Thursday, October 26, 2006

Consumer Spending and lessons from abroad

This is an excerpt from a June 2005 article in The Economist.

The complete article is worth re-reading, but this bit is especially interesting as it warns of the position America is fast approaching right now, a little over one year later.
Vern

http://www.economist.com/finance/displayStory.cfm?story_id=4079027#top
"Another worrying lesson from abroad for America is that even a mere levelling-off of house prices can trigger a sharp slowdown in consumer spending. Take the Netherlands. In the late 1990s, the booming Dutch economy was heralded as a model of success. At the time, both house prices and household credit were rising at double-digit rates. The rate of Dutch house-price inflation then slowed from 20% in 2000 to nearly zero by 2003. This appeared to be the perfect soft landing: prices did not drop. Yet consumer spending declined in 2003, pushing the economy into recession, from which it has still not recovered. When house prices had been rising, borrowing against capital gains on homes to finance other spending had surged. Although house prices did not fall, this housing-equity withdrawal plunged after 2001, removing a powerful stimulus to spending.
Housing-equity withdrawal has also fallen sharply over the past year in Britain and Australia, denting household spending. In Australia, the 12-month rate of growth in retail sales has slowed from 8% to only 1.8% over the past year; GDP growth has halved to 1.9%. In Britain, too, a cooling of the housing market has been accompanied by an abrupt slowdown in consumer spending. If, as seems likely, home prices continue to fall in both countries, spending will be further squeezed.
Even a modest weakening of house prices in America would hurt consumer spending, because homeowners have been cashing out their capital gains at a record pace. Goldman Sachs estimates that total housing-equity withdrawal rose to 7.4% of personal disposable income in 2004. If prices stop rising, this “income” from capital gains will vanish."

Inventory numbers and selective reality

This quote also from the FOXnews.com

http://www.foxnews.com/story/0,2933,224881,00.html
'The inventory of unsold homes, after climbing to all-time highs, fell for a second straight month, decreasing 2.4 percent, to 3.75 million unsold homes at the end of September, which represents a 7.3 months supply at the September sales pace.'

(Vern) - Perhaps I got up on the wrong side of the bed this morning, but this report leaves me feeling grouchy.

Is that all there is? Are there any more facts, like how many homes were pulled off the market because the listings became stale?

I know that real estate agents can pull a listing, leave no trace of its having been on the market in the MLS, and then reintroduce it at a lower price as a ‘New Listing’ a couple of months later.
What ever works…
My point being that there is more than one possibility for inventory numbers to drop on paper. I’m sure I’m not aware of all the creative possibilities, but the released stats don’t jibe with what I see when I put my head out of the window for a look around at the real world.

True, there may be investors or large numbers of private buyers who see their local markets as being over sold and pulling the trigger on that new home purchase, but I feel there’s something more to the inventory numbers than that simple statement implies.

I for one will be on the sidelines for some time, but I’ve been wrong before.

Vern

While parallels to Nero fiddling while Rome burned are not exactly what I’m looking for, I will draw your attention to David Lereah’s comments highlighted by me in red.

Remember Bagdad Bob?
He was Sadam’s mouthpiece and head-cheerleader, (I don’t remember what his official title was) Mr. Bob (as I like to call him) was in the habit of claiming victory at every turn, even as American troops were overrunning his city.
Was he mad, an eternal optimist or a pathological liar? It doesn’t matter, he was funny.

Anyway, I always wondered what became of him after the war.
I think I know. Plastic surgery and a new job as Chief economist for the National Association of Realtors!
That’s right, David Lereah is non other than Bagdad Bob!

Vern

FOXnews.com
http://www.foxnews.com/story/0,2933,224881,00.html

WASHINGTON — Sales of existing homes fell for a sixth straight month in September and the median sales price dropped on an annual basis by the largest amount on record, further documenting a lukewarm housing market.

The National Association of Realtors reported that the median price of a single-family home fell to $219,800 last month, a drop of 2.5 percent from the price in September 2005. That was the biggest year-over-year price decline in records going back nearly four decades.
Sales of previously owned homes fell by 1.9 percent in September to a seasonally adjusted sales pace of 6.18 million units, the slowest sales rate since January 2004.

The median price of a single-family home fell to $219,800 last month, a drop of 2.5 percent from the price in September 2005. That was the biggest year-over-year price decline in records going back nearly four decades.
Housing, which had set sales records for both new and existing homes for five consecutive years, has been rapidly loosing altitude this year, as consumers were battered by rising mortgage rates, soaring energy prices and a slowing economy.

However, economists with the Realtors said they believed the housing decline could be hitting bottom.

"The worst is behind us as far as a market correction — this is likely the trough for sales," said David Lereah, the Realtors' chief economist. "When consumers recognize that home sales are stabilizing, we'll see the buyers who've been on the sidelines get back into the market."

However, analysts said that the weakness in housing could last for several more months with a real upturn in sales not occurring until next spring.
Sales were down in all sections of the country except the South, which posted a small 0.4 percent decline. Sales fell the most in the Northeast, a drop of 3.7 percent, followed by the West, where sales were down 3.1 percent, and the Midwest, where sales fell by 2.8 percent.

The inventory of unsold homes, after climbing to all-time highs, fell for a second straight month, decreasing 2.4 percent, to 3.75 million unsold homes at the end of September, which represents a 7.3 months supply at the September sales pace.

Sales of single-family homes dropped by 1.6 percent to an annual rate of 5.42 million units while sales of condominiums fell by 3.2 percent to an annual rate of 763,000 units.

The 2.5 percent drop in the price of single-family homes pushed them down to $219,800 while condominium prices fell by 3.2 percent to a median price which was also $219,800.

Wednesday, October 25, 2006

Housing Market Reality

Though I know more downbeat news is beginning to trickle in from Texas as well as other parts of the US now, I personally completed the sale of my own home here in Europe just yesterday and saw first hand a very similar dynamic in my market.

We took less than appraised value when just this spring a comparable house in my area was bid up to double it’s asking price! A price so rediculous I won't mention it here.
More on this in a later blog…
Vern

(CNNMoney.com) -- An Austin couple, Richard Morrisett and Regina Maldve, had a lot to learn about selling a home. That education is costing them big money.
They had put their three-bedroom, two-bath house on the market in April for $419,000, then dropped it to $399,000. In June, just as they were moving to their new home, they finished negotiating a verbal offer of $393,000.



"We said, 'Sure, that sounds great. We'll take it,'" says Maldve.
Eight hours later, they had another bid - at $399,000. That's where the trouble began. They failed to land either buyer and the couple is still trying to move the property.

"The buyers thought they had a verbal agreement and they were angry," says Maldve. They backed out and closed on another home just a week later.

Steady state market

During the past few years Texas had been one of the steadiest real estate markets for buyers; the economy was good, jobs were being created and homes were affordable and remaining that way. Prices had stayed low because of plenty of new home construction. The median home price in Austin is around $176,000.

When the couple finally changed brokers, they discovered they had overpriced the house, with comparables in the neighborhood about 25 percent lower.

They repriced it for $365,000 but still had no bites. They dropped it to $359,000 with the same results.

Meanwhile, they were now over-extended with two mortgages. They had counted on proceeds from the sale of the old house to pay for some upgrades on the new one.

They borrowed to make their payments - and worried a lot. "We can't carry two mortgages and other bills and credit cards," says Maldve.
Their salvation may be at hand. They have accepted an offer of $350,000 and took a down payment. But the new buyers have asked to delay closing until they can sell their own house.

"But we need to close before Oct. 31," says Maldve. "We've already tried to get our credit union (their mortgage lender) to delay our payment and roll it into the final payment when we sell."

They feel they must close before the end of the month. The brinksmanship is nerve wracking.

"I go to some of the local real estate blogs," says Maldve, "and read about how Austin keeps increasing in home sale prices. It's so frustrating to see these. I can't look at it without getting sick to my stomach.

Tuesday, October 24, 2006

FUBAR

For those of you who don’t know, FUBAR is an acronym, military slang that means ‘Fukked Up Beyond All Recognition’

I ran into this post on Mish’s Global Economic Trend Analysis blog. http://globaleconomicanalysis.blogspot.com/

Personally I lean conservative but Liberal John makes a good point.
Vern

I was reading the article below while watching the evening news. http://www.safehaven.com/article-6148.htm It basically discusses the amount of capital we need to bring in every day. It started at 2 billion then 2 1/2 and now it is up to 3 billion a day. Am I the only guy that just finds this unfreaking believable. Then I started thinking you know I think the rest of the country including most Republicans in the house and senate are starting to say that the policies in Iraq are FUBAR. Probably Afghanistan also. Someone I read today said that these two spots could go down as some of the greatest foreign affair blunders in US history and rank right up there with some of the greatest blunders of western civilizaton. Ok, so lets just say the two places are major leagued freaked up and no one knows how to fix it. Then I started thinking, well everybody was saying those places were moving along ok (according to Washington) until the last couple of months, what if the same thing is happening in the economy. What if our economic policy is just as FUBAR as our foreign policy (I know that might come as no surprise to anyone here) and the wheels are starting to come off. How can we just act like nothing is wrong when one of America's business icons comes out and says it is losing $5 billion this quarter and next quarter does not look to good either and the market goes up. Have the pod people finally taken over everything? You know this whole thing is really starting to get a smell to it. Like rotting vegetation.
Liberal John

Monday, October 23, 2006

Housing and the ripple effect

It’s true, the housing bubble effected perhaps a dozen areas of the U.S. that are now paying a high price for earlier giant gains in equity.

There seems to be a lot of talk from areas that didn’t see great price gains that this violent downturn won’t effect them.
Think about it, the run up was all perceived value, mere psychology. A lot of people fixated on ‘get rich quick’. They fooled themselves into believing the party would never end. They borrowed on equity, bought big screen TVs, vacations to Maui, ‘spend, spend it will never end’.

Now the psychology has experienced a paradigm shift. The party is over, equity is falling and so is spending which brings us to the point of the ripple effect.

Domestic spending is around 70% of the US domestic economy. This is serious! Not only is the equity liberation boom finished, as it goes, so does the spending it spawned. Goodbye good economy. This is an effect that will spread like wildfire across North America. If no one is spending, less people are producing, simple math. A down shift in jobs means less and more of less.

Here is where you will see the ripple spreading across the pond.
Japan is experiencing a comeback after what, 14 years of zero growth? A complex economy anchored by production and export of consumer goods, their biggest customer of course, the U.S.
Bad news for them.

China, a growing economy on fire! But also complex and highly dependent on production and export. The US being the largest consumer nation on Earth is their largest customer. Bad news for them.

The Euro-Zone. A little more complex but it’s safe to say, now that the world is flat they will be effected also as the ripple reaches their shores.

The resulting psychology of contraction will take a long time to filter out of the minds of all the internationally connected economies. This bias alone will prove a formidable obstacle to overcome.
Bad news for us all.

Vern

Saturday, October 21, 2006

Dow up, Housing down

Anyone else see the coincidense?
It’s quite possible that you and I are on the outside.
The smart money moved out of housing and back into the stock market.
I don’t believe however that there is near enough domestic cash out there to move the indexes this high.

Foreign money might explain why so much cash has flowed into a market that, well, let’s face it, is overvalued already. It looks like a sucker’s rally, a big play by big players to draw us in and take our dough.

Another theory would have it that this might be a coordinated effort to hammer the US economy – setting up US markets to drop in lock step with a spiraling housing market. This action is so big that it could only be achieved by foreign central banks.
Possible, but not probable. This kind of attack would affect the attackers as well as the world economy is now closely tied together.

It is more probable that we simply live in an era of greed and avarice where Arthur- Anderson style accounting is the norm and every baby-boomer such as myself sees nothing wrong with participating in it for personal gain. Just look at the wild speculation that led to the run up in housing prices.

With this in mind, ‘buyer beware’. There be monsters out there.

Vern

Friday, October 20, 2006

Thought for the day

Islamic fundamentalists have often repeated that they embrace death as Americans embrace life.

If that’s so, why do they wear masks?

Vern

Thursday, October 19, 2006

Bubble?

Lot’s of people are talking about a housing crash.I think it’s safe to say there was a bubble. It’s probably safe to say that it is no longer growing. No, SAFE is not the word I’m looking for...

I’ve noticed that when conducting a search and perusing other blogs on the subject, the horror stories seem to come from the same areas of the country over and over again. Upon polling individuals I know from some of these areas personally I don’t seem to get the same sense of urgency about their local markets, but this is only my personal experience. I think it’s safe to say, it’s hard to get the whole picture or any hard statistics. I do however get the impression that the crashing sound is still a bit more localized at the moment than some would have us believe.

I do have some personal experiences to share though.I currently reside in Northern Europe and travel around a bit. After leaving a Hawaii housing bubble in 2004 I found myself in a parallel bubble here in Euro land, probably driven by the same economic fundamentals. I was in Spain six months ago and found what can probably best be called a monumental housing bubble. I read that an estimated 3 million units were held by speculators and most of them were empty. That’s a lot of speculation! Though I can not verify these numbers, I can say that even in small fishing villages that I passed through I saw building cranes in abundance. Prices were high and by my best estimate, disconnected from all reality. In fact by US standards, I found housing prices in Spain very high. Again apparently driven by the same fundamentals as the US market: low interest rates and creative financing.

I think it is safe to say housing around the world has disconnected from basic fundamentals. Something has to give and will probably do so sooner than later. In the US we have numbers from the BLS that can’t be verified because they won’t disclose how they come up with their business birth and death statistics. Best guess is that it’s computer modeled, you know, theory, but they aren’t saying. What other government reporting agencies are getting creative with the numbers? Your guess is as good as mine. This further muddies the waters of information gathering and dissemination making it harder for an average guy to know if the sky really is falling.
I can tell you though, it’s a slam dunk safe bet that consumer spending is screeching to a halt as you read this, but who’s interest will it serve to release that information? After all, things could turn around right? Probably not…

If they don’t turn around soon, a few bad housing markets in the US will surely spread to areas that didn’t experience rapid price rises. They have to as the economy contracts. Of course as housing prices decline further the economy will most probably follow. You can see where this is going…

Anyway, you can do some simple arithmetic and come up with your own conclusion. If the kid who stocks the shelves at you local grocery store can’t afford a roof over his head, he will be forced to move to an area where he can. Who will stock the shelves? Who will check you out? Does anyone else see a chock point coming? Housing prices can't rise in perpetuity. Whether now or tomorrow, prices must come down, how far is the question.

Vern