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Peter Flint, CEO of online real estate service Trulia, tells MarketWatch’s Stacey Delo about home-price reductions around the nation in July and what parts of the country are seeing the biggest changes.

The one question I seem to get more than any is on (Hyper) Inflation versus Deflation. As previously noted, we clearly are in a Deflationary party of the cycle now.

While inflation may occur ion the future, and the possibility exists for Hyper-Inflation, these are merely potential issues down the road.

As  these two charts show, we now have Deflation, are likely to see it continue for some time into the future:

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Near Record Deflation Rates At All Levels

click for larger charts

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US capacity utilization leads core inflation by about a year

Chart source: Albert Edwards, Society General

So far, auto buyers in the U.S. have signed contracts to trade in 358,851 clunkers for new vehicles, stimulated in large part by government rebates of up to $4,500.

AP reports that most of the trade ins have been pickups/SUVs. And what are they driving ff the lots in exchange?

1. Toyota Corolla
2. Honda Civic
3. Ford Focus
4. Toyota Camry
5. Toyota Prius
6. Hyundai Elantra
7. Ford Escape (front-wheel-drive)
8. Honda Fit
9. Nissan Versa
10. Honda CR-V (four-wheel-drive)

Interestingly, there are 3 Hondas, 2 Fords, 2 Toyotas — but no General Motors or Chryslers on the list . . .

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Source:
Top 10 vehicles bought by people trading clunkers
Associated Press, August 18, 2009

http://www.globeinvestor.com/servlet/story/RTGAM.20090818.wclunkers0818/GIStory/

“Cash for Clunkers” Sales on the Rapid Decline
Edmunds.com, August 18, 2009

http://www.businesswire.com/portal/site/google/?ndmViewId=news_view&newsId=20090818006043&newsLang=en

Guest Host Douglas Kass TheStreet.com Contributor Seabreeze Partners Management

SQUAWK BOX

I have long been a critic of the current Appraisal system. There can be no doubt as to the corrosive and corrupting influence of Real Estate Agents and Mortgage Brokers on the process.

As noted earlier (Home Appraisal Reform: WSJ vs NYT) the changes effected by Fannie Mae in settlement with Andrew Cuomo are prompting a fresh look at the issue.

Query:  What experience do people have with State Appraisal Boards? It seems some states actually randomly assign appraisers, while others merely license and oversee them. For any local readers, what is the differences between the way things are run in states such as Nebraska, Texas, Arizona, Louisiana and Oregon?

Anyone with experience care to comment on these?

Read the rest of this entry »

David A. Rosenberg is Chief Economist & Strategist at Gluskin Sheff, with a focus on providing a top-down perspective to the Firm’s investment process. Mr. Rosenberg has earned both Bachelor of Arts and Master of Arts degrees in Economics from the University of Toronto. Prior to joining Gluskin Sheff, David was Chief North American Economist at Bank of America-Merrill Lynch in New York and prior thereto, he was a Senior Economist at BMO Nesbitt Burns and Bank of Nova Scotia. Mr. Rosenberg has ranked first in economics in the Brendan Wood International Survey for Canada for the past seven years and was on the U.S. Institutional Investor All American All Star Team for the last four years.

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IS THE RECESSION REALLY OVER?

Not necessarily, according to at least two officials over at the National Bureau of Economic Research (NBER). Robert Hall, who actually heads the Business Cycle Dating Committee, came right out and said yesterday that the group will “wait for activity to surpass its previous peak” and added that the “committee will have to reconcile positive GDP growth with shrinking employment … I personally put substantial weight on employment, so I may be leaning toward a later date.”

Well, that may have some serious implications for the markets because historically the S&P 500 bottoms, on average, four months before the recession ends and never by more than eight months. By the sounds of what Mr. Hall had to say, the recession may not end for another 6 to 12 months, which may mean that the March low … may ultimately be retested. What the market seems to be responding to is the consensus of economic forecasters because 90% of them believe that the recession is ending this quarter. (Of course, like the dog wagging its tail, the group is taking its cue from Mr. Market; and Mr. Market in turn is taking his cue from them … talk about a symbiotic relationship!)

To repeat, as we said yesterday, we believe that the equity market is early in pricing in a recovery. The S&P 500 has rebounded 49% from those March 9 lows. Imagine how abnormal a 49% rally over a five-month span — it’s unprecedented back to the 1930s. In the last cycle, it didn’t happen until February 2004 — 18 months into that bull phase where again there was tremendous policy stimulus and an oversold low to climb out of. In addition, household credit was expanding rapidly. Even coming into what was a secular bull market in 1982, it took a good seven months to rally 49% — and that was with the benefit of a V-shaped economic recovery. Going back to 1950, it has taken an average of around 18 months for the market to rebound 49% from a recession trough, not five months as has been the case thus far.

Let’s examine what the macro landscape usually looks like at that magical +49% point in the equity market rally:

• Real GDP had expanded on average by 4.5%
• Employment had rebounded an average of 850k
• The ISM had firmed to an average of 56.2 (the lowest print by this juncture was 53.9)
• Corporate profits had recovered 12.0%
• Bank lending rose an average of 5.0%

In other words, the market is way ahead of itself, because, as of the latest data points during this 49% rally:

• Real GDP is trying to make a cycle low
• Employment is trying to make a cycle low
• The ISM is off the low but still sub-50 at 48.9
• Corporate profits are still trying to make a cycle low
• Bank lending is still trying to make a cycle low

We have never before witnessed a stock market rally of this magnitude over such a short time frame; and absent anything more than tentative signs of economic improvement. The only rally of this magnitude was the wild bear market rally ride in 1930, which was followed by a resumption of the decline that finally bottomed 82% lower in 1932.

As we said last week, the equity market right now is priced for 40% profit growth and 4.0% real GDP growth in the coming year. At the lows back in March, we estimate that the equity market was pricing in flat earnings growth for the coming year (since that time, the S&P 500, by our reckoning, has gone from discounting $50 on operating EPS to just over $70). We’re not sure if pricing in $50 on earnings is truly an Armageddon scenario seeing as we were at that level in 2003, but let’s say that a really bad backdrop, especially for the financials, was priced out four months ago; by the same token, nirvana began to get priced in with this last leg up in the equity market that began just about a month ago. At best, the truth is somewhere in between, but it is not at 1,000+ on the S&P 500. Not at this juncture. This goes down as the mother of all ‘show me’ situations.

At any given moment of time, there are four variables that drive the equity market — fundamentals, technicals, liquidity and valuation. When you look at valuation metrics, namely price-earnings multiples, and for all the talk about how we were facing Armageddon back in March, the P/E multiple at those lows were actually nowhere near where they were in the 1930s. In fact, at around 12x, the valuation of the market was actually no better than the average at other market troughs. In other words, the market never got attractively priced enough at the lows, and now we have the most expensive stock market on our hands in over four years.

Compare and contrast that with the corporate bond market, where valuation is measured by the interest rate premium over government bonds, and indeed, if there is a case to be made that an Armageddon scenario was being priced in back in March, it was in the corporate bond market, not the equity market. Baa spreads, which I use since Baa is the median credit rating in the S&P 500, pierced 600 basis points late last year, which was not far off the spread levels seen in the early 1930s. As cautious as I have been over the economy, I doubt we were ever going to see the same default experience we saw in the Great Depression.

What has happened since that time is that those spreads have collapsed to just over 300 basis points, which is still above the peaks of the last two recessions. So, while the depression scenario has been priced out of corporates, this asset class, by my estimation, is still priced for 0% economic growth, while equities are discounting 4.0% real GDP growth in the coming year. In other words, there is still likely more opportunity for bad news to be priced out in the credit markets than in equities.

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Due to continued concerns that the pace of economic stimulus cannot be sustained, the Shanghai index fell another 4.3% and is now down 19.8% from its level of just two weeks ago. As China is predominantly responsible for lifting the global economy off its arse in March, the pullback is having its now obvious impact on everyone else. Growth concerns have sent the US 10 yr bond yield to a one month low. ABC confidence rose 1 point to -46 as evidence of consumer saving may be having an influence. The Personal Finance component rose to a 13 week high even as the State of Economy figure fell to an 8 week low. Also, there was a sign of acknowledgment on the part of the consumer that things have stabilized as ‘those that said economy is getting worse’ fell to a 5 1/2 year low at 31% but only 26% thinks its getting better with the balance being ‘the same.’ The MBA said refi’s rose 6.9% and purchases rose 3.9%, an 8 week high.

Two new articles — in the NYT and the WSJ — look at the home appraisal business:

Both article somewhat acknowledge the role appraisers played in facilitating the outsized run up in prices. Yet clearly, there are significant differences.

The Times wrote “A profession that should have been a brake on the spiral in home prices instead became a big contributor.” My view is even stronger, as I have called the appraisal industry corrupt, and the appraisers as prime enablers of the entire boom/bust/collapse cycle. They were one of the many “But Fors” — but for their failure to adequately perform their duties, much of what went wrong would not have occurred.

Surprisingly, the Journal seems unconvinced, beginning the piece with a more exonerating sentence “After being blamed for helping to inflate home values during the housing boom, the appraisal business is again coming under fire.”

Of the two, the Journal seems a bit more friendly to the NAR argument that Appraisers need to be local, and therefore somewhat less independent. This would generate more fees and business activity for RE Agents/Mortgage Brokers.

Part of the distinction seems to be the inherent anti-regulatory outlook of the Journal:

“The debate over appraisals is inflamed by a natural tension: Real-estate agents and mortgage brokers, who need to complete transactions to collect their fees, are unhappy when an appraiser nixes the sale price. But it also suggests that there may be unintended consequences to an attempt by New York Attorney General Andrew Cuomo to reform the appraisal business.”

That is a fair statement — yet somehow, the unintended consequences of allowing appraisers to run wild from 2002-07 gets overlooked. Such is the Journal’s approach focusing on whether lenders are “squeezing appraisers too hard.”

The Times piece takes a more sympathetic look at the new appraiser regs:

“On May 1, a sweeping change took effect that was meant to reduce the conflicts of interest in home appraisals while safeguarding the independence of the people who do them. Brokers and real estate agents can no longer order appraisals. Lenders now control the entire process.

The Home Valuation Code of Conduct is setting off a bitter battle. Mortgage brokers, lenders, real estate agents, regulators and appraisers are all arguing over whether an effort to fix one problem has created many new ones.”

Both pieces are worth reading in their entirety.

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Previously:
Fraud in Real Estate, Mortgages & Homebuilders (August 17th, 2008)

http://www.ritholtz.com/blog/2008/08/fraud-in-real-estate-mortgages-homebuilders/

Nonfeasance in Financial Oversight (August 18th, 2008)

http://www.ritholtz.com/blog/2008/08/nonfeasance-in-financial-oversight/

NAR, NAMB Fighting Appraisal Reform (June 24th, 2009)

http://www.ritholtz.com/blog/2009/06/nar-namb-fighting-appraisal-reform/

Sources:
In Appraisal Shift, Lenders Gain Power and Critics
DAVID STREITFELD
NYT, August 18, 2009

http://www.nytimes.com/2009/08/19/business/19appraise.html

Reappraising Home Appraisers
JAMES R. HAGERTY
WSJ, AUGUST 18, 2009

http://online.wsj.com/article/SB10001424052970203496804574348712795471006.html

Certain indicators are warning that the stock market is in for a turbulent September. But are too many investors already betting that way?

Barron’s Mike Santoli:

I am not sure what to make of this BW cover: It shows an Ostrich, with its head buried in the ground, making the case apparently for Blind Optimism.

Consider the following if you want to think of this as good advice or as a contrary indicator:

-Could this cover have come out in late February or early March?
-Or, does it take a 50% rally to give nerve to the editors who made this decision?”

I suspect it is the latter.

Hence, why this is more likely a contrary indicator than good advice.

Excerpt:

Sure, it has been a harrowing storm. And now is no time to discount the dangers that still exist. But opening your mind to optimism can help you seize the opportunities ahead

The U.S. economy is in such bad shape that the loss of (just) a quarter-million jobs in July was greeted as good news. Long-term unemployment and foreclosures continue to mount in the worst economic downturn since the 1930s. Health-care costs are out of control. An aging population around the globe is driving government spending through the roof. And scientists say we need an expensive crash program to fight global warming or we’ll incinerate ourselves. It’s little wonder that despite some positive news lately, the daily Gallup Poll on U.S. economic conditions as of Aug. 11 found that 53% of Americans think the U.S. economic outlook is getting worse (yes, even worse), vs. 42% who think it is getting better.

But before you assume a purely defensive posture—knees pulled to chest, hands on head—remember this: Just as people become overly exuberant in good times, they tend to get too pessimistic in bad times. While the economy remains deep in a hole, and could indeed get worse, the truth is that nobody really knows what will happen next. Prudence demands that you prepare yourself for all possible outcomes, including some highly positive ones.

Note: My motto is “Hope for the best, prepare for the worst.” No excessive optimism or pessimism required . . .

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Source:
The Case for Optimism
BusinessWeek, August 24 and 31, 2009

http://www.businessweek.com/magazine/toc/09_34/B4144magazine.htm

See also:
BusinessWeek: ‘Don’t Worry, Be Happy’
The Deal, August 18, 2009

http://www.thedeal.com/dealscape/2009/08/businessweek_optimism_auction.php