Positive Data For Those Arguing For A Recovery

[Parsad]

Southern California home prices were up year over year:

 

http://www.bloomberg.com/apps/news?pid=20601087&sid=av2pFDXS7_YY&pos=4

 

I would argue that California home prices were up due to demand in a low-interest environment and tax credits being offered, as well as banks holding onto inventory to allow the market to stabilize.  Is this sustainable going forward?

 

 

S&P still cheap based on cash flows:

 

http://www.bloomberg.com/apps/news?pid=20601087&sid=anDIJIkZOUt4&pos=7

 

Expected, as the economy stabilized, interest rates to refinance are lower, and companies have streamlined their businesses.  With higher regulatory requirements and taxation, will this trickle down to earnings?  Will consumption start to increase?  Cheers!

 

 

 

[ERICOPOLY]

On Australian television a couple of nights ago there was a psychologist explaining why some individuals get sucked into believing in apocalyptic scenarios from "the book of revelation".  Apparently, as aweful as it is to contemplate armageddon, some people actually find relief in believing it because it provides them some certainty... finally, they know how it ends.  So it gives them relief... relieved that  they know how the world is going to end, and when... I know, silly as that sounds the psychologists were saying it anyway.  But what immediately struck me is that people probably find the same relief when they reach the conclusion that the financial world is going to end... and that probably encourages people to step onto the hell in a handbasket bandwagon... notable investors included.... permabears.

 

 

[ERICOPOLY]

You also ask a good question... how sustainable is the tax credit?  

 

The housing market is oversupplied by 860,000 units:  http://newobservations.net/2009/12/27/housing-inventory-still-dramatically-oversupplied

 

It would cost $146 billion dollars to buy 860,000 units and scrap them.  Kind of like cash for clunkers in a way (scrapping houses instead of cars).

 

$146b is well within the remaining unspent stimulous budget.  My assumption is that the average price paid is $170,000 -- that may be fallacious because median is not the same thing as average price.

 

 

 

 

 

[twacowfca]

On Australian television a couple of nights ago there was a psychologist explaining why some individuals get sucked into believing in apocalyptic scenarios from "the book of revelation".  Apparently, as aweful as it is to contemplate armageddon, some people actually find relief in believing it because it provides them some certainty... finally, they know how it ends.  So it gives them relief... relieved that  they know how the world is going to end, and when... I know, silly as that sounds the psychologists were saying it anyway.  But what immediately struck me is that people probably find the same relief when they reach the conclusion that the financial world is going to end... and that probably encourages people to step onto the hell in a handbasket bandwagon... notable investors included.... permabears.

 

 

You might enjoy very much reading the book, Escape from the Twisted Planet by Harold Myra.  It's the antithesis of the account of Revelation.  Is it really necessary that there be a dicotomy between good and evil?

A very interesting and provocative book of fiction about what could happen on a space journey away from the twisted planet.

 

[Parsad]

The housing market is oversupplied by 860,000 units:

 

Hi Eric,

 

That number is the current oversupply from the 10-year average, but does not include homes that are 60-90 days delinquent.  If you look further down that same link you provided, or the one below, you'll see on the last slide exactly what the shadow inventory looks like. 

 

Multiply the number by about 4-5M, not 860K.  It's still doable, but the current administration is going to get alot of flack for trying...that's if they even have enough Senate seats to actually pass any future legislation!  Everyone who owns U.S. debt won't be pleased as well.  Cheers!

 

http://ftalphaville.ft.com/blog/2009/12/17/115581/us-shadow-housing-inventory-at-1-7m-corelogic-says/

[ERICOPOLY]

The housing market is oversupplied by 860,000 units:

 

Hi Eric,

 

That number is the current oversupply from the 10-year average, but does not include homes that are 60-90 days delinquent.  If you look further down that same link you provided, or the one below, you'll see on the last slide exactly what the shadow inventory looks like. 

 

Multiply the number by about 4-5M, not 860K.  It's still doable, but the current administration is going to get alot of flack for trying...that's if they even have enough Senate seats to actually pass any future legislation!  Everyone who owns U.S. debt won't be pleased as well.  Cheers!

 

http://ftalphaville.ft.com/blog/2009/12/17/115581/us-shadow-housing-inventory-at-1-7m-corelogic-says/

 

 

You are right, there is the shadow inventory.  But there is also FHA loans, there's Fannie and Freddie which is going to absorb a good deal of those expenses anyhow... I think that if you buy a house for $170k and tear it down... you are then supporting a housing price level.  But let's say you don't do that... you let prices fall and in that case prices go lower and Fannie/Freddie takes a larger loss.  I think we're talking about some level of government losses one way or the other.  Everyone that owns US debt ought to understand that.

 

So buying up the entire 4m of housing inventory would be an overstated cost.  Once you get well into the 1-2m buying level, prices stop falling or rise, confidence wouldn't get any worse (likely improve), perhaps some of that shadow inventory dissipates on it's own.  But suppose it doesn't and you need to buy and destroy 4m homes.  I think once that happens you have normal supply/demand that drives construction and magically people go back to work building houses, selling appliances, selling carpets, etc...  Then you have incomes to tax again (vs unemployed people) and that further chips away at the cost. 

 

All of the assets tied to house prices benefit... that may mean they are not sold at such steep losses, so there are fewer tax loss deductions and that ultimately means higher taxes collected on other gains.  So again, some of the money goes back to Treasury.

 

I don't think that $100b of stimulus spending necessarily equates to $100b of deficit... if the money is spent on destroying supply then it brings recovery a step closer, and that means growth in tax receipts.

 

[twacowfca]

The idea of destroying the housing oversupply sounds appealing, but is it?  By extension of the same logic,  should we buy oil when the price is "too low" and use it for a big bonfire to help the economy recover?  And  perhaps also spend a few hundreds of billions of $$ €€.?? To sequester the CO2 generated to aid the struggling green industries?

 

 

 

[Guest Broxburnboy]

Why debt delevering, the dynamic behind the US housing market decline, will continue:

 

http://seekingalpha.com/article/183315-debt-and-debtors-a-global-picture-of-deleveraging-part-i

 

Cheers?

 

"just the facts m'am"     

Sergeant Friday "Dragnet"

[rmitz]

I would argue that the actual inventory is somewhat *lower* than the books indicate.  Vacant housing is deteriorating as we speak; a lot of the value of those houses has already been destroyed, and will only be back with further improvement investment, which will go directly to the economy.  Many of them are probably already approaching tear-down status.  Delinquent housing is actually the safer investment, since people are still living there and at least doing a basic amount of maintenance (the heat is kept on...)

[Guest kawikaho]

The housing supply is approaching historical norms.  Prices are stabilizing, but may drift a little bit lower this year.  There are two headwinds, I think, to the housing recovery:

 

1) Loan requirements have changed in late Nov.  They are much more strict, and that will hinder the demand side.  Several REOs and short sales I've seen go through recently were from investors buying with all cash, and no financing.  Much tougher to secure a loan with the 17% unemployed.

 

2) Rates are at an all time low.  Where else can they go but up?  That implies housing may be a bit overvalued still, unless we see mortgage rates stay at the same levels for the next decade.  I'm guessing rates rise sometime in this year at the earliest.

 

The shadow inventory, to me, is a red herring.

[beerbaron]

I always found that destroying anything to stimulate the economy is pretty stupid. If there is an over-supply of ressources (in this case houses) then under a theorical economic model the workforce will move toward another market where their time is most needed. Therefore, increasing the country's efficiency.

 

If we destroy old houses just to stimulate the construction then we do not let the free market do it's magic and we will still have an over supply of work force in that area.

 

BeerBaron

 

 

 

 

[ERICOPOLY]

The idea of destroying the housing oversupply sounds appealing, but is it?  By extension of the same logic,  should we buy oil when the price is "too low" and use it for a big bonfire to help the economy recover?  And  perhaps also spend a few hundreds of billions of $$ €€.?? To sequester the CO2 generated to aid the struggling green industries?

 

There are some notable things that make it unique. 

 

We'll keep using OIL as the example:

Pushing up the price of oil makes the Saudi's happy but increases costs for the so called "Main Street" individual.

Oil exploration to replace supply destruction does not put "Main Street USA" back to work

US residents who own houses do not feel wealthier and more confident as the price of oil rises

Lenders who want 40% down for houses do not feel encouraged by rising oil prices

 

My point about destroying excess inventory is merely to get it out of the "OVERBUILT" status.  Then it goes back to the normal place where we would be had it not been for the housing bubble.  So then the free market can allocate capital whereever it feels appropriate again, and the government can step back.  People who normally are employed by the home construction sector go back to work, they buy bread which puts another cashier behind the checkout line... and they have income which allows them to make their payment on their mortgage again (they are one of the millions who are currently delinquent in paying).

 

I could go on, but anyway...  I see your point that it can't possibly make the country wealthier in the aggregate to destroy an asset (which is housing).  It does however improve some of the other problems that are leading to much of our current social unrest.

[ERICOPOLY]

under a theorical economic model the workforce will move toward another market where their time is most needed. Therefore, increasing the country's efficiency.

 

That works when an industry is destroyed permanently.  Those workers need to learn a new skill.  For example, people once were employed for manual labor that is automated today.

 

The homebuilding sector (and related industries like carpets/appliances) is not permanently destroyed.  It is just idled while we wait for demographic growth to eat up the oversupply.

 

What are they going to do?  Retrain as computer programmers for the next three years only to go back to work in construction when their labor is needed again?  Aren't you then wasting a lot of money on retraining them?  We need carpenters... we just don't need them right this second.

 

Where is this other industry that is undersupplied for labor over the next few years?  Free market?  Sometimes the free market is not in need of huge amounts of additional labor, such as when demand is slack.

 

[Zorrofan]

I don't really consider myself a bear, mainly because I think things will get better. But while many can argue things are recovering it's my belief that with high unemployment, consumer debt at all time highs, a weak housing market etc etc, people are just getting ahead of themselves. Eric Sprott had a great comment about celebrating the 26th consecutive month of job losses simply because they were lower. The deleveraging process will take longer than the market seems to think. Here is a link to an interesting article on the deleveraging process, an arguement for a long period of slow economic growth while the deleveraging takes place.....

 

http://www.ft.com/cms/s/0/1a646218-0175-11df-8c54-00144feabdc0.html?nclick_check=1

 

cheers

Zorro

[SharperDingaan]

 

Assume there were a new federal institution that simply 'bought' the mortgage delinquencies for 65c on the $. They pay with a rolling 5 year note paying 3.5%, & service the debt with new issues of floating rate T-Bills; 100MM of annual spend would allow 2.86B of immediate purchases [(1/.035)x100M], clear 4.4B of delinquent housing stock [2.86/.65], & produce a 44:1 multiplyer. The existing homeowner either pays the utilities & property tax, or gets immediately evicted - 'new deal' FDR stuff.

 

If you can prove you have the cash-flow, & agree not to sell/refinance for 5 years, they will sell you the place at the capitalization of the then floating rate + 3.5% (to defray costs). ie: If they paid 100K for it & the floating rate is 4.00% at time of sale, they'll sell it to you, if can prove that you're good for 7500/yr [7500/.075=100K). To make it easier they allow 2 or 3 joint-owners - more 'new deal' FDR stuff.

 

Then assume that 35% of the total investment ended up as a write-off (trashed/leveled houses, abuse/theft, etc). The 'average' house price would increase at the inflation rate, owners would be building equity, & there would be very little new-build other than re-modelling. You'd save millions of people from welfare, & the 1930's showed that out of sheer gratitude - most of them will continue to vote for you through to their dying day. 

 

The world has changed & its hard to see how there can be anything but a very slow recovery when it finally starts to turn around

 

SD   

 

 

 

 

[ERICOPOLY]

Warren weighs in:

 

http://www.huffingtonpost.com/2010/01/20/warren-buffetts-housing-s_n_429850.html

 

"We could have a cash for clunkers program on housing. If we would blow up 3 or 4 million houses today, the housing shortage would be over... if you have an inventory overhang. You have to have demand be greater than supply for a significant period of time. And we're well on our way to that."

[Guest kawikaho]

The idea that we should "blow up" 3-4 million homes is extremely stupid.  I'm sure Warren was being facetious here.  Someone is going to take a loss on those 3-4 million houses being "blown up", and it would be alot of capital wasted.  

[ERICOPOLY]

The idea that we should "blow up" 3-4 million homes is extremely stupid.  I'm sure Warren was being facetious here.  Someone is going to take a loss on those 3-4 million houses being "blown up", and it would be alot of capital wasted.  

 

Yes, there is some facetiousness even in my advocation of it.  However it was an attempt to answers Sanjeev's question as to whether government support is sustainable... this is a method I found that actually puts a price on it.  Not acting has a price too by the way, as those jobless persons are given humanitarian aid by the government.  Part of that cost (the one we are paying anyhow) is capitalized in the price of blowing up some inventory -- labor is the largest cost component of building a house and we are paying for that labor one way or the other.