Just Precious

I think it is just precious that Bernanke can speak at some conference out in the Hole, reference that things are not going so swimmingly - at least not as swimmingly as he and the main-stream economist crowd had predicted - and that QE2 is in the offing. And the market bounces big time with no real positive news. Now reading between the lines there is a bit of dissent at the Fed on what to do and QE2 may not be in the cards as readily as Mr. Ben says, but what the hell, let's have a market rally on speculation that the Fed might do more easing, effective or not. Bartender, another round for my friends - and I think we need a cab for Ben as he has obviously had too much of his own rhetoric to understand reality.

And oh, what a difference a weekend can make. Ben gets to sober up, as do his friends, and all does not look so great in the sober light of day. At least that is what the markets suggested today. So what happened, what caused the drop today - nothing.

Seriously, nothing happened. Trillions of dollars in stimulus flushed and nothing much happened. Unemployment stays stubbornly high, housing still in a funk (with strong signs the borrow-it-forward stimulus approach does not work), folks are still paying off debt (very slowly), incomes are not increasing as much as hoped (for those who have jobs), and, well, folks are still in the doldrums facing the new reality. So nothing happens at a time when investors are desperately seeking something to hang their hat on, even if it is just Ben in the Hole speaking without actually saying anything.

Stupid is as Stupid Does

So HUD Secretary Donovan comes out and indicates they are going to do everything they can to help support the housing market. Calculated Risk does a nice analysis that I will not repeat.

http://www.calculatedriskblog.com/2010/08/lawler-hud-secretary-may-have-just-made.html

The point here is you do not suggest the possibility of another home buyer tax credit and expect that to help stabilize anything. First of all, the prior credit was a total disaster to the point where one major home builder in their recent results asked that the government stop doing things to try to help. Credits front load sales and now the prospect of more down the road could very well dampen sales while people wait and see. It is very hard to plan your business as a builder if the government keeps meddling in things.

Second, as noted, the credit did not work. You are just giving money to people who by and large would have bought anyway. Third, there ain't nothing wrong with renting. Renting has a certain freedom to it. Sure you are stuck for the term of the lease but after that you are free to walk, move across the country, live in a cave, whatever, without having to worry about selling the house. And you never have to worry about your house being under water as it is not your house. I can guarantee you there are millions of people out there wishing they had never bought and for whom the American Dream is their worst nightmare. I know people struggling to make payments on homes they cannot sell and it is a terrible situation. The dream for them would have been to rent and not buy. Fourth, there is already too much supply and that will take time to adjust. There is absolutely nothing the government can due to fix this other than to simply help those with homes they cannot afford get by. Promoting more sales is the wrong thing to do.

Immigrants - Good For Business?

A study by the Fed finds that immigrants do not take jobs from U.S. born workers and indeed serve to stimulate the economy and lift wages. This is obviously going to be highly controversial - especially in certain states like Arizona.

http://www.bloomberg.com/news/2010-08-30/immigrants-don-t-take-jobs-away-from-americans-fed-study-finds.html

Now if this study is true, we have an interesting situation; the U.S. just started using unmanned drones to help protect our borders so these illegal immigrants cannot come into the country and boost our economy. Yes, the government is actively protecting us from a better economy and, I might add, at great cost. Go figure.

http://www.reuters.com/article/idUSTRE67T5DK20100830

Disclosures: None

Can - Road - Down

Obviously the numbers out this week show that residential real estate is on life support. The scary part is that things could be worse. For a long time now a lot of lenders have been holding off on foreclosing on homes and even for those they now own have been holding off on putting them on the market. I have reported on this numerous times before but the situation is very much still continuing, and perhaps in some respects getting worse.

http://www.americanbanker.com/issues/175_165/foreclosures-modifications-california-1024663-1.html

The GSEs have picked up the foreclosure rates a bit of late and real estate prices will likely suffer more over time for it (the median was down even more in this week's report), but if the banks start foreclosing and stop kicking the can, then all hell will break loose. The market is collapsing, sales are at record lows despite record low mortgage rates and prices are continuing to fall, yet there are over four million homes over 90 days delinquent and the banks are holding off on foreclosing big time. There are a number of "possible" reasons for this including the banks not wanting to come clean on the impact of their problem loans. What this will do is prolong the housing crisis for a very long time. I thought we would come out of the forest on residential RE next year but am now having second thoughts.

Not helping things is the percentage of homes under water. We are talking 11 million, or 23% of all homes with mortgages, are under water. That is a tad better than last quarter but largely because of foreclosures taking homes off the list. Think about that - 23%. That kind of pain will take a very long time to heal as house prices are not likely to recover to any significant degree for quite a while - not with all the foreclosures that will come on the market.

http://www.corelogic.com/uploadedFiles/Pages/About_Us/ResearchTrends/CL_Q2_2010_Negative_Equity_FINAL.pdf

Mind you, housing in most areas is priced below what it costs to build new housing and expectations are for further drops in prices. It could take a long time for home builders to be competitive and other than certain folks who insist on new homes, they probably have a few more tough years ahead.

Commercial real estate is no better off and it will likely suck wind for at least a couple of years too. In some markets there are improvements, but the reality is that malls are still overbuilt, consumers are continuing to cut debt (thank goodness), which does not bode well for malls and the like, businesses have rebuilt profitability by letting people go, which does not bode well for commercial RE, and so forth and so on. Did you know that the U.S. has 50% more retail space than the second closest country? Go figure. Really, go figure what that means for commercial RE when consumers are cutting back, facing high unemployment, homes under water and the like. Ain't pretty at all.

Most recessions were fixed by housing rebounds and/or consumer spending. This recession is not going to be fixed by either. So what will fix it? I am still trying to figure this out myself.

Across the Pond

Not a lot to say here but I just need to send out a reminder that the EU has a bunch of problems. After the EU went nuclear with it massive rescue effort, the problems in the PIGS - then PIIGS - were quickly forgotten, which is exactly what officials in the EU wanted. I do not want to burst their bubble, but getting people to forget about it for a while does not make the problem go away. Ask Ireland - Irish debt was just downgraded by S&P and it came at a very improvident time as Irish banks are in the process of trying to roll over 30 billion euros in debt. The downgrade makes this difficult to do and may force them to the ECB, which draws more attention to their problem, which may lead to more lenders being concerned and more downgrades and so forth and so on.

http://www.independent.co.uk/news/business/news/irish-debt-downgrade-raises-fears-of-international-deflation-spiral-2062136.html

My point is that EU problems have not gone away and with their lust to cut debt as a percentage of GDP, their economies are definitely going to be challenged for the next few years. Double dip, quite possibly. As I noted the other day, Stiglitz, the Nobel Prize economist, thinks this will happen. Either way, it is just a matter of time before the world will again focus on the EU problems. And focus they will because the EU collectively has the world's largest economy, ahead of the U.S. and China (Japan just got relegated to not getting to stand on the medal stand). When the next wave of problems surface in the EU (they are there just not to the surface yet) it will be problematic for us here in the U.S. as well. Just one more thing to worry about.

I promise I will try to think of something more optimistic to report; as long as I believe what I am reporting I have no problem with it - really.

Survey

Help me out here. I have had a significant up tick in folks visiting this site. The two or so regulars I had are I assume still around but I am really seeing an up tick. So do me a favor and tell me why. Here are the reasons I can assume:

• I am posting on a more regular basis
• The economy is sucking wind so doom-and-gloomers like me are getting more attention
• Someone somewhere linked me or recommended me
• I suddenly became a much better writer than I was
• I have actually been more right than most folks of late
• It is a direct correlation to increases in population
• It is off season for most TV shows and you are tired of reruns
• My friends are paying you to mess with me

Please let me know. Vote now and vote often.

Disclosures: None.

Economist's Says . . .!

A mathematician, an accountant and an economist apply for the same job.
The interviewer calls in the mathematician and asks "What do two plus two equal?" The mathematician replies "Four." The interviewer asks "Four, exactly?" The mathematician looks at the interviewer incredulously and says "Yes, four, exactly."
Then the interviewer calls in the accountant and asks the same question "What do two plus two equal?" The accountant says "On average, four - give or take ten percent, but on average, four."
Then the interviewer calls in the economist and poses the same question "What do two plus two equal?" The economist gets up, locks the door, closes the shade, sits down next to the interviewer and says, "What do you want it to equal"?

I cannot take credit for the joke but the best part is I think it reveals a bit of truth; economists give us what we want to hear, and right now that is anything but reality. Their jobs may be short-lived if they spoke the truth. For example:

The durable goods orders came out this morning and the bookings increased .3 percent, which is just a smiiiiiidge below (as in one tenth of) the 3% median of economists' forecasts based on a Bloomberry survey of 75 economists.


http://noir.bloomberg.com/apps/news?pid=20601087&sid=acPSIQI5pXfw&pos=2

Indeed, it was just a smiiiidge below every single economist forecast of the 75 surveyed by Bloomberry, who ranged from 1.2 to 6.8%. Imagine that, even the most pessimistic economist was off by 400%. I wish they would post the names of the surveyed economists as I would sure like to see who said 6.8%. He got some splainin' to do.

So you think this is an isolated incident, well let's talk about the new housing sales number out today. Sales fell 12% to an annual pace of 276,000. I like the Bloomberry headline:

"Sales of U.S. New Homes Unexpectedly Declined to a Record Low Last Month"

http://noir.bloomberg.com/apps/news?pid=20601087&sid=aMPHz7m3ZYq0&pos=2

So this was "unexpected"? By who, might you ask. Well, you got it, economists. Bloomberry surveyed 74 on this topic and the median was 330,000, just a smiiidge over 276,000. Now, admitedly, it would be rare for an economist to predict a number that would be the worst ever result on record. So rare, in fact, that not one of the 74 surveyed economist was even close. The lowest forecast was 291,000. And some economist who apparently lives in a cave with no access to the outside world forecast 355,000.

By the way, henceforth I am referring to Bloomberg as Bloomberry. I like the sound of it.

Update: Out this morning is the weekly jobless claims report came in with initial applications at 473,000. Econmists predicted a worse number. So I suspect an apology is in order. But before I do so, let me note that every one of the 48 economists surveyed by Bloomberry had more pessimistic numbers than what was being reported, though one economist at 475,000 was darn close. So I apologize. Let me also note the weekly numbers are quite volatile and most folks prefer to focus on the four week moving average.

http://noir.bloomberg.com/apps/news?pid=20601087&sid=aIdbC83.n6KM&pos=1


Disclosures: None.

Clouds Forming

What a difference a few weeks makes. Some disappointing news on the jobs front, disappointing consumer sentiment reports, disappointing housing numbers and, before you know it, everyone is a doom and gloomer. Even folks from the Fed are becoming more reserved in their carefully worded presentations. And the chief economist (I love economists) at the S&P is now fearful that the U.S. has a realistic prospect of stagnation, Japan style.

http://www.bloomberg.com/news/2010-08-24/u-s-has-realistic-chance-for-japan-style-stagnation-s-p-s-wyss-says.html

Negative pundits are cropping up every where, and some who were never too optimistic to begin with are getting even a bit more pessimistic. Take Joseph Stiglitz, for example, this Nobel Prize winning economist (I found one I like) thinks Europe has a serious threat of a double-dip recession due to its attempts to reign in government deficits to be less than 3% of GDP per year, a target he considers arbitrary and an objective he considers ill-conceived in the current environment.

http://www.bloomberg.com/news/2010-08-24/stiglitz-says-government-cuts-set-to-push-europe-into-double-dip-recession.html

I frankly agree with him. I am not a big fan of stimulus spending beyond what is need to maintain stability (and I have problems with where much of it is spent) but a heavy attack on government deficits at the moment is not the solution. Yes, to the extent a given sovereign is perceived by its lenders as problematic to the point it can no longer borrow on reasonable terms, that is a problem that might need to be attacked with austerity measures, but otherwise the goal should be to stabilize the economy with some government dollars and let it fix itself. Withdrawing government dollars now only worsens the GDP (ask Ireland) and exasperates the sovereign debt issues by lowering taxes and increasing unemployment. And when this takes place in multiple economically connected countries in the EU all at the same time there is a real chance of a nasty spiral effect throughout the entire EU, which may explain why investor confidence in Germany, a pretty well off country financially, is the worst it has been in 16 months.

Given that the EU is the largest single economy on earth if you treat it as one union, then you can see where it heading into a double-dip is not good for the rest of the world. Unless you still believe that decoupling thingy, we can all be in for a world of hurt if the EU has significant problems - i.e. above and beyond the problems we are facing here as well. And even though China has now passed Japan in terms of the size of their economies, now third to the EU and the U.S., it is still not nearly big enough to lift all these boats.

Refinance Debate

Okay, no real debate here; with mortgage loans at historic lows - 30 years fixed below 4.5% and adjustables under 4% - there is no question that if your rate is more than a couple of years old you should consider refinancing if you can. Sure, every one's situation is different. If your loan is close to being paid off or if monthly payments are already pretty small because you bought cheap, the savings may not pay the closing costs off very quickly or at all. But most folks looking at it would like to refinance if they can.

There are plenty of folks who cannot refinance for a multitude of reasons. These include:

• they are underwater on their homes or at least do not have enough equity to qualify;
• they have no job;
• they have poor credit;
• they cannot afford the closing costs; or
• they do not expect to be in their homes long enough for it to make sense.

Some of these reasons have no easy cure. If your credit rating is too low you need to do what you can to improve it and that can take time. No job - well you have worse things to worry about than refinancing. You cannot afford closing costs is one that is not a big problem. So long as you have enough equity and decent credit there are plenty of low to no closing costs options still available, so start looking and do the math. The problem I am personally dealing with is that due to price decreases, I do not believe I have 80% equity in my home. Absent 80%, I am looking at higher rates and/or PMI, which takes the benefit out of refinancing.

So here is the debate, do I take money out of my investments to increase my equity to 80% so I can refinance. I have come to the conclusion that I should, but this is personal to me and my situation. Let's say that I need around $10,000 to bring my house back up to the 80% mark. Add to that probably a couple thousand in closing costs and you have $12K up front to refinance. I calculate that refinancing will save me around $150 a month in payments. Accordingly, some would say, don't do it, it will take around eight years just to break even. But I do not see it that way.

Here is my logic. I figure the $10,000 more I sink into my house I will not lose unless my house somehow becomes worth less than $10,000. Barring a nuclear war, I do not see this happening. Sure, my house could lose $10,000 more in value but that loss will happen whether I put $10,000 more in or not. It has nothing to do with the $10,000 I put in. Accordingly, from my view, my principal, the $10,000, is about as safe as it can get locked up in my house.

Now I say "locked up" as that is the major issue with putting it into my house. Assuming you have the money, the question is whether you want to make it illiquid, perhaps very illiquid, by locking it up in your house. You need to consider how much savings you have, how many months you need to have set aside, etc. But if the money is not for liquidity needs but rather for long term investment, I propose that shifting it into the house - if needed to refinance - is not the worst investment you can make.

Back to my example, I am hypothetically putting $12 K up front into refinancing. $2000 of that is for closing costs, so that is out the window until I recoup it through reduced payments. With payments going down $150 a month, I will recoup that in just over a year, so not a big problem. If recouping it will take years, I would need to consider various other issues, including the years left on my existing loan, the years I plan to be there, etc. I am okay on these fronts.

But recouping the whole $12 K will take over 12 years and I do not plan on being in my current house 12 years, so does it make sense? I think for me it does. After a year the closing costs are paid off. After that I am getting an $1800 return on my $10,000 investment and, as explained above, the invested principal is very safe, though very illiquid. So I have to ask, where else can I get a guaranteed annual return of 18% (assuming I keep my house and do not default)? I am reducing my interest tax deduction minimally on the one hand but the 18% is in after tax money on the other, so the real return is much more than 18%. And so, I ask my readers, what am I missing here?

I know I need to consider the pros and cons of replacing a loan with a remaining term under 30 years with a loan with a 30 year term. Another alternative, however, is to cut several years off the loan term and keep my payments the same. My returns at that point are in eventual increased equity that is harder to quantify, but it should still be a good return that is quantifiable. Either way, I think I can trade in a very uncertain return on the $10,000 invested in equities for an investment with a defined very good return and very low risk to principal.

Obviously, few people are probably in my situation and everyone's situation is different, so everyone has different considerations they need to consider, but for me, when I figured out I could take some long term holdings I do not need to be liquid and turn them into a guaranteed high rate of return, it seems like a no brainer. The point being, if your home is below the 80% LTV figure and you think it makes no sense to refinance, you should look at other holdings, do the math, and see what works for you.

Disclosures: None.

Yeah, We Sure Showed Those Credit Card Companies

So the government beats its chest and enacts legislation to show how it is whipping those credit card companies and banks into shape, saving the consumer and making life good for us all. So the credit card companies respond and beat their chests and raise rates to the highest level in nearly a decade even though their borrowing rates are at record lows, thanks to our government (namely us taxpayers). Nice pay back.

http://www.nakedcapitalism.com/2010/08/credit-card-companies-jack-up-rates-despite-flagging-economy-super-low-funding-costs.html

Wanna' guess what this will do to the 70% of the GDP represented by consumer spending or the impact on small businesses that rely on credit cards to cover expenses? Go ahead, guess. Yep, not good.

That Real Estate Drum Keeps Pounding

Here is some hot off the presses news from Bloomberg - housing is putting a drag on our recovery from the recession.

http://www.bloomberg.com/news/2010-08-23/housing-slide-in-u-s-may-drag-economy-into-recession-as-foreclosures-rise.html

Glad they are on top of things.

Seriously though, they are right about it, just the news seems a bit old. Anyone really paying attention to real estate has seen this coming for a very long time and has known it is a key fundamental precluding the recovery so many economists envisioned. Then again, economists are a bit delusional (okay, a lot delusional). But I have had that rant here before. For a good gauge on where RE is and is heading, I recommend this link to Calculated Risk, where the author also seems to think the economist consensus is off the mark just a tad:

http://www.calculatedriskblog.com/2010/08/lawler-existing-home-sales-consensus-vs.html

Anyone want to bet on whether the mean economists' number from Bloomberg is too optimistic tomorrow?

Update 10/24: If you took the bet you can send your check to me. As expected, the delusional economists were once again with their heads in the clouds or the sand (your pick). The sales of existing homes number for July came out this morning and it was bugly. A drop of over 27% in the annual sales rate and inventories rising to 12.5 months, the highest in over a decade. Moreover, of the 74 economists surveyed by Bloomberg how many do you think either got it right or were even more pessimistic than the actual number in their forecast? If you guessed the big old goose egg, as in zero, zip, nada, you are correct. Seriously, not a one. The lowest of the 74 was at 3.96 million sales and the actual number was at 3.83 million. One "economist" predicted 5.3 million sales and he should have stayed home today. And it seems reality is setting in for the markets. When it sets in for economists, we are all in trouble.

http://noir.bloomberg.com/apps/news?pid=20601087&sid=aTa9xAXkpKaU


Disclosures: None.