"Surge"

Let's talk real estate for a moment. CNNMoney today ran a headline that housing starts had "surged" in August. Yes they said "surge." I just went to the site and now they are down playing the situation just a tad. The current headline notes the housing market is showing a "glimmer" of hope. From "surge" to "glimmer" in one day.

http://finance.fortune.cnn.com/2010/09/21/housing-market-shows-glimmer-of-hope/

Actually, neither is true. Yes, single family home starts are up nicely (10.5%) off of an adjusted down July figure and they were the highest in four months. But they are still horribly low. For some perspective go to the linked chart at Calculated Risk to see the - barely perceptible - "surge."

http://www.calculatedriskblog.com/2010/09/single-family-housing-starts-increase.html

Now in typing the above I almost said that the housing start number was at the "best" it has been in four months but then corrected myself and inserted "highest" instead. This is because at the moment highest is not necessarily best.

You see we have over ten months of existing housing inventory, a bunch of shadow inventory from foreclosures and people just waiting for prices to improve and a lot of homeowners under water. There is no good news here. Until folks get their personal debt within reason, save up a good down payment and qualify for credit to buy a home, building homes serves no purpose. It only adds inventory and depresses prices further. Builders should simply stop building, period, unless they have someone paying them to build a specific home. It will be several years before we work off inventory and new homes make sense, so more construction does not make any sense to me. In my book, it is bad news. And I did not even mention the problems with personal debt levels.

I noted the under water homes above as a problem in part because a lot of home buying comes from people moving more so than first time home buyers and if you are under water or even close to it you cannot move unless you somehow get rid of your current house and still have money to put the down payment on the next one. For a good quarter or more of folks with a mortgage that is simply not an option. Even if they can get their bank to do a short sale they have to save up for a new down payment. And if they do jingle mail they are not getting a new loan any time soon. The only folks under water or close to it who can move are those with money to make up the difference and still pay a new down payment. That is a major disincentive to moving, a major downward pressure on housing and a tough cycle to break. Add in all the foreclosures taking place and it is a toxic mix for at least another year or two (and I fear 5 of more years as the situation is really that bad). Folks lost trillions of dollars in real estate values the past few years and for many that was their piggy bank. Piggy has run away. Did I mention unemployment is increasing and those without jobs cannot buy a home? Did I need to?

http://www.calculatedriskblog.com/2010/09/state-unemployment-rates-in-august.html

So back to the housing starts. From what I have seen it is mostly multi-family starts and these are highly variable. Moreover, to the extent these are being built to rent, the rental market has a glut too, so good luck with that. Build it and they will come is not working here.

I simply do not get why anyone is building anything right now, why anyone is wanting something built or why folks think more starts are good news. More starts, without more buyers, are not good news at all.

Let me add two more things before I am done. First, I read last week that some developers are instituting resale fees. These tend to be hidden in the paperwork but basically they call for the developer to be paid say 1% of the resale price on any property they sell for 99 years. So you buy a property for $200,000 and sell it in five years for $200,000 and you have to send the developer $2000. And everyone who sells that property for 99 years needs to do the same, which will significantly reduce the value of the property. Developers are packaging these fees and securitizing them to turn them into instant cash. Gee, that sounds familiar.

http://www.nytimes.com/2010/09/12/business/12fees.html?pagewanted=all

Second, I have a relevant story about a neighbor of mine. I will call him Joe. Joe bought a run down house down the street a decade or so ago and paid roughly $190,000 for it with $150,000 in mortgage. Over the years the assessed value went up to $250,000 and Joe refinanced, eventually peaking in 2005 at a mortgage of $395,000. I knew Joe had a blue collar job that was respectable but did not pay tons, yet he always had a new car, had ATVs like crazy, had jet skies, a big ass enclosed trailer for everything and a major motor home. His house was nothing great but Joe had all the toys and then some. I would estimate he had a good $200,000 in toys. Joe moved out a few weeks ago and I suspect jingle mail. The house was never worth more than say $250,000 even given the market bubble, so he did well to pump a bank for $395,000. I do not feel sorry for Joe or the foolish bank, but the bank will be lucky to cover half its loan and Joe will be lucky to get any credit for a few years. And this story is repeated millions of times across this great nation.

None of this bodes well for real estate any time soon. And you also have all the problems banks are having foreclosing. Apparently, during the bubble the paper work was not always optimal, a third party entity (MERS - the Mortgage Electronic Registration Systems) may not meet legal muster in its system (which may negate certain mortgage securitizations) and folks are now having to make up affidavits to try to make a case, so it will be a bumpy and perhaps slower mortgage road for many banks going forward. GMAC just stopped all foreclosure activity in 23 states due to certain such issues.

http://www.nakedcapitalism.com/2010/09/how-serious-is-the-gmac-problem-pretty-serious-and-not-just-gmac.html

http://www.calculatedriskblog.com/2010/09/on-gmac-foreclosure-stories.html

Yes, all this mess is obviously going to clear up any day now and we should start building a lot more homes to satisfy the massive pent up demand! That is the good news? You decide.

Update: New mortgage applications have now declined three weeks in a row (and most or refis anyway) and are now at their lowest in six weeks. Sounds like an excellent time to build new houses.

Disclosures: None.

Get Ready

This is short, very short. All I have to say is the market this far into September is up the most for the start of September since 1939. I am seeing a lot, and I mean a lot, of mixed data. Nothing great and nothing terrible (at least not terrible by recent standards), so I am not expecting doom-and-gloom but I also see little to justify this month's gain on very low volume. We will see, but I do not have a good feeling about the rest of the month as little really explained the recent gains. Without good support, what goes up must come down.

Disclosures: None.

Pesky Questions

I am breaking from my usual format tonight (like I have one) to simply ask some questions that I think are worth asking. Things that may have no answer but are I think worth chewing on. You decide. Feel free to posit any answers in comments. So here we go:

1. Private debt reached all time highs in the past couple of years no matter how you measure it, but it has been coming down. I think it will take through 2012 at least to get back to historic norms but there are a host of variables impacting that time frame that are difficult to predict. Now there are various ways to reduce debt with the leading two being paying it down and default. Given unemployment, the markets being down drastically, home prices being down and the like, did the reduction in private debt to date in the U.S. for the past couple of years come mostly from people being frugal and paying it off or people defaulting? I have not seen stats on this so if you have I would appreciate seeing them.
2. Related to the last point, you have people saving more (though still not enough), some debt being paid off, unemployment high and everything else I said above, so where is consumer spending, which is around 70% of GDP, going to come from for the next year or two?
3. I just got a rescue dog recently and he takes a leak in the house every time I come home from work (really), so what can I do to stop this?
4. If the level of economic activity in this country for the past 10 years or more was built largely on easy credit and the resulting increased debt instead of people actually being able to afford what they could buy at the time they buy it, and if people are making less today collectively than they used to make due to unemployment, debt reduction and the like, where is the economic recovery coming from other than people foolishly returning to debt-laden ways if they are allowed to do so (as in a new bubble)?
5. Why do I always have to move toys to pull into my garage space at home?
6. If we do recover but in fact live within our means, instead of off debt, how much will that reduce GDP versus where it was in its debt-fueled days?
7. How does infusing banks with money (in multiple ways) so they can lend lead to a recovery when people have no way to pay the debt they already have and are becoming more frugal?
8. On a related note, what sense does it make to try to spur a heavily debt-laden country into spending again?
9. If Republicans in large part caused this mess and Democrats apparently failed miserably in fixing it, who the hell do you vote for?
10. We have massive excessive factory capacity in this country, so why would you give tax benefits to companies to spend more on factories and equipment?
11. Houses are selling in many markets for less than it would cost to build them and excess capacity along with shadow inventory will keep this so for a long time, so exactly how do we help builders by giving folks credits to buy houses they would buy anyway?
12. The stock market is up the past couple of days on very low volume on news that was mediocre at best, can it, will it, continue?
13. Do you double down on 7s when the dealer has 16 showing?
14. Everyone now, including those doing the tests, acknowledge that the EU bank tests really did not test everything they needed to test and major capital infusions are likely needed there (even if there is no sovereign defaults). And the spreads there for the PIIGS are at, above or near record highs reached in May, so what does the bond market there know that the stock markets seem to be ignoring?
15. Why is the toilet paper roll always empty when I go to take a dump?

Disclosures: None.

The Jones Factor

I have read a lot recently but have not read anything on the potential impact of this idiot Terry Jones with a church in Florida burning the Koran (Quran if you prefer) on the economies of the world. Now I am not expecting an immediate response economically but this jerk could easily cause a massive uptick in religious and political tensions, which last I checked is not good for economies. Last thing we need here is more troops going into the Middle East because some idiot in Florida wanted to make a name for himself. But it can happen and it can have a high cost - on many levels - to many countries, in terms of lives, in terms of folks having to serve time away from home, in terms of kids missing their mom or dad and in economic terms. Personally, the economic terms are the lowest consequence on my list but they are still there.

Even more personally, I vote for the U.S. making an exception, drafting the bastard Jones and sending his ass to Iraq. He wants to take a stand, let him do it next to those risking their lives. Indeed, better yet, he says he wants us to "stand up, confront terrorism," then give him and all those that support him the opportunity to go to Iraq, Iran, Afghanistan or the "evil" country of their choice with guns and let them "stand up" to terrorism personally and on their own. That should solve the issue. It is easy to sit behind a desk in Gainesville, FL, pontificate about standing up and burn some books for attention; it is different to actually put your life on the line for your country every day. I apologize for the less than PG fodder, which I truly do try to avoid, but this jerk has me really pissed off.

Rage aside, I return to the thought that this headline seeking A-hole will lead to a possible ignition of global repercussions, but nothing I have read is talking about this. As Taleb might say, this is in the fat tail of unexpected consequences. We will see, perhaps in as little as two days.

P.S. I wish all these generals and politicians would stop making speeches on how terrible the whole Quran burning thing is and simply call Jones and try to convince him to lay off. He is obviously just doing it for the publicity and headlines about Obama saying this, Hillary saying that, one general saying this and another general saying that, are only fueling the flames here. Note, I recognize the bit of irony in me doing a blog post on this and then saying folks should stop building press over it, but I tend to think the three of four people who read this post will not give Terry Jones a big head.

P.S.S. I read an Obama interview where he said Jones is causing a recruitment bonanza for al Qaeda but also noted there is nothing legally we can do about it because it is First Amendment protected free speech. Now I am a big fan of the Constitution and I know religious and political speech are in highly protected categories, but there are still limits. Remeber the whole "you cannot shout 'fire!' in a crowded theater" thingy? Well, you cannot hide behind the First Amendment and incite violence or support terrorists. I know Jones is not intending to support terrorists, but it is pretty blatant that he is doing precisely that. I doubt there is any one thing a Taliban leader could do to inspire so many to join his cause moreso than what Jones is doing. So yes, Jones is supporting terrorism. And he will incite people to commit murder. I do not view this as a First Amendment protected act.

Disclosures: None.

Build It and They Will Come

You see, once again the Administration takes a bass ackwards approach to fixing things. Now they want to front load for companies their ability to write off expense on investments in plants and equipment through 2011 instead of the over a longer period. In other words, the Administration is saying to companies go ahead and use some of the capital on your books to build plants and buy new equipment and we will provide billions in up front tax breaks instead of billions in over time deductions. Obviously the Administration thinks such spending will help spur the economy.

Only problem is that companies right now have more plants and equipment than they can use. Sure, maybe some equipment is a bit old and needs to be replaced but I suspect companies with the capital to do it are not holding off on needed purchases, and a tax break ain't going to get them spending capital on unneeded stuff. I just do not see it happening. Companies want solid proof that the economy is going to improve in a significant and sustained way before they spend, and they are not seeing it yet. With talk of double-dip, the EU having numerous countries in doubt and plenty of folks talking about Japan style stagnation in the U.S. for years, companies know that cash is king.

The other problem, as pointed out in this linked post, is that offer by the government really is very little financial incentive to them. If they have the money to spend in the first place they are not needing an instant deduction and with rates low waiting to get the deduction over time is not a big problem.

http://www.calculatedriskblog.com/2010/09/reactions-to-obamas-business-tax-break.html

This program is similar to what the Administration has tried with housing and cars; they incentivize folks to spend with tax credits or direct financial support but all they achieve is (1) giving breaks to those who would have bought anyway - including me on cash-for-clunkers and (2) front loading expenditures to the detriment of later spending. They consistently fail to realize that this is a debt driven recession and it can only end when debt is paid down, which will take a long time to achieve.

Don't Shed a Tear

Meredith Whitney believes Wall Street has some tough times ahead and she expects them to cut 80,000 jobs over the next 18 months. She expects 2010 bonus payouts to be down drastically and then the cuts. Now you might think good riddens but I suspect those being cut are not the idiots that produced this mess. Those idiots are still getting the big bonuses and are off thinking up new fleecing techniques to rebuild company profits. No, the 80,000 that may be let go are likely the folks at the other end of the totem pole.

http://www.bloomberg.com/news/2010-09-07/wall-street-firms-will-cut-up-to-80-000-jobs-over-18-months-whitney-says.html

Knock, Knock, Knocking at Greece's Door

The price to protect debt for the PIIGS is again reaching the record heights it saw in May. I noted a week and a half ago that the EU problems had been off the radar screen for a while but they were still there and would in time become the focus again. Well, it seems that this week they are back in focus. So what will the EU do for its next hat trick?

http://www.bloomberg.com/news/2010-09-07/u-s-stock-futures-decline-bank-of-america-citigroup-alcoa-shares-drop.html

http://www.bloomberg.com/news/2010-09-07/greek-debt-deals-hidden-from-eu-probed-as-400-yield-gap-shows-bond-doubts.html

Disclosures: None

Double Dip Not Likely?

According to some folks interviewed by Bloomberry, a double dip is not likely in large part because things are already terrible and it has not happened yet.

http://noir.bloomberg.com/apps/news?pid=20601087&sid=aXNpH2TK4EJI&pos=1


While I see their point, they seem to ignoring the fact that we are just now weaning ourselves off of trillions in government stimulus, which is the only thing that brought us out of a recession in the first place. Without trillions more a double dip is certainly a possibility and I do not see the government going that extreme with more stimulus. The amazing part is the bounce from the last recession was so anemic despite the government pouring trillions into the system. Accordingly, I am of the mind a double dip (which is really dependent on how you define things as I do not think we ever came out of the recession) is not only possible but likely.

Disclosures: None.

September Will Be Interesting

Markets were pretty much down, up, down, up, down up, side-ways all day. Consumer sentiment, while very low, still better than expected. Housing prices up but that is due to the tax credit so the other direction is to be expected in upcoming reports. FOMC minutes, not so good. Overall, mixed news and nothing too significant. And August was not such a good month to speak of for the market. Will September be better?

I have read several pieces today saying October is known for the steeper drops but September overall is the bigger month for being down. We will see. I have for some time predicted a bad Fall for the U.S. and if you predict enough stuff you will eventually be right and then get to say afterwards how intelligent you are for your predictions, so if September sucks wind I will be shouting from the roof tops how intelligent I am. If not, expect silence. I have done it before and am not beyond doing it again. It is a secret of the blogger trade.

Not in the Mood(y)

Apparently SEC is not in the mood to sue Moody's over bogus ratings during the crisis. Now I am certain this has nothing to do with Buffet being a shareholder and there are certainly no politics behind this decision. It has to be totally above board.

http://www.bloomberg.com/news/2010-08-31/sec-says-it-declined-to-sue-moody-s-for-fraud-over-company-s-cdo-ratings.html

Good Luck With That

Bloomberry reports that Emirates is needing to raise $28 billion to build its aircraft fleet through 2017. They are seeking to compete with other airlines by adding 45,000 more seats. At a time when many airlines are idling airplanes to lessen seats and improve pricing this just seems to be a bit against the grain of what is going on elsewhere in the industry. Go figure and good luck with that.

http://www.bloomberg.com/news/2010-08-31/emirates-to-raise-28-billion-for-fleet-expansion-seeks-majority-in-debt.html

Not Eating Our Way Out of This One

In another sign that consumers are cutting back, restaurant spending has contracted for a fourth month in a row. Face it folks, despite consumers showing a slight uptick in spending in the latest figures they need to deleverage big time. Savings are up but need to go up more to be at historic norms and with incomes down and debt maintenance payments high any expectations of higher savings rates need to be tempered. This will take years to correct and the government just needs to stabilize as minimally as they can while it happens.

http://www.calculatedriskblog.com/2010/08/restaurant-index-shows-contraction-in.html

Just my take.

Disclosures: None