The Economic Viewpoint

The Coming Housing Bust - Business Week

2009-10-17T21:55:00.003-04:00

I guess it's time that I out myself. I have been writing this blog for four years and in that time I spoke about the housing bubble well before it was a national concern, I wrote about GM's failing management strategy, oil prices, and banking failures. There will be much more to discuss as the US recovers from the "Great Recession".

Two weeks ago my phone rang. It was a Business Week reporter who wanted to discuss a thought I had posted on the Hot Property blog. All the research I am doing shows that we will have a large housing problem as soon as the boomers begin to retire in mass. In short, there are too many large suburban and exurban homes that will not be desirable to younger generations. This thought was first established in a 1989 paper by N. Gregory Mankiw and associates titled "The Baby Boom, Baby Bust, and the Housing Market". This paper surmised that as baby boomers aged and moved into smaller houses population growth and demographics would not be strong enough to backfill into these homes. We know now that this paper was premature yet I believe it's still relevant.

I spoke for a few minutes with the reporter about my thoughts on the matter. We had a great discussion and I'm pleased that the article was more or less on par with what we discussed.

It's even more relevant today than it was then - we are in a long term energy price spike. Higher energy prices have always resulted in a conservation movement in this country and I don't expect this time to be any different. This could be the start of a long downhill trend for the housing market, regardless of any short term upticks or stabilization of the market.

The Economics of Camping

2009-10-05T00:38:00.003-04:00

Another summer has come and gone and while camping is winding down in a majority of the US, it's just coming into season in Florida. Camping has always been one of my more enjoyable hobbies and I had an interesting exchange with a campground host at my last outing which lead to this post.

It should be clear to everyone by now that we are in a recession (or maybe just exiting one). Why then have camping rates risen so much over the past year? The Florida Parks Service has raised campground fees at many campsites 10% or greater, with one park (Rainbow Springs) having a 20% increase in camping fees. Why would the parks be raising the camping fees when the economy is weak. I had a wonderful conversation with an employee of the Parks service at the headquarters in Tallahassee when I called to ask him this exact question. He clearly stated that costs have risen since the previous rate hike, especially utility expenses. Check. He also stated salaries of the park staff. Check. I asked him what sort of falloff in visitors they would see from this hike (the price elasticity) and he admitted it would probably be brutal in the beginning before starting to come back. Double check.

I have to believe the parks service had someone run the price elasticity of demand to determine if total revenue would increase or decrease with an increase in price. Without the snowbirds coming, a decrease would be guaranteed. Yet, so many snowbirds come to Florida with their RVs and I cannot see them turning around just to save another $6 per night. There is no easy substitute product for Florida RV sites, and private camps often have high fees. Sure, maybe some will go to Texas but if an east-coaster tries to save a few dollars on camping they'll probably spend more on fuel. I do believe there is a price at which people will begin to feel camping is too expensive, and I believe we have crossed that point.

Let's take the hypothetical John Doe family. Mom, dad, and two kids. Assuming their camping purpose is to save a little money when visiting Disney World, let's see how much they would save by camping. For the parameters of the model, we will assume that this family will camp 2x per year, that camping gear lasts 5 years, and they would not use the gear outside of camping. Let's look at the expenses of the Doe family:

Tent: $75

Cooler: $20

Sleeping bags $20x4=$80

Other supplies:$10 per night (includes stove, lantern, firewood, charcoal, plates, napkins)

Camping site fee: $30 per night

We're going to remove food from this model as that is required whether camping or not.

The model looks like: CN = ((T+C+S)/10)) + O + S

Taking the total supplies the cost to camp (T+C+S) is $17.50 per night. Add in supplies and site fee and we arrive at a grand total of $57.50/night to camp (CN).

It's not too hard to find hotels close to Disney for $57 a night. The only places to camp around Disney for $30 a night are at least 1 hr drive away from the parks. In almost every circumstance, except as noted below, it would be equal or cheaper to stay in a hotel. *Exception: the Doe family gets immense enjoyment out of camping, which cannot be quantified in this model*

Thesis: Many campgrounds are going to price themselves out of the market.

What's really going on with the Housing Market

2009-08-25T16:54:00.002-04:00

The past few days have seen a flurry of news articles about how housing prices are "up" again. What exactly defines "up"? Just a shrewd bit of reporting. According to this Reuters article, prices are up 1.5 in June vs. May. The article does state that housing prices are still way down year over year. Since when did we start to compare individual months? Could it be that housing prices were up in June since May was a cooler month, and warm weather is known to draw out shoppers? I don't know. Maybe people were buying less foreclosure homes in June vs. May, causing the numbers to turn positive. Who really knows?

What I do know is that the only numbers that matter are year-over-year (YoY) numbers. Until this turns positive, don't believe for a second that a housing recovery is anywhere close.

Ironically, this article states that "23% of mortgages are delinquent in Florida for the second quarter of 2009".

I have a feeling this housing market correction is in the 3rd inning of a 9 inning game.

Inventories down, but demand up?

2009-04-08T09:54:00.002-04:00

There's an interesting article in the WSJ today about businesses that have cut inventories so much that at the current rate of consumption there will be a production rebound in the next few months. The article said that 2/3 of CEO's expect demand to soften in the next 6 months while only 1/3 expect it to strengthen. The best quote was from the Josam Corp CEO (maker of industrial drains), who said he believed the worst is behind us.

That's my position too.

I spend too much time reading news and comments on the Internet message boards, but I am astounded at the pervasive negativity that so many people see to have. I posted on one forum that I think the first quarter of 2009 will be the bottom (viewed in retrospect) and I was immediately flamed by those who "know better", asking me to put my money where my mouth is. I have done just that (via the stock market).

In Spring 2003, negativity was at levels seen today, with common perception that the economy would never recover, only to start a sustained bounce that exact month that ended the year with the largest GDP growth since 1984 (7.8% in 3Q 2003), and 20% rise in Dow for the year.

In fall 2007, as the economy was quickly decelerating, there was a high level of positiveness even though all the data pointed to a huge, and I mean HUGE credit crunch in the making (starting in July 2007), and housing price declines on the way.

In summer 2008, people were talking $5/gallon gas for the foreseeable future. (Note my posting in July 2008 that oil would be below $100/brl by fall, and in my thinking, I wouldn't have imagined the fall to $30, I expected somewhere around $60-65).

My point is, using what I call my 'human-emotion' index, which is not scientific by the least, but if one goes against the common thought in society we can see data and turning points missed by the mania of the moment. That's what I see today.

*Sorry, I don't like to WSJ articles since it requires a subscription, but the article is titled "Glut of Goods is Easing".

Long Time

2009-03-19T13:28:00.002-04:00

I can't believe I haven't updated this blog since July 2008. At that time, I was overseas for a while and had some free time in the morning, but since I've been back in the 'States I've been busy. I'll try and spend some time writing every day, but I'm not sure where to start.

Let's start with the bank failures. As predicted, some major banks have failed (WaMu, Wachovia) and mainly because of the mortgage mess. WaMu was well known for thier lax lending standards and aggressive expansion. Why WaMu sees a need to open a ton of branches in Florida is anyone's guess, I have noticed that Chase has shut many of them down. Wachovia was brought down by the Golden West acquisition.

Bank of America so far isn't choking the way I expected on Countrywide, but this is likely because of government help. Recently, BofA accounced they will retire the Countrywide name, which is a prudent considering they were one of the the largest offenders in subprime, liar's loans, etc.

Where do we go from here? Citi is in major trouble, BofA isn't far behind. There will be more failures. An upcoming wave of mortgage defaults will stress all the banks. We are just now seeing resets in 2007 issued loans, and all my sources tell me the only thing being issued then was fraud. Time will tell, but its' not smooth sailing ahead. It will get better, but there will be some pressures in the short term.

Oh, and oil is up to $50/brl today. See my post from July 13, 2008, and who would have thought oil moving up to $50 would ever happen again?

The Banking Crisis - Where will it end?

2008-07-28T13:58:00.003-04:00

There has been lots of discussion about the banking crisis for the past year so let's take a look at some of the primary causes of this crisis and what it will take to end it.

First, the banking crisis was caused by lax lending standards and nothing more. Many people were approved for mortgages they never should have received had banks been following traditional underwriting guidelines. This was caused by the global glut of savings looking for some kind of return, however small, with a secondary cause being that banks were more than happy to loan out the money with little to no research into the actual ability of the borrower to repay. Some pundits have cited over-reliance on standard indicators such as a FICO score but to me that's treating the symptom and not the disease - if people want to receive a loan, they should have some kind of skin in the game in the form of a downpayment.

Another contributing factor was the ability of banks to package these toxic loans into securitized assets that received good ratings from the likes of AM Best and S&P.

The real question is when will this crisis end? It will end when all these toxic loans have been written off the balance sheets of the banks. This will require massive (read: trillions of $$) losses from the banks and the best indicator of this will be when the masses begin to believe that it will never get better and banks are giving out very few loans. I cannot begin to predict when that will happen, but as a SWAG I would say sometime in fall 2009 which gives us another 12 months of interesting lessons in history from which people should, but will probably fail to learn from in the future.

Grad School - The End is Near

2008-07-24T15:14:00.000-04:00

Some of you who have followed me for a while know I am finishing up a graduate degree in Economics.

I intially began to study econ in 2002 trying to understand what happened in the dotcom bubble and how to keep it from happening again. Then we had the mother-of-all-bubbles in the housing mess and I was really curious to take my education to a higher level and I joined a Masters program in Econ in fall 2006. Fast forward two years and I am down to my last class. I will not write a memoriam until I complete it all but I can say it seems like just yesterday I was starting and today I am looking at the finish line. My understanding of economics has increased by magnitudes and I have a much more critical mind in determining what is happening in the economy today and actions taken by the various players.

For instance, Hank Paulson has been widely criticized for the Bear Stears bailout--or buyout, however you see it. Media reports that he wanted a very low price ($2) paid to shareholders to force them to take a loss and send a message of moral hazard throughout the markets - i.e. that companies that make bad decisions will have to pay. To the average lay person it looks like some people are walking away with stuffed pockets but sending a message out about losses definately causes a strong market reaction.

Economics has provided me with a large set of tools with which to better understand the markets and why people sometimes act the way they do, or a theory called rational expectations.

New Housing Bill Nears Law

2008-07-23T14:16:00.003-04:00

Yahoo reports today that President Bush has agreed to sign the housing bill that is moving through Congress. From what I read, the bill does the following things:
- Allows FHA, FreddieMac and FannieMae to guarantee more mortgages, including
- The guaranteed refianance of $300 billion in mortgages

Starting with the first point, one of the problems that got us into this mess is that banks were writing unsound loans knowing they could be sold to the mortgage giant GSE's. Recently the limits were raised on the mortgages from $417,000 to in the $700,000's. Ironically the FDIC has not raised the limits of insured deposits

The second part is the refinance clause. Housing pundits like to believe that allowing someone who is upside down on a home to refinance will fix the issue. With rising gas and utility costs, many of the homes in which people are upside down might not be desirable now. Note that this will also not stop the growing number of 'mortgage walkers', or those who only bought for appreciation purposes or some other reason who won't pay for an asset that has little chance to bring an immediate return.

Mortgage walkers - keep an eye on this in the media as I believe this term will become synonomus with 2009.

I'm disappointed about this housing bill because it does nothing to fix the real problem (price/income ratio) and everything to hopelessly delay the inevitable (price/income ratio back to historical norms).

Plight of the American Auto Makers

2008-07-22T14:57:00.001-04:00

My last post on the auto makers was in May 2005 where I commented that GMs new truck line was a mistake and not likely to bring the additional revenue they expected because the market was shifting away from large trucks and suvs. Apparently GM and Ford received the same memo sometime early this year and are now scrambling to build as many new cars as possible as the US moves to join our European and Latin counterparts at doing more with smaller vehicles, not less with larger ones.}

Ford announced today it will close the plant that builds the Ford Expedition and Ford Explorer, and start building the Expedition alongside the F150. I do not know where or if they plan to build the Explorer, but my prediction is that the midsize body-on-frame SUV will end. GM is also cutting back production on their SUV models.

We have all heard the automakers want government help to build a new generation of fuel efficient electric cars. I am not convinced it is the job of the government to subsidize these products, and I am also not convinced electric cars are needed in the US. There were concerns that the Internet craze in the 1990s would drag down the nations electric grid - what in the world would happen if everyone was charging cars? We would need all kinds of new power plants along with more efficient transmission lines, both entities that have all sorts of NIMBYs upset. Thus, electric cars really cannot be a feasible option today.

The real solution is more mass transit. Many people will not take mass transit because it is not convenient - but this problem can be rectified by more availability and options for travel. I am not convinced that the US citizens are so much for personal trasit they would turn down the economics of mass transit that would save them a ton of money in gas, car payments, insurance, etc. Matter of fact, I will happily sign up for a convenient mass transit option if one becomes available to me. It is time we as a nation look at the possibilities of mass transit in a positive light, not a negative one.

IndyMac Failure

2008-07-12T22:39:00.003-04:00

We have seen the first large bank failure of the hosuing crisis - IndyMac has failed. IndyMac was once a part of Countrywide Financial, which is now a part of Bank of America. IndyMac specialized in Alt-A mortgages, or those given to people who cannot or (will not) document their income to qualify for mortgages. IndyMac had some bad loans on the books and suffered from an old-fashioned bank run after rumors circulated in the press that the bank was insolvent.

Now we have seen a major ill-effect of the housing bubble. This is just the beginning, as we will soon see a large uptick in people walking away from houses they can afford, we will see an increase in suicides and personal bankruptcies. I hope that society and the lawmakers are prepared to let the market run its course and know that while it will get worse, it will one day get better.

For the record, I don't believe we'll see an uptick in the housing market until spring 2010, and the upturn will include a stable market (no increase or decrease in prices), and will probably stay that way for 12-18 months before small positive ncreases in housing prices return. Soon I will write about the reasons I believe we will see another major housing bust in the future even though there will be no bubble before. This housing bust will likely persist for 15-20 years with some years of increases and some of decreases.

The Real Cost of High Oil - And Why it's a Bubble

2008-07-11T11:49:00.002-04:00

I'll go ahead and put myself on a limb here - I believe that oil will be below $100 a barrel by the end of October.

Let's look at the following circumstances:

- Demand is down 5% per day according the CNN

- People are becoming very conscious about oil consumption

- Gas guzzlers are out and small cars are in

- Airlines are cutting 10-20% of their flights (this one alone will save a TON of oil)

- As inflation rises in the US, FFR increases will strengthen the dollar resulting in less usage of oil as an inflation hedge

- The Olympics will be over in China, and China will stop stockpiling diesel oil

- Asian countries are removing their oil subsidies for oil consumers, resulting in increased prices for consumers, likely spurring conservation

Add up all these little pockets of demand that are going to disappear and we have the market forces to push oil back down below $100/brl, but we shall see.

***Since I wrote this article, oil in the past week has dropped $12/brl, the largest one week drop in history. We're now about $133/brl and I expect the drops to continue***

Mortgage Bailout!!!

2007-12-05T21:48:00.000-05:00

We all saw this coming - the Bush administration is poised to annouce a 5 year rate freeze on subprime mortgages. To appease people like me who don't want to see a bailout, they propose the following

".... (Henry) Paulson, who has been leading the effort to craft a plan, said on Monday that the program would only be available for owner-occupied homes -- to ensure the break is not given to real estate speculators."

My question: what kind of criteria will they use to determine owner-occupied? It's a federal offense to lie on a loan application and it's well known that many speculators stated 'owner-occupancy' when it really was an investment property. Thus, if the loan application is used as criteria for this program, we've bailed out people who should be bagholders. Yes that's right, WE as in YOU and I as consumers and taxpayers. The favorite economist saying of "There is no such thing as a free lunch" holds here too - consumers will subsidize the lost earnings of the banks through higher fees on credit cards and other loan products.

This plan is like using a band-aid to plug a cut in the jugular. Government intervention is going to worsen the problem and prolong the agony. People who speculated and lost on homes need to suffer the consequences and accept their loss. I would love to default on my credit card. Why doesn't the government subsidize that, because I spent too much. Not any different from someone buying real estate they cannot afford.

Besides, this plan won't do anything to stop the next wave in this real-estate bust: people who can repay loans but choose not to. Let's talk about that - the easy losses have already been cleaned out by the markets. Now we will begin to see many people who have the means and income to repay loans begin to walk away due to the prospect of being underwater for years. For instance, lets use a hypothetical customer paying $1500 a month on an investment condo that is sitting empty. Even if he can pay that with his salary, it's like throwing money away. So he'll just turn in the keys, stop paying, take the hit on his credit, and move on. Chances are any pain will be temporary. In the case of sufficient income, he should go out and buy a new car right now and take the hit on his credit report (foreclosure), because since he's not filing bankruptcy, he won't need to take out a loan for 3-5 more years and by then his score will be substantially recovered. Actually, the way things are looking at that timeframe from today, banks will be begging to have customers who have ability to repay loans.

So you read in here first - the next wave in this bust is people walking who have ability to pay. Looks like this rate freeze won't do much about that. Maybe the bailout can then be "pay for 1 year, free house for life?"

Green Decisions - The personal cost of high oil

2007-11-05T22:00:00.000-05:00

Tonight I was sitting in a bakery and noticed the gas station across the street was selling regular unleaded for $3.05/gallon, the first time that gas has been over $3/gallon since September 2005 (at least in these parts). I glanced back at the hulk of a pickup truck that I drive and started to do some computations in my head of my direct cost of oil.......

In this country people don't seem to put much, if any emphasis on conservation. We drive monster cars, have monster houses, and way too much waste in our lives. I'm no less guilty than the next guy - I consume more than I should and drive a bigger vehicle than necessary. However, conservation and being green is always on the front of my mind when it makes economic sense to do so. Repeat that - it must make economic sense. What is that you say, well lets' get back to gas prices.

I drive a pickup truck. A V-8 powered 4WD breast of a vehicle. Surprisingly, it doesn't get horrible gas mileage for it's size (about 17 mixed). I purchased said pickup for a specific purpose and now that gas prices are real high conventional wisdom says I should ditch it for a fuel efficient car. Economic reason is different and we're going to look at this case through the lens of replacement value - or what would it cost me to get an equivalent vehicle today. Let's look at the facts here. One, my truck is paid for. That means I have possession of the title, and it's mine all mine. That reduces my cost of ownership quick significantly because I'm not spending $400-500 a month that an equivalent new truck would cost me. Due to it being paid off (and slightly older), the insurance premium is cheaper. Another $50/month saved. I drive on average 150 miles per week to school/work and back, and at 17 MPG, that is rougly 8.82 gallons of gas, we'll say 9 to keep the math easier. Final calculation: I use 36 gallons of gas a month for my personal transportation cost which would cost me $107 at $3.05 per gallon.

For comparison sake, I'm going to buy a Chevy Cobalt. Not really, but IF I were to need a car tomorrow, it would be at the top of my list due to it's value and economy. As much as I like the Prius, there is certainly not an economic case to be made to drive one. Back to the Cobalt, let's say I have to take out a loan of $250 a month (48-months) to pay for it. Insurance is about $130/month, and the car averages about 30 MPG. Conventional wisdom says that people with fuel efficient cars drive more because it costs less to do so - I don't buy it, but let's say I drive 700 miles a month now. At 30 MPG mixed, I use 23.3 gallons a week, spending $72 a month. In essence I've saved $35/month, YET I have increased my expediture by ~$100 a WEEK by having to make payments and additional insurance costs. Sure doesn't look to make economic sense does it, to save a little gas?

To be fair - there are a host of other variables that I am not controlling for or observing. It's hard to guess the utility (happiness) I would receive from a new car. I may save some money on repairs. I might feel good about burning less fuel (and creating less CO2). If I paid cash for the new car the numbers would be substantially different, but the result is still the same. It's generally a net loss to buy a new car to save money on gas.

If I had to do it over again, I would strongly reconsider my choice of vehicle. I don't like wasting anything but to spend dollars to save pennies makes no economic sense in my book.

Tampa Home Prices to Drop, says report

2007-09-19T22:13:00.000-04:00

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.

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

2007-09-18T21:14:00.000-04:00

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.

Florida Housing ready to bust?

2005-12-19T21:22:00.001-05:00

I've been PC in most of my comments but that is going away. Florida housing is ready to bust, and here's why:

1. Prices too high - why the hell should a house be close to 10x the median wage? The area of Florida in which I live anything less than 200k will buy you a trailer. If you're lucky it won't blow away the next time a tropical storm threatens the state. I believe the median wage where I live is $30,000/yr. The average house costs $230,000. $230k buys you a three-bedroom, two bath, 2 car garage in a boring subdivision that is a good 30-45 mile drive from anywhere that pays decent, meaning it's a two hour daily commute. Great, I'll pay $230k for a boring house surrounded by boring houses so I can drive 2 hours a day and spend the weekend listening to the neighbors brag how their house has appeciated X dollars this year or how their new $75 clearance toilet makes the bathroom look great which should increase the value $10,000.

2. Area - Florida is not the nirvana that everyone makes it out to seem. It looks like an idyllic setting when coming down to visit Mickey the Mouse with palm trees everywhere and a pool behind every house. Move down here and the picture changes. This state is full of in and out transients who have overbuilt this state and are generally ruining it. Drive on I-75. It seems that every third vehicle is a moving van or trailer, some heading away but many more coming. The heat is oppressive. Sure, the winters are spent without shoveling snow which has it's pluses. Yet summer stretches from April to November with an unrelenting heat and oppressive humidity that is unmatched anywhere else in the states. Little wonder that the true population of Florida didn't begin until air-conditioning was invented. Oh and the year-round swimming. That only lasts the first year. After that, water is only warm enough from swimming from April until October. It's really not any different from northern states except a couple extra months of swimming. The ocean is COLD until early/mid June. (<75'F). It cools down below 75 sometime late October or early November. 75 sounds warm until you swim in the Gulf in August when the water temp is close to 90'. Try swimming at 75 after being in at 90 and it's like taking a cold shower. Trust me on this.

3. Industry - there is not enough high paying jobs moving into this state to support the population growth. For every job that is coming there is someone out of state that wants the job as well as 2-3 people in-state. Many jobs are being created that are low-paying call center and service industry jobs (Hotel workers, retail, etc). This is while the overpriced housing is continuing to rise.

Outcome: Real estate bust. Money from the rest of the country can only pour into Florida real estate for a finite period of time. Interest rates are still pretty low on a historical basis but they are looking high after being used to 5% mortgages the past 3 years. (kind of like 75' water feeling cold after being in 90' water). Add a couple hurricanes that have driven property insurance through the roof and you have a 'perfect storm' brewing.

For those who don't believe me, look at what happened to Florida real-estate in the 1920s. Around the area I live crummy apartment complexes are turned into condos, sold to people who gladly pay a $1500/month mortgage for an apt. that commanded a rent of $850/mo. A few complexes around here were casualties of the last Florida condo bust of the 1980s. Condos were bought up by big developers and turned into apartments after people walked away from mortgages. Some people think it will be different this time. It certainly will. The hurt will be worse.

Long time, no updates

2005-11-06T19:39:00.000-05:00

Okay I'm back online. Sorry I haven't posted in a long time. I became very busy working with some stuff so now I'm back.

There have been a lot of changes in the past 6 months:
1. Hurricanes Katrina/Rita/Wilma
2. Ben Bernake to succeed Alan Greenspan.
3. Spiking energy costs

Since I don't want to rehash the past, I'll just start writing again about current events.

Here's a blog that I've been watching, it's a good, honest discussion.

http://themessthatgreenspanmade.blogspot.com/

Books I am currently reading:

Irrantional Exuberance,Part 2 - Dr. Robert Shiller

Call of the Mall - Paco Underhill

Up Against the Wal-Marts - Don Taylor & Jeanne Smalling Archer

The Trouble with GM

2005-05-07T00:07:00.000-04:00

To be fair, Ford is having similar problems, but they just aren't the whipping boy in the media now. Let's not forget back in 2002/2003 they sure were, while GM was sitting on the sidelines.

BusinessWeek did a great article on GM, and why their problems cannot be easily fixed. I'd like to say the problem is their cars, but I think some of it is their lack of....GM has been focusing too much on SUV's and pickup trucks, while letting their car line lag. In reality, GM has put out some new cars lately (Pontiac G6, Chevy Cobalt, Buick Lacross), but none of these cars are "pushing the envelope". I've seen the G6, and I think that is one sweet car. Haven't driven it yet, but I would say that GM is probably getting a worse whipping than they deserve from the media. Same for the Cobalt. The Chevy Equinox cross over SUV has been selling like hotcakes. The selling problem with GM is they are too dependent on "chic" vehicles. The large SUV has been the "wanted" vehicle the past couple years, but as any one with any marketing knowledge will know, consumer trends and tastes shift over time. Why GM could not figure out that the SUV craze was cooling off is beyond me. Ford saw it and planned for it. GM is in denial, stating that new versions of the Tahoe, Suburban, and Silverado will spur sales. I'm sure they are right; some holdouts will trade up for the new thing. I am quite certain it will be a short term boost, not drawing huge amounts of buyers who might not have otherwise bought a GM product.

Quality is not GM's problem either. GM makes quality cars. I have been very happy with the three I have owned. The problem is the perception, Honda and Toyota have been building quality cars for 30 years. They have an expectation of quality. People almost expect GM not to be as good as Toyota or Honda. It doesn't help when magazines like "Consumer Reports", (which I love their reviews), appear to show obvious bias towards foreign cars. In 2000, they had the VW Passat as the best sedan. Come on now, a VW is a nice car, but for many of us, a Ford Taurus, that likely has similar reliability, fits the call of duty for a lot less cash.

Labor contracts are certainly a big issue and it looks like the day of reckoning has finally arrived.

GM's possible plan on hanging on until the actuarial tables change in its' favor (BW) sounds very similar to a company I once followed. That company had labor issues, product (mainly perception) problems, and never took the opportunity to make the painful cuts that could have ensured its survival. That company was TWA airlines.

Statement of Purpose

2005-04-22T07:49:00.000-04:00

The purpose of this blog, Economic Viewpoint, is to present the alternate view of current economic events. Mass media often focuses on one dimension of the economy with a lack of understanding of the related dimensions.

The least understood area of economics is consumer behavior. Indexes have been created to gauge it (i.e. consumer sentiment survey). The past couple years have showed us that this is not anywhere near an exact science, as consumer sentiment was negative much of 2002 and 2003, yet consumers kept spending. Since 60% of the economy is based on consumer spending, it is highly critical for companies to understand where the market is headed.

As a consumer, you must understand where the economy is heading to maximize your investments.

Emotions often get in the way of logical decision making. Ever read the reports of compulsive gamblers who believe the next play will be the big payoff? What about the Ebayers who pay well over market price for a trinket due to the thrill of winning an auction?

This same sort of thing happens in the economy, yet the consequences are more severe since they affect all of us.

Unfortunately, I believe the housing market has turned into the next "overhyped stock market." Take away the unreasonably easy money supply, which is slowly going away anyways, and the economic fundamentals are minimally different today than they were 10 years ago. High energy prices are also taxing consumers and reducing disposable income.

On the positive side of the coin, removing the housing problem and persistently high energy prices, the economy is well balanced. Demand is strong on both the manufacturing and service fronts. The job market is growing near it's historical average. The unemployment rate is dropping. Paychecks are growing. There is a lot to be optomistic about.

After reading EV, I hope that you use critcal reasoning to think of the unmentioned dimensions of the economy. Conventional wisdom tells us the housing market will continue to rise. Is this true? Maybe. Maybe not. Only time will tell.

Whether you agree or disagree with my posts and conclusions, I've accomplished my goal if you spend the time on EV contemplating the alternate view.

Is Stagflation a Risk?

2005-04-21T22:48:00.000-04:00

Today's article on CNN.com supports what I have been writing, that the chances of us returning to some sort of "stagflation" are growing.

Stagflation is a combination of a stagnant economy with inflationary pressures. This is quite uncommon, since stagnant economies generally have very little inflationary pressures. The issue occurs when there is little to no economic growth, but pricing pressure increases. The last time this country has faced any kind of stagflation was the 1970s.

I believe the current round of inflation is affected by the following factors:
-lack of pricing power since 2000. The economy went four (4!!) years without any substantial pricing power due to a recession and subsequent jobless recovery. Now that the economy is growing at a decent clip, companies have found it easier to raise prices. I believe some companies are trying to catch up to where prices should have been.

-Competition from overseas. China's torrid economy is sucking up resources just as fast as we can produce them. Supply vs. demand.

-Low interest rates allowing easy access to money. When people are buying, prices rise. When no one buys, prices decline. Simple as that.

My solution to this problem is simple. Raise the short term rates 1/2% at the next meeting in May. The impact will be more emotional than material. It will show the markets that the Fed is serious about keeping inflation contained. The increase is small enough that it should not have an adverse impact on economic growth or consumer spending. Like all trends, the housing market is slowly coming back to earth, so the spending that is coming from home equity and refinancing is going to dry up anyway.

It's time for the Feds do their primary job (control the money supply), without worrying about upsetting everyone. A well-balanced economy today will bring a greater tomorrow.

Rampant Consumerism, Part II

2005-04-19T23:27:00.000-04:00

I've been thinking about my earlier post about the Newsweek editorial about rampant consumerism. The more I think about it, the more I think that guy is right.

Looking at the headlines recently, some of the major ones have been "Record low savings rates" and "record high debt rates". Someone is getting rich from consumer debt. GM posted a $1 billion dollar loss today, yet that is amazing since they are on TV talking about the "American revolution" and how American it is to drive around in a large SUV. Wal-Mart stock is near it's 52-week low, yet they have higher earnings than ever, selling the consumer class a bunch of depreciating goods that we don't need if you get down to the nitty gritty of it.

I've been reading "Good Debt, Bad Debt" by Jon Hanson. I'll give a little preview, but I intend to post a full book report on here once I am completely done with the book. Mr. Hanson divides all people into two classes; consumerati and econowise. The consumerati (I figure a majority of us) do not understand the concept of delayed gratification. We spend and spend, putting off the dirty work until tomorrow. The econowise among us understand delayed gratification, and hence they have more opportunites to save money to invest at the right opportunity. Are there any readers who do NOT wish they had $300,000 to invest in real estate in 2002? I wish I had that kind of money then. Consumerati have largely missed out on opportunities such as that one due to the payment on the good 'ol GM SUV referenced above.

I was looking at my budget tonight on Money 2005 (technology should make it easy) but when the numbers are depressing, what is there to do? Change!!! Even though I am not finished with "Good Debt, Bad Debt", I feel I am longing (needing) to be econowise, yet I am still consumerati. I look at my trinkets (depreciating, worthless junk according to Mr. Hanson), and I know that having debt does not make me feel good. A nice car sure looks sharp in the driveway, but the thoughts of lost opportunity (opportunity cost) is enough to keep me up at night.

The consumer class powers 60% of the economy. If we stop buying new furniture, new cars, new computers, new toilet seats, new ...insert item here... the economy will stop. The flip side of that coin is the debt associated with all these purchases. Will the economy ever get to a point where we will choke on all our debt? I can imagine it happening if the dollar or housing market crashed. The most likely scenario is that we will continue on as we are now, not saving anything and spending away without regards to tomorrow.

I guess we shall leave the answer to tomorrow as well....

To view "Good Debt, Bad Debt" on Amazon, click on the link:

A New Era of Investing?

2005-04-18T18:07:00.000-04:00

**I hate to post more than one article a day, but the first one is timely and this one has been on my mind, so here you go ***

Today on Yahoo there was a good article called "Sentiment vs. Sensible", courtesy of Forbes magazine. The premise of this article was that housing and real estate is in a bubble because of sentiment, and airline stocks, specifically AMR, are a heck of a buy because of sensible. Has this "touch and feel" ability created a bubble in the real-estate market? You can read the article by clicking the headline.

My main subject for today is again, you guessed it, housing prices. For the future, I will refer to housing as the real estate market, so commercial property is included.

I had a revelation (more like a hypothesis) this weekend about what could be causing high real estate prices. To my knowledge, this has not been discussed in the media, but surely it has been thought of by many economists. My revelation is that we may have entered a new period of investing, with the real estate market as the primary growth vehicle instead of the stock market.

Let's explore this by looking a little deeper. Post-WWII, the stock market has had spectacular growth and horrendous crashes, while the housing market has risen, stagnated, risen again, but never with huge gains or declines on a nationwide basis. After the 2000 stock market crash, many people have chosen to invest money in real property instead of paper assets. (I think a home should be considered a paper asset until you own the home free and clear.) In my opinion, the trend away from the stock market can be attibuted to the financial scandals and the terrorist attacks. When you come home from work, you can see your house and park in your driveway, but to many people a stock porfolio is a vision of a computer screen showing massive losses or lately, anemic gains.

If this trend is in fact a fundamental shift in investments, the stock market may soon be the "stable haven" and the real-estate market would be subject to booms and crashes. Would investors (home owners) be willing to endure these swings? I am leery. Americans are a very mobile group, living in multiple homes over a lifetime. I doubt that the average Joe is willing to stay in a house and foresake the McMansion because they are "underwater" in their home loan due to a downturn period. It's a lot easier to click on a computer screen and sell a stock portfolio, or to ride out a bear market since Joe doesn't (physically) come home every night to a stock portfolio.

Investors should consider themselves warned. Moving to real-estate as the primary investment market of the future could literally turn the McMansions into McPrisons. If the market is indeed making this switch, I advocate caution and awareness, two qualities that seem to be foreign to the mass investor class.

Stock Market at 8-Month Lows

2005-04-18T18:06:00.000-04:00

This is bad news for any investors. Data points to a possible weak spot in the economy, with slowing profits and manufacturing growth. What does this mean for us?

Quite honestly, I hope this is only a rough patch of water. Some people claim the Feds can now slow their interest rate increases, but I do not believe this is possible. Here's the reasons why:

1. Inflation, while the official reports say it is contained, my own eyes and mind tell me otherwise. Rates must rise to curtail inflation. We could be entering a period of 1970's-style stagflation.

2. Budget deficit: While the federal government is running the largest deficit ever, if the economy starts to slow down, foreign investors might flee the US equities due to poor ROI. This could be mitigated by raising interest rates but that has it's own dire consequences of slowing the economy more, creating a snowball effect.

3. Housing prices are still out of control in some parts of the country. A slowing in the interest rates rise might allow this problem to manifest further, so instead of slight economic consequences, we could have a severe calamity on our hands.

I believe all of these problems could have been mitigated if the fed funds rate was at the appropriate level for the past year. (around 4-4.5% right now, with 30 year mortgage rates of 7-7.5%).

The economy is now a runaway train on a mountain pass. If the fed doesn't get the imbances slowed down before the next curve, we could be well off the track.

Bankruptcy Law Changes--How will this affect you?

2005-04-14T18:00:00.000-04:00

Congress finally passed a version of the bankruptcy bill that has been sitting around Congress since 1998. The real question is what is the material effects on the economy?

"But backers in Congress and the financial services industry argue that bankruptcy frequently is the last refuge of gamblers, impulsive shoppers, divorced or separated fathers avoiding child support, and multimillionaires -- often celebrities -- who buy mansions in states with liberal homestead exemptions to shelter assets from creditors.

Rep. David Dreier, R-Calif., said the legislation would save American families an average $400 a year in higher interest rates now charged to consumers to recoup losses from those who abuse bankruptcy proceedings."

I agree that bankruptcy is abused by a certain segment of people, but these are the people that should be held accountable for their actions. I highly doubt the credit card industry would return any of the money saved from this bill to consumers as well.

Possible economic side effects of this bill:
-credit becomes easier to get for the marginally qualified, since the chances are they would have to pay back something.
-Credit card companies' profit rises even higher, and last I checked the credit card companies weren't exactly broke. Here's the numbers for MBNA, one of the largest credit card issuers:
"For the fiscal year ended 12/04, interest income rose 5% to $4.07 billion. Net interest income after LLP rose 45% to $1.39 billion. Net income applicable to Common rose 15% to $2.66 billion. Net interest income reflects growth in loans outstanding and higher average yields on earning assets. Net income was partially offset by higher costs for services provided for by 3rd-party vendors"

$4.07 billion eh? Looks like they did about $12 billion in sales, so this equates a little over 30% profit margin. Wal-Mart did $287 billion in sales in 2004, profiting $17 billion. This is about 5.9% profit margin. Which business would you rather run if your bonus was based on profitability?

Some economic impact will surely be felt from the largest bankruptcy overhaul in over 25 years.

Retail Sales Hurt by Higher Gas Costs

2005-04-13T22:47:00.000-04:00

***Sorry about the recent lack of articles posted. I had written some in advance and the links were expired. I uphold my journalism to the highest standard and will not post unsubstantiated articles. I was out of town for a few days and finally have caught back up.*****

Is this a surprise to anyone?

"The consumer has been the driving force powering the economy in the three years since the 2001 recession as Americans, bolstered by successive rounds of tax cuts and cheap credit, have spent with abandon."

We are most certainly practicing "Rampant consumerism".

"Analysts say continued gains in employment should produce further spending increases this year. But those employment gains will have to offset the waning impact of tax cuts and rising interest rates. The Federal Reserve is expected to continue with its nearly yearlong campaign of raising interest rates to make sure the rebounding economy does not produce unwanted inflation."

I know that my income has not risen 10% in the past year, yet housing prices around here did. How can anyone afford to buy a house now? As more income is devoted to housing and automobiles, something else must give. This could be the beginning of a long period of flat retail sales, given the end of cheap credit and higher unit costs of everything.

"The strong 0.7 jump in sales of autos and auto parts in March followed a much weaker 0.1 percent increase in February."

The automakers are giving away cars with huge incentives.

"The 1.9 percent drop in sales at clothing stores and the 0.7 percent drop at general merchandise stores, the category that covers big department stores, were both the largest declines since April 2004.

Sales also fell by 0.6 percent at furniture stores and were down 0.3 percent at electronic and appliance stores.

Bucking the downward trend, sales at hardware stores were up 1.5 percent, sales at sporting goods stores rose by 0.8 percent and service stations posted a huge 2.1 percent increase, a rise that reflected in large part higher gasoline prices."

Rampant Consumerism

2005-04-04T17:31:00.000-04:00

I was reading my newest issue of Newsweek, and in the Comments section there were some really good reader comments about the article from a couple weeks ago, "The Incredible Shrinking Dollar". I wanted to respond to a couple opinions and post one response I thought presented the alternate opinion.

One reader commented that Americans practice "rampant consumerism". I take this to mean that we buy too much, consume too much, and waste too much. Purchases and consumption keep the economy growing. I believe the low cost of goods relative to income has driven many purchases. My grandparents had 1 TV set for many years. Most people I know today have two or three. Is this rampant consumerism? No. In 1979 the average wage was $2.90 an hour, so a full time employee making minimum wage would gross $6032 a year. If a TV set cost $400 in 1979 dollars, that would be close to 6.7% of income. Today the person making minimum wage will gross $10,920. A 25" Sanyo TV at Wal-Mart is about $250. This is less than 2% of income. The low costs of goods relative to income spur more purchases. Could we be living beyond our means? The low savings rate implies yes. That is a discussion for another day.

Another reader thought that we have given away the crown jewel of the economy; the industrial base (manufacturing). I could not disagree more. Companies have been offshoring labor for manufacturing for many years. China has cheap labor compared to our costs, but in due time the Chinese will get smart and demand more, bringing their costs more in line with ours. This is already happening in India with regards to software development. Unfortunately, our quality lagged the Japansese for many years and American manufacturing still has a "black eye", even though quality appears to have caught up. When is the last time you thought a Ford car was a quality product? What about Toyota?

We cannot and should not turn our backs on globalization. In an ideal world, the manufacturing base will be situated in the lowest cost areas of the world, while the innovation will be in the highest educated and most advanced areas. Will this be America in the future? Time will tell.

Here is one particular comment that attracted my attention.

"However, I must take issue with the assessment that our current arrangement, where foreigners send us their goods and we send them our debt, is good for both sides. It is far worse for us. We buy our gewgaws and gadgets from them, and they in turn use the dollars we send them to purchase our Treasuries, stocks and real estate. In this scenario, who is truly getting wealthy—we who are up to our eyeballs in debt buying depreciating goods, or they, who are not only selling us all their stuff, but investing in and purchasing our assets? The current situation is unstable not only economically, but geopolitically. For instance, China owns so much of our Treasuries and dollars that the United States could never be more than a paper tiger regarding Taiwan. In a conflict, China could bring the United States to its knees without ever firing a single shot. It would just have to say "sell," and our bond and stock markets would be instantly thrown into chaos. Until we get our financial houses in order, we will continue to be on the losing end of the deal when it comes to trade and the problems with the dollar and our debts."
XXXXXXXXX
Ft. Lauderdale, Fla.

This is an interesting comment, and I think the reader (name removed for Privacy) brings up an frequently overlooked consequence.

Irrational Exuberance, Second Edition

2005-04-01T18:36:00.000-05:00

Today, one of the economists I most respect, Yale economist Robert Shiller, releases his book, Irrational Exuberance, Second Edition.

I have read an excerpt of this book in Money magazine a few months ago, and it made perfect sense. Mr. Shiller makes his point clearly and backs it up with undisputible facts. Mr. Shiller's point is that the housing market is dangerously overvalued, and left unchecked, faces a meltdown similar to the stock market meltdown with severe effects on the world economy.

Before you dismiss this book as "bandwagon rhetoric", consider that "Irrational Exuberance" (March 2000), which covered the insanely high stock market, was correct in it's predicition that the market value was out of line with fundamentals.

The most interesting thing about Mr. Shiller is he studies behavioral economics; the study of how people's behavior affects the economy. I find this to be much more fascinating than just looking at numbers and trends. If behavior had nothing to do with economics, there would be no housing bidding wars, no unrealistic price appreciation expectations, and no bubbles of any form.

From time to time, I will recommend books I find to be informative and insightful. I recommend that you purchase his book through Amazon, and the link to it is:

Irrational Exuberance Book on Amazon

To visit Mr. Shiller's website, here's the link:
Irrational Exuberance Home Page

Inflationist Hedging

2005-03-31T17:40:00.000-05:00

I've decided to shelve my original post for today in exchange for this article I found while looking on Yahoo.

Here's the meat of the article:
"Our long-held conviction that the economy can't sustain rapidly rising interest rates remains intact. The main reason for this is the sheer amount of debt in the system and the average consumer's undesirable financial situation ... if the economy starts showing signs of weakness, then the question begins whether the Fed will continue tightening monetary policy. If it stops and we try again to artificially induce growth, then excessive speculation will remain the only game in town, eventually leading to a spectacular collapse of the financial system." Courtesy: Wall Street Winners group.

This opinion is similar to mine. The FED is in a difficult position. The FED has three tactics it could use:
1. Raise interest rates quickly to counter inflation and risk hurting the economic recovery, OR
2. Raise interest rates slowly and let inflation get out of hand, OR
3. Do nothing.

None of these cases are desirable and all of these cases were completely avoidable. As far back as 1Q2004, the fed should have made the first interest rate increase (from 1% to 1.25%). What harm could that have done? Absolutely none. Once the FFR started rising, the FED should have jawboned the long term rates higher to conincide with short term rate increases. This would have kept the excess we now see in the housing market from building to such momentum.

Now lets' explore the other part of this statement:
"If it (economic growth) stops and we try again to artificially induce growth, then excessive speculation will remain the only game in town, eventually leading to a spectacular collapse of the financial system." "

This is exactly what will happen. The fed raises the rates too high, causing economic growth to stall. Then they reverse course and lower rates. BANG! This is not what could happen, this is what will happen if this scenario plays out, which I hope it will not. Shall I repeat that again? This is exactly what will happen as long as growth is not balanced.

Let me draw an analogy here. Take a simple 4-cylinder engine in a vehicle. If one cylider is not firing correctly, the engine runs rough. The economy is similar. Housing, business spending, consumer spending, and financial markets are each cylinders in the economy. (It could be argued that housing and financial markets are one in the same, but let's keep in simple). All of the cylinders must work in tamdem to produce power. If one is slacking, the other three much pick up the work or output falls.

Another area to examine of this article is:
"WSW's Gue drew the moral: "Commodities ... present [...] investors with an outstanding once in-a-generation opportunity; these markets are just in the early stages of what's likely to be a major, multi-year bull market move broadly equivalent to the 1982 to 2000 bull market in stocks."

Makes sense to me. China is sucking up commodities as quickly as they can be produced. India is an up and coming economic powerhouse. Commodities are really what has brought the economy to the strength is has today.

There is also a good part on the dollar, but I will reference that when I finish writing my dollar article.

Let me end today by referencing the great economist, Mr. Robert Shiller (more on him tomorrow).

"The changing behavior of home prices is a sign of changing public impressions of the value of property and of a heightened attention to speculative price movements. It is a sign of a bubble, and bubbles carry within them the causes of their ultimate destruction. "
Courtesy: "Irrational Exuberance, Second Edition" by Mr. Robert J. Shiller

Economy Finished 2004 Strong

2005-03-30T20:30:00.000-05:00

Looks like 4Q 2004 had GDP growth of 3.8%. For the second half of 04, overall economic growth averaged 3.9%.

This is excellent news. I especially liked the part of:

"Business spending on equipment and software increased at a robust 18.4 percent pace in the fourth quarter, compared with a 17.5 percent pace in the third quarter."

This is exactly what the economy needs. Business investment is the critical pillar at this juncture, because as housing price appreciation slows (or stops) and interest rates rise consumers will not have as much money to spend courtesy of home-equity and mortgage refinancings.

"Consumer spending grew at a 4.2 percent rate. That was on top of a brisk 5.1 percent growth rate in the third quarter"

I do not believe this rate of consumer spending is sustainable at current trends. The DOW hasn't really done much since 2003. Where is all this extra money coming from? You betcha, it's coming from home-equity loans, home sales, and mortgage refinancing. The economy created over a million jobs last year, but I do not think this fact alone could account for the consumer spending. Once the home-equity dries up, a rising stock market will be forced to pick up the slack, or consumer spending will suffer.

BTW, here's my guesses as to the GDP growth for this year.
1Q05: 3.8%, 2Q05: 3.4%, 3Q05: 3.1%, 4Q05: 3.0%

I'm working on a good post about the Declining Dollar. Stay tuned.

Housing Prices Begin to Cool

2005-03-29T23:26:00.000-05:00

You heard it here on EV. I said in my other post that housing prices were riduculously high, and today when I was reading my newest issue of Business Week, in the BW 50 is Pulte Homes. Here is a direct exceprt from this article:

"Rock-bottom interest rates and a steady supply of aging baby boomers for its "active adult" homes kept Pulte growing in 2004. Geographic diversification across the U.S. shielded the Bloomfield Hills (Mich.) builder from some regional fluctuations. Profits last year jumped 61%, as strong demand in the Southeast offset weakness in some Western markets. Pulte's new orders in the Southeast, for instance, shot up 45% in the fourth quarter. But the red-hot Las Vegas market suddenly cooled, forcing the company to slash prices there. Pulte also spreads its bets demographically, catering to first-time buyers and move-ups, as well as getting one-third of sales from new retirees. Rising interest rates remain a risk to sales growth. To cut costs, Pulte is experimenting with computerized methods of factory pre-assembly. After selling its Argentine unit in January, analysts expect the builder to soon divest its units in Puerto Rico and Mexico. "
Courtesy Business Week: http://www.businessweek.com/bw50/2005/company/PHM.htm
NOTE: You might have to be a subscriber to see this story. This is not a paid endoresment, but I have subscribed to BW for 8 years, and I feel that it has offered me the most educational value of ANY periodical I've ever read. I highly recommend BW magazine.

This was the first I have heard of the Las Vegas slowdown. I researched it a bit on the internet and found the other referenced article on CNN.

Did you catch the key point in the article reference above? The southeast orders shot up 45%!!!! What does this mean? To me, it means that the same thing that happened in LAS is going to happen in the southeast in due time. I have speculated that unsold housing inventories are rising, and there is the proof. Remember that as interest rates rise, less people will be able to afford these new houses. Supply rises while demand falls, bringing the equilibrium price down.

The prick has occured in the housing bubble. Once slowdowns begin in one area, others are sure to follow. This is very reminiscent of the stock market crash in 2000. Remember that the one event that precipitated the downturn was the AOL/Time Warner merger. Why? The merger was the most unlikely event. The thoughts at the time were "The internet on training wheels is taking over a venerable media company? Has everyone lost their minds?". At this point, everyone realized the market had gone too far. Las Vegas is to the housing market what AOL/TW was to the stock market; madness at it's peak.

Time will tell if I am proven correct or not. That is not the important part. The important part is that the economy continues to create jobs and expand GDP in the face of a vast monetary meltdown of disasterous proportions.

High Gas Prices

2005-03-29T00:03:00.000-05:00

How many times must I say that the reason for high gas prices is not due to a "security premium", it is due to the economic law of supply vs. demand. We are now competing with China for a greater portion of the oil pie than we have in the past.

This has driven up the costs for both sides, because as supply stays steady and demand rises, prices rise as well.

I do not believe that energy conservation will solve all of our problems, but it is the easiest 50% of the problem. Kind of like picking low hanging fruit off the tree.

Keeping gas prices in perspective, it behooves me why a single occupant, driving a Ford Expedition, sitting in the drive-thru lane at Starbucks, spending $3.50 for a 16-oz cup of coffee, is complaining about paying $2 for a gallon (64 oz) of gasoline.

Inflation Flickers Again

2005-03-28T00:00:00.000-05:00

Inflation Flickers Again
http://story.news.yahoo.com/news?tmpl=story&cid=2352&ncid=2352&e=1&u=/csm/20050325/ts_csm/ainflation

Is anyone surprised at the latest articles about inflation? I sure am not. And here's why:
As I noted yesterday, I have noticed prices rising when shopping the past year. Most of the increases have been in the food and energy sector, which are excluded from core CPI numbers, but lately other things have went up in price. I was looking at a new washing machine at Sears; it was $399 in December, and with sales it was generally 10% below that price. In January, the same machine was up to $449, and that was after the 10% sale. I read demand for steel was causing Maytag and Whirlpool to raise their prices. These increases were passed along to Sears.

The FED is behind the curve again with inflation. The economy is doing very well right now, but a concern of mine is "stagflation", reminiscent of the 1970's. Or we could be in an inflationary period like the early 1980's.

"House prices rose 10% last year. Did your income rise 10%?"

Today's topic, Interest rates and how they relate to the housing market

2005-03-27T23:45:00.000-05:00

The Fed raised the fed-funds rate from 2.5 to 2.75% the other day, marking the 7th consecutive raise since June 2004. As expected, long term rates (which have so far been trailing the short-term rates increases), have finally began to edge higher. The 30-year mortgage rate is now about 5.9%.

I feel the FFR should have received a 1/2% raise, to 3%. I think Alan Greenspan and the fed governors are "behind the ball" on inflation. I can tell this when I go to the grocery store. Prices are up on everything, meat and dairy products especially. (even though food and energy prices are removed from the CPI). But the real problem in this economy is not food or energy prices, it is home prices.

USA Today reports (3/23/05) that the average home selling price is now $191,000, up 11% from the same time last year. This is pure lunacy. I'd like to know how many readers had an income rise of 10% last year? This is on top of the double digit rise from 2003-2004. It is safe to say that house prices have risen over the ability of most people to afford them, IF interest rates were at the rate they should be at NOW.

Let me back up my statement about the interest rates. Demand for housing has been artifically stimulated by the flood of cheap money from the Feds. Judging by stuff I see, if you have a pulse and paycheck, you can get a mortgage, and the banks don't seem to have a problem letting you get way more house than you could traditionally afford.

I've heard many times from friends that "house prices have never declined on a national scale". I think that is quite likely within the next couple years. I have a hedged bet (in delaying my purchase of a house), that house prices will drop 5-10% in the Tampa metro area in the next 2 years. If we weather this storm fairly well, prices will not drop but will stagnate and remain stagnant for years to come.

My conclusion:There is no precedent in history for home prices to increase by double digits year after year, and anyone who believes this is possible is flying in the face of all economic priciples.

"167,500: The median sales price, in dollars, for a home sold in July, up 17 percent from a year ago, for the Tampa, St. Petersburg and Clearwater area." August 2004 news article.
http://homeseeker.tbo.com/homeseeker/MGBDBHHSIYD.html

The Economic Viewpoint

2005-03-26T23:39:00.001-05:00

Welcome to my blog. My favorite hobby is economics and statistical analysis, so you may call me an "amateur economist". The purpose of this blog is to discuss economic events. I will write my thoughts about the economy, and I hope to get your thoughts on how I am right or wrong in the comments section. If I have a source of information, I will reference it in my post if it is available. Now for a couple rules.

The rules:
1. All comments will be respectful. If you have a source, please reference it. No derogatory comments will be accepted and they will be deleted.
2. No plagarism of sources.
3. If you post something, know what you are talking about. Ignorance speaks for itself.

Data warehousing and data mining is what I do for a living. I apply the same tactics to economics because so much of economics has a basis in history, and the past can be used to predict the future.

The Economic Viewpoint

The Coming Housing Bust - Business Week

The Economics of Camping

What's really going on with the Housing Market

Inventories down, but demand up?

Long Time

The Banking Crisis - Where will it end?

Grad School - The End is Near

New Housing Bill Nears Law

Plight of the American Auto Makers

IndyMac Failure

The Real Cost of High Oil - And Why it's a Bubble

Mortgage Bailout!!!

Green Decisions - The personal cost of high oil

Tampa Home Prices to Drop, says report

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

Florida Housing ready to bust?

Recommended Reading

Long time, no updates

The Trouble with GM

Statement of Purpose

Is Stagflation a Risk?

Rampant Consumerism, Part II

A New Era of Investing?

Stock Market at 8-Month Lows

Bankruptcy Law Changes--How will this affect you?

Retail Sales Hurt by Higher Gas Costs

Rampant Consumerism

Irrational Exuberance, Second Edition

Inflationist Hedging

Economy Finished 2004 Strong

Housing Prices Begin to Cool

High Gas Prices

Inflation Flickers Again

Today's topic, Interest rates and how they relate to the housing market

The Economic Viewpoint