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What If Housing Is Done for a Generation?
What if housing valuations are in a structural, multi-decade decline?
A strong case can be made that the fundamental supports of the housing market– demographics, employment, creditworthiness and income–will not recover for a generation. It can even be argued that housing has lost its status as the foundation of middle class wealth, not for a generation, but for the long term.
Let’s begin by noting that despite the many tax breaks lavished on housing–the mortgage interest deduction, etc.–there is nothing magical about housing as an asset. That is, its price responds in an open, transparent market to supply and demand and the cost of money and risk.
There are a number of quantifiable inputs that feed into supply and demand–new housing starts, mortgage rates and income, to name three–but there are other less quantifiable inputs as well, notably the belief (or faith) that housing will return to being a “good investment,” i.e. rising in price roughly 1% above the rate of inflation.
If this faith erodes, then the other factors of demand face an insurmountable headwind, for the most fundamental support of housing is the belief that buying a house is the first step to securing middle class wealth.
Rising rates of homeownership require five conditions:
1. Favorable demographics: a cohort of potential buyers that is larger than the cohort of potential sellers.
2. Rising household formation rates: an expanding population does not necessarily translate into rising rates of household formation. If the number of people per household goes up, then the number of households can plummet even as population expands.
3. A large cohort of creditworthy potential buyers: that means buyers with savings, buyers with sufficient income to pay the mortgage and buyers with low debt loads.
4. An economy that generates rising incomes to support homeownership.
5. An unshakable belief that owning a house is a favorable and secure investment that will rise in value in the decades ahead.
If the first four conditions have eroded, then the belief in the permanence of a rising housing market will also erode.
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CONSUMER CREDIT DEMOLISHES EXPECTATIONS, GROWS $19 BILLION
It’s hard to think that the economy is going into any kind of recession with numbers like these. For the second straight month we just got a HUGE number on consumer credit
Cnosumer credit expanded by $19 billion in December. That’s far more than the $7 billion that was expected by economists.
Revolving consumer credit (credit cards) grew by $4.1 billion sequentially, and is basically flat from last year again (up barely).
One more point on this: A lot of people think that US consumer have too much debt, and that a big number here is “bad” and we could imagine that being true. But if we’re talking about cycles, and whether the economy is in rebound or recession mode, re-expanding credit is OBVIOUSLY what you want to see.
Read the full announcement here.
This chart from Reuters’ Soctty Barber basically tells it all.
It’s a very slow week economic data-wise, but this is the biggie…
Consumer credit for December comes out at 3:00 PM ET.
Analysts expect $7 billion worth of new credit for the month. That’s down from $20.3 billion in the month before.
Remember, last month REVOLVING consumer credit registered flat year over year growth for… Continue reading
Mortgage Fraud: Local Officials Step Up To Uncover Document Fraud
In the absence of state and federal research about how the nation’s largest mortgage companies are forging mortgage documents and wrongfully foreclosing on borrowers, local officials are stepping up. Earlier this week, San Francisco assessor-recorder Phil Ting released a report concluding that 85 percent of nearly 400 audited foreclosures had serious problems or were outright illegal, providing a rare glimpse into the specifics of foreclosure fraud in America.
“We really wanted to take a look at what the documents would tell us and whether or not it was something systemic,” Ting said. “We had a lot of anecdotal information but never knew if the problems represented 5 percent or 20 percent or 80 percent of the cases. What we have for the first time is hard data about the level of systematic problems going on in the mortgage industry.”
Democratic Leader Nancy Pelosi (D-Calif.) called on U.S. Attorney General Eric Holder to follow up on the report’s findings and launch an investigation to determine if federal laws were broken.
Five years into the country’s unprecedented foreclosure crisis, hard data about the exact nature of the mortgage companies’ abuses remains in short supply. Though federal officials insist they have investigated the problems, they haven’t released their findings, leaving the public to piece together the situation from individual stories of struggling homeowners. Ting joins a very short list of local officials who are trying to fix that.
Baltic Dry Index Signals Renewed Market Collapse
Much has been said about the Baltic Dry Index over the course of the last four years, especially in light of the credit crisis and the effects it has had on the frequency of global shipping. Importing and exporting has never been quite the same since 2008, and this change is made most obvious through one of the few statistical measures left in the world that is not subject to direct manipulation by international corporate interests; the BDI. Today, the BDI is on the verge of making headlines once again, being that is plummeting like a wingless 747 into the swampy mire of what I believe will soon be historical lows.
The problem with the BDI is that it is little understood and often dismissed by less thoughtful economic analysts as a “volatile index” that is too “sensitive” to be used as a realistic indicator of future trends. What these analysts consistently seem to ignore is that regardless of their narrow opinion, the BDI has been proven to lead economic direction in the market movements of the past. That is to say, the BDI has been volatile exactly BECAUSE markets have been volatile and unstable, and is a far more accurate thermometer than those that most mainstream economists currently rely on. If only they would look back at the numbers further than one year ago, they might see their own folly more clearly.
Introduced in 1985, the Baltic Dry Index first and foremost is a measure of the global shipping rates of dry bulk goods, mostly consisting of vital raw materials used in the creation of other products. However, it is also a measure of demand for said materials in comparison to previous months and years. This is where we get into the predictive nature of the BDI…
Waist Deep in the Big Muddy
With its announcement this week that it will keep interest rates near zero until at least late 2014, the Federal Reserve has put another large crack into the foundations underlying the US dollar. In a misguided attempt to provide clarity and transparency, Ben Bernanke has instead laid out a simple road map for economists and investors to follow. The signposts are easily understood: the Fed will stop at nothing in pursuing its goals of creating phantom GDP growth, holding down unemployment, propping up stock and housing prices, and monetizing government debt. To do so, it will continue to pursue a policy of negative interest rates, while ignoring the collateral damage of unsustainable debt, virulent inflation, misallocated resources and credit, suffering yield-dependent retirees, and a devalued U.S. currency.
Not surprisingly, precious metals and foreign currencies rallied strongly on the news – with gold up more than 4.3% and the Dollar Index down nearly 1.6% in the days following the announcement. The Dollar Index is now down more than 3.5% from its highs in mid-January.
In coming to the momentous decision to extend the Fed’s prior low-rate promises by another 18 months, Bernanke and his cohorts relied on a somber view of the economy that is at odds with the sunnier view presented the night before by President Obama in his State of the Union address. To justify holding rates so low for so long, the Fed is choosing to ignore the fact that CPI inflation is currently running north of 3%. Instead, it has conveniently chosen to look at a hand-picked alternative measure, the chain-weighted core PCE, which comes in just a shade below the Fed’s arbitrary 2% target. How convenient.
After some changes in key membership at the Federal Reserve’s policy-setting Open Markets Committee, in which a few long-time hawks were put out to pasture, the Fed has now established itself at the extreme dovish end of the policy spectrum. Among other central banks around the world, it may now be outflanked only by some very profligate ones in South America and sub-Saharan Africa. Unfortunately, the FOMC has its hands on the wheel of the world’s reserve currency, and therefore its decisions may lead the planet into financial chaos as long as other nations are content to follow the Fed farther and farther into a swamp of liquidity. To paraphrase Pete Seeger’s protest of the escalation of the war in Vietnam, “we are waist deep in the Big Muddy and the damn fool yells ‘press on.’”
The Perfect Heist: Why Government Theft Continues to Go Unnoticed
Today, we doff our caps to the folks at the European Central Bank. They’ve pulled off the perfect heist.
The euro-feds have opened the valves…turned on the spigots…and let nearly a half trillion euros worth of liquidity flow directly into the very same banks that have proven they can’t be trusted with a penny.
But that’s how a zombie system works. The living give. The monsters get.
And since, at this stage of the credit cycle, the living don’t have much to give, the feds turn on the printing presses.
Then, from whom does the money come?
Gotta come from someone, no?
That’s right… When you borrow it, it comes from the people who lend it. When you tax it, it comes from the taxpayers. But whom does it come from when you just print it up?
Well, at first it appears to come from no one. Nobody reaches in his pocket and finds fewer dollars. Nobody’s pocket has been picked. But how could that be? Nothing comes from nothing. You add a zero to a zero and you still have a zero.
And yet, the zombie banks now have 489 billion more euros in their vaults. That’s what it said in yesterday’s Financial Times.
“Banks snap up 489 billion euros in ECB loan offer.”
This money certainly seems real. The banks can lend it. Spend it. Toss it out the window or down the drain. They can light cigars with it. They can use it to wrap gold coins before sending them out as Christmas presents.
Let’s see, we saw an ad. Mercedes Benz CL class 2011-2012 autos are selling, in round numbers, for $100,000. With this money, you could buy about 6 million of them. Which is probably more or less what will happen to the money.
But what concerns us today is not where it goes but where it came from. Did it come from space? From another galaxy? No? Then, isn’t all wealth on earth owned by someone? Yes? Then, it must have come from some humans somewhere on Earth.
