The Real Estate Soufflé

We have a decidely nuanced view of Real Estate: While not neccessarily a bubble, it has been the prime driver of the economy since rates were slashed to half century lows 3 years ago.   

Our expectation for the slow motion slow down rests on Real Estate cooling (which its been doing since August), home construction and sales slipping, and prices slowly sliding. That may stop the Fed from tightening appreciably further (2 and through?). Mortgage rates staying below 6.5% allows Real Estate to maintain a moderate level of activity — but one that is obviously way off its prior white hot pace.

I suspect this could happen more slowly than those who think Real Estate is a full blown bubble ready to pop. Indeed, one of the comments in "Top Ticking Real Estate is Different Than Stocks" notes that:

"Last weekend I first heard the term "real estate soufflé" proposed on the radio to replace the term "real estate bubble." Even when the soufflé falls as it comes out of the oven, it doesn’t pop like a bubble."

That seems to make a lot of sense to me. Its consistent with last month’s final Home Sales slipping to to a minus 0.3%, from a prior 3 month average gain of 4.6%. While down on a month to month basis,  the absolute levels still remain historically high. Mortgage Rates have been bouncing between 6 and 6.25% — still historically cheap.

Barron’s Alan Abelson is even more Bearish than I on the prospects for Housing & Real Estate:

"On that score, our conviction has been mightily strengthened by clear signs that the great housing boom is rolling over. Exhibit A is last month’s steep drop in the sales of existing houses — 5.7%, to be precise. Yes, we’re well aware that the Commerce Department reported that sales of new single-family homes rose 2.9% in December. But the figures don’t jibe with the rather downbeat findings of the housing industry. And as to which we find more credible — Uncle Sam’s or the builders themselves — it’s no contest."

Merrill Lynch’s David Rosenberg has become a regular in his column. His views on the end of the housing boom, and its impact on the macro economy are also pretty bearish:

"To that astute economic observer David Rosenberg of Merrill Lynch, the startling collapse of sales of existing single-family homes in the October-December span — they fell at a 36% annual rate — is persuasive proof that the bull market in housing has metamorphosed into a bear market.

What marked the extended and powerful cycle, he reminds us, is that it was built on cheap credit and incredibly relaxed loan standards. Some 43% of first-time buyers, David recounts, put zero money down on their home purchases last year; by contrast, two years earlier, 28% bought a house with no down payment. Well over a quarter of the mortgages in ’05 were of the dicey "buy now, pay later" variety. Not exactly sturdy underpinnings for a boom, especially with credit likely to get increasingly less cheap and the regulators fretting over lending standards.

The backlog of unsold inventories in the resale housing market last month shot up 26% above the December ’04 level to a 5.1 months’ supply; that compares with the low of 3.8 months in January of last year. Inventory of new homes stands at its highest level in nine years. The overhang of unsold units in the condo market constitutes a formidable 6.2 months’ supply. And pricing is beginning to reflect the inventory bulge: December’s median price of $211,000 for an existing home was virtually unchanged from last spring and down 4% from the August peak."

There’s little there I disagree with; If anything, we only differ on how long this will take. I have no clue, but I suspect it will be a more gradual process than many expect.

"For the economy, David asserts, the end of the housing boom could be
a serious drag on economic growth. Considerably more serious, we might
interject, than most of the sunshine gang, whether in Wall Street or
D.C., care to admit. In the past three years, the surge in housing
prices, he calculates, accounted for nearly 40% of the expansion in
household spending via home equity cash-outs. Merely stagnant home
prices, by his reckonings, would shave a full percentage point off
consumer spending growth in the coming year. An outright decline
obviously would have that much more of an impact.

Just the direct effects of the raging bull market in housing, he
figures, chipped in 25% of the overall growth in GDP since 2003. The
real-estate boom, he goes on, was responsible for a cool 20% of the
rise in total retail sales, while enlarging the nation’s payrolls by
around a million jobs.

As David wonders, "So who picks up the baton now that the housing parade is over?" Who, indeed?""

The sunshine crowd will tell you that Business is ready to pick up the baton; they certainly sang that from on high after Q3 GDP showed a big uptick in Corporate Capex. Of course, they have been saying that for years now. And as Q4 GDP has revealed, Q3 capex is looking more and more like an outlier . . .

>

Source:
UP AND DOWN WALL STREET:  Fun and Games
ALAN ABELSON
Barron’s MONDAY, JANUARY 30, 2006   

http://online.barrons.com/article/SB113840713897658794.html

Category: Economy, Markets, Real Estate

Weekend Linkfest!

Category: Weblogs

Returning to the Work Force

Category: Employment

About that GDP . . .

Category: Economy

Economists React to GDP

The always excellent online Journal collect lots of econo-geek comments on yesterday’s GDP stinkeroo: I didn’t feel the need to pile on, but I do dig the difference between the excuse makers and those genuinely shaken by the awful data:

WSJ: "After the economy navigated a brutal hurricane season to post robust growth in the third quarter of 2005, growth cooled considerably in the fourth quarter. Gross domestic product, the broadest measure of U.S. economic output, increased at just a 1.1% seasonally adjusted annual rate as free-spending consumers became more cautious and the gaping trade deficit continued to provide a drag on the expansion. For all of 2005, GDP growth averaged a 3.5% annual rate. What does the slowdown in the fourth quarter mean for the economy in the months ahead?

Economists weigh in with their reactions:

"In both its overall appearance and underlying detail, the 1.1% fourth quarter growth in real GDP ranks as the most perplexing report in memory. At face value, such weakness would seem to make it more difficult for the Fed to tighten monetary policy again. But the underlying details reinforce — if not increase — perceptions that much faster growth lies ahead. Nonetheless, the confusing and conflicting contradictions with other data make it difficult to be confident in any inferences about the outlook."

– David Resler and Gerald Zukowski, Nomura Securities International

* * *

"Consumer spending was actually a little better than expected, rising by 1.1% in the quarter vs. our forecast of +0.3%. I think more of the decline in auto sales was apportioned to the business sector (fleet sales) and less to the retail side than we expected. Housing posted a reasonable gain of 3.5%, but this was less than half of our assumed rise. The monthly source data pointed to a bigger gain, so this is a bit puzzling."

– Stephen Stanley, RBS Greenwich Capital

* * *

"The consensus was a bit optimistic but this is a big surprise. The softness against our 2.6% forecast is explained by two components, fixed investment and government consumption. The former rose only 3.0%, with equipment and software up only 3.5%. This is baffling, given the 19.5% annualized leap in the value of capital goods production and the 14.9% rise in shipments of core nondefense capital goods. We expect big upward revisions."

– Ian Shepherdson, High Frequency Economics

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Category: Economy

The Speculative Sap is Rising

Category: Markets, Psychology

Media Appearance: Kudlow & Company (1/27/06)

Category: Media

Sell Off on Volume

Category: Technical Analysis

Technicals versus Economics

I got involved in a debate earlier at RealMoney – Columnist
Conversation
, and wanted to pass it along here.

Pre-GDP (1/27/2006 7:31 AM EST), I wrote :

1) Technicals remain strong, and continue to be the driving force short
term. But economics look weak, and continue to be source of concern
long term.

2) Last Friday’s market actions was the market’s early warning sign.
Very heavy volume to the downside on a big selloff is never a good
thing. I interpret that day as a foundational crack of the cyclical
Bull market. Again, we are not looking for a 1987 situation, but rather
a Q1 topping out, and an ugly rest of the year.

3) Gold also looks toppy — it’s well overdue for a 10% correction. We
are short here, but would re-establish a long position in the 480-510
range.

4) A 500 point day in Japan is too exuberant — it’s a sign of very
emotional trading. Historically, these sort of buying frenzies tend to
end badly. As such, we are lowering our multiyear price target on the
Nikkei down from 21,000 to 18,000. I would not be surprised to see this
lowered again before year’s end. And the Korean Topix, which I have
liked for some time, is geting crazed. Still plenty of upside, but
getting frothy…

Norm Conley raised a legitimate question about this:

"It seems as if you are taking two outlier one-day moves in markets (one "up"
move, and one "down" move), and extrapolating that although they are
contradirectional, they both carry ominous portents."

My response was:

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Category: Economy, Technical Analysis

The Astonishingly Inefficient Market

Category: Apprenticed Investor, Markets, Psychology, Technical Analysis