Wednesday, September 19, 2007

Tampa Home Prices to Drop, says report

The local paper here reports that Moody's Economic Reporting says that local prices in the Tampa area will drop by around $20,000, a 12% reduction from the high reached in 2006.

I strongly disagree with this report. Let's talk 20% and we're in the ballpark. There's no way that all the condos that have been built in this area are going to sell for just a $20,000 reduction. Many condos in my neighborhood have reduced their asking prices by $20k already and still no showings.

In short, I expect the median house will cost $180,000 (down from $229,000 and less than the $202,000 that Moodys' reports), and the median condo will be somewhere around $120,000. We also won't know until 2009/2010 because this mess is going to drag on a lot further than many people think.

Tuesday, September 18, 2007

1/2% Rate Cut, Did the Fed Overdo it?

I just read the news that the Fed has cut the funds rate (FFR) 1/2%, from 5.25 to 4.75%. In turn, the stock market rocketed up 335 points, the biggest one day jump in 5 1/2 years, and the largest after a fed move since the unanticipated move on April 18, 2001.

A move of this magnitude worries me. First, we wouldn't be in this mess if the Fed had raised up 1/2% in April 2005 like I discussed at that time. The national housing market is in the worst recession since the great depression, the dollar is at an all-time low against the Euro, and oil is at a non-inflation adjusted high of $81/barrel. What does this tell us? Our currency (the dollar) is worth very little in the international exchange markets and will be heading down from here.

One factor about the high price of oil that many people seem to miss is that it's related with the currency decline. A strong dollar policy (like we had until 2002) would lower the cost of oil because our dollars would buy more. It would also hurt our exporting and trade deficit with other nations, but we shouldn't be importing so much junk from China anyways.

There may be a net positive effect of this rate cut. If it loosens up the credit market slightly, we may be able to avert recession until 2009. It will also help people with credit card bills and car loans. What it will not help is the housing market, and here's why. Regardless of what the NAR, NHBA, and real-estate groups say, there are too many homes on the market at too high of prices. This is a classical case of markets being out of equilibrium, except right now we have a glut of supply and very low demand, kind of the worst of all worlds situation. On top of that, much more supply will be coming on the market with little appreciable increase in demand. In all honesty, the only thing that would save housing from a severe correction is the advent of interest-free home loans, and the chance of that happening is slim-to-none.

I'll keep a close eye on the markets and try to update with more that is happening. In the meantime, stay tuned for a post on my graduate economics program.