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Tuesday, August 24, 2010

Laughing

Go over to Calculated Risk for a full discussion of existing home sales.

What has me laughing is this summary from the Bloomberg economic calendar:
It doesn't get worse than this. Existing home sales fell 27.2 percent in July to a 3.83 million annual rate for the lowest level in 15 years. The 3.83 million rate compares with expectations for 4.65 million. Supply at the current sales rate ballooned from June's already swollen 8.9 months to 12.5 months for the worst reading in 11 years.
Sadly, the only inaccurate statement above is "it doesn't get worse than this". It does when home prices collapse again and the taxpayers get to foot the bill for all the government-guaranteed home mortgages written over the two years SINCE the original collapse.

I do want to remind everyone that this is neither unexpected or unpredictable. CR predicted the over-12 months and the much lower sales than the "expectation". The difference is between Wall Street economists and working economists.

However the Fed will now go into another round of injecting money into the market, which will only shove the dollar down. Over time, the Fed needs the dollar to stay low, because by doing so they hope to stimulate exports. However to really leverage the low dollar, the US would need a much better energy policy which would provide reliable energy at relatively low cost.

I still can barely move my left arm, and typing is very painful. So I would like to write more, but for now I will refer you to this article published last Friday by the Philly Fed on economic returns from housing. This is a very understandable article for the non-economists among us.

The authors have missed a few points about why buying primary residences works for some lower income population groups, but they have pegged the real return correctly:
Assuming an annual depreciation rate of 2.5 percent, a property tax rate of 1.5 percent, a mortgage interest rate of 7 percent, and a marginal income tax rate of 25 percent for a typical taxpayer, the adjusted real rate of return on housing actually falls below zero (1.3-2.5-1.5+0.25(7+1.5))=-0.575 percent!
The 1.3% is the real rate of home price appreciation nationally. It was only the expectation of really high rates of return that made buying multiple houses seem like a really great way to make money, and that was accomplished only by dropping mortgage underwriting standards so low that many homeowners were doomed to ultimately default.

The controlling factor for home prices in the long run are incomes in the home-buying cohort and the size of that cohort. Incomes control long-term home prices by setting rents in the marketplace, which sets rates of return for investment housing.

Over the next 20 years, both the size of the home-owning/homebuying cohort will drop and average incomes will drop in the rental market. So nationally, home prices have considerable declines built-in.

I figure that the federal government just wasted from 300-400 billion of taxpayer money in a futile attempt to shore up the unshoreable. And they're defending this as a good policy!

PS: The price calculations in this report (it was reported that median price rose) are meaningless. You have to look at single-family vs condo sales in at least each market to see what is going on. In most of the nation, single-family housing costs more on average than condos. In some areas of high density, the reverse is true. And a great deal of reported home price valuations is based on the change in the mix. That's one factor. Another factor is that the housing tax credit temporarily scraped out lower-level entry buyers, so you tend to get a slightly more affluent set of buyers in the market now. You get the breakouts by region and housing type here at NAR's Existing home sales data page.



Comments:
MOM,

I was watching that real time on CNBC this morning.

It was like the headlights just came on in the center of a deer herd, lol.

It was shock and awe at its very finest.

Hope your arm gets better soon. As seen on the Internet...

"Laughter is the shock absorber that eases the blows of life."
 
I know - and Mark, the only reason why it's funny is that it was so completely predictable.

What did people expect? A miracle? Are we in the era of faith-based economics now?

I bet you're laughing about your TIPS, too.
 
Why-- You mean-- a HOUSE can depreciate -- lose value, just like a car, or office furniture/ equipment?

OMG, RLY ?

WHO KNEW?
 
MOM,

"I bet you're laughing about your TIPS, too."

I bought the 30-Year TIPS in the February auction. I think my advantage, at least in the short-term, is that I'd already been bearish 6 years. What's another 30?

U.S. Treasuries

30-Year 2.125 02/15/2040 110-10 / 1.68

I paid $97.73 per $100 for a bond that pays me 2.125% over inflation. Not it is sitting at $110.31 (10/32). I also received my first semi-annual interest payment recently.

Is it a bubble? What do I care? I'll be earning 2.125% over inflation for the next 29 1/2 years and won't require a greater fool to buy it from me. It will simply mature.

Now people are accepting 1.68% over inflation? I don't think that's all that surprising.

From where I sit, if Jeremy Siegel is ultimately right about the bond bubble, then he's really not going to like what his precious stock market will do.

Can't you just imagine what 10% interest rates and fears of hyperinflation would do to the price of oil (and the real return of the stock market)? Has he not read up on the 1970s?
 
A_Nonny_Mouse,

Here's another warning flag that was apparently easily ignored.

May 9, 2005
Faster Equity Buiding With Mobile Homes
 
Stimulus for the banks, automakers, and home
builders. Higher prices (temporarily) and higher taxes for the rest of us. Oh yeah, free trade agreements with countries that manipulate their currency, another hand out to big business and an incentive to ship jobs overseas. Hold on for QE2.

Sporkfed
 
MoM,a factor not mentioned in skewing the median is quality. Where I am if a home is not sparkling clean,in good shape and priced right,no sale. So,even with identical square footage in the same area buyers are getting more house. And FHA loans are insane. 30 year fixed,no points,4.25%,3.5% down,3% credit from seller,580 fico. and 55% of your GROSS income can go to the house payment. The loan broker I heard announce this had a happy bounce in his step. I DEEPLY regret that dueling is illegal at times. Please see SuperDoc about that Bursitis!!!
 
MoM,

I hurt my shoulder a few years back and it made me miserable because the thing that caused the most pain was laughing. Had to avoid friends and TV (especially the news) for two weeks. (It was in the winter so I had to avoid shoveling snow, too, which would have been a disaster if we'd had more than one storm.)

Get well.
 
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