US Housing Market Bottom Not Panacea

Many real estate forecasters tend to speak about the arrival of a bottom in the U.S. housing market as an answer to everyone’s woes, but a look to the past shows that may not be the case. Analyst Tim Iacono references economists Robert Shiller and Barry Ritholtz in a discussion about the dip in Los Angeles home prices in 1996. He notes that prices stayed low for four years following the dive, suggesting that any bottom that may come in 2012 will likely not be the answer everyone hopes it will be – at least in the near term. For more on this continue reading the following article from Tim Iacono.

Not surprisingly, I’m going to have to agree with both Yale Economist Robert Shiller in this Business Insider interview and Barry Ritholtz at his Big Picture blog in arguing that a housing bottom – if it does indeed arrive in 2012 – will prove disappointing for those expecting gains on their real estate investment in 2013 or 2014.

We happened to be living in Southern California at the time and had the good fortune to buy a house there in 1995, though, we were just looking for a place to live, not thinking of it as an investment.

I remember the price actually declined by another five percent or so in the year after we bought it and it wasn’t until five or six years later that we began to hear about rising home prices, a bit surprised to learn that the value of our place had increased by $100,000 or more.

But, for the first few years, you were better off not even thinking about home values.

Using the broad Los Angeles price index as an example, even if you had bought at the absolute bottom in February 1996, you’d have had less than a one percent gain a year later.

The index spent a full four years within five percent of the February 1996 low!

Anyone thinking that a housing market bottom in 2012 means that home prices will be higher next year or the year after that will probably be disappointed.

Moreover, given the size of the recent boom and the likelihood of the bust being of similar magnitude, I wouldn’t be surprised if home prices don’t post a substantive advance for the rest of the decade.

This blog post was republished with permission from Tim Iacono.

It's Time To Drop Those Money Funds

If you are still invested in money funds, Bernanke's announcement that the Fed plans on keeping interest rates the same for the foreseeable future should help spur you into action. With returns near 0%, if you keep money in a money fund, you are simply losing buying power everyday to inflation. Tim Iacono from The Mess That Greenspan Made, takes a closer look at money fund investments in his blog post below.

More fallout from last week’s Fed announcement of a one-and-a-half year extension to their freakishly low interest rate forecast comes via this MarketWatch story about the dim prospects of money market returns between now and sometime in 2015 (or later).

Money funds are designed to be ultra-safe cash-equivalents, and traditionally they provided a bit more return than bank certificates of deposit or savings accounts.

But for about 18 months now, nearly two-thirds of all money funds have yielded under 0.01%. To see just how horrible that is, consider that if you had $1,000 and split it evenly between a money fund and a piggy bank, at the end of a year the fund would only be ahead by a nickel.

This is not a new problem, but the Fed paints it in a new light. Central bankers made it clear that savers will not see any boost in money-fund returns for the foreseeable future, and can be sure that inflation will take a bite out of their cash. So if you use a money fund for emergency savings, the dollars aren’t growing even as the cost of insurance is rising.

Even when rates rise, money-fund yields aren’t likely to go up. Financial-services firms have been waiving costs, basically operating them at a loss to keep assets in-house; many smaller firms have simply shuttered their money-market funds. When rates finally do go up — and the Fed forecast doesn’t mean it can’t happen, it just suggests that it won’t until 2014 — firms will first take much of any increase for themselves.

By the way, does anyone know how stable value funds are doing these days? I was tempted to not convert one of our 401ks to a self-directed IRA when we left our cubicle jobs back in 2007 in order to get the 3 or 4 percent these funds paid in the event that the early-decade low rate environment returned which, as it turns out, it did with a vengeance.

I regret that decision a little more each year…

This post was republished with permission from Tim Iacono.

Fed Economists Laugh It Off

A new graph is making its way around the Internet that charts the amount of laughter recorded by Federal Open Market Committee (FOMC) stenographers during meetings between 2001 and 2006 – during the ramp-up to the recession. The graph shows that committee members had increasingly more fun as the years passed, and suggests they could have been doing more to keep an eye on the growing housing bubble that would soon burst. The FOMC is expected to announce a new initiative regarding interest-rate projections and future impact, and many are wondering how many will be laughing. For more on this continue reading the following article from Tim Iacono.

The Federal Reserve transcripts from 2006 released ten days ago continue to reverberate around the internet as the central bank has become a laughing stock for being so unaware of the U.S. housing bubble that was inflating to dangerous levels throughout the year.

Dean Baker’s Alan Greenspan’s ship of fools from last week is well worth reading if for no other reason than to learn what former Fed governor Frederic Mishkin was thinking late that year and I recently came across this item at The Daily Staghunt blog that charted how much laughter appeared in the transcripts over the years.

While Fed economists are purportedly a funny lot, it does look pretty bad to see increasing joviality at a time when they could have been doing something about the housing bubble.

The FOMC (Federal Open Market Committee) meets this week and they are expected to announce of a new communication initiative with two key features – expanded interest-rate projections and an explanation of their objectives for inflation and employment. Fed Chairman Ben Bernanke will surely discuss these in detail in the press conference after the meeting and, though normally keen on audience engagement, he’ll probably be hoping that he’s not asked about the 2006 transcripts.

If we’re really lucky, someone will ask him about this chart.

This blog post was republished with permission from Tim Iacono.

Stiglitz Forecasts Financial Doom, Gloom

Columbia University professor and Nobel laureate Joseph Stiglitz is not optimistic about the prospect of the American Dream as the country moves into 2012. Stiglitz waxes philosophical about the country’s growing wage gap, terminal unemployment and financial crises that have erupted in multiple areas of the world. He opines that working on long-term problems like fiscal debt could actually solve short-term problems like unemployment if the world’s power players were not rooted in politics as usual. The fear, Stiglitz says, is that the system will cataclysmically right itself before cooler heads prevail. For more on this continue reading the following article from Economist’s View.

I think it would be fair to say that Joe Stiglitz isn't predicting a return to general prosperity anytime soon:

The Perils of 2012, by Joseph E. Stiglitz, Commentary, Project Syndicate: The year 2011 will be remembered as the time when many ever-optimistic Americans began to give up hope. President John F. Kennedy once said that a rising tide lifts all boats. But now, in the receding tide, Americans are beginning to see not only that those with taller masts had been lifted far higher, but also that many of the smaller boats had been dashed to pieces in their wake.

In that brief moment when the rising tide was indeed rising, millions of people believed that they might have a fair chance of realizing the “American Dream.” Now those dreams, too, are receding. ...

This year is set to be even worse. It is possible, of course, that the United States will solve its political problems and finally adopt the stimulus measures that it needs to bring down unemployment to 6% or 7% (the pre-crisis level of 4% or 5% is too much to hope for). But this is as unlikely as it is that Europe will figure out that austerity alone will not solve its problems. ...

Meanwhile, long-term problems – including climate change and other environmental threats, and increasing inequality in most countries around the world – have not gone away. Some have grown more severe. ...

I'm not sure it was intended as a joke, but this part made me laugh: "It is possible, of course, that the United States will solve its political problems and finally adopt the stimulus measures that it needs..."

This article was republished with permission from Economist's View.

Fed Backs Conversion of Foreclosures into Rentals

The Federal Reserve’s latest report on the U.S. housing market indicates its advocacy for the bundling and selling of government-owned foreclosed homes to investors who can then convert the homes into rental properties. The report notes that the market is not expected to improve and that interest in rentals will continue to increase, thereby opening the door to a government investment opportunity. Some critics believe, however, that the ulterior motive here is to neutralize an area (rental costs) that accounts the for the Fed’s “core” inflation rate by placing more rentals on the market, thereby providing more room to print money in the event of a new fiscal emergency. For more on this continue reading the following article from Tim Iacono.

The Federal Reserve’s new white paper about the U.S. housing market released just yesterday – The U.S. Housing Market: Current Conditions and Policy Considerations (.pdf) – contains the following paragraph and a good deal of supporting rationale for their recommendation to sell GSE-owned foreclosed properties in bulk to investors so that they can be converted in bulk into rentals.

The price signals in the owner-occupied and rental housing markets–that is, the decline in house prices and the rise in rents–suggest that it might be appropriate in some cases to redeploy foreclosed homes as rental properties. In addition, the forces behind the decline in the homeownership rate, such as tight credit conditions, are unlikely to unwind significantly in the immediate future, indicating a longer-term need for an expanded stock of rental housing.

While, on the surface, this makes a good deal of sense after the nation painfully learned a few years ago that home ownership wasn’t what it was cracked up to be and, ever since, home prices have been falling while demand for rental properties has grown, a massive conversion of REO properties into rental properties would also have the convenient side effect of helping the Fed keep inflation low, giving it more leeway to print up another trillion dollars or so for the greater good, should the need arise.

How so?

Recall that, part of the reason that the housing bubble grew so big was that the inflation statistics include rental prices as a proxy for the cost of home ownership, a change that was made all the way back in 1983 and that forever changed how inflation is reported and how high home prices could rise (see this Seeking Alpha article on the subject from a few years back that still ranks quite high on a search of “owners’ equivalent rent”).

After years of being subdued because everyone wanted to own a home (and nearly did), lately, rents have been rising – up about 2 percent over the last year – and, since rents account for 40 percent of the Fed’s “core” inflation rate, you can see why lower rental prices might be in the central bank’s interest.

This blog post was republished with permission from Tim Iacono.

Farmland Values Soar in Heartland

Tim Iacono comments on a Brian Williams news segment detailing the rising prices of farmland across America’s heartland, particularly in Iowa, where Republican presidential candidates so recently debated. Prices in the area have risen more than 30% in Iowa and 25% on average throughout the Midwest. One land auction featured in the report resulted in a sale for more than $13,000 per acre – more than double the value from five years ago. Experts say the increases are driven by the rarity with which farmland comes on the market and the growing demand for agricultural products, particularly corn for the surging (and subsidized) ethanol market. For more on this continue reading the following article from Tim Iacono.

After today, we won’t be hearing much about Iowa anymore as aspiring presidential candidates pack up and leave town following today’s caucuses, but, this NBC report on the farmland boom there puts things in a slightly different perspective than you may have heard after listening to talking heads on MSNBC and Fox News for the last few months.

Visit msnbc.com for breaking news, world news, and news about the economy

There are some pretty impressive statistics associated with the boom – per acre prices in Iowa up over 30 percent from last year and, across the entire Midwest, up about 25 percent … and you thought the real estate bubble was over.

This blog post was republished with permission from Tim Iacono.

China Showing Signs of Economic Weakness

Economist Paul Krugman takes an unflinching look at China’s current economic position, and believes what he sees is a mirror image of Japan in the 80s or the U.S. in 2007: a country that has relied on shady banking practices to sustain a boom in growth that now cannot be supported by domestic consumption or financing. Now, as the bubble is set to burst, the country seems ready to dig in its heels, particularly by issuing punitive tariffs on foreign trade partners. Krugman rightly notes that the last thing the global economy needs is another crisis point, but he also believes that is the direction in which the country is headed. For more on this continue reading the following article from Economist’s View.

Uh-oh?:

Will China Break?, by Paul Krugman, Commentary, NY Times: Consider the following picture: Recent growth has relied on a huge construction boom fueled by surging real estate prices, and exhibiting all the classic signs of a bubble. There was rapid growth in credit — with much of that growth taking place not through traditional banking but rather through unregulated “shadow banking” neither subject to government supervision nor backed by government guarantees. Now the bubble is bursting — and there are real reasons to fear financial and economic crisis.

Am I describing Japan at the end of the 1980s? Or am I describing America in 2007? I could be. But right now I’m talking about China, which is emerging as another danger spot in a world economy that really, really doesn’t need this right now. ...

The most striking thing about the Chinese economy over the past decade was the way household consumption, although rising, lagged behind overall growth. At this point consumer spending is only about 35 percent of G.D.P., about half the level in the United States.

So who’s buying the goods and services China produces? Part of the answer is, well, us:... China increasingly relied on trade surpluses to keep manufacturing afloat. But the bigger story from China’s point of view is investment spending, which has soared to almost half of G.D.P.

The obvious question is, with consumer demand relatively weak, what motivated all that investment? And the answer, to an important extent, is that it depended on an ever-inflating real estate bubble. ...

And there was another parallel with U.S. experience: as credit boomed, much of it came not from banks but from an unsupervised, unprotected shadow banking system..: in China as in America a few years ago, the financial system may be much more vulnerable than data on conventional banking reveal.

Now the bubble is visibly bursting. How much damage will it do to the Chinese economy — and the world? ...

For what it’s worth, statements about economic policy from Chinese officials don’t strike me as being especially clear-headed. In particular, the way China has been lashing out at foreigners — among other things, imposing a punitive tariff on imports of U.S.-made autos that will do nothing to help its economy but will help poison trade relations — does not sound like a mature government that knows what it’s doing. ...

I hope that I’m being needlessly alarmist here. But it’s impossible not to be worried: China’s story just sounds too much like the crack-ups we’ve already seen elsewhere. And a world economy already suffering from the mess in Europe really, really doesn’t need a new epicenter of crisis.

This blog post was republished with permission from Economist's View.

Eurozone Crisis Overshadows U.S. Debt Concerns

The U.S. media and market analysts have been focusing so much attention on the Eurozone debt crisis that similar problems brewing at home in domestic credit markets are not getting any attention, say some critics. Now that the presidential election is in full swing, many argue that the growing U.S. debt debacle will go unattended as politicians focus all their time and energy on staying in – or getting into – office. With the Federal Reserve’s latest announcement that Treasury borrowing rates will remain at historical lows, it appears that policymakers are intent on letting the problem fester rather than making the tough decisions that represent sound fiscal sense. For more on this continue reading the following article from Tim Iacono.

Former Kansas governor Mark Parkinson appeared on CNBC yesterday and made the point that you don’t hear too much anymore these days with European credit markets being such a mess – that the U.S. will someday have a similar crisis.

Unfortunately, with the election season now well underway, officials in Washington are not likely to take any action to make the looming U.S. debt crisis any less menacing, in fact, with borrowing rates so low for the Treasury Department, you get the feeling that we’re whistling past the graveyard louder than ever.

This blog post was republished with permission from Tim Iacono.

Consumer Credit Trends Shifting

Tim Iacono reviews data compiled on EconomPicData that reveals American consumers are ratcheting down their use of credit cards, dropping toward 15% of personal income. Consumer debt has been rising for decades, but now it is being replaced by student loan debt, which has increased dramatically in the last 10 years to approach 5% of personal income. Iacono believes this will likely cause problems in the long term as getting an education begins to look less appealing and eventually impacts U.S. competitiveness in the global market. For more on this continue reading the following article from Tim Iacono.

From this item at Jake’s EconomPicData blog the other day comes the graphic below depicting dramatic changes in consumer credit trends over the years. Racking up revolving credit (e.g., credit cards) is not nearly as popular as it was for decades, what I’ve long called “the real Reagan Revolution” as individuals dramatically increased their use of credit cards to fuel consumption (i.e., buying things you don’t need with money you don’t have).

Taking up the slack for falling credit card balances are higher student loan balances that, already, are further separating the nation into have and have-nots (a.k.a. debt serfs) while making the whole idea of higher education less appealing when this is one the the things the country needs most to remain competitive with emerging economies in Asia.

This blog post was republished with permission from Tim Iacono.

Eurozone Eyes Questionable Bailout Strategy

Talks in the Eurozone turn on who is going to accept the loss in a debt restructuring deal, and now architects of the plan are saying private-sector bondholders may not have to take a haircut in the event of a bailout. The news has fueled a short-term rally, but experts criticize the measure as one that will result in the same kind of catastrophe that befell Ireland when it granted banks a blanket bailout that pushed the debt onto Irish citizens and resulted in a staggering collapse of the economy. As European countries scramble to guarantee one another’s debt and lenders seek to avoid paying for bad decisions, ratings agencies are poised to downgrade the entire region. For more on this continue reading the following article from Economist’s View.

Felix Salmon:

The eurozone’s terrible mistake, by Felix Salmon: The FT is reporting today that the new fiscal rules for the EU “include a commitment not to force private sector bondholders to take losses on any future eurozone bail-outs”. If this principle really does get enshrined into some new treaty, it will be one of the most fiscally insane derelictions of statesmanship the world has seen — but it certainly helps explain the short-term rally that we saw today in Italian government debt.

Right now, the commitment is still vague...

To understand just how stupid this is, all you need to do is go back and read Michael Lewis’s Ireland article. The fateful decision in Ireland was to take the insolvent banks and give them a blanket bailout, with the banks’ creditors all getting 100 cents on the euro. That only served to put a positively evil debt burden onto the Irish people, forcing a massive austerity program and causing untold billions of euros in foregone growth, while bailing out lenders who deserved no such thing.

Are we really going to repeat — on a much larger scale — the very same mistake that Ireland made? ...

On Ireland, see: Despite Praise for Its Austerity, Ireland and Its People Are Being Battered.

This article was republished with permission from Economist's View.