Archive for January, 2013
Is the US becoming more of an empirically based society? The early evidence across a variety of fields is in, and it appears to be yes — albeit rather slowly. I suspect this adaptation is going to accelerate rapidly over the next decade. A blog post is not where we can do a full blown…Read More
Iceland President: We Decided to Let the Banks Fail
Iceland President Olafur Ragnar Grimsson on the recovery of the country’s economy
Olafur Ragnar Grimsson Iceland president ‘Let banks go bankrupt’
Iceland President Olafur Ragnar Grimsson tells Al Jazeera’s Stephen Cole that Europe should let banks that are ran “irresponsibly” go bankrupt. Speaking at the annual World Economic Forum in Davos, Grimsson also held his country as a model of economic recovery after its near-collapse four years ago. “We didn’t follow the traditional prevailing orthodoxies. And the end result four years later is that Iceland is enjoying progress and recovery.”
Interesting discussion by Think Tank contributor MacroMan, who retells a story about Yale Professor Robert Shiller: We asked him once to visit us in our offices and the meeting took place the day after then Fed Chairman Alan Greenspan’s famous Irrational Exuberance speech in December 1996: “But how do we know when irrational exuberance has…Read More
My afternoon reads: • Why the Founding Fathers Loved the National Debt (Echoes) • Capital Economics: Bull Market in Treasurys Far From Over (MarketBeat) • Financial Stars Behind Bars? (Project Syndicate) • Fleckenstein: The Fed knows nothing: Who knew? (MSN Money) • The Rise of the Permanent Temp Economy (Opinionator) • Wall Street keeps an…Read More
Category: Financial Press
The Japanese Parliament reconvened today. Details of their proposed budget for the fiscal year starting 1st April have been released. Total expenditures are expected to be Yen 92.6 Tn, with new government bond sales to amount to Yen 42.9 Tn and with tax revenues of Yen 43.1 Tn. The numbers do not add up, suggesting…Read More
Category: Think Tank
Pending Home Sales index for December 2012 was released this morning. The data itself was mixed — down 4.3% from November (SA) but up 6.9% year over year. The index is a measure of housing contract activity, based on signed real estate contracts (existing single-family homes, condos and co-ops).
The spin from the NAR is always amusing, and this report is no different. How the NAR framed this, and what it might mean going forward, is rather interesting. NAR chief economist Lawrence Yun made the following statement: “The supply limitation appears to be the main factor holding back contract signings in the past month. Still, contract activity has risen for 20 straight months on a year-over-year basis.“1
Yun is onto something, but he doesn’t seem to really understand what it is. Supply limitation is an important factor, but why supply is limited is an even more important factor. Understanding the inputs into this directional vector is significant if we want to discern where housing may be heading this year. Said differently, the factors underlying the limited supply matter much more than the supply itself.
On the positive side:
- Fed has taken rates down to very low levels
- Employment has been improving (albeit slowly)
- 7 years have elapsed since the RE market peaked in 2006
- $25 billion dollars or so of Private Equity funds has been purchasing real estate for a “Rent-to-resell” model
- Confidence is coming back that the crisis is behind
On the negative side:
- Low rates will eventually rise, capping price appreciation
- Growth is inorganic, artificially spurred by the FOMC
- Wages have been flat
- Banks are still sitting with millions of REOs, waiting for price appreciation
- 20% of home owners with mortgages are underwater
- 20% of home owners with mortgages have little or no equity.
Those last two data points come from Jonathan Miller, who calls the current environment a “Pre-covery.”
“Sellers, when they sell, become buyers (or renters) and with >40% of mortgage holders having low or negative equity, they don’t qualify for the trade up. We have been so focused on negative equity that we’ve paid short shrift to the impact of low equity.
Not only don’t many sellers qualify – they simply aren’t under duress i.e. they haven’t lost their job, don’t need to move, etc. so what will they do when they realize they don’t qualify? Nothing.“
There is the reason for what the NAR has correctly identified as the basis for falling prospective sales index: The lack of inventory.
But it is not the kind of shortfall they think it is. It is not “If we only had more houses, we could sell them.” Rather, its more of “The lack of equity is causing both a lack of homes for sale and a lack of potential new buyers.”
What fixes these problems? More Household formation, increased employment — and increased wages. As those three go, so goes Housing.
Pending Home Sales Down in December but Remain on Uptrend
January 28, 2013
Falling Inventory Has Created a Housing “Pre-Covery,” not “Recovery”
Miller Samuel January 28, 2013
A New Housing Boom? Don’t Count on It
ROBERT J. SHILLER
NYT, January 26, 2013
1. Note that when home sales were falling, their emphasis was on monthly data, but let’s save that for another time.