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Friday, July 21, 2006

US Housing

Homebuilders tell the tale about real estate:
D.R. Horton, which has nine communities actively selling in the county, said that in the past 60 days it had cut the number of lots it has under contract in San Diego County.
But companywide, the home builder wrote off $57.2 million in the quarter for deposits on land that it now isn't going to buy.
About San Diego:
“San Diego is our weakest market in California,” Tomnitz told analysts. “California continues to be a challenging market for us. There continues to be a small percentage of affordability out there.”
For example, June sales were down 24 percent from a year earlier, the 24th consecutive month of year-to-year sales declines. The inventory of homes on the market is hovering around 20,000 – nearly double the number at this time last year.

The median price for a San Diego County home was $488,000 in June, down from a peak of $518,000 in November.
But DC is very bad also, as the article notes later. And Phoenix is worse than DC or San Diego. HousingTracker uses median list prices to compile 25%, median and 75% information on major metro areas. Obviously listing prices measure more the sellers' expectations than actual sales figures, but they are a useful index to some extent.
Washington, DC:
07/21/2006 12,111 listed, $349,950 (25th), $474,900 (median), $649,000 (75th)
08/14/2005 5,347 listed, $360,000 (25th), $489,000 (median), $699,900 (75th)
San Diego:
07/21/2006 14,872 listed, $395,000 (25th), $519,000 (median), $725,000 (75th)
08/14/2005 9,656 listed, $410,990 (25th), $545,000 (median), $758,000 (75th)
07/21/2006 26,817 listed, $259,900 (25th), $344,000 (median), $519,900 (75th)
08/14/2005 7,447 listed, $264,867 (25th), $379,900 (median), $629,900 (75th)

The difference between this median for San Diego is that it is a median of offering prices, whereas the $488,000 noted above for June is a median of sold homes. And somewhat different areas are included - but note that the relative drops are similar in scope (-5.7% in sales price vs. -4.7% in listed price). Phoenix's 10% drop in median list price is pretty rough; Miami's is worse. The HousingTracker site is a pretty good idea to get a feel for the different conditions in different areas at the moment.

The problem with the housing market in some of these areas, as I keep repeating, is that historical trends are no longer predictors of future trends. The exotic loans with layered risks (high debt-to-income ratios, no-doc underwriting, low or no downpayments, non-amortizing or even negative amortizing loans with rapid resets) mean that recent borrowers are abnormally vulnerable to even flat markets, much less falling markets. Their only hedge against risk is a rising market. With homes being so unaffordable in many of these places, many new prospective buyers will be unlikely to qualify for traditional mortgages, and creditors will stop writing these loans for all but the most qualified borrowers. Who in the heck is going to want to hold a 20% piggyback for an 80/20 financing in a market like this? The second-lien holders are the ones who lose their principal if the loan goes into default.

With that in mind, the Fed's Monetary Policy report is interesting. It carefully skirts around the housing issue, and comments favorably on the growth in business investing as a factor bolstering up the consumer spending/residential investment shortage to support continued economic growth. But, as a Forbes article points out, there are big uncertainties involved. The article goes on to note that 75% of large cap firms surveyed expected to increase capital spending, then cites drops in stock, tightened monetary policy and an inability to pass along costs:
Forecasters predict growth will slow to about 3 percent or less over the next six months, and the worry is what happens next.
Some think big business could come to the rescue. Among them: Federal Reserve Chairman Ben Bernanke, who testified before Congress this week that capital expenditures should remain strong, given that "firms remain in excellent financial condition, and credit conditions for businesses are favorable."
Business leaders appear to be showing some concern. The National Federation of Independent Business found that only 27 percent of the 416 small-business owners it surveyed planned on boosting their capital outlays in the next three to six months - the lowest level since March 2003, when the United States headed to war in Iraq.

Goldman Sachs just released its survey of information technology executives, which found a "decreased urgency to spend." In its report, the investment firm noted that there was "creeping conservatism" among those making technology decisions.
Consumer disposable income is dropping for the poorer half of our population, and drops in retail employment show the pressures on this part of our population. High consumer spending seems to have been supported by the housing ATM in many areas, and that is going to be sharply curtailed by more cautious lending practices.

A dollar more per gallon of gas means at least $17 more in weekly fuel costs for an average family, and that translates to close to $900 a year. Utility costs are hitting too, and costs of many staples in stores are rising quickly. The cost of incidental credit (cards, drawing on lines, etc) has risen sharply. Except for the cost of credit, these costs are not significant to those in the top third of the income bracket, but they are deeply, hugely signficant to the bottom 40%. The consumer is tapped out and businesses would have to indulge in an orgy of spending in order to offset a consumer spending pullback.

The only way I can see that we can get that orgy of investment is to actually do old-fashioned things like drill for oil, build power plants, etc. As the Fed report notes, government purchases account for a significant stimulus to our economy, and I do believe the tax ATM is about to run out as well.

As Oraculations has been writing, what we need are jobs, and most of all, good-paying jobs. Inflation is going to beat the already marginalized bottom third of the income bracket to death. It's jobs and real investment we need:
How does anybody know that tax cuts caused an economic boom? What information do any of us have that proves it? Sure it helps investors but where does it say that increased investment creates jobs? I'd say that increased employment creates increased investment. Increased investment boosts share prices, but as far as creating jobs how can anything other than new investment in new companies or products boost employment?
If there were any old-fashioned JFK dems left, we'd all be crawling on our bellies begging them to run. Look at Howard's comments - share prices are dropping. We have got to return to being a country that makes things and doesn't rely on a massive illegal worker program to keep wages down.

"how can anything other than new investment in new companies or products boost employment?"..if Caterpillar sells more equipment of existing models in the export market (which it is doing very nicely) then in order to expand production it will need to buy more machine tools, robotic systems, and maybe whole new factories. These boost employment just as much as if Cat were launching a whole new product line, or if someone started a whole new bulldozer company.
Yes, but the competitive nature of most markets demands that in order for those products to be produced here, the companies must invest in more efficient production and better design.

We are locked into the necessity for innovation in order to maintain these old product lines, and that means that the same amount of sales will generate less jobs or less pay.

With that in mind, Howard's statement is broadly true. The virtue of free-market capitalism is that it diffuses technology, productivity and therefore wealth, and that this diffusion creates a situation in which countries can gain not by war but by achievement.

But the corollary is that individual countries will be forced to adopt polices which are conducive to, or at least not inimical towards, innovation. Our domestic policy has been broadly negative towards this type of innovation. We are suffering from self-inflicted wounds.
One of these self-inflicted wounds is tax policy. Most capital equipment must be depreciated, for tax purposes, over multiple years. What this means in practice is that you are paying taxes on money you did not really make ("make" in the sense of cash flow.) This systematically discriminates against businesses whose investment is in tangible things, as opposed to those whose investment can be expensed in the year incurred.
Yes. That's one example. There are many others. We have a created a legal situation in which no new productive plants will be built in much of the country. We are starved for production and paying for pollution to be shifted to other countries.
I've have a degree in Mathematics. I've got 30 years programming expericence under my belt.

The best job I can get? Stocking shelves at the local dollar store night shift for $8 per hour.

Thankfully I don't have a wife and kids to support.

Hey...local governments could make a lot of revenue by taxing real-estate "house for sale", "open house" and "FBO" signs on the roadways' median strips.

Was up in Ashburn, (Loudoun County) last weekend...hoo-ahh.

Anon - exactly. And you are not the only one in this situation. Things are badly broken. We are producing too little to sustain ourselves. Please email me at smoke_perro@hotmail.com

Bilgeman - Loudoun County officials are very honestly discussing their fears about their property tax base. They're not alone.
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