Obviously, OFHEO and the Census don't precisely agree (statistical samples rarely do). So, I used a figure close to $119,600 ($125,000) that will get us to a reasonable result when using OFHEO's price adjustments.
At any rate, changing the starting point to $119,600 or to $130,000 would not change the % valuation gap, and only reduces / increases the estimated dollar amount of the gap by $1,000, so it's not material to the analysis... mostly cosmetic.
An interesting fact to note is that prices jumped by 69% as measured by changes in the OFHEO Home Price Index from 2000 to 2006. To put that in perspective, median house values took 40 years to double before this period.
Click on the picture for a larger image.
Tuesday, April 10, 2007
I'm still working on my next big post on house price fundamentals, but it's not quite finished. In the meantime, you've got to check out this link:
Irony of the Day: David Bach's Advice on How to Avoid Foreclosure - Yahoo! Finance
This is the guy who just last year released Automatic Millionaire Homeowner. It looks like his definition of "millionaire" means $1,000,000 in debt. I'm amazed that this guy could live with himself writing something like this. How many of these foreclosed (or soon-to-be foreclosed) house debtors acted on his advice?
Thursday, April 5, 2007
Housing Inventory Surges in March
April 5, 2007; Page D2
A sharp increase in homes offered for sale last month suggests that home shoppers will find plenty of choices this spring.
|Click the chart or here for an interactive version.|
The number of homes listed for sale in 18 major U.S. metropolitan areas at the end of March increased 6.5% from a month earlier, according to data compiled by ZipRealty Inc., a national real-estate brokerage firm in Emeryville, Calif. The data cover listings of single-family homes, condominiums and town houses on local multiple-listing services.
Over the past 22 years, home inventories nationwide have increased an average of 1.7% in March from February, according to Credit Suisse Group. Supplies typically rise modestly in March as sellers pursue the many families with children who seek new homes in the spring, so they can move during summer vacations.
The big rise in the latest month may reflect sellers' expectations that it will take much longer to find buyers than it did during the housing boom of the first half of this decade, said Patrick Lashinsky, president of ZipRealty. Rather than waiting for April or May, he said, many people planning to move this summer put their homes up for sale in March. He added that many sellers are being cautious, waiting to sell their old homes before committing to buy new ones.
ZipRealty recorded the biggest increases in the metro areas of Los Angeles (12.8%), San Francisco (12.2%) and Washington, D.C. (9.4%). Miami, where a glut of unsold condos has been weighing on the market, showed a modest rise of 1.8% in the supply of all types of homes in March from a month before. But the Miami inventory was up 61% from a year earlier. For all 18 metro areas, the inventory at the end of March was up 35% from a year earlier.
Large inventories have caused prices to level off or fall modestly in much of the country over the past year or so. The recent surge in defaults on subprime mortgages -- loans to people with blemished credit records -- has prompted lenders to tighten credit standards. That tightening is expected to put downward pressure on home prices by removing many potential buyers from the market.
Write to James R. Hagerty at email@example.com
Wednesday, April 4, 2007
I'm currently swamped at my real, pay-the bills job (the reason for my lack of posting). I'll have to keep this very brief. The story goes like this:
Yesterday, the Dow was up 128 points. Incredibly, the Associated Press attributed this run-up to a 0.7% (seasonally adjusted) ANNUAL increase in the NAR's pending sales index. (YAWN!) This makes absolutely no sense, especially given that the index is 8.5% below its year-ago level and the Northeast and West, the two most important regions, posted month-over-month declines. Oil's retreat and a potential breakthrough in the Iran hostage crisis (Didn't this happen before somewhere?), drove the rally. The reason: worries of a severe exogenous price shock due to a spike in oil (similar to the 1970's oil spike) combined with tons of liquidity and a slowing economy, a recipe for the U.S. economic train to pull into the stagflation station, abated. In short: looks like the outlook for inflation did not get worse (although it really hasn't improved).
For all you history buffs out there, I can't wait until Tony "Neville Chamberlain" Blair proclaims to his people, after appeasing Iran, that "WE NOW HAVE PEACE IN OUR TIME."
For my next post, I'm going to teach all you non financial types about fundamentals (a lot of talk about them, but no one in the media seems to explain what they are(or have a clue, at all) and how to do a real, honest-to-goodness buy versus rent calculation (for a house), so you can make an informed financial decision in line with your long-term interests. You'll see why I rent in Philadelphia, would perhaps buy in Midwest, and would contemplate suicide in California.
- David Lereah Announces that He is Leaving the NAR ...
- "Bad Weather" Causes Largest Sales Drop in 18 Year...
- Existing Home Sales Report: Due Out Today
- PIMCO's Bill Gross: Houses 15%-20% Overvalued
- House Price Fundamentals: By the Numbers
- Fair is Foul and Foul is Fair: An Epic Irony
- Housing Inventory Surges in March
- Mainstream Media Misses the Boat on Yesterday's Da...
- ▼ April (8)