Looks to me like maybe the payback has run its course.
I’d look for a rebound through the orange line I drew.

The only problem is there aren’t a lot of actual houses for sale.
So a pick up in housing starts can’t be far off either as they are very low given 1-3% GDP growth supported mainly by income helped by the govt deficit spending, lower home prices, and reasonable mortgage rates?

And yes, the surviving companies are those that have figured out how to make money in this environment, and most have massive operating leverage should GDP pick up to more normal recovery levels.

Still looks to me like over the next few years the big money will be lost by being out of stocks given where it seems we are in this cycle.

Unless Congress gets serious about near term deficit reduction. So far it’s pretty much all talk, but who knows!

On Wed, Aug 25, 2010 at 10:48 AM, wrote:

The payback from the expiry of the government’s tax program has been horrific. As can be seen from the chart, new home sales are at multi-decade lows. Existing sales yesterday were alarmingly poor. Despite this news, homebuilders are doing better, no doubt helped by Toll Brothers’ earnings today which were significantly better than expected.

18 Responses

  1. Warren, you’ve almost certainly heard of it, but on the chance you haven’t, I’d highly recommend following the blog Calculated Risk. Superb non-ideological coverage of housing and various economic reports.

    I can’t imagine what you mean by “The only problem is there aren’t a lot of actual houses for sale” unless you are simply referring to new home inventory alone. See the graphs of high existing home inventory and over twelve months supply here (and he’s done plenty of posts on huge additional shadow inventory).

    Yes, new home sales are low… CR runs a “distressing gap” series and essentially agrees: “I expect that eventually this gap will be closed…” (And yes, I know any increase is a positive for GDP).

    CR expects a further 5-10% nationwide fall in US housing prices (and generally his forecasts have erred on the side of optimism not pessimism). Unless this study of homeowners STILL expecting 10% per year house price appreciation is flawed, I do have to wonder whether a Japan-lite house price scenario over the next five years will finally put a dent in those expectations. (And even if prices don’t decline at all, the odds of appreciation faster than inflation seem remote). If so more people may finally try to save more of their income instead of expecting a nest egg via their home value doing their saving for them. But if the timeframe is long enough, the effect will perhaps be subdued enough to not contract growth. Extend and pretend is certainly the name of the game all around…

    1. everything is always for sale at a price. much is prices well above market levels and still offered for sale anyway.

      note all the foreclosures that are selling (30% of sales?) and they are hitting bids and getting sold.

      What I’m saying is there aren’t that many houses ‘priced to sell’ and remaining sellers are pricing their homes too high for the current buyers.

      When the foreclosure wave finally passes prices will move up to the next level of real sellers.

  2. Just got back from a breakfast on real estate market in Houston. A VP from a civil engineering firm I spoke with there says the big resediential developers are engaging them to kick start new home developements. The builders are turning bullish! A stark contrast from the past 18 months.

    1. Paul, as you well know, Houston is headquarters for much of the oil and gas industry. Booming real estate markets in North Dakota, Alaska or Houston say more about the price of oil than they do about the national economy.

      Hbl is right, there’s a huge inventory of unsold houses, most of which aren’t even on the market because the mark to market rule has been suspended. If banks put them on the market and they sold, the actual market sale prices would make the insolvency of an absurd number of banks impossible to hide. No one want to catch a falling knife, so buyers are staying on teh sidelines. For the national real estate markets (oil states excepted), there can’t be a genuine recovery until there’s a dead cat bounce. Between here and there a lot of banks will have to be nationalized first, the President and Tsy should have taken the pain early and done this last year. The banks have lot more political power now, so the Administration is frozen from acting until the proverbial blood is running in the streets.

      The Administration bailed out the wrong side of the loan transaction, instead of recapitalizing bank it should have set up a system of home-equity insurance for property owners.

      How would it work? If prices fall, you’re covered. The insurance would be linked to the overall house price index at a local level, not the price your home. That way, you can’t sell at a loss just because you didn’t maintain the house. Lenders would also be protected, with first claim on any payment from the policy. Protecting lenders should make them more willing to provide loans and help bring some leverage back into the mortgage market.

      Unlike other bailout programs, providing home equity insurance won’t cost taxpayers billions. Here’s why. Having insurance available changes the whole market psychology. The very existence of the insurance increases demand which reduces the risk that prices will fall. This makes the insurance cheap to provide. Indeed, if the increased demand just stabilizes prices, there won’t be any claims and the cost of providing the insurance will be free.

      1. That’s interesting, I just saw this article out yesterday. Looks like somebody is holding onto REOs.

        Estimations on the shadow inventory abound. According to Morgan Stanley, the shadow inventory of foreclosures could top 7m properties and take nearly four years to clear. The credit rating agency, Standard & Poor’s, put the total aggregate balance of the shadow inventory at $480bn worth of loans that would take nearly three years to clear. Barclays Capital reported that it could peak at 4.7m in the summer of 2010.

  3. Unless Congress gets serious about near term deficit reduction. So far it’s pretty much all talk, but who knows!

    The talk about austerity is a lot of gas. It sounds good but plays awful politically when it comes down the specifying the details. The GOP Establishment has made it clear that “deficit reduction” means social spending cuts, with no concern for the budgetary consequences of tax cuts. There will be no deficit reduction no matter who is in power. It is just a question of the mix of taxes and spending. We seem to be looking at significant deficits far into the future. Now it is just a question of which interests are going to profit from them and which lose out.

    1. Tom,
      I posted some of this this on another thread in response to Dan (Dan hope you see this) but I think it is relevent to your point here:

      As of last Friday the MTD Treasury data is:

      Tot Withdrawals: 685,657
      Bond Redemptions: 436,658
      Net Withdrls (spending): 248,999

      Deposits: 702,877
      Treas Sec Issued: 564,956
      Net Depos: 137,921

      So it looks like MTD net deficit is 111,078 (Adjusting for Treasury sales/redemptions)

      My point here is that if the 248,999 term starts to drop due to austerity/cutbacks in expenditures/end of stimulus take your pick then net deposits (tax revenues) can fall (due to corporate sector throwing more out of work) to keep the deficit at the 111,078 (or thereabouts) as this may be the non-govt sectors savings desires.

      this is what I am going to try to watch for. any reduction in net withdrawals here (without the “handoff” WM is looking for, watch Bank Credit for this) would probably result in another leg down in employment and probably temporarily GDP.

      To your point about continuous deficits, a lot of govt spending is non-discretionary, but I dont think that most of the 2009 780B stimulus was discretionary, it was authorized for the period and not much is left (see recovery.gov). The stimulus was built in to the monthly deficits since about March 2009 and those arrangements both for taxes and spending portions are ending. Without the “handoff” WM is looking for, imo the govt is going to have to “re-authorize” the stimulus (or equivalent tax holiday) to keep us at the current GDP levels.

      It looks like we’ll make it thru the Nov elections and a bit beyond with this kind of net spending rates, but then when the stimulus effect ends in earnest, net spending may take about a 30B/mo. hit else equal (780B/24 months). … and then there would be another somewhat painful adjustment.


      1. What we know from the sectoral balances is that when the stim peters out, then either business starts hiring and income goes up, or people go deeper in debt, or exports increase markedly, or else recession continues. Odds are that taxes will either remain the same, i.e., the Bush tax cuts are extended, or there will be an increase in taxes on the upper tier, or else taxes will rise across the board. There will be no new tax cuts. And there will be little or no new spending, other than what is already approved.

        Everything depends on November. Intrade has the GOP taking the House. The odds have been steadily increasing and are now over 75%. 538 has it that the GOP could take up to ten Senate seats. That would make President Obama a lame duck and result either in further gridlock or a tilt of policy to the right. In any case Obama looks like a one-termer, due to poor leadership, staff selection, and decision-making.

        As far as I can see, the GOP strategy is to be the party of no, effectively sinking Obama’s presidency and ensuring his loss in 2012. They will try to pass legislation and a budget that moves the country to the right, but they will have to face determined opposition from the left in Congress and a presidential veto. So I think the net effect will be a holding pattern, with the economy declining. This suits the GOP just fine, since it undermines the Dems for 2012 and virtually guarantees a GOP sweep. By then, Dick Armey (and the billionaires he is fronting for) will be the GOP kingmaker.

        See Randy Wray’s brilliant satire, The Great Depression and the Revolution of 2017.

        Of course, there is no predicting the future and a shock or two could change the patterns considerably. The wild cards are debt deflation and wider war. There is a significant likelihood of one or the other. There is still a mountain of toxic debt out there, Israel has already declared that a nuclear Iran is a threat to its existence, and Pakistan is crumbling. Lots of things could happen, and some we probably haven’t even thought of. I don’t expect things to be quiet in the period following the November elections.

        “May you live in interesting times.” (reputed to be be an ancient Chinese curse)

      2. Tom, in other words, we’re doomed.

        I just came across on wikipedia that you’d like. At a congressional hearing in 1997 on issuing dollar coins, a Fed official, Thomas Allison, accidentally melted the brains of the congressmen present.

        Suppose the total amount of coins went up. That would provide a means of financing expenditures for the Treasury that didn’t exist before; that is, the Treasury can in effect spend. Let’s say there were another one billion coins, the Treasury could, in effect, spend—on goods, services, salaries, anything it wants to buy—a billion dollars without having to borrow the money to do it. And, therefore, it would save the interest cost on a billion dollars of debt that is avoided, in the case of a billion more coins. I’m not predicting that there would be a billion more coins, but just to put this in the perspective of some possible number.

        Which got me thinking, Congress could pass a revaluing all pennies and nickels in circulation to 10 cents and all quarters to 1 dollar at no cost, well, to anyone. It’d be a bull market for piggy bank accountholders everywhere (my niece would be delighted). If nothing else, it would further the aims of the metric system conspiracy, and I suppose chartalist economics too. :o)

      3. I am sadly in agreement with Tom.

        I think republican will take house, but not senate. nevertheless, those MORONS will be party of “no” and Obama will not be able to push much more through the gridlock. Unless, of course, he pushes a big tax cut program (which Republicans will back) but his own base keeps him from doing that.

        However, I do not think it will result in catastrophe. Look at Japan — it has been going through this for 30 years and there are no riots on street. Yes, Japan is very different culture than US, but still, automatic stabalizers are pretty powerful and it is possible US reach some muddle through condition like Japan. So US has European unemployment and underemployment rate — lots of people think US should be more like Europe and now it will be.

        Japanese “L” is more likely economic outcome

      4. Zanon, I hope you are right, but I am concerned that Japan is nation of savers, while in the US, private debt is historically high, setting the stage for possible debt deflation if the government handles thing stupidly, which it very well may.

      5. was japan always nation of savers? Someone had to be doing a lot of spending to push up property value and stock market in mid 80s.

        i was speaking to friend who live there, and she tell me most japanese are not interested in buying property — mostly they just rent in appartment building, so no mortgage. Don’t own car, so no car loan. College is cheap and paid for by parent, so no college loan.

        With mortgage, car, and college taken out of picture, what is there left to take on debt to buy?? So maybe it is not that japanese are nation of savers, maybe it is japanese do not have opportunity to take on debt to buy things.

      6. I think that is probably correct, Zanon. Credit is not as easy to come by for most people in the rest of the world as it is in the US, where creditors are anxious to finance just about any consumption if the interest rate is high enough and the spread great enough. That’s where “financialization” begins.

        It began with housing. Then realization grew that mortgages could be duplicated in other areas. First, this moved to auto loans and then on to durables, and then credit cards and HELOC’s that could be used to finance any kind of consumption the borrowers desired. Securitization and derivatives were built on top of that. I am not aware that this has happened elsewhere, at least to the extent it has in the US, where the economy is now credit driven rather than income driven, and many people have become expert in managing cash flow with multiple credit lines, as only businesses used to be not so long ago.

  4. Congress could pass a law, I meant, to amend 31 US 5112. I guess you’d have to revise the legal tender value of 50-cent piece for good measure (to keep everything divisible by dimes).

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