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July 29, 2006 at 5:45 PM in reply to: Weiss Ratings: PIMCO and ProFunds earn E-, Chevron earns A #30051July 29, 2006 at 4:10 PM in reply to: Goldman Sachs: U.S. Housing Prices Set to Fall in Nominal Terms for the First Time Ever #30046
powayseller
ParticipantBut the biggest problem on the horizon is the swelling backlog of unsold homes: an eight-year-high of 6.3 months for existing homes and 6.1 months for new homes.
David Rosenberg, chief North American economist at Merrill Lynch, said there are 4.3 million condo and single-family homes for sale in the United States, up 37% on the year.
“Every boom, mania and bubble follows the same path,” Mr. Rosenberg said.
“What has undone everyone of these back to the tulips in the 17th century is a massive accumulation of unsold inventory once you’re past the peak of the cycle, and that’s exactly where you are with the U.S. real estate industry.”
The housing industry has been a linchpin of the U.S. economy since the tech crash and the 2001 recession.
The U.S. Federal Reserve slashed interest rates to 1% to rescue the economy but fuelled a building frenzy, especially in Florida, California, Las Vegas and parts of the East Coast.
The construction industry has accounted for more than a third of overall job growth in the past three years, Mr. Rosenberg said.
ParticipantDaniel, I also got a kick out of the questions. A couple senators asked some tough questions, Ben cleverly avoided an answer and then the senator trailed off toward changing it into a comment and ending their turn. So they did not press Ben on the answer to the tough questions. I was in utter amazement at the lack of courage and staying power of these senators.
Since we are on the topic of the testimony, here are a few snippets:
On the deficit
Ben: “In 5-10 years, there will be increasing reluctance by foreigners to hold U.S. assets, and that will have effects on our economy and we need to address that….We should become more reliant on our own savings and reduce the account deficit.”Inflation and wages
Ben: “I am surprised wages have not risen more by now….Wages offset by productivity gains are not inflationary…. Inflation is going to moderate over the next couple years”. [WHAT – a couple years before it moderates – what does that mean?]Social Security and Medicare shortfalls
Ben: “Social Security doesn’t show up in the deficit. The deficit should include future liabilities of Social Security and Medicare. In 10-15 years, we’ll see more pressure from the transfer agreements and we need to address them”.Risk of GSEs
Ben: “The portfolios of the GSEs are too large and pose the threat to stability of the financial system. We should give strong guidance of how to relate the mission to the size of the GSEs. I have a heightened concern that these portfolios could cause serious problems for the financial markets”.Why we haven’t reduced energy dependence, although Brazil has done so
Ben: “We need to diversify our energy sources. The government can support research, and create environmental regulations that are more clear and constant, i.e. that don’t keep changing.”Fed decision-making on rates
Ben: “The Fed is a consensus-based organization. Spirited discussion precede the meetings.”
Sarbanes: But these discussions don’t make it into the Minutes. Isn’t it good for the markets to hear alternate views?
Ben: “FOMC members are free to present their views to the public”.ParticipantVery interesting cooperdog. Are you investing in any commodities, options, or shorts?
July 29, 2006 at 3:04 PM in reply to: Weiss Ratings: PIMCO and ProFunds earn E-, Chevron earns A #30039ParticipantI was surprised to see any PIMCO funds below a B, since PIMCO to me was synonymous with the best bond management available in this country. It turns out I was wrong. PIMCO severely underperformed in their mission in the long bond category, and I find this concerning and a reason to question Paul McCulley going forward.
About Profunds and Rydex, it turns out they do not accurately track the inverse at all. One blogger invested in it, and on a day that the correlated stock market was DOWN x%, the Profunds fund, which should have been UP x%, was down also! He wrote a letter of complaint. I investigated Profunds this spring, and wrote several letters of complaints to the company, because they refuse to disclose ANY of their holdings. They do NOT short the correlated stock fund, as they claim. Thus, their E rating, because they do poorly at accomplishing their mission. So these funds are somewhat misleading in their claims of shorting the market. If they did truly short the market, and peform inverse of the market, I would be buying shares of those funds.
I trust Weiss Ratings, and that’s why I paid $15 per report on my banks. If Weiss isn’t data, what is it?
ParticipantSteve, thanks for your reply. You can’t compare the price of San Diego homes to the price of Cedar Rapids homes. (Sunshine tax refers to the higher cost of living here.)
What is the historical price/income ratio for the other cities you mentioned? I would guess that price/income is 2.5 – 3 for Cedar Rapids, 3.5 or 4 for Kansas City. It is usually between 7 and 9 in San Diego. You pay more for the privilege of living in a desireable city.
San Diego’s supply glut could take a decade to consolidate. With the overbuilding, people moving out, and rising foreclosures, it could be many years before the current supply is bought up. Buyer fear, a reverse psychology of the buyer mania of the last 6 years, can make the downturn even worse than any of us expect.
My prediction is San Diego median price is $308,000 by 2011. So it is well above your $300K minimum. What if foreclosures are really high, buyer psychology against buying is stronger than expected, and we get below $300K? Possible? I don’t know.
Have you read the Bubble Primer articles? A lot of people have not read it, but it is well worth the time.
ParticipantI rely on data to make my predictions. I extrapolate from history and current data to make my predictions.
A statement that many ARM borrowers can afford their products because their incomes will rise 50% should be easy to verify.
The sales decline are based on MLS data. Sales are falling by 10 points every quarter, so I am extrapolating. -10% Q1, -20% Q2, -30%Q3. I estimate -40%Q4, but we won’t know until it happens.
Likewise, home price deline is an extrapolation of past trends. I saw -5% by last winter, and now in summer we are hearing stories of 2004 prices, so that’s -15% in some cases. I extrapolate to get -20% by end of year. Again, time will tell if this is correct.
Anecdotes are very important, because as we know, the median is often 2 years lagging. Even the Federal Reserve relies on anecdotes for some of their analysis.
sakina96, let’s really try to analyze how many people would fall into the category of rising wages, because it helps us all to predict better the future of the market. What do you think is the impact of ARMs, both in data and in your own experience.
Participantzk, I’ve been called a dumbass and idiot on this forum for my predictions, too. Maybe they’ll call me a genius next year ?? 🙂 Both you and Bugs have talked about buyer psychology, and I didn’t understand the importance of it, until I started my latest book, Irrational Exuberance by Robert Shiller. Psychology starts bubbles, and psychology pops them. Once psychology shifts, not even lower interest rates will increase sales.
Eric at iTulip describes it so well. On the way down, houses go on the market and fewer people show up to look. That’s because earlier buyers bought on the expectation of rising prices NOT because they needed a place to live. As in the example you cited, the people didn’t want to buy now that they were first on the list, so they opted out. Since they sense there won’t be a future buyer in line to purchase that house from that, they stay home, so to speak.
Once housing transactions fall, this creates fear and loathing about prices. Eventually you get long periods of time with no transactions, like barnaby33 who told me of a house that had NO lookers for one year in the last bust. This happened in Japan, and prices nationally are still more than 60% below peak prices of 1992, although interest rates were 0%. So you have an actual example that not even FREE loans could entice buyers back in, once the psychology shifted.
Once the foreclosures start and prices start falling, the psychology will pick up momentum. Could we go to sales of 10,000 per year or less? Last year we were at 40,000, and this year it is probably 30,000.
ParticipantI love your comments. Have you thought of e-mailing [email protected], to give him your feedback? I’ve done this with him on other topics, and he is very open-minded to feedback, and sometimes changes his position, or explains how he arrived at his conclusions.
Re the stock chart, it shows that asset classes fall in and out of favor. The S&P 500 Growth funds were in the #7 spot in 1993, in the #1 spot from 1995 – 1998, and then moved back down to the #7 spot from 2000-2005. None of the sectors consistently stayed in the top or bottom slots for the period shown.
ParticipantOur HOA prohibits trailers, RVs or boats parked on the street. This area of townhomes has 1 car garages, so there are a lot of cars parked on the street, but each home has only one family in my neighborhood. When we rented in a nicer area, while we were building our house in 2003-2005, the neighbors complained when my brother parked his car outside for a week. No cars were allowed on the street, garage doors had to be closed. But those homes had large driveways, so excess cars parked in the driveway, not the street. Boats, RVs, and trailers were kept offsite somewhere.
The car parking and RV eyesore is what kept me from buying in Rancho Penasquitos.
All in all, it comes down to how big the driveways and garages are. Most people use their garage for storage plus 1 car. The 2nd and 3rd cars go in the driveway if you are on a large property, or on the street if you are in a lower income property. If you cannot afford RV or boat storage, you leave that stuff on your street.
ParticipantThat’s why this guy is nervous. His neighbor has been on the market since January, with no sale and several reductions. This guy doesn’t know what to do. Sell for less than the neighbor, i.e. low 900’s, hope for prices to come back up, hope for interest rates to drop before his interest only period expires?
BTW, I didn’t say what department he’s in. I saw technicians in 4 departments during that visit.
ParticipantI don’t have a life either :), and thanks for all the comments.
I checked the Labor market data, which lists employees by the type of employer (so janitors at realtor offices are listed under real estate). Out of 1.3 million jobs,
law firms employ 11,800
scientific research and development 71,000Most of our employment is in
retail 219,000
construction. 95,700 + ? (10% of 1 mil in CA)
gambling/restaurants 154,700
real estate,lending,insurance 83,800So there may be a handful of people who get promotions to cover their ARMs. It doesn’t matter if you are a lawyer earning $200K, only that your salary goes UP 30-50%. This is a subset of the professional category.
Let’s give you the benefit of the doubt, and say that 5% of ARM holders will get 50% pay raises and afford the higher payments. What will the other 95% do?
Remember, I am looking at the big picture: you only need 30,000 motivated sellers at any time to start seriously reducing property values. The motivated sellers bring down the price for the other 1 million homes. It doesn’t matter if a few ARM holders can afford their higher payments or leave town or refinance. We’ve got a mass of people who used these as affordability products, and the trend will be set by them.
Not even Fannie Mae or the FDIC knows how big this problem is. Neither do I. I’m just having fun guessing (since I don’t have a life…)
Participantsduuuude, do you think the market has more control than the Fed? I have no idea about that.
Participantqcomer, the dollar falling only affects the exchange rate, I think. It will increase our exports and make imports more expensive, but it shouldn’t change housing prices, unless interest rates are dramatically affected by the Fed changing them to keep FCBs buying Treasuries again. So I don’t see how a falling dollar affects housing.
I think we can have higher rates and a weaker dollar. As soon as the Fed stops raising, FCBs could stop buying Treasuries. They will instead buy assets in countries with stronger economies (less debt, more exports). We could have 7% Fed funds rate and a falling dollar. It’s certainly possible. The other countries are getting nervous about having so many US$, and want to diversify. This can cause them to sell dollars, and that makes the dollar weaker.
I think the Fed will keep raising rates as long as commodity prices are rising and feeding through to producer and consumer prices. They have to avoid letting inflation take hold. I am surprised that inflation signs are still showing up. Do you think they will stop in August?
ParticipantI read an analysis today saying the Fed has no control, they’ve lost control and the market is in control.
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